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Financing Infrastructure During the COVID-19 Crisis

The Brief
  • Volatility in the municipal bond market at the outset of the COVID-19 crisis has since subsided, but many state and local governments face headwinds that could disrupt and delay essential infrastructure projects.
  • A handful of municipal bond issuers—from the state of Alaska to New York’s Metropolitan Transportation Authority—have been hit by credit downgrades or negative watches from major rating agencies in the past couple months and more are expected.
  • Policymakers must monitor these developments closely and consider options to ensure states, local governments, and their agencies, can finance projects needed for a quick economic rebound and longer-term growth.

Trouble in the Municipal Bond Market

About 90% of state and local capital infrastructure spending is financed with debt, such as municipal bonds. Long-term debt enables governments to spread out the large, upfront costs of major infrastructure investments. The $3.8 trillion U.S. municipal bond market that provides this financing is well known for its relative safety and stability. Amid the coronavirus pandemic, however, that historic sense of safety was not enough to dissuade investors from selling off their holdings.

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Performance of the S&P Municipal Bond Index (Year-to-Date)

Source: S&P Global

Starting on March 10, the S&P Municipal Bond Index, which measures the fixed-rate, tax-free municipal bond market, experienced a dramatic dip of about 11% over the course of just two weeks, erasing nearly 15 months of growth. This volatility, caused by rising risks and uncertainty, has since stabilized, signaling a return in bond demand.

Quick action by policymakers to provide states, local governments, territories, tribes, and the District of Columbia with fiscal relief—in legislation like the $2 trillion CARES Act—no doubt helped calm some of the volatility COVID-19 caused in the municipal bond market at the outset of the pandemic. The Federal Reserve also intervened to ensure bond markets remained liquid, establishing the Municipal Liquidity Facility on April 9 and offering up to $500 billion in loans to states, cities, and counties through the purchase of short-term anticipation notes. While most state and local debt is long term, some states issue anticipation notes to manage their cash flow.

While these efforts will help state and local governments cover essential services as tax dollars dry up, they may not be enough to fully fuel their recovery. States and local governments face several headwinds moving forward:

  • Pandemic-related shutdowns have hit state and local government budgets hard—delaying income tax payments, curtailing sales tax receipts, and resulting in massive health and public safety expenses.
  • COVID-19 remains an ongoing public health and economic threat, with new cases per day recently exceeding 50,000 and causing some communities to halt their reopening efforts. The virus remains a general market risk, may undermine the creditworthiness of government bond issuers, and could further disrupt infrastructure projects.
  • A handful of states, local governments, and other infrastructure bond issuers (such as transit authorities, airports, and water systems) have been hit by credit downgrades or negative watches from major rating agencies—potentially raising borrowing costs just as they grapple with budget shortfalls. (See a summary of recent ratings activity in the table below.)
  • Rural, tribal, and other disadvantaged communities, which already faced challenges taking out debt and financing infrastructure improvements, may find it particularly challenging to service existing debt obligations and finance new projects.

U.S Public Finance Credit Rating Activity (through 6/25/20)

Source: S&P Global

ActionLocal GovernmentsStatesTransportationUtilities
Downgrade + Negative Outlook Revision 151
Downgrade + Stable Outlook Revision 1
Negative Outlook Revision 2661619730
CreditWatch Negative 102

The Role of Infrastructure Investment in Economic Recoveries

Many infrastructure projects have stalled as a result of coronavirus prevention measures. In fact, the National League of Cities found in a survey that 65% of cities have had to delay or cancel capital expenditures and infrastructure projects since the coronavirus pandemic broke out. While some communities—from Los Angeles to Westchester, NY—have found a way to accelerate projects to take advantage of infrastructure idled by stay-at-home orders, others have been unable to overcome budget challenges and more pressing public health needs. Yet with its ability to stimulate the economy and foster long-term economic growth, infrastructure improvements should continue to be a primary focus at all levels of government.

From the Great Depression to the Great Recession, federal infrastructure programs have played a significant role in national economic recoveries. For example, infrastructure spending from the American Recovery and Reinvestment Act of 2009 injected an estimated $1.85 into the economy for every dollar spent. According to S&P Global, a $2.1 trillion infrastructure package could add up to $5.7 trillion to the U.S. economy by 2029 and recover over 2 million jobs within the next four years.

Legislative Outlook

Promisingly, President Donald Trump and both chambers of Congress are moving forward to advance infrastructure priorities. The White House issued an executive order on June 4 to expedite the federal permitting process for infrastructure projects and has endorsed the need for infrastructure investment. In the House, the $494 billion INVEST in America Act, to reauthorize federal highway, mass transit, and rail programs has been folded into a larger $1.5 trillion infrastructure package that would also increase funding for water infrastructure, housing, and broadband—the Moving Forward Act. On July 1, the larger bill passed a House floor vote and now awaits the Senate. However, the bill was developed through a largely partisan process, is not likely to gain Republican support, and lacks a pay-for. The Senate Environment and Public Works Committee is looking to advance to the full Senate three bills it passed unanimously—the America’s Water Infrastructure Act, the Drinking Water Infrastructure Act, and the America’s Transportation Infrastructure Act, their $287 billion surface transportation reauthorization bill.


The combination of budget shortfalls and uncertain borrowing costs for state and local governments threatens infrastructure project delivery at a time when economic stimulus is sorely needed. Policymakers should continue to prioritize measures that protect households and businesses from COVID-19, but must also respond to critical infrastructure financing needs, ensuring that localities can access affordable loans and meet project deadlines. At the federal level, Congress should continue to pursue infrastructure legislation with an added emphasis on consistent funding for localities. The Federal Reserve’s Municipal Liquidity Facility helped restore investor confidence, but as we see a new surge in COVID-19 cases, policymakers must prepare extra assistance measures. As history has shown us, stability in the infrastructure sector will play an important role in promoting job creation and long-term resiliency during and after this pandemic.

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