- S&P Global Ratings has revised its 2021 sector views for the U.S. state, local government (including school district), and charter school sectors to stable from negative given our view of stronger economic growth for 2021 and beyond.
- Federal funds through the American Rescue Plan (ARP) provide significant financial support to these sectors and other provisions of ARP will accelerate recovery from the pandemic and the recession.
- Material cuts, deferrals, or delays in funding to schools and local governments is unlikely given stronger-than-budgeted state revenue performance coupled with federal stimulus funding.
Economic Recovery Plus New Money
The revision of sector views for the state, local government, and local and charter school sectors back to stable from negative reflects a marked improvement in economic conditions as well as the receipt of additional federal stimulus. A sector view is a macro, forward-looking assessment of where we see credit trends in the year ahead; for 2021 we now see a more balanced view of credit actions for these sectors. A sector view does not apply to specific issuer or issue level ratings. Following this change, all sector views are stable in U.S. public finance with the exception of higher education (including community colleges and student housing) and not-for-profit health care.
The ARP included meaningful support for states, local governments, and schools (both charter schools and local districts) that will provide financial support for operations and also offset revenue declines. With additional funds for transit, housing and health care--plus support for individuals from stimulus checks, child tax credits, and enhanced unemployment--the ARP will provide a broad range of support that will have both direct and indirect benefits to governments and schools. The combination of a significantly improved economic forecast ("Economic Outlook U.S. Q2 2021: Let The Good Times Roll," March 24, 2021) and direct federal aid for state and local units of government suggest that credit conditions are back on track.
All three stimulus bills over the past year provided aid for state and local governments and schools, but to varying degrees, and not all the support was direct. Since a year has elapsed from the start of the pandemic, most issuers have closed one fiscal year and budgeted for the next. With direct stimulus from the ARP, governments at all levels can use the funds to rebuild and adjust to a new normal as the economy opens further. With stimulus dollars from the ARP going directly to issuers, the flexibility they will have to direct revenues to their own needs will enhance credit stability. Enhanced federal funding and policy initiatives to speed vaccination and contain the COVID-19 virus should also contribute to a more even pace of economic and health recovery.
States: How ARP Money Gets Spent May Drive Credit Direction.
Allocation is generous relative to current budget outlook. ARP has $195.3 billion for states and the District of Columbia and an additional $155 billion for local governments. Additionally, there is an additional $10 billion, to be accessed by states, territories and Tribal governments, carved out for critical capital projects to work and schools respond to the public health emergency. In our assessment, this is a generous allocation to the states. Many states have weathered the budgetary impact of the pandemic through use of reserves, adjusting revenue expectations and cutting expenditure items. Additionally, the conservative revenue estimates many states adopted for the fiscal year ending June 30, 2021, are being exceeded year-to-date, helping the budgetary situation. Along with the direct stimulus money, the various measures in the bill to bolster the economy will help stabilize state-level revenues.
Flexible funding is key. Unlike the prior stimulus bills, this money to the states has a wide range of allowable uses. States can replace budgeted revenues not able to be collected due to the pandemic in order to balance budgets. There are two notable restrictions on the stimulus money flowing directly to the states. First, states are prohibited from using the federal allocation to reduce state-level taxes. Additionally the depositing into or replacing pension fund payments are also not allowed. Governments are expecting guidance from the U.S Treasury over the next couple of weeks that will further clarify the flexibility of the ARP funds.
Future structural alignment will be a key focus. There is a new credit risk that these stimulus monies introduce--that of building new recurring expenditures into a budget using these one-time revenues. Using these monies in a way that could create a future structural imbalance could have a negative credit impact over time. Should these one-time monies be used for one-time expenditures, this stimulus would be credit supportive.
Credit risks including uncertainty of tourism-related revenue stream, acceptance by the general population of travel, variants and their effects on the pace of economic recovery, and the strength of the energy sector remain. Negative state outlooks will be resolved as information about the risks become clearer.
Local Governments: Flexible ARP Funding Creates Path To Stability
Flexibility of aid is important. Unlike CARES Act stimulus, ARP can be used to replace revenues lost because of the pandemic. This should enable issuers to use the aid to fill holes created by lower revenues during the height of the pandemic. It also makes it possible to use the direct stimulus dollars for other projects that can support economic development. For issuers who experienced limited operating imbalances in 2020, leveraging ARP funds to drive economic expansion will allow for faster project implementation. Governments can also access additional grant funding for shovel-ready projects from the U.S. Economic Development Administration, accelerating projects which otherwise may have taken years to start.
Balancing short- and long-term demands is crucial. How local governments use the one-time revenues will be an important factor for long-term credit stability and ratings, and will be different based on the issuer's experience during the pandemic. While some local governments experienced significant shortfalls in 2020, others saw limited disruption in revenues or expenditures. Management teams will have to balance the demands of reserve replenishment against the potential for accelerating economic growth. While the credit environment is improving, pockets of stress—and even some distress--will exist for some in both the short and long term and could weigh on credit performance over time. For local governments who ended the pandemic with a markedly weaker economy, sustained lower demand (such as in the hospitality tax sector) or with a significant deterioration in tax base, a return to credit stability may be more difficult to achieve.
Local School Districts And Charter Schools: Credit Strength For States Is Critical
Consistent federal support has helped. Many school districts and charter schools ended fiscal 2020 with a surplus since they were not operating buildings or transportation during pandemic shutdowns and had also received CARES funding. Unlike state and local governments, in December 2020, schools received additional funds under the Consolidated Appropriations Act. Additionally, about 25% of our rated charter schools were approved for loans under the Paycheck Protection Program.
State stability supports school stability. Federal sources of liquidity were key in supporting schools' operations and providing financial flexibility for the near term. However, even with such meaningful federal support, our view of the outlook for all schools was most affected by the potential for cuts in per-pupil funding by struggling states. Notably, the December relief bill did not include any additional direct state and local government aid, and without meaningful additional stimulus we expected that any widespread revenue pressure at the state level would affect school funding formulas as states looked to balance their own budgets. Thus, while the ARP's $130 billion for K-12 provides additional financial support, the $204 billion dollars provided to states may play as critical a role for schools as the one-time monies do. Better results at the state level mean less chance of per-pupil state funding cuts, a key indicator of renewed stability for school district and charter school operations.
- Economic Outlook U.S. Q2 2021: Let The Good Times Roll, March 24. 2021
- Across U.S. Public Finance, All Sectors Stand To Benefit From The American Rescue Plan, March 18, 2021
- Outlook For U.S. Local Governments: Revenue Pressures Mount And Choices Get Harder, Jan. 6, 2021
- Outlook For U.S. States: Symptoms Persist, But A Shot In The Arm Could Lead To Growth, Jan. 5, 2021
- Outlook For Charter Schools: State Revenue Weakness May Test Credit Quality , Jan. 7, 2021
- What the Latest COVID-19 Economic Relief Bill Means For U.S. Public K-12 Schools, Jan. 21, 2021
This report does not constitute a rating action.
|Primary Credit Analysts:||Jane H Ridley, Centennial + 1 (303) 721 4487;|
|Geoffrey E Buswick, Boston + 1 (617) 530 8311;|
|Jessica L Wood, Chicago + 1 (312) 233 7004;|
|Robin L Prunty, New York + 1 (212) 438 2081;|
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