I have been reading about how we have the highest unemployment rate since the Great Depression even though it has moderated a bit recently. I also await the revisiting of the estimate of the decrease in GDP for the first quarter this Thursday. The reading of down 5% is not expected to change much. But let us reflect that down 5% may not look that bad when compared with the forthcoming estimate for the second quarter after month’s end. The phased re-openings are having a positive impact on the economic activity, but the effect is a gradual one. It may be some time before we see a surge in the upside. Realtors are being permitted to show homes again with certain precautions. That change may lead to some real estate activity that has been pent up for some time. Low mortgage rates help the case. Any increases in assessed valuation due to more real estate activity may be expected to lag the actual experience by a good measure.
In the meantime, serious discussions about a proposed next phase of fiscal support will not take place until some time in July. We know that Congress will want to wrap up any next phase quickly due to the impending election and the need to get out and campaign before Labor Day.
There have been many questions on the Republican side whether more stimulus is needed. One of the consistent themes is that the aid that has already been approved has not been spent in full at this point. That certainly is probably the case. Once again, the funds really cannot be spent until the expenses are incurred and processed. As anyone who has ever received a medical bill, the process may take months.
I sincerely hope that we will be able to maintain some objectivity on this topic. There should be no shaming if those in power genuinely believe that more needs to be done.
Instead of just focusing on Covid-19 direct expenses, we are talking about providing more of a buffer to individuals and businesses to get through this period of unemployment and sharply reduced business levels. The conference or meeting business is cited as one of the last that may return to “normal”. However, even Apple is forging in a new direction by conducting conferences virtually.
I have also been reading about how municipal defaults and bankruptcies should be expected to behave as they did in the 2008-2010 period. That downdraft was caused by financial factors and is not a perfect comparison for what is taking place now. If we have a serious second wave of the Covid-19, the experience could be quite different especially if the recovery takes a W shape.
I also take issue with the range of revenue losses. If any government loses up to a third of its anticipated revenue for the year, this level of loss is an exceedingly high hurdle to overcome even with a measure of government assistance. States have sovereign powers and have many capabilities for raising debt even when under severe financial stress. State ratings rarely fall below the A level and have retained investment grade ratings in the post Great Depression world. I am not quite as sanguine about local governments. Although local governments rely more on the real estate tax that may be considered somewhat more stable unless the root cause of the downturn was a real estate bubble, there still may be considerable challenges in sustaining operations given hits in other revenue sources. Safety net spending also increases in down markets and this additional pressure may take a toll the longer the unemployment level remains at elevated levels.
Most governments will do their utmost to avoid major problems including having layoffs in critical services if need be. I just believe that there is much more risk in the system to consider this time. The adjustments that may need to be made are more monumental in scale which is precisely why they all may not get done in time to make a difference. I agree that limited governments and special districts may have an even greater challenge in this scenario.
As for the timing on the financial side, most governments that end their fiscal years on June 30 will not even be reporting their financial results and audits until after the election. Perhaps, the Congress may be just too calculating.
John Hallacy
John Hallacy Consulting LLC
06/22/20
Recent Comments