Rogue DOGE
It is hard to recollect a time when just about everything that has an effect on municipals is either coming into question or is being fully reconsidered. We are in a market that is used to adapting to change; but, now the very fundamentals are being reconsidered outright. In the meantime, the market has been quite orderly and there have not been any real pricing difficulties. It is also reassuring that over $1B has flowed into the mutual funds in the last week. Perhaps, the equity market volatility is starting to have a real impact. Rates have drifted back up with the 10 year Treasury reflecting some of the ongoing strength in the employment/unemployment and income numbers.
DOGE has been given a carte blanche to examine all expenditures. This process is necessary and useful. However, we do not think that all changes can be made without input from the House especially. There may be some differences of opinion on how to proceed even within the Republican ranks. Those tasked with making recommendations in the DOGE world need oversight in the same way the rest of the government has to comply with to keep order.
For example, should we just accept that the Education Department will be eliminated in due course? How will the Title funds flow in the future or will that aspect just be an afterthought?
The education sector in the municipal market is one of the bedrock sectors. Will these various moves upend the sector? States with support programs will be less affected but perhaps many of the factors that have been relied on in the past will become less reliable. Somewhere around up to 40% of the market is concentrated in primary and secondary education bonds.
Where is the data? Other confusing accounts are coming out that some of the data that economists rely on to prepare their forecasts may be subject to change. We can accept some change but such changes need to be totally transparent. It could be that some of the traditional measures and approaches may have to be substantially changed or abandoned. Everyone gauging the health of the economy needs and deserves good reliable data.
I also realized that I have not heard much about impoundment since President Nixon was in office. In addition to the various legal proceedings findings, participants came to appreciate that impoundment was just not a good government practice. Will we be subject to such a strategy again? What happens to projects that are relying on those funds? It is very hard to walk away from a project where the groundwork has been done and the improvements have begun.
Other lingering considerations are the debt ceiling and the federal budget. Cabinet officials are occupying their posts and we will need to hear from them just how much the priorities will be changing. Shrinking the government is not as easy as it sounds. In the meantime, I hope and trust that it is still a priority that we do not default on the federal debt. No strategy should risk that premise.
As for making municipals taxable, in this environment the concept cannot simply be dismissed.
States and localities (and citizens) would be paying a great deal more in interest costs. Municipal yields could easily rise 100 basis points give or take on average versus the equivalent Treasury. Receiving block grants on the revenue side will not help with the increased fixed cost.
Another thought is that doling out funds under federal programs usually has a specific set of rules to be followed. Certainly, politics have always influenced the process at the margin. But the standards should be fair and equitable. Distributing transportation funds using other metrics strikes me as more the practice of a totalitarian state.
John Hallacy
John Hallacy Consulting LLC
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