I am not certain where the longer wait is these days. Is it staying in line for a Covid-19 test or waiting for Congress to act on another round of support for states and localities? I appreciate that there has been direct and indirect support. But now we are waiting on the kind of support that props up budgets and forestalls defaults and bankruptcies. I know that all of you are students of the trends of the past. I am not certain that the behavior during this crisis will be the same as in the past. Many governments are already close to or at their practical taxing limits. Raising taxes at a time like this is punitive. New Jersey may be forced to lead in this regard. We will find out when the budget extension runs its course.
The other alternatives to increasing taxes is to cut the budget and to borrow. Let me take up the easier one first. Borrowing when rates are at or near all time lows just makes sense. Once again, New Jersey plans to borrow up to $10 billion. I am OK with this inevitability because rates are where they are now. Let us get into the market before these rates encounter a hiccup. The only other consideration is the tenor of the loan. I continue to believe for this kind of borrowing that shorter is better even if induces a bit more pain in the near term. One does not really want to pass on deficit financing to the next generation. One only must look to Puerto Rico for what may happen, but a state is a different entity that is stressed at a higher credit level at inception.
Cutting the budget is always easier in theory than in practice. There is just no way to do the cuts without having somewhat of an adverse effect. We know that safety net spending in this environment is necessary and, in most cases, mandated by law. I would urge any states that are borrowing from the federal government to pay unemployment benefits to tap the tax exempt or taxable municipal market instead. It stands to reason that the rate in the market would be attractive.
Across the board cuts have the appeal that they would spread the pain throughout the broader budget. There are always categories that need to be exempted including the payment of debt service. The remaining categories that would experience a simple across the board cut will all suffer to differing degrees. The easy cuts are no filling of vacancies, no travel, no COLAs, and a range of others. These should be accomplished. Deciding how many teachers or teachers’ aides are necessary and countless other categories is at a minimum particularly challenging.
Early retirement programs can work but are often prone to aggravating the cash flow scenario in the near term when that is precisely the pressure that needs to be alleviated.
We continue to see good demand for paper in the market and the inflows have continued. One advantage this year is that the Buy-Side is not all on vacation. The whole industry is around and engaged to make the purchase and the trade happen.
It is also good to see taxable municipals doing so well. We may fret about running the risk of having the tax exemption taken away, but in the near term it is worth the odds.
It is good to see that Green bonds are a consistent presence. They are now being accompanied by Social bonds or the S in ESG. Many of us in the municipal industry would argue that most of the municipals that are issued are worthy of one or all the ESG designations. The goal is to obtain a wider distribution and a cost advantage for the Issuer. The former is almost a given at this point while the latter is still building momentum. We will have some examples this week.
In the meantime, it is looking like Congress will do something more. Attaining the level of $1 trillion for states and localities is appearing to be a relatively high hurdle. As the virus caseloads increase in several states, the peaking may provide more justification to accomplish something in this regard. Congressional recess is just days away. Perhaps, the impending break will provide enough weight to approve a package that is not acceptable to all but provides something significant for states and localities to endure without taking drastic action. Have a carve out for pensions if that helps.
John Hallacy
John Hallacy Consulting LLC
07/17/20
In the Waiting Room
I am not certain where the longer wait is these days. Is it staying in line for a Covid-19 test or waiting for Congress to act on another round of support for states and localities? I appreciate that there has been direct and indirect support. But now we are waiting on the kind of support that props up budgets and forestalls defaults and bankruptcies. I know that all of you are students of the trends of the past. I am not certain that the behavior during this crisis will be the same as in the past. Many governments are already close to or at their practical taxing limits. Raising taxes at a time like this is punitive. New Jersey may be forced to lead in this regard. We will find out when the budget extension runs its course.
The other alternatives to increasing taxes is to cut the budget and to borrow. Let me take up the easier one first. Borrowing when rates are at or near all time lows just makes sense. Once again, New Jersey plans to borrow up to $10 billion. I am OK with this inevitability because rates are where they are now. Let us get into the market before these rates encounter a hiccup. The only other consideration is the tenor of the loan. I continue to believe for this kind of borrowing that shorter is better even if induces a bit more pain in the near term. One does not really want to pass on deficit financing to the next generation. One only must look to Puerto Rico for what may happen, but a state is a different entity that is stressed at a higher credit level at inception.
Cutting the budget is always easier in theory than in practice. There is just no way to do the cuts without having somewhat of an adverse effect. We know that safety net spending in this environment is necessary and, in most cases, mandated by law. I would urge any states that are borrowing from the federal government to pay unemployment benefits to tap the tax exempt or taxable municipal market instead. It stands to reason that the rate in the market would be attractive.
Across the board cuts have the appeal that they would spread the pain throughout the broader budget. There are always categories that need to be exempted including the payment of debt service. The remaining categories that would experience a simple across the board cut will all suffer to differing degrees. The easy cuts are no filling of vacancies, no travel, no COLAs, and a range of others. These should be accomplished. Deciding how many teachers or teachers’ aides are necessary and countless other categories is at a minimum particularly challenging.
Early retirement programs can work but are often prone to aggravating the cash flow scenario in the near term when that is precisely the pressure that needs to be alleviated.
We continue to see good demand for paper in the market and the inflows have continued. One advantage this year is that the Buy-Side is not all on vacation. The whole industry is around and engaged to make the purchase and the trade happen.
It is also good to see taxable municipals doing so well. We may fret about running the risk of having the tax exemption taken away, but in the near term it is worth the odds.
It is good to see that Green bonds are a consistent presence. They are now being accompanied by Social bonds or the S in ESG. Many of us in the municipal industry would argue that most of the municipals that are issued are worthy of one or all the ESG designations. The goal is to obtain a wider distribution and a cost advantage for the Issuer. The former is almost a given at this point while the latter is still building momentum. We will have some examples this week.
In the meantime, it is looking like Congress will do something more. Attaining the level of $1 trillion for states and localities is appearing to be a relatively high hurdle. As the virus caseloads increase in several states, the peaking may provide more justification to accomplish something in this regard. Congressional recess is just days away. Perhaps, the impending break will provide enough weight to approve a package that is not acceptable to all but provides something significant for states and localities to endure without taking drastic action. Have a carve out for pensions if that helps.
John Hallacy
John Hallacy Consulting LLC
07/17/20
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