Another round of stimulus totaling $1.9 trillion is making its way through the US economy, with hopes it will trigger a sharp rebound from the ravages of COVID-19. The relief package includes funds for individual state and local governments, which should help shore up some lost tax revenues and close budget gaps. Jennifer Johnston discusses the implications for municipal bond investors, noting that where these entities direct the funds will be crucial.

The recent passage of US President Joe Biden’s $1.9 trillion COVID-19 relief package, “The American Rescue Plan Act of 2021,” not only includes checks for individuals, but also allocates funds for state and local governments, so it should provide a boost to states, cities and counties reeling from the pandemic. While the CARES Act and the last round of stimulus in December restricted funding to coronavirus-related efforts, this time around, local governments can use federal dollars for more flexible purposes. States want revenue replacement aid—aid which can be used for any purpose to replace lost revenues—and they got it. Aid will be received in two pieces and can be used through 2024.

We caution that this sort of blank spending check comes with a potential moral hazard, so good governance at the state and local level will be paramount in terms of allocating these funds judiciously, in our view. How this process plays out will need to be watched very closely as it can have an impact on the credit outlook for the municipality both in the short- and long-term time periods.