On June 29th, the Federal Reserve issued a term sheet and commenced its program to support issuance of new debt by large employers. The Primary Market Corporate Credit Facility (PMCCF) will give companies access to credit by either (i) purchasing qualifying bonds as the sole investor in a bond issuance, or (ii) purchasing portions of syndicated loans or bonds at issuance. The term sheets details eligibility requirements and pricing. In addition to the PMCCF, the Federal Reserve is also operating the Secondary Market Corporate Credit Facility (SMCCF) (together, the CCFs). The combined size of the CCFs will be up to $750 billion.
On June 25, 2020, the GAO released its report assessing and evaluating the major federal actions in response to the COVID-19 pandemic, including the CARES Act expenditures. The report, critical of the delay in comprehensive reporting of government COVID-19 expenditures permitted by OMB, drew on data directly from agencies.
Among the key findings highlighted by the report:
(1) Appropriations: Approximately $2.6 trillion appropriated across the government: “Six areas—Paycheck Protection Program (PPP); Economic Stabilization and Assistance to Distressed Sectors; unemployment insurance; economic impact payments; Public Health and Social Services Emergency Fund; and Coronavirus Relief Fund—account for 86 percent of the appropriations.”
(2) Testing: Reporting to the CDC on viral testing remains inconsistent and incomplete across the country.
(3) IRS payments to deceased taxpayers: The IRS made stimulus payments totaling $1.4 billion (the $1200 payments) to 1.1 million deceased individuals. Although the IRS has access to Social Security death information, Treasury and its Bureau of the Fiscal Service (involved in disbursing payments) did not.
The report makes a series of recommendations on following topics including: (1) Paycheck Protection Program (PPP) integrity; (2) IRS and Treasury access to Social Security death data; (3) better data tracking in state unemployment programs on benefits claims to coordinate with the PPP (under which businesses are expected to rehire or retain workers to qualify for loan forgiveness); (4) Congressional action to direct the Department of Transportation to develop an aviation preparedness plan; and (5) Congress’ need to use revised Medicaid payment formulas to provide appropriate payments during an economic downturn.
In its assessment, the Board noted that “the stress brought on by the COVID event has been larger than anticipated,
affected sectors of the economy in a highly unusual way, and could result in an unusual relationship between the economic and financial factors and credit losses, in part because of extraordinary government actions.” The stress tests showed that in three downside scenarios, loan losses for the 34 banks ranged from $560 billion to $700 billion. Aggregate capital ratios declined from 12.0 percent in the fourth quarter of 2019 to between 9.5 percent and 7.7 percent in the three scenarios. Given the results, the Board took steps to “ensure large banks remain resilient despite the economic uncertainty from the coronavirus event.” For the third quarter of this year, no share repurchases will be permitted. The Board also capped dividend payments to the amount paid in the second quarter, with additional limits based on recent earnings. Banks are also required to re-evaluate their longer-term capital plans.
The CARES Act provides favorable tax treatment for coronavirus-related distributions of up to $100,000 to qualified individuals from their eligible retirement plans. Such distributions are not subject to the 10% additional tax otherwise generally applicable to distributions made before age 59 ½. The CARES Act also permits coronavirus-related distributions to be included in income in equal installments over a three-year period. Qualified individuals who take such distributions have three years to repay and undo the tax consequences of the distributions. The CARES Act also permits retirement plans to suspend certain plan loan repayments and temporarily increases the dollar limit on plan loans from $50,000 to $100,000. Notice 2020-50 expands the definition of a qualified individual to include additional factors such as reductions in pay, rescissions of job offers, delayed start dates, and being unable to work due to lack of child care due to COVID-19. The latest IRS guidance also permits factors such as adverse financial consequences to an individual arising from the impact of the COVID-19 coronavirus on the individual’s spouse or household member.
Recent policy action on the coronavirus front:
(2) TESTING: Senator Ted Cruz introduced a bill to provide tax incentives to businesses that test workers for Covid-19.
(3) OVERSIGHT: On Monday June 15, 2020, it was revealed that the inspectors general designated by the CARES Act to monitor spending — the Pandemic Response Accountable Committee — wrote to key Congressional committee chairs last week expressing concern that the administration’s recent legal rulings were blocking their ability to provide oversight of the spending programs.
(4) LIABILITY: States explore limiting liability for COVID-19 related claims, including Iowa legislation signed by the governor on June 18 that limits liability retroactive to January 1, 2020 and North Carolina’s limited liability bill that passed the senate.
(5) PRIVACY: The most recent round of proposed federal legislation aimed at protecting privacy in COVID-19 contact tracing apps, follows on the heels of earlier proposals as well as state level action on the privacy front (see e.g. California bill; Minnesota bill). Around the globe, countries have introduced contact tracing apps — including Japan’s introduction today (June 19, 2020) of its national tracing app.
The Paycheck Protection Flexibility Act, H.R. 7010, which extends the period to use Paycheck Protection Program funds to 24 weeks, passed with unanimous consent in the Senate, and passed the House last week 471-1. The legislation also reduces the level of Paycheck Protection Program funds that must be used for payroll to 60% from 75%.
In a June 1, 2020 letter in response to an inquiry from Senator Schumer, the CBO noted that it will take until 2030 for U.S. GDP to return to recover from the effects of the COVID-19 pandemic.
Specifically, the CBO projects with respect to nominal GDP: “Over the 2020-2030 period, cumulative nominal output will be $15.7 trillion less than what the agency projected in January . . . That different constitutes 5.3 percent of the value of the cumulative nominal GDP for that period that the agency predicted in January.”
And, with regard to real GDP the CBO now projects: “[O]ver the 11-year horizon, cumulative real output (in 2019 dollars) will be $7.9 trillion, or 3 percent of cumulative real GDP, less than what the agency predicted in January.”