Latest Round of Fiscal Relief to the Rescue!
On March 11, 2021, the $1.9 trillion American Rescue Plan Act (“the Act”) was signed into law by President Biden as the latest installment of fiscal relief to address the economic drag brought on by the COVID-19 global pandemic. Broadly, the Act contains multi layers of recovery-centric spending, expanded unemployment insurance benefits, additional direct payments to households, funding for state and local governments, and targeted funds for vaccination distribution as well as for drug testing programs. At the heart of the relief package is $350 billion in emergency funding earmarked for state, local, territorial and tribal governments that will be made available through December 31, 2024. These allocations have an intended purpose of addressing the mismatch between elevating costs and declining revenue streams, which have impacted the states unevenly even though we continue to see evidence of municipal credit resiliency. The funding will enable many municipal governments to not only avoid some rather deep spending cuts, but to also preserve delivery of essential services in the areas of healthcare, public safety and educational programs and to serve as a bridge as demand continues to recover. Across the asset class, funding allocations are expected to lessen operational risk and to be accretive to municipal credit quality, and are being strongly considered by the rating agencies as they return various sectors to a stable outlook.
The Act details eligible uses of funds such as responding to the public health emergency along with its negative economic consequences, providing bonus payments to essential front-line public health workers, replacing lost public sector revenue due to the COVID-19 emergency and avoiding further cuts, making critical investment in water, sewer and broadband infrastructure as well as in other public health-related expenditure areas. The Act also identifies certain restrictions on the use of relief funds including the inability to apply monies to tax cuts, pension liability payments or debt service, in addition to prohibitions on directly or indirectly using Act funding to offset a reduction in net tax revenue. In a general sense, the Act was designed to deliver immediate and direct relief to those families and workers most adversely impacted by the health crisis and to engineer an equitable economic recovery. As we know, funding and budgetary needs differ across state and local governments and the spending priorities for fiscal rescue funds show just as much variability. To a meaningful extent, Rescue Plan allocations have the potential to address social and racial inequality through more targeted outreach to disadvantaged Americans and lower-income communities. Had it not been for a stronger and more accelerated recovery than initially anticipated, funding for essential services would have been even more impaired and we see the rescue funds as providing a buffer to lost spending on essential services.
Because of the uncertainties surrounding the timing of receipt and use of these funds, the additional revenue has yet to be fully factored into all state budgets for the coming fiscal year and this will likely be one of the busiest budgetary revision cycles seen in a while. Had it not been for the fact that revenue performance turned out better than expected, we suspect that the budgetary adjustment process for a number of states would have been even more challenging. Better-than-expected revenue performance can thank expansive fiscal stimulus, which has provided an offset to state revenue displacement, as well as more resilient income and sales tax collections.
For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Professional.