Congress has passed a follow-up to the $2.2 trillion stimulus package introduced in April 2020—and it may not stop there. We look at the municipal sectors set to benefit most.
Investors look to the municipal market for both quality and diversification. They were rewarded in 2020, when the municipal market proved resilient despite a challenging economic environment. Investment-grade municipals quickly rebounded from the spring’s extreme volatility to deliver solid returns for the year on the back of declining interest rates and stable credit fundamentals. The strength of municipal credit quality surprised many, including forecasters who envisioned doom and gloom earlier in the year. April’s $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act was instrumental in stabilizing the economy for much of the year, proving essential in supporting many areas of municipal finance, including state and local governments, transportation, education, and health care.
The lame-duck session of Congress followed this in December with a long-awaited boost to the CARES Act: the $900 billion Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA). While the bill doesn’t provide direct aid to state and local governments, it will provide over $100 billion in aid to various municipal sectors.
One of the biggest beneficiaries of the new bill is the education sector. Elementary and secondary schools will receive $54 billion in aid, and higher education institutions will receive $20 billion. Elementary and secondary education is usually the largest expense item in state budgets, with states covering 47% of K–12 education costs on average. The significant education aid can therefore be viewed as back-door aid to states, since they’ll have the ability to cut school funding, yet school budgets could still be made whole through federal aid.
Other sectors benefiting from the bill include:
Investors are beginning to see the light at the end of the tunnel from rapidly developed vaccines and significant economic stimulus intended to bridge the gap to a postpandemic world. We expect the resilience in municipal credit quality witnessed in 2020 to continue in 2021. This positive outlook on muni credit may provide a lift to valuations and, more importantly, preserve both the quality and diversification that investors seek from the municipal asset class.
Special thanks to Eaton Vance director of municipal research Bill Delahunty, CFA, for his significant contributions to this post.