6/04/2020
The recent dual stresses of Covid-19 and tragic violence and strained racial relations have me wondering if there will be more cooperation in society and in government. The political parties are so far apart from an ideological perspective and in many other ways that there would seem to be few opportunities to work in harmony. Yet in all jurisdictions including federal, state, and local there needs to be enough cooperation to pass budgets and to determine the most pressing priorities from both a fiscal and a capital related focus.
Renewal of the transportation bill falls into this category. There is quite a bit of agreement that many high priority projects need to be funded. The challenge is the funding consideration. Covid-19 has put additional stress on federal gas taxes given the quarantine necessity and the consequent effect on the amount of travel generally. As the reopening process picks up the pace, the pressure will ease but we will still have the consideration of the hole in revenues that has already been built. Some have proposed that the VMT (Vehicle Miles Travelled) time has arrived. There have been some demonstration projects for the VMT, but we are still awaiting more insights from those cases. The thought is that VMT will more accurately reflect driving behavior and will not be as prone to decline as is the case with the gas tax.
In any event, when the Transportation Trust Fund does not produce the targeted revenues, the recourse has been to seek an appropriation from the federal general fund. This draw cannot continue in its present form. There are too many demands on the federal budget already that have been exacerbated further by emergency spending as provided for in the CARES act and any subsequent acts.
Infrastructure spending will require even more careful consideration. We are still looking to after the election for any bill. However, the spike in unemployment may provide another reason to act faster.
The Fed appears to be doing its part to support the state and local sector. Illinois is tapping the MLF where others may be more hesitant or may just have better options at lower interest costs. The Fed has eased the rules on which governments may participate in the Fed’s programs. Now each state may select two cities or counties and two revenue backed enterprises that may borrow directly from the Fed. In each subsequent easing of the rules there is more of a possibility that the Fed’s offerings will be utilized at some point.
Markets have been supported by all the massive liquidity being provided by the federal level. Equities have been robust of late largely as a function of looking out a year or longer to when the recovery will firmly take hold. Due to low rates and ready buyers, corporate debt issuance has already surpassed the $1 trillion mark. At the same time, the municipal market is gradually regaining its footing. Rates at the short end are exceptionally low, while rates on the long end remain moderate. Issuance has accelerated to draw on the strengths of the seasonal aspects of redemptions and rollovers with June and July representing peaks in the year.
We have begun to see some rating adjustments due to the Covid-19 induced decline in revenues and increase in expenses. I conclude currently that most of the rating actions have been of relatively small intensity. I would expect to see more adjustments in the cycle as budgets are set and preliminary financial results for the fiscal year become available It is hard to know precisely how much of a role the CARES act funds to the states will counteract these potential negative effects. Issuers are now taking more of a proactive role in posting what the impacts are on the EMMA system. We applaud the issuers who have done so to date, and we are hopeful that others will follow as soon as they are confident about their discovery process.
Despite all the financial pressures at the present time, we keep in mind the experiences from previous downturns. Rating adjustments will take place on an individual credit basis but will there be some adjustments en masse. Experience guides us that most of the adjustments will be on a case by case basis.
It is becoming clear that drawing on fund balances in full may only provide so much relief. Fund balances even when well-funded often provide only a month or more of a buffer. We cannot discount the possibility that there will be some restructurings that will be necessary.
We understand the urgency to reopen. We also know that staying safe is of paramount importance. Finding the appropriate balance is the focus for our leaders. We must trust that they will make good choices. After all, the electorates put them in the posts to do so.
John Hallacy
John Hallacy Consulting LLC
06/04/20
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