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What The CARES Act Means For Credit In U.S. Public Finance

The Coronavirus Aid, Relief and Economic Security (CARES) Act is the third, and largest to date, stimulus bill to come out of Washington in an effort to slow the spread of the virus and offset the losses from the accompanying recession. The bill contains several provisions that S&P Global Ratings views as credit supportive for entities in U.S. public finance, including programs to address the needs of state, local government, transportation, health care, housing and higher education credits. All the provisions in the bill are designed to help provide liquidity and stabilize operations, but the credit risk remains that these measures may be exhausted too soon and more federal actions or more severe budget cuts could be needed. The monies in the CARES Act will start to flow to the sector in late April.

In this report we will answer some of the high-level credit questions.

Even with the CARES Act monies just beginning to reach the target users, there is discussion in Congress of a possible fourth stimulus bill. S&P Global Economics is forecasting that this recession will be more severe than the Great Recession, although shorter in duration. The stimulus to date has already exceeded the stimulus during the Great Recession. The first federal measure to address the growing pandemic was the $8.3 billion in public health support bill passed on March 4, which allocated money to vaccine research, small business loans, foreign aid, public health programs, and personal protective equipment purchases. The focus of this first act was on preparedness and response. The first, though, was soon followed by the Families First Coronavirus Response Act on March 18, which extended sick and family medical leave and also supported state credit by extending the federal Medicaid reimbursement rate by an additional 6.2 percentage points. As health care costs related to fighting COVID-19 continue to grow, this reimbursement increase will aid in buffeting the states' outlays for Medicaid, although those costs do continue to grow, putting more liquidity pressure on some.

Table 1

Summary of U.S. Public Finance Provisions In The CARES Act
Amount (bil. $) Program Sector Description
454 Treasury Exchange Stabilization Fund States, Local Govt To provide loans and guarantees to the Federal Reserve to support lending and liquidity programs for businesses, states, and municipalities; estimated to generate more than $4 trillion in loans and liquidity.
Municipal Liquidity Facility States, Local Govt Seeded from monies in the CARES Act, this program will provide liquidity (up to $500 bil.) through the purchase of notes from eligible participants.
150 Coronavirus Relief Fund States To make payments to states, tribal governments, and territories.
100 Public Health Emergency and Social Services Fund Health Care Provides reimbursements to eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.
14 Higher Education Emergency Relief Fund Higher Ed Funding will be allocated to “each institution of higher learning” by series of formulas.
13 Elementary And Secondary School Emergency Relief Fund GO School & Charter School Will support elementary and secondary school emergency relief grants to each state educational agency by series of formulas.
3 Governor’s Emergency Education Relief Fund States Can be used to provide emergency support through grants to local educational agencies and institutions of higher education.
25 Transit agency grants Transporation Payments to transit agencies to cover operating expenses related to coronavirus response, reimbursement for operating costs to maintain service and lost revenue due to the coronavirus.
10 Grants-in-aid for airports Transporation Payment to airports to prevent, prepare for, and respond to coronavirus.

Programs That Support Government Credit Quality

Although all of the provisions in the CARES Act are supportive of the broader economy, and thus credit supportive, the three funds within the act directly supporting state and local government credit and the municipal market are the $454 billion Treasury Exchange Stabilization Fund, the $150 billion Coronavirus Relief Fund, and the $3 billion Governor's Emergency Education Relief Fund.

The largest allocation in the act, a significant addition of funds for the Treasury Exchange Stabilization Fund, is not a municipal-only source of funds, as it is intended to provide liquidity support for corporate entities as well. The Exchange Stabilization Fund has already been used to support several of the credit market facilities announced in March. However, the CARES Act provided a significant infusion of federal money for this fund and also expanded authorities for the types of programs that can be supported. Following passage of the CARES Act, the New York Federal Reserve announced four new programs to be financed through the Stabilization Fund, which received a significant infusion of funds from the CARES Act.


  • Municipal Liquidity Facility
  • Main Street New Loan Facility
  • Main Street Expanded Loan Facility
  • Paycheck Protection Program Lending Facility

Announced in March:

  • Commercial Paper Funding Facility
  • Money Market Mutual Fund Liquidity Facility
  • Primary Dealer Credit Facility
  • Primary Market Corporate Credit Facility
  • Secondary Market Corporate Credit Facility
  • Term Asset-Backed Securities Loan Facility

Seven provide corporate support, thus strengthening the companies active within the local economy, and two of the programs announced in March, the Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding Facility, helped stabilize the short lending markets that many public finance entities rely on. However, the Municipal Liquidity Facility will have the greatest direct impact on rated governmental entities.

Municipal Liquidity Facility

The Municipal Liquidity Facility, funded by the Department of the Treasury using $35 billion in funds in the CARES Act, authorizes the Federal Reserve Bank to purchase up to $500 billion in eligible notes to support all 50 states, the District of Columbia, counties with populations over two million and cities with populations over one million. The eligible notes will be short-term, with a maximum maturity of 24 months. The notes are expected to be in the form of bond anticipation notes, tax anticipation notes, and tax and revenue anticipation notes, or the like. The note purchases will be made through Sept. 30, 2020, unless Congress votes an extension. We see this as one possible tool states can use to help manage liquidity as revenues are expected to decline precipitously due to the sudden-stop economic condition induced by measures intended to slow the spread of the virus. Additionally, the liquidity pressures created by matching the adjusted federal tax filing date can be alleviated with this facility. The shift by most states will cause revenues originally included in one fiscal year to be received in the subsequent fiscal period (although, with accrual periods, in the end most states will still record the funds in the current, originally planned, fiscal year).

Access to the facility is limited to 20% of the general revenue from the borrower's own sources based on fiscal year 2017 actual, but states are able to exceed this limit to support political subdivisions and instrumentalities not eligible to apply on their own. As we are hearing that many counties, cities and towns, regardless of size, are expecting revenue shortfalls, should states avail themselves of this optional program, this could support local government credit. As there is no clear playbook for setting up such programs, and in some cases legal questions remain, we do not yet know when, or even if, the funds will flow to local governments. While this program is clearly supportive of credit quality overall, we note that the two-year maximum term could create risk if government receipts have not recovered sufficiently by the time repayment is due.

The Coronavirus Relief Fund

The CARES Act provides a $150 billion carve-out for state and local governments to supplement direct expenditures stemming from the pandemic. The act requires outlays to be deposited no later than 30 days from enactment, so states should see the monies by April 26. Of the total, $139 billion is earmarked for states while the remainder allocated to the District of Columbia, Puerto Rico, the other territories, and tribal governments.

Chart 1


Chart 2


States are eligible for no less than $1.25 billion in support with local government entities with populations of at least 500,000 eligible for direct support from the Treasury. A state's allocation of the $139 billion is proportional to its population and a local government's share of the direct aid would come from the total available to the state. Accordingly, California, Texas, Florida, and New York are estimated to be eligible for the greatest share of the total at roughly 30.5%. Currently, 14 states do not have a local entity whose population exceeds 500,000.

While guidance on how resources will be disbursed is forthcoming, the act outlines eligible purposes for how states can utilize funds (section 5001[d]):

  • Are necessary public health expenditures due to COVID-19;
  • Were not accounted for in the budget most recently approved for the state or local government; and
  • Were incurred March 1, 2020 through Dec. 30, 2020.

Notably, in the event an expense is deemed ineligible by the inspector general of Treasury Department, the resources would be treated as debt owed to federal government.

In our view, given disbursed funds cannot be used to offset indirect costs, namely revenues that would otherwise have been generated absent restriction on economic activity, the efficiency of funds may be low for some states and local governments. In that sense, other targeted measures provided in the act including supplemental aid to health care programs and public education could provide stronger budgetary support.

Programs That Support Health Care Credit Quality

Our not-for-profit acute health care sector will see some relief from the CARES Act. We note these provisions provide short-term benefits for direct support as well as liquidity due to COVID-19 and the related investment market dislocation but are not a panacea for the continued cash flow and liquidity challenges facing many providers as they manage increases in expenses as they relate to capacity, supplies, and equipment, and experience decreased revenues due to the deferral of non-emergent procedures, outpatient visits, ancillary services, and imaging. The value of the programs vary by hospital and health system but should be helpful in offsetting a portion of the operating losses as well as providing liquidity.


Many health care systems had built up their unrestricted reserves over the last several years and with the disruption in the markets as well as the recent cash flow challenges, health care providers have been trying to shore up liquidity. Some key features of the recent act aim to support this effort, including the Medicare accelerated payment program that provides a six-month lump sum payment with a payment-free period of 120 days (after which claims are offset to recoup the payment). The loan is interest-free for 12 months, after which the outstanding balance will begin to accrue interest of 10.25%. We note that this program is significant for many of our hospitals and is akin to a short-term interest-free loan that will help with the short-term cash flow challenges. While some credits may be able to solely rely on this for cash flow needs, we believe others will still need additional forms of liquidity to carry them through this period. We understand that funds from this program are beginning to flow quickly, which we view favorably given the significant cash flow challenges that started for many providers beginning in March with the deferral of non-emergent cases.

Another area of liquidity support through the CARES Act is the ability for providers to delay their payroll tax payments from March 27, 2020, through Dec. 31, 2020, although we view this as incremental. Hospitals will have to begin paying those in 2021 and 2022, but this is another short-term reduction in required cash payments that can aid them.

Support for operations

The act also includes some direct funding for hospitals--$100 billion for hospital and health care provider COVID-19 related expenses and forgone revenue. We believe this provides some short-term flexibility for care. Approximately $30 billion of the $100 billion of funding will be distributed based on Medicare fee-for-service payments in 2019 and that money has begun to flow to hospitals as of April 10. How the remaining $70 billion will be distributed to hospitals has not been specified, but the administration has identified priority areas particularly affected by COVID-19 including rural providers, providers of services with lower shares of Medicare reimbursement, or who serve primarily Medicaid population, and providers treating uninsured Americans as well as potentially those providers in locations that have been more affected by COVID-19 cases.

Several other components help to support operations, including the 2% Medicare sequestration from May 1 through the end of the calendar year, and delayed disproportionate share fund cuts to begin Dec. 1, 2020, instead of May 22. The act also increases Medicare reimbursement rates for COVID-19 hospitalizations by 20%, which offsets some, though not all, of the expense increases.

Legislation updates beyond the CARES Act

There are changes beyond the CARES Act that we view as incremental positives for the not-for-profit health care sector, including the Families First Coronavirus Response Act, which included a temporary increase of 6.2 percentage points in the Medicaid federal medical assistance percentage from Jan. 1, 2020, through the emergency period. However, this increase does not apply to adults who were part of the Affordable Care Act expansion. The act also provides a state option to cover COVID-19 testing and testing-related services at a 100% federal match for uninsured individuals during the emergency period. The Centers for Medicare and Medicaid Services has also expanded payments for telehealth services that help hospitals and physicians continue providing care through the 1135 waiver authority Coronavirus Preparedness and Response Supplemental Appropriations Act.

Programs That Support Higher Education Credit Quality

The CARES Act established a Higher Education Emergency Relief Fund to provide $14 billion in relief funds directly to institutions of higher education, which we believe will partially offset the adverse credit impacts of the COVID-19 response, though statutory requirements on funding may limit usefulness of funds in some cases.

The law requires that 90% of the Higher Education Emergency Relief Fund, or roughly $12.6 billion, be provided to "each institution of higher education" with 75% apportioned by relative share of full-time Pell Grant recipients and 25% by relative share of non-Pell Grant full-time student. We believe the statutory formula-driven allocation will help expedite delivery or funds.

Notably, the law requires that recipients use at least half of this allocation (about $6.3 billion) to provide emergency financial aid grants directly to students. The other portion of this 90% allocation may only be used to offset costs associated with changes to remote instruction delivery due to coronavirus, with some exclusions. Higher education institutions are still seeking clarity on whether these relief funds can be used to cover room and board refunds, as these revenue losses are for the most part much more material than new costs from coronavirus.

The remaining 10%, or $1.4 billion, of the Higher Education Relief Fund has much more flexible eligible uses, including maintaining operations and continuing to employ existing staff, and we believe will provide the most efficient means of operating relief. Of this $1.4 billion, 7.5% will be allocated according to proportions in existing federal grants, with the remaining 2.5% reserved for grants to be awarded according to "greatest unmet need related to coronavirus."

Table 2

Top 25 CARES Act Allocations To Higher Education Institutions
Rank School Allocation (mil. $) Minimum for emergency financial aid (mil. $)
1 Arizona State University 63.5 31.8
2 Pennsylvania State University (The) 55.0 27.5
3 Rutgers, The State University Of New Jersey 54.2 27.1
4 University Of Central Florida 51.1 25.5
5 California State University, Northridge 44.7 22.3
6 Ohio State University (The) 42.9 21.4
7 California State University, Long Beach 41.7 20.9
8 California State University, Fullerton 41.0 20.5
9 Texas A&M University 39.8 19.9
10 University of Washington 39.7 19.9
11 Florida International University 38.3 19.2
12 California State University, Los Angeles 37.9 19.0
13 University Of California, Irvine 36.7 18.4
14 University Of Houston 36.7 18.4
15 University Of California, Los Angeles 35.9 18.0
16 California State University - Sacramento 35.7 17.9
17 University Of California, San Diego 34.9 17.4
18 University Of South Florida 34.8 17.4
19 University Of Texas - Rio Grande Valley 34.3 17.2
20 University Of California, Davis 33.9 16.9
21 California State University, Fresno 32.8 16.4
22 University Of Texas At Austin 31.5 15.7
23 University Of Illinois At Urbana-Champaign 31.4 15.7
24 University Of Florida 31.0 15.5
25 University of Arizona 31.0 15.5

Programs That Support Transportation Credit Quality

Transit agency operating support

The CARES Act provides $25 billion in additional funds to transit agencies, with $22.7 billion apportioned to large and small urban areas and $2.2 billion to rural areas. Funding will be provided at a 100% federal share, with no local match required, which we believe will enable rapid utilization of the funds. Notably, the eligible uses of funds are some of the most flexible for programs targeted to municipal issuers and will be available to support lost revenue and operating expenses beginning Jan. 20, 2020, to prevent, prepare for, and respond to the coronavirus. The law required that these funds be made available for obligation by the Federal Transit Administration seven days after enactment of the CARES Act and so should flow to transit agencies quickly. In our view, both the flexibility of eligible uses and requirements for rapid, formula-driven allocation will help stabilize transit agency operations for a few months, supporting credit quality.

We believe that the transit sector is at a high risk of depressed revenue collection for an extended time and so could face significant operating losses after this relief is exhausted. However we believe this funding will support liquidity and operations in the next few months, thus freeing internal resources to help meet debt service payments

Table 3

Five Largest Urban Area Transit Agency Operating Allocations
Urbanized Area Amount (mil. $)
New York-Newark, NY-NJ-CT 5,437
Chicago, IL-IN 1,482
Los Angeles-Long Beach-Anaheim, CA 1,216
Washington, DC-VA-MD 1,020
Boston, MA-NH-RI 884
Requirement: "Designated recipients shall continue to sub-allocate funds allocated to an urbanized area based on a locally determined process, consistent with Section 5307 statutory requirements."
Grants-in-aid to airports

The CARES Act provided nearly $10 billion to almost all commercial service airports to keep the system in service to the aviation industry and to support the economy. The funding, expected to begin flowing in April on an expedited basis, comes in the form of grants from the Treasury and not from existing Federal Aviation Administration grant programs. As with most airport grant programs, there are the standard strings attached (monies must be used for FAA-approved purposes, Buy American, prevailing wage requirements) including workforce retention requirements for large, medium, and small hub airports, and importantly can be used to pay debt service requirements. The CARES Act divides the $10 billion into four groups, each having a separate allocation formula with the bulk of the amount (approximately $9.4 billion) allocated to commercial service airports and primary commercial service airports (generally larger hub airports) on a formula basis taking into consideration passengers levels and financial metrics. Table 4 shows those airports eligible to receive $100 million or greater based on the allocation formulas.

Clearly, these grants are a critical liquidity lifeline for airport operators who are experiencing passenger demand levels up to 95% lower than at this time last year while still operating, albeit at reduced schedules that are expected to be further reduced. Airlines--also recipients of federal aid--will be better positioned to pay their airport landing fees and terminal rentals, though we anticipate airport operators will provide rate relief to airlines and other tenants in various forms, which is allowable under FAA rules.

Table 4

CARES Act Grants To Airports Greater Than $100 Mil.
Rank State City Airport ID Total (mil. $)
1 GA Atlanta Hartsfield - Jackson Atlanta Intl ATL 338.5
2 CA Los Angeles Los Angeles Intl LAX 323.6
3 TX Fort Worth Dallas-Fort Worth Intl DFW 299.2
4 IL Chicago Chicago O'Hare Intl ORD 294.4
5 CO Denver Denver Intl DEN 269.1
6 CA San Francisco Intl Airport San Francisco Intl SFO 254.8
7 FL Miami Miami Intl MIA 206.9
8 NV Las Vegas McCarran Intl LAS 195.5
9 NY New York John F Kennedy Intl JFK 193.4
10 WA Seattle Seattle-Tacoma Intl SEA 192.1
11 FL Orlando Orlando Intl MCO 170.7
12 TX Houston George Bush Intercontinental/Houston IAH 149.2
13 AZ Phoenix Phoenix Sky Harbor Intl PHX 147.9
14 NJ Newark Newark Liberty Intl EWR 147.5
15 VA Dulles Washington Dulles Intl IAD 143.4
16 MI Detroit Detroit Metropolitan Wayne County DTW 141.9
17 MA Boston General Edward Lawrence Logan Intl BOS 141.3
18 NC Charlotte Charlotte/Douglas Intl CLT 135.6
19 FL Fort Lauderdale Fort Lauderdale/Hollywood Intl FLL 135.0
20 MN Minneapolis Minneapolis-St Paul Intl/Wold-Cham MSP 125.2
21 PA Philadelphia Philadelphia Intl PHL 116.3
22 NY New York LaGuardia LGA 102.9

Programs That Support Housing Credit Quality

Several provisions of the CARES Act, which are meant to keep both tenants and homeowners in their homes, have the capacity to create pressure on the credit quality of housing finance agencies (HFAs). The provisions allow homeowners to request forbearance of mortgage payments for up to one year, which could increase delinquencies in resolutions that contain whole loans and will require HFAs that service mortgage-backed securities to advance payments during the forbearance period. Depending on the severity and duration of the pandemic's economic fallout, HFAs should generally have sufficient resources to absorb these credit losses and advances.

In contrast, the act contains substantial funding for public housing authorities (PHAs) through $1.25 billion for tenant-based rental assistance to "prevent, prepare for, and respond to coronavirus, including to provide additional funds…to maintain normal operations and take other necessary actions…". This includes $850 million for administrative and other expenses for PHAs' section 8 programs, and $685 million to help PHAs maintain normal operations; the latter will remain available until Sept. 30, 2021. This financial support should sustain PHA rating stability in the near term.

Programs That Support K-12 Education Credit Quality

The Elementary And Secondary School Emergency Relief Fund (ESSER) and the Governor's Emergency Education Relief Fund (Governor's) combined will provide roughly $16 billion to K-12 education, charter schools and, to some extent, higher education. The monies in the Governor's program are distributed as a block grant at the state level and then allocated out, whereas the ESSER is an application program with state allocation limits. California and Texas will receive the most at $2 billion and $1.6 billion, respectively, with Vermont receiving the least with a $35 million allocation. The social distancing measures implemented to curtail the spread of the virus has closed schools across the country, requiring many to continue through online learning. This comes at a cost that is yet to be calculated. As states and school districts adopt budgets for the fiscal 2021 school year, we will monitor the sufficiency of these funds and what long-term impact the COVID-19 response will have on local education funding.

This report does not constitute a rating action.

Primary Credit Analysts:Geoffrey E Buswick, Boston (1) 617-530-8311;
Benjamin P Geare, New York + 1 (415) 371 5047;
Oscar Padilla, Farmers Branch (1) 214-871-1405;
Suzie R Desai, Chicago (1) 312-233-7046;
Marian Zucker, New York (1) 212-438-2150;
Secondary Contacts:Jessica L Wood, Chicago (1) 312-233-7004;
Kurt E Forsgren, Boston (1) 617-530-8308;
Anne E Cosgrove, New York (1) 212-438-8202;

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