BBB connotation

BBB connotation

BBB for most of us with links to the financial world means investment grade. It still means just that. But for the next few days leading up to July 4 it will translate to the Big Beautiful Bill.

The pressure is on to get the bill passed but there is some wrangling over the fine points both of which will affect state and local governments going forward.

The two areas of focus in the budget process that could cause gridlock are SALT levels and Medicaid funding. I have discussed SALT numerous times before. Whether the ultimate level selected is $40,000, $30,000, $10,000 or none hangs in the balance. What is critical to the process is the number of votes tied to the issue to effectuate passage of the budget. Some key members are vehemently against SALT relief. As the President always says, it’s a negotiation.

Medicaid funding has also been discussed in my other articles. Apparently, more states are fully appreciating what it will mean to cap or to eliminate provider taxes.  If elimination is the approach, many hospital budgets will be negatively affected. Most of us agree that some level of a work requirement or study for those able bodied individuals that seek Medicaid is a reasonable requirement. Implementation rules will be critical to avoid unintended consequences.

The next few days will be critical in formulating the federal budget. The only way it probably gets done is by presidential persuasion. One aspect is certain. Bringing down the deficit and reducing treasury debt issuance is a sideshow. Raising the debt ceiling is a must if for no other reason than to prevent further erosion of bond ratings.

Here in New York City we are possibly entering into a new phase with the convincing victory of candidate Mamdani in the democratic primary. Some of his ideas have real populist appeal. Free buses and a rent freeze fit that category. I fail to see how government run grocery stores will bring down prices. Groceries are quite dear in NYC due in part to a lack of competition. Providing subsidized housing has some merits. The federal government already does so but there is some talk that may change.

How to pay for these proposed services will be key going forward. We are already heavily taxed here in NYC. A “soak the rich” approach to taxing earners over $1 million may become quite problematic. The group already pays a good share of the tax bill. What is concerning is that when the time comes to evaluate the proposal, the threshold may have to be a good deal lower at $500,000 or $250,000. The latter level is middle class here in the Big Apple. Many have no sympathy for this perspective but people can vote with their feet. An exodus has not happened in the past but that is not to say that it could not develop.

Of particular interest to the bond community is how the subsidized housing would be realized. There are some reports that doing a significant amount of bond issuance would be an approach. I have many questions about what would be the security pledge or revenue stream backing such bonds. Would it be a new name in the market? Is there sufficient demand to absorb such a large amount of proposed debt? Would the bonds have to be taxable? At this point, there are more questions than answers. Some level of issuance may be quite manageable. It would be some time before any of these proposed initiatives would be tested. The election comes first.

In the meantime, issuance has lightened up in the municipal market while rates have become somewhat more attractive to issuers. Redemptions tend to be high July 1 so there is a chance that the market will become richer barring any unknown events.

John Hallacy