CARES Act Stimulus: Early Implementation
Coronavirus Economic Stimulus and Relief:
Program Implementation Begins
It is amazing how quickly things can get done. Just a few weeks ago, on March 27, the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, the largest economic stimulus and relief measure in United States history, was passed into law. (Read my summary here.) Now, 26 days later, hundreds of billions of dollars of loans and economic aid have been dispersed to large and small businesses. Direct payment checks for $1,200 have started landing in the bank accounts of tens of millions of citizens. The Federal Reserve has announced several major new programs, adding $2.3 trillion dollars more to the economic stimulus and relief effort.
The implementation of so many new programs, so quickly, on such an unprecedented scale, has not been smooth or easy or without controversy. But an impressive amount has been done. A very significant amount of loans and financial aid has been distributed to a very large number of people and organizations. Given the short-term nature of many of the CARES Act’s provisions and the probable length and severity of the economic downturn caused by the coronavirus pandemic, businesses, individuals, state and local governments and the health care system will be calling for much more financial assistance in coming weeks.
CARES Act Economic Stimulus and Relief:
Early Implementation of Major Programs
Small Business Loans and Grants
Demand for Paycheck Protection Program loans for small businesses has been so high that the $349 billion program ran out of money less than two weeks after opening. Under the program, businesses and nonprofit organizations with up to 500 employees can apply through qualifying banks for loans backed by the Small Business Administration. Loan proceeds can be used for payroll costs, healthcare benefits, mortgage payments, rent and additional items. If borrowers meet employee retention and employee compensation requirements, up to 100% of the principal amount of the loans can be forgiven.
The rush to file for Paycheck Protection Program loans began on April 3. Some banks were not able to process loans the first day because of limited guidance from federal agencies about how to implement the program. Many banks only worked with existing customers. Much of the money was distributed to relatively larger, more sophisticated small businesses with access to other sources of credit. More than 100 publicly traded companies received PPP loans. Due to overwhelming demand, the program ran out of money on April 16, while many small business owners were still trying to apply.
Paycheck Protection Program loans are meant to cover about two months’ payroll and expenses. Given the short-term nature of the loans and the rising likelihood of a slow and extended economic recovery, small businesses will be seeking additional financial assistance. About half of all jobs in the United States are with small businesses.
As of the date of this newsletter (April 22), the Senate had approved a new $484 billion economic stimulus and relief plan. The proposed plan includes $320 billion to replenish the Paycheck Protection Program and additional funding for hospitals, expanded coronavirus testing and the Small Business Administration’s disaster relief fund. The measure is expected to go the House of Representatives soon and is expected to be signed into law. Demand is expected to be very high again for the second round of PPP funding.
To put the numbers in perspective: At more than $2 trillion, the Coronavirus Aid, Relief and Economic Security Act alone equals about half of what the federal government spent in all of 2019.
New Federal Reserve Programs: $2.3 Trillion Dollars of Additional Firepower
The Federal Reserve has expressed a willingness to take unprecedented steps to cushion the economy and calm markets. On April 9, the Federal Reserve announced the creation and expansion of nine lending programs that will add up to $2.3 trillion to economic stimulus and relief efforts. The Federal Reserve is now playing a significantly larger role to protect the economy than it did during the Global Financial Crisis just over a decade ago.
The objective of the new Main Street Lending Program is to enable up to $600 billion in lending to companies that are too large to qualify for small business loans, but too small to access corporate debt markets. Under the terms of the program, companies with up to 10,000 workers, or with revenues of up to $2.5 billion, will have access to four-year, unsecured loans. Loans sizes will range from a minimum of $1 million to a maximum of $25 million (subject to certain requirements). Principal and interest on the loans will be deferred for one year. Unlike Paycheck Protection Program loans, Main Street loans are not forgivable. Small businesses that have applied for PPP loans may also apply for Main Street loans.
The Municipal Liquidity Facility was set up to provide financial relief to states and local governments. Municipal bond markets have been in turmoil. Congress has provided only limited relief to state and local governments in recent legislation. The new program will purchase up to $500 billion of short-term notes – with maturities of up to two years – from states, counties with at least two million residents and cities with at least one million residents.
In addition, the Federal Reserve created a Paycheck Protection Program Lending Facility to enhance the ability of financial institutions to originate Paycheck Protection Program loans to small businesses. The Federal Reserve also expanded the size and scope of three existing programs: the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility and the Term Asset-Backed Securities Loan Facility. These three programs are intended to increase the flow of credit to households and businesses. The Federal Reserve also expanded its purchasing to include some classes of corporate debt below investment grade.
Aid for States and Local Governments
A major debate that will be playing out in Washington in coming weeks is how much additional coronavirus-related federal aid should go to state and local governments. State and local governments are facing huge surges in costs and huge losses in revenues because of the pandemic. Unlike the federal government, most state and local governments have to balance their operating budgets every one or two years. The National Governors Association is asking for a half trillion dollars to help states counter budgetary shortfalls.
Some jurisdictions are already announcing cuts to essential services. New York City Mayor Bill de Blasio said on April 16 that the city will slash an additional $2 billion in municipal services from his proposed city budget of $89.3 billion for the next year. The cuts include a hiring freeze and cuts to a number of programs. New York City has spent approximately $700 million to fight the coronavirus through mid-April and expects that number to rise to $3.5 billion by the end of the year.
The CARES Act provides $150 billion in direct aid to states.
Aid for Hospitals and the Health Care System
The CARES Act includes more than $100 billion for hospitals and the health care system. The Department of Health and Human Services has been relatively slow to distribute this money. The measure approved by the Senate earlier this week, which is expected to become law, includes an additional $75 billion in assistance for hospitals and $25 billion for expanding testing for the coronavirus across the country.
More than four million Americans applied for unemployment benefits during the week ended April 18, bringing the five-week total during the coronavirus pandemic to 26.5 million. Some economists are estimating that the current rate of unemployment is approximately twice the 10% peak reached during the Global Financial Crisis in 2009. State unemployment offices are reporting record numbers of claims and many applicants are facing extreme difficulty contacting unemployment offices online or via telephone.
The CARES Act provides an extra $600 per week from the federal government on top of whatever base amount a worker receives from the state. Implementation of this program has been relatively successful and most states are now paying recipients this $600 supplement. The CARES Act extended the duration of unemployment benefits to 39 weeks from the 26 weeks typical in most states.
One-Time Direct Payments to Households
To provide quick financial relief to households, direct payment checks started landing in tens of millions of household bank accounts about April 15. The CARES Act provides for one-time direct payments of $1,200 to Americans with adjusted gross income of up to $75,000 for individuals and $150,000 for married couples. Couples and individuals are eligible for an additional $500 per child. The grants are phased out for people in higher income brackets.
To speed up check processing, the Internal Revenue Service set up a website where individuals without a bank account on record with the IRS can provide electronic banking information to them.
Next Stimulus and Relief Legislation
When members of Congress return from their home states to Washington in early May, they are expected to turn their attention to a broader economic stimulus and relief measure that would include aid to state and local governments, coronavirus caregivers and possibly for workers at grocery stores and drug stores and others providing essential goods and services to Americans subject to stay-at-home orders.
To read the April 2, 2020, edition of my newsletter, which describes the $2 trillion Coronavirus Aid, Relief and Economic Security Act, please click here.