This is the third article in a three-part series on the CARES Act, a $2 trillion stimulus bill that was signed into law on March 27th, 2020. The law is designed to offer wide-ranging assistance to households and businesses, providing everything from cash infusions to hospitals and expanded access to COVID-19 testing to small business loans to expanded unemployment benefits.
This article provides an overview of aspects of the law as a whole, including funding for large corporations and state and local governments. You can read our overview of relief provisions for small businesses here and provisions for individuals and families here.
The CARES Act, signed by President Trump on March 27th, is a $2 trillion stimulus package designed to bolster the economy through the coronavirus crisis. Prior articles in this series discussed the $600 billion in stimulus funding for individuals and families and $377 billion for small businesses, which only represents one-half of the total package. In this article, we will review the other major recipients of aid under the Act: large corporations, state and local governments, the health care sector, and safety net programs.
To provide some context for the size of the stimulus package, we estimate that $2 trillion is about 9% of GDP, with the entirety of this stimulus intended to be distributed within the next few months. The stimulus package passed in 2009 was one-half of the size—about 4.5% of GDP—and was spread over two years. The CARES Act is a stimulus package of truly enormous size and scope, but it will likely not be the only such package required to sustain the economy through the pandemic and its painful aftermath.
Within the CARES Act is the Coronavirus Economic Stabilization Act of 2020, which focuses on emergency relief to large businesses. In other words, this part of the Act will provide bailouts primarily to large corporations, though large non-profits, municipalities, and other entities are also eligible. $500 billion is provided to support organizations that do not qualify for small business relief, with special funding dedicated to the airline industry. This pool of money will be distributed to companies in the form of loans, loan guarantees, and other investments with a maximum five-year term. Dedicated funding is as follows:
- $25 billion in loans for passenger air carriers,
- $4 billion in loans for cargo air carriers,
- $17 billion in loans for businesses critical to national security, and
- $454 billion in funds for the Treasury to backstop emergency actions by the Federal Reserve to help other types of distressed businesses.
Unlike some of the loans available to small businesses, loans to large corporations are not forgivable. The loans must also be “sufficiently secured” and will have interest rates determined by average Treasury rates. The Treasury has been instructed to ensure that the Federal government is compensated for the risk assumed in making these loans, and any interest payments or gains from the businesses will be returned to the Treasury or deposited in the Airport and Airway Trust Fund.
The challenge with a bailout fund is ensuring that assistance only goes to the financially needy and that the interests of taxpayers are protected, and the CARES Act, unfortunately, has limited power on these fronts. Notably, the loans do come with a set of conditions that are intended to ensure that the funding is not used to pay shareholders or leadership directly. Firms must agree to:
- A prohibition on stock or equity buybacks, dividends, or capital distributions for one year from the date of the loan or until the loan guarantee is no longer outstanding
- Limitations on the compensation of any officer or employee who made more than $425,000 in 2019 for two years following the loan date
- Retention of at least 90% of their employment levels as of March 24th, 2020 through September 30, 2020 (this requirement will apply to many but not all loans)
However, the Secretary of the Treasury has the latitude to waive any of the above requirements, so it is unclear how many firms will actually operate under these restrictions.
There are other potential loopholes that could lead to questionable uses of funds. For example:
- The $454 billion general distressed business fund will go into a special purpose vehicle (SPV), which the New York Fed will leverage to make $4 trillion in corporate loans, representing 18% of U.S. GDP. The New York Fed will, in turn, rely on Blackrock to disburse the cash. The entire process will lack transparency, as all parties will be subject to confidentiality agreements that survive the termination of the contract.
- The Act includes a clause that bars bailout loans from going to companies controlled by the President, Vice-President, Cabinet members, or members of Congress. However, some businesses associated with politicians (including some of President Trump’s businesses) might still qualify for assistance through small business loans to the hospitality industry.
- To receive a loan, a company must be headquartered in the United States; this registration requirement seemingly rules out big companies that are registered overseas for tax reasons. However, some of these large companies have subsidiaries that are based in the United States and may be eligible for a loan, which would effectively use U.S. taxpayers’ dollars to bail out firms that avoid paying U.S. taxes.
Additionally, there is some question as to whether loans were the appropriate bailout vehicle at all. Many people, including President Trump, had been supportive of giving taxpayers equity stakes in the companies they rescue, which is how bank bailouts during the Great Depression were structured. In March 1933, the Reconstruction Finance Corporation (RFC) was empowered to purchase preferred stock in banks in need of financing; previously, the RFC’s role was only to provide loans to distressed banks. This change gave taxpayers an equity stake in the banks while giving the banks more time to recover, as there was no fixed repayment plan, which dramatically reduced the number of bank failures.
State and Local Government
Overall, the CARES Act designates about $340 billion for programs to aid state and local governments. $274 billion of the total is earmarked generally for the COVID-19 response, with $150 billion of the response funding coming in the form of direct aid to state and local governments. That direct aid will be allocated to states by population with a minimum of $1.25 billion, and states will split the direct aid with local governments serving populations of more than 500,000 people. As an example, the Tax Foundation estimates that Illinois’ total allocation will be just under $5 billion, with $3.5 billion going directly to state government and the remaining $1.5 billion going to the five largest counties.
Outside of the broad COVID-19 funding category, the Act also includes $5 billion for Community Development Block Grants to provide services to senior citizens and the homeless, $13 billion for K-12 schools, $14 billion for higher education, and $5.3 billion for programs for children and families, which includes providing immediate assistance to child care centers.
While $340 billion may seem like an enormous amount of money, this provision of the CARES Act is already being criticized as providing too little aid to states and to municipalities with too many restrictions. State and local governments are on the front lines of the coronavirus crisis, and many were facing financial difficulties before the pandemic. Unlike the Federal government, state and local governments generally must balance their budgets, so as revenues drop during the unfolding economic crisis, so too will state and local government spending, leading to budget cuts that could hamper recovery efforts.
The CARES Act provides $150 billion in funding for public health purposes. $100 billion of that fund will be used to create the Public Health and Social Services Emergency Fund, which will reimburse eligible heath care providers for expenses related to the coronavirus crisis: building or leasing additional space for patients, buying medical supplies or personal protective equipment, training the additional workforce, etc.
For patients, the Act requires that health plans cover diagnostic tests for COVID-19 without cost-sharing or prior authorization as long as the Food and Drug Administration (FDA) or state have approved the test. Health care providers will be required to reimburse at a negotiated rate or the price listed by the provider. Plans will also be required to cover qualifying preventive services that may ultimately be recommended by the Centers for Disease Control and Prevention (CDC).
The Act also makes some strategic allocations to help with the coronavirus crisis as a whole: $11 billion for diagnostics, treatments, and vaccines, including funding to the FDA to expedite new drug approval; $4.3 billion to the CDC for programs and response; and $16 billion to the Strategic National Stockpile to increase the availability of equipment like ventilators and masks.
Safety Net Programs
The CARES Act provides $26 billion in funding to bolster the safety net programs that focus on food security. Schools will receive additional funding to provide meals to students, additional money is allocated to the Supplemental Nutrition Assistance Program (SNAP) to cover the expected increase in applications due to the coronavirus crisis, and food banks will receive direct aid. This is the second round of emergency funding for most of these programs, as they received earlier support from the Families First Coronavirus Response Act in mid-March.
Coronavirus Response: What’s Next
Despite the enormous size and scope of the CARES Act, many people, including ourselves, are asking the same question: will it be enough? As significant as the Act is, it seems highly unlikely that this will be the only stimulus measure taken by the Federal government in the coming months. Much depends upon the severity of the coronavirus outbreak and the length of time that social distancing measures put so much activity, economic and otherwise, on hold. We are in uncharted territory: not even during the Great Depression did so much of the economy come to a screeching halt. While we should not expect the CARES Act to be a solution to all problems, it is an important and, for the most part, well-considered first measure to provide immediate relief to the individuals and businesses who desperately need it, although we expect that more aid will be required. While this emergency stimulus package seems both appropriate and necessary, the long-term inflationary consequences of the deficit spending that will occur in 2020, funded by money printing by the Federal Reserve, are also deeply concerning to us.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy”, dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Although information has been obtained from and is based upon sources Pekin Hardy believes to be reliable, we do not guarantee its accuracy.