Economic Intervention – Federal and State Government Immediate and Future Fiscal Actions in Response to the COVID-19 Crisis
The COVID-19 pandemic has unquestionably impacted and continues to impact the way we live, work and do business. In response, federal and state governments implemented certain actions to safeguard people (i.e., shelter-in-place orders) from the pandemic and mitigate the consequent negative effect on the economy. Future governmental intervention will seek to provide further economic mitigation and stimulus to various national industries including real estate and construction industries. This article briefly discusses governmental action taken to date, and thereafter explores what governmental intervention to expect in the coming months in response to the COVID-19 pandemic.
To Date – The Federal Cares Act Stimulus Package
The well-publicized Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27, 2020, provides an estimated $2 trillion stimulus package to support the U.S. economy. One component of the CARES Act provides immediate and meaningful relief to small businesses so that they can remain operational despite economic losses caused by the pandemic. Additionally, the CARES Act provides over $28 billion in funding for economic stabilization, including funding for the operation and maintenance of federal agencies, airports, and other transit-related infrastructure. A significant portion of the funding will be used in response to newly imposed safety and security requirements aimed at mitigating further spread of the COVID-19 virus including additional cleaning, use of personal protective equipment (PPE), sterilization procedures, and social distancing protocols implemented by federal, state and local governmental authorities. It is anticipated that these extraordinary expenses will not only continue but also increase as shelter-in-place orders are rescinded. Further, airports and transit agencies may apply CARES Act funding as a stopgap to cover lost revenue due to decreased use of the nation’s airports and transit systems during and immediately following state and local shelter-in-place programs. The $10 billion “Grants-In-Aid for Airports” may also be used to support airport improvement projects.
While the CARES Act provided a much needed injection of monetary aid to businesses and individuals impacted by COVID-19, there is near-unanimous belief by economic experts that more fiscal relief is needed to ensure timely and sufficient economic recovery in direct response to the COVID-19 pandemic.
Crystal Ball: Potential Fiscal Action at Federal and State Levels
What’s Next From the Federal Government?
While CARES Act funding continues to be distributed, Congress will consider addressing other areas of concern in the economy that might need further assistance. This next economic stimulus, which has been given the moniker “Phase 4,” will most likely not see passage by Congress until at least late May or early June due in large part to partisan debate, as the political parties begin to dig into their ideological trenches. For example, deficit hawks are beginning to feel the country has reached a point of reprieve from the pandemic and will therefore seek to slow federal spending and consequent increase in national debt, while Democrats and some Republicans from economically hard-hit states seek increased federal spending, especially directed to particularly financially-stressed state and local governments. President Trump, for the moment, has signaled his support for additional state and local funding, though such support will come with various strings attached not seen with previous stimulus packages.
Previously, President Trump indicated a desire for Congress to pass a $2 trillion infrastructure spending bill in April and, in partial response, Democrats repackaged their infrastructure bill introduced earlier this year in January. However, Republicans and Senate Majority Leader McConnell have been hesitant to promise another massive spending bill at this time. Specifically, McConnell recently indicated his desire not to include infrastructure in Phase 4, but that position will see significant resistance by third-party groups and trade associations representing infrastructure industries seeking specific funding allotments. The Transportation Electrification Partnership, for example, requested that congressional leaders allocate $85 billion and $25 billion in stimulus funding for zero-emission infrastructure investment and zero-emission transit, respectively. Tax credits for clean energy infrastructure, construction and investments will also likely be debated by Congress during Phase 4 negotiations and beyond. Businesses intent on receiving funding for capital projects they are overseeing must advocate the importance of their work with Congress to ensure they have a viable path for relief. Other interest groups are continuing to lobby Congress for needed support. By way of illustration, education trade associations banded together to request over $250 billion in Phase 4, and expressed support for the $500 billion state stabilization fund. Included in the $250 billion is $175 billion for stabilizing state budgets; $50 billion for higher education, $4 billion for a fund administered by the Federal Communications Commission (FCC) to support distance learning for students without internet access, and more funds for extending opportunities to make up for missed learning time.
When Congress returns in May, Democrats are expected to come forward with a proposal of nearly $500 billion for state and local aid, in addition to unemployment insurance funding and other priorities. Reflecting broad support for this proposal, Larry Hogan, Republican Governor of Maryland and Chair of the National Governor’s Association, has called for $500 billion in additional funding to states, while Senators Bill Cassidy (R-LA) and Bob Menendez (D-NJ) have proposed a plan which would provide funding to states in three tranches that reflect state population, infection rates, and revenue loss.
The Federal Reserve, on the other hand, is expected to provide more information on its lending facilities for mid-sized businesses, corporations, states and municipalities, and asset-backed securities. Facilities that have yet to be implemented by the Federal Reserve include the Main Street New Loan Facility, Main Street Expanded Loan Facility, Primary Market Corporate Credit Facility (PMCCF), Secondary Market Corporate Credit Facility (SMCCF), Term-Asset Backed Loan Facility (TALF), and Municipal Liquidity Facility. Final term sheets for these lending facilities continue to be adjusted, including lowering the population minimum of eligible cities and counties for the Municipal Liquidity Facility, as well as allowing nonprofits, including hospitals and universities, to participate in the Main Street New/Expanded Loan Facilities.
On the federal level, transportation, infrastructure, and other capital projects will receive some form of financial relief through federal funding provided to state and local governments. What is less clear with respect to the next phase of financial relief, however, is the level of funding for these interests as well as the allotment criteria to the states affected by COVID-19. While direct federal funding allocated to transportation and infrastructure projects is still on the wish lists of many lawmakers as well as the President, it remains too early to predict at this juncture if the size and scope of the recession will motivate fiscal conservatives to continue their deficit spending. Should economic recovery continue to lag, the groundwork is being laid at the federal level to have capital projects be considered as a means for economic recovery.
What are the States Doing in Response to COVID-19?
States are also utilizing a variety of vehicles to implement the CARES Act relief and respond to the COVID-19 crisis on an individualized basis, including state executive orders and legislation, budget revisions and reallocations, in addition to initiatives undertaken by local government agencies.
To give an example, Florida’s legislature had already met and adjourned prior to the pandemic’s onset, so Governor DeSantis has driven most of that state’s policy in response to the pandemic. North Carolina’s COVID-19 response and relief strategies were initially focused around executive orders issued prior to its legislature convening in late April after conducting remote committee meetings. Illinois has been scheduled to come in for session at various times in April, but in each instance canceled and postponed, thus leaving the crisis response largely in the hands of the governor’s office. In Texas, its legislature does not meet at all this year and so the response is all on the Abbott administration. Virginia, New York, California, Pennsylvania, and Georgia’s respective strategies were more legislatively driven, and include a combination of various state legislation and executive orders in addition to local government-based initiatives.
Legislation passed or proposed by various states will likely impact the construction and real estate industries. For example, Virginia’s legislature voted to delay the effective date of certain pro-labor related laws (i.e., increase in minimum wage, engaging in collective bargaining negotiations for public projects, and the use of project labor agreements). Similarly, the New York and Pennsylvania State Assemblies proposed legislation which, if enacted, would require that certain perils be covered under business interruption insurance during the COVID-19 pandemic which may provide consequent expense and/or lost revenue coverage. Pennsylvania, California, and North Carolina have also proposed or enacted grant and loan programs for certain businesses in response to COVID-19. A number of states have also seen legislation proposing a presumption of COVID-19 being contracted on the job for various emergency (and non-emergency) workers, thus expanding workers’ compensation claims risk.
At this time, it appears that states are focused on the general welfare of the state and their citizenry through business loans and other funding in direct response to the pandemic (i.e., PPE gear, etc.) rather than allocating funding to specific industry needs including the construction and real estate industries, despite their vital importance to state’s financial health. States are also seeing a dramatic decrease in tax revenue due to the pandemic. For example, Georgia’s Department of Revenue reported in early May that tax revenues have decreased over 35%, while California now projects a $54.3 billion deficit as a result of the coronavirus pandemic, eliminating a pre-pandemic $21 billion cash reserve. If, as expected, state budget deficits as a result of COVID-19 are greatly impacted, then special interest funding will likely be subordinated to general funding priorities for the foreseeable future.
Conclusion
While the federal and some state governments have provided initial financial relief to businesses on a macro level, including real estate and construction focused businesses, it is likely that additional funding or other forms of legislation from federal and state governments will be passed to support industries from a perspective of most to least impacted by the pandemic. Future relief is largely dependent on bipartisan support, balancing potential economic benefit versus an increased deficit, and interest groups ability to persuade government leaders to provide funding and other relief to industries negatively affected by the pandemic. At this time, it’s hard to predict when funding will be earmarked for the real estate and construction industries. However, since the President has shown interest in these industries including funding infrastructure projects, it is likely that we will continue to see interest groups push for their inclusion within the next phases of the CARES Act.