Some state and local governments are using American Rescue Plan Act funding to combat entrenched social problems — and if they make headway it could be a credit positive for them.
“The way we frame it in the report is: it will be credit positive if they are successful in achieving their goals,” said David Levett, a Moody’s vice president/senior analyst. “ARPA resulted in a lot of experimentation in this space.”
That would mean positively influencing social issues using metrics that include increasing workforce participation, mitigating affordable housing challenges and strengthening demographic trends, according to the report. “This, in turn, has the potential to strengthen resident incomes, improve property tax wealth and reduce demand for services.”
For the programs to be effective, it will likely take many years of effort and require strong governance, Levett said.
In Detroit, the city is already bearing fruit from a program to renovate or demolish blighted properties that tapped $95 million of the $827 million in ARPA funding it received. In November 2020, voters also approved $250 million in bonding authority for such efforts.
The city’s population began declining several decades ago as unemployment rose when car manufacturing left. The substantial population decline resulted in abandoned houses and vacant lots that later became blighted. The city has been working for several years on efforts to reduce blight, which it sees as a way to lower crime, spur economic development and lower costs. It’s also still recovering after
“The city is already benefiting from its efforts through faster fire response times, which is partly due to reduced demand for services as the number of abandoned structures that have historically been a target for arson has been reduced,” Moody’s analysts wrote.
The City of Los Angeles and Los Angeles County are using ARPA funding to tackle the region’s entrenched housing affordability and homelessness crises.
Los Angeles County allocated $400 million in ARPA funds to provide interim and permanent housing and housing services, Moody’s said. The city allocated $99.9 million in ARPA funds from its 2021-22 fiscal budget for homeless assistance, prevention, shelter and clean-up programs, according to budget documents. It was allocated $1.28 billion in federal relief funds and received the first $640 million in May 2021 and will receive the second half next month, according to the controller’s office.
The housing crisis and homelessness have been at center stage in California politics and policy in recent years. The state and many big cities have approved and sold billions of dollars of bonds to fund affordable and supportive housing.
Results of those investments aren't inherently visible at street level.
The 2020 Greater Los Angeles Homeless Count estimated that there are
Heidi Marston, the head of the Los Angeles Homeless Services Authority, resigned Tuesday saying
The city sold $221.9 million in taxable general obligation bonds to build supportive housing for unhoused people in October tapping the $1.2 billion Proposition HHH bond measure voters approved in 2016. The city had previously issued a total of $362.5 million off the proposition from sales held in 2017 and 2018.
As of March, the city has completed 20 housing projects for 1,259 units with Proposition HHH funding, with 79 projects for 4,726 units currently under construction, according to the mayor’s proposed 2022-23 budget. It expects to use the allocated $332 million in Proposition HHH funding to construct an additional 104 projects to create over 6,600 supportive and affordable housing units.
Thirteen of California’s mayors, including Los Angeles Mayor Eric Garcetti and San Diego Mayor Todd Gloria were in Sacramento Monday to lobby the Legislature to approve an additional $1 billion in funding for a total of $3 billion for a state program that supports homeless programs.
“We are making progress and we can’t let up now,” Gloria said at Monday’s press conference. Oakland Mayor Libby Schaaf called homelessness California’s greatest shame.
“We know what is at stake and we know that stable housing improves people’s lives,” Garcetti said.
The housing crisis isn’t impacting the city’s or county’s credit profile though income and inequality is moderately negative in terms of ESG, or environmental, social and governance, risk to both the city and county, said Moody’s analyst Lori Trevino.
In its ratings report, Moody’s notes that the city is working on the issue and points to the city’s passage of Proposition HHH and the county’s passage of Proposition H, a sales tax that funds supportive services for homeless people, Trevino said.
“They are making an attempt to address the issue,” Trevino said. “The voters did as well when they approved the bond measure. The city has a $1.2 billion allocation that will take time to spend. That is also indicative of the cost to address the issue.”
The rating agency hasn’t commented on whether it believes Los Angeles has made any traction on housing and homelessness in ratings reports, Trevino said, adding the pandemic probably limited their ability to make a dent to the degree they had hoped.
“It’s a factor we consider and we are aware it’s a pressure on the city and the county,” Trevino said. “The city has a strong financial position at the moment. At this point it has not become a credit issue.”
Southern California is not alone in deploying federal relief money toward housing programs. Many states are launching programs funded by $10 billion in ARPA aid allocated to the federal Homeowner Assistance Fund, seeking to help homeowners behind on mortgage, insurance and utility payments, Moody’s said.
State governments in Nevada and California, which both lag in educational attainment and literacy, are putting money toward programs in that category, Moody’s said. Nevada has appropriated nearly $220 million to tutoring services, summer and school and literacy programs. California is applying nearly $1.8 billion to the statewide child savings account program to broaden the college savings program to 3.7 million low-income public school students.
“If these programs move the needle on educational attainment that would prompt us to look at those scores,” said Denise Rappmund, a Moody’s vice president/senior analyst. But she added there are a lot of other factors involved in educational attainment including poverty.
The State of New York is allocating $900 million of ARPA funds to eligible child care providers.
Chicago allocated $293 million to mitigate negative economic effects of the pandemic and $179 million in cash transfers, job training and community violence interventions. The city is supplementing ARPA with $660 million in bonds, which will finance targeted capital projects.
Chicago is receiving $1.9 billion in ARPA relief after tapping $1.3 billion for budget relief to make up for lost revenues. Mayor Lori Lightfoot’s administration is using the remaining $600 million of funds along with $660 million of new general obligation borrowing to fund more than $1.2 billion of social, climate, environmental affordable housing, violence prevention, homeless reduction, economic, health and other infrastructure investments under a Local Fiscal Recovery Fund package. Many of the new investments are one-time in nature so as not to further burden the city’s future fiscal condition, the administration said last year when they announced the program.
Baltimore is spending $55 million of ARPA funds on workforce training programs for unemployed and underemployed residents. In Florida, Broward, Palm Beach and Duval counties and the city of Jacksonville are committing ARPA funds to convert residential and nonresidential properties from using septic systems to sewer systems, to support public health by reducing the risk of groundwater contamination.
While these programs could elevate ratings down the road if the programs are successful, they also pose a risk for cities if the one-time money created ongoing programs, or even if they create expectations that they would be more than temporary, Moody’s wrote.
“The ARPA funds and large infusion is generally positive,” Levett said. “It is positive that they are making these investments and potentially making some headway. If it causes budgetary problems down the line, that’s where there would be a challenge, especially if the efforts aren’t successful.”
If programs gain strong political support, state and local governments will face demands to continue them after ARPA funding ends, which could mean cutting other programs or raising taxes.
“Some of these issues are perennial, spinning back to poverty,” Rappmund said. “So they are difficult to change.”
As Moody’s states’ team looks at budget plans, the proposed spending lines up with where Moody’s had identified environmental or social risks in their profile, Rappmund said.
The spending states have been proposing “is lined up with where they, and we, perceive the greatest risks to be,” Rappmund said.
Yvette Shields contributed to this report.
