Stimulus Response: ARP’s Impact on Muni Bond Issuers | Lord Abbett
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Fixed-Income Insights

A detailed look at how the $1.9 trillion American Rescue Plan has helped support key sectors of the municipal bond market.

Read time: 5 minutes

[This article is from the forthcoming edition of the Lord Abbett Muni Quarterly.]

The $1.9 trillion American Rescue Plan Act (ARP), which was enacted in March 2021, has and will provide significant support to municipal bond issuers nationwide. Through economic stimulus and direct aid, we believe the funds will meaningfully increase near term revenues for state and local governments, schools, and transit systems. Most municipalities proved to be resilient over the past 12 months, as tax revenues did not decline as much as been expected and many came into the pandemic with sizable rainy-day funds. Therefore, it is our view that the aid will not only support economic recovery but likely will also stimulate future growth.

The ARP is the third in a series of stimulus packages that also included the $1.8 trillion CARES Act passed in March 2020 and the $900 billion Consolidated Appropriations Act (CAA) passed in December 2020. (See Figure 1.)


Figure 1. Stimulus Funding for Municipal Bond Sectors


Although state and local governments received $150 billion of direct aid through the prior two plans, those moneys could only be spent to offset COVID-related expenses already incurred. ARP directs $351 billion to state and local governments and provides them with a wider discretionary berth. The only limitations are that the funds cannot be used to offset tax-rate decreases or paying down funding pension liabilities.

The impact of the stimulus funding for state and local governments will be felt over a two-year period, as 50% of the funds will be paid within 60 days of enactment and the other 50% no earlier than one year later. The legislation also requires that the moneys be spent by 2024.

Pursuant to the ARP, $195 billion will be allocated among the states based on each state’s relative unemployment rate. According to Moody’s, this is equivalent to nearly 16% of fiscal 2019 state own-source revenue. Highly rated states like California, Texas, New York, and Florida will all receive more than $10 billion each. Lower rated states like Illinois and New Jersey will receive $7.5 billion and $6.4 billion, respectively. The state aid amounts are sufficient to cover recorded fiscal 2020-21 budget cuts and budget expenditure increases for every state.

Local governments will directly receive a total of $130 billion which will be distributed based on a formula which incorporates growth, population, housing, and poverty. Some of the largest city allocations include New York- $4.3 billion, Philadelphia- $1.1 billion, Chicago- $2.0 billion, and Los Angeles- $1.3 billion.

Stimulus funding from the ARP is not limited to state and local governments. Other major provisions include $126 billion for K-12 education, $40 billion for higher education, $30 billion for mass transit, $8 billion for rural hospitals and $8 billion for airports. Municipal issuers will also benefit indirectly through the ARP provisions which send checks to individuals and expand unemployment insurance, both of which should stimulate economic activity.

Although the stimulus payments will close budget gaps for many governments in the short term, it will not change the long-term credit fundamentals of those that have structural imbalance. The aid is a one-time infusion of money, so it is important that that the funds are not used for recurring programs that will require new funding sources once the stimulus runs out. Ideally, they should be used for such purposes as paying down debt, offsetting COVID related expense spikes, and offsetting short term tax revenue loss.

How might individual municipal issuers benefit from the ARP stimulus? Here, we provide three case studies.

School District: Los Angeles Unified School District

Los Angeles Unified School District (LAUSD) is the second largest school district in the United States, with an enrollment of over 450,000 K-12 students. LAUSD has a very large tax base and good finances yet faced significant operating challenges because of the pandemic and the shift to online learning.

From March 2020 through December 2020, the school district incurred approximately $700 million of additional costs related to the pandemic.  In addition, enrollment has been declining for the past several years, and this was exacerbated by the pandemic. Fortunately, the fiscal 2020-21 state budget included a hold-harmless provision for the purpose of calculating state funding which is tied to enrollment levels. However, this provision is not expected to continue beyond 2021-22, and LAUSD was projecting a structural budget imbalance in fiscal 2023.

Favorably, the federal government has provided states and local governments, including school districts, with a large pool of stimulus funding. Through various relief bills, LAUSD has been allocated nearly $5 billion in funding. Of that amount, $2.7 billion comes from the ARP, which features flexible spending requirements. In total, stimulus funding equates to approximately 55% of LAUSD’s fiscal 2020 revenues and 150% of fiscal 2020 fund balance. On an interim basis LAUSD reports an operating surplus, even when excluding the most recent stimulus dollars. The additional federal funding provides LAUSD with significant flexibility to address its projected structural imbalance.



Health System: CommonSpirit Health

CommonSpirit Health is the largest not-for-profit hospital system in the United States, with nearly $30 billion in annual operating revenue and operations in 21 states. Like almost all healthcare providers, CommonSpirit saw a precipitous drop in patient volume in April 2020 as many states imposed temporary bans on elective procedures. During that month, CommonSpirit’s admissions dropped to less than 70% of pre-pandemic levels. Recovery began in May 2020, but as of December 31, 2020 volumes were still below pre-pandemic levels.

Despite the loss of patient volume, CommonSpirit’s financial performance through December 31, 2020 was stronger than the prior-year period. Financial support from the federal government in the form of CARES Act grants was an important driver to performance. In total, CommonSpirit received $1.4 billion of these stimulus payments. Without these funds, CommonSpirit notes in their financial disclosure that the EBITDA (earnings before interest, taxes, and depreciation & amortization) margin would have been 30% lower. The CARES Act funds were an important lifeline for many healthcare systems, hospitals, and other providers during the pandemic, and importantly, the CARES Act grants do not need to be repaid to the federal government.

In addition to the CARES Act funds, CommonSpirit received $2.7 billion of advance payments from Medicare. The Medicare Accelerated and Advanced Payments Program distributed approximately $100 billion to healthcare providers in the early months of the pandemic. Unlike the CARES Act grants, these advance payments will be recouped by the federal government over a period of 29 months, beginning one year from the date a provider received the advance payment. It is important to note, however, that by advancing these funds, the federal government provided critical liquidity support during a period of tremendous pandemic-induced strain. This allowed hospitals and health systems to focus on managing their clinical operations.



Airport: Los Angeles International Airport

As a vital transportation sector, airports are key to a broader U.S. economic recovery. During the pandemic, the federal government recognized airports’ importance and offered significant fiscal support through the stimulus programs.

Like all airports, Los Angeles International Airport’s (LAX) passenger traffic ground to a halt at the start of the pandemic – it was 96% lower in April 2020 compared to April 2019. Enplanements have slowly recovered over the past year, although traffic in the month of March 2021 was still 65% lower than pre-pandemic levels. Prior to the pandemic, approximately 30% of enplanements were for international travel, which has recovered much slower than domestic traffic due to travel restrictions.


Figure 1. Tracking the Traffic Recovery at LAX

Los Angeles International Airport monthly passenger traffic, January 2019–March 2021

Source: Los Angeles World Airports ( Data as of March 31, 2021.


Despite the large decline in enplanements, LAX’s credit fundamentals remain strong due to the infusion of a large amount of federal fiscal stimulus. LAX was allocated $324 million of CARES Act grants, which represents around 24% of annual operating revenues. The federal aid package passed in December 2020 allocated an additional $72 million for LAX. Additional funding through the ARP will also be allocated to LAX, although the federal government has not yet released allocation amounts. Funding through the federal stimulus programs is being used by LAX to address near-term operating pressure caused by the pandemic, to help cover operating expenses and to maintain debt service coverage levels. Liquidity levels remain very strong; as of November 30, 2020, the airport held over 500 days cash on hand.




This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

References to specific securities and issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in portfolios managed by Lord Abbett and, if such securities are held, no representation is being made that such securities will continue to be held. This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be profitable.

A Note about Risk: The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems.

The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, is a $2.2 trillion economic stimulus bill enacted in March 2020 in response to the impact on the U.S. economy of the COVID-19 pandemic.

The credit quality of the securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness.  Ratings range from ‘AAA’ (highest) to ‘D’ (lowest).  Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.



    Muni Quarterly




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