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The Coronavirus Aid, Relief and Economic Security Act

The $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act is the largest economic stimulus and relief measure in United States history.  Equivalent to more than 9% of US GDP, the CARES Act is larger than the three major measures enacted to counter the effects of the 2007-2009 recession.  Major provisions of the law provide relief to large and small businesses, individuals, state and local governments and the health care system suffering from the impact of the coronavirus pandemic.


The highly-complex, 880-page law was written very quickly.  It is a lot to digest.  Federal agencies are now working overtime to provide guidance on how the new law will be implemented.  The Treasury Department, the Federal Reserve and other federal agencies will be providing important details about implementation in coming days.  Given the cashflow challenges many businesses and individuals are currently facing, the speed and effectiveness with which program measures are implemented will be extremely important.

Key Provisions of the CARES Act

The $2 trillion measure includes an estimated $500 billion for loans, loan guarantees and other aid for businesses, states and local governments; $349 billion for small businesses; $301 billion for one-time direct payments to households; an estimated $250 billion for unemployment aid; $150 billion for aid to states and local governments; and more than $100 billion for hospitals and the health care system.


Aid for Businesses, States and Local Governments


The largest item in the CARES Act is a $500 billion authorization to provide financial assistance to businesses, states and local governments.  Of this total, $25 billion is earmarked for passenger air carriers, $4 billion for cargo air carriers and $17 billion for businesses deemed critical for maintaining national security.  The remaining $454 billion will be used for the Treasury Department to provide financial assistance to lending programs or facilities established by the Federal Reserve.  With leverage (possibly as much as 10 times), these funds will fundamentally increase the financial resources available to the Federal Reserve for lending to businesses, states and local governments.


The CARES Act gives Treasury Secretary Steven Mnuchin substantial discretion to approve loans, loan guarantees and other assistance to companies.  Given the scale and the scope of authority granted under the CARES Act, Mnuchin and Federal Reserve Chairman Jerome Powell will play a fundamental role in the success of government stimulus efforts in coming weeks.


The Treasury Department and the Federal Reserve are currently working out important details about lending initiatives for businesses, states and local governments.  Watch for important details in coming days and weeks.


Small Business Loans and Grants


To help small businesses keep employees on the payroll and stay open in the near term, Congress appropriated $349 billion for loans to small businesses through the Paycheck Protection Program.  The PPP is a new program the Small Business Administration is administering.


Under the program, businesses and nonprofit organizations with up to 500 employees can apply through qualifying banks for loans backed by the SBA.  Loan proceeds can be used for payroll costs, healthcare benefits, mortgage payments, rent, utility payments and additional items.  Borrowers will be eligible for loan forgiveness up to 100% of the principal amount if they meet employee retention and employee compensation requirements.  The maximum loan amount is $10 million.    


Given the large number of small businesses in the US (many of which operate with minimal cash reserves) and the relatively generous terms of the program, demand for Paycheck Protection Program loans is expected to be very high.


One-Time Direct Payments to Households


To provide quick financial relief to households, 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 direct grants are phased out for people in upper income brackets.


Unemployment Assistance


The CARES Act makes major changes to unemployment assistance, increasing benefits and broadening eligibility.  The law extends the duration of unemployment benefits to 39 weeks from the 26 weeks typical in most states.  The law provides an extra $600 per week from the federal government on top of whatever base amount a worker receives from the state.  This $600 supplement will last for four months.  The law also creates a temporary unemployment program for individuals not otherwise eligible for unemployment benefits (e.g., self-employed, independent contractors, gig economy workers). 


Aid for States and Local Governments


State and local governments are generally required to balance their operating budgets every one or two years.  The economic shock caused by the coronavirus pandemic has significantly altered their fiscal outlook.  The CARES Act provides $150 billion in direct aid to states, distributed according to population size.  Local governments can apply to receive aid directly, reducing the amount available to the rest of the state.    


Aid for Hospitals and the Health Care System


The CARES Act adds $100 billion to the Public Health and Social Services Emergency Fund to reimburse health care providers for health care expenses or lost revenues that are attributable to the coronavirus.  Coverage of diagnostic testing for COVID-19, expanded telehealth, preventative services, higher Medicare reimbursements for doctors and hospitals and a delay in certain Medicaid cuts to hospitals are part of the complex package.

What to Watch for Next

As large as the $2 trillion measure is, the CARES Act will most likely not be the last major stimulus and relief measure enacted by Washington.  State and local governments and the healthcare system are under extreme pressure and will need additional financial assistance.  Businesses of all sizes will be requesting additional financial assistance.  A major infrastructure bill is being debated as a way to stimulate the economy and create jobs.  Additionally, much of the CARES Act aid is relatively short-term in nature.  For example, many people will spend their $1,200 check quickly and the small business Paycheck Protection Program only covers loans made between February 15 and June 30, 2020.


Throughout the pandemic, the Federal Reserve has been implementing extraordinary measures to help the economy and keep the financial plumbing working.  Like during the 2008 Financial Crisis, the Federal Reserve will play a key role in stabilizing the economy during the ongoing coronavirus pandemic.  The Small Business Administration will play a key role in helping keep many small businesses and nonprofit organizations in business.  Watch for important guidance about the implementation of programs under the CARES Act coming out of federal departments and agencies in the very near future.

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