Implementation Phase
Now that the federal budget bill has become law, we turn to the implementation phase. What we have learned in recent days is that the start dates for some of the cuts and adjustments have different start dates. The work requirement for able bodied individuals receiving Medicaid will start earlier than originally planned. I assume that the states will be tasked to see to it that the strictures under the budget will be followed. Of course, there is no additional funding for the states to do so.
Reports are that the Medicaid cuts will reach $1 trillion. That amount will require many actions to be taken. There is already speculation in the market about which healthcare institutions may close and which will need to find a stronger partner. California and New York will be particularly impacted by the change. Neither budget has so many reserves on hand that it will be able to backfill the cuts imposed. New York in particular has already signaled that it will need to do some kind of mid-year correction of its budget. No one knows where all of this will lead. The $50 billion of assistance approved for the Medicaid transition will be obligated in relatively rapid fashion. New York City, San Francisco, and others already have a population on the streets that need assistance before all of the changes become effective. One has to come to the conclusion that there will be more personal bankruptcies due to the out of pocket healthcare coverage that will not be covered.
The call for terminating FEMA comes at a very heartbreaking time due to the flood and loss of life in the Kerrville area. Most municipalities have some insurance coverage in the form of a blanket policy or self insurance. Flood is often not covered. We understand that most of the properties affected in the area where the recent event took place have little or no insurance. In these cases, FEMA has provided a lifeline. Clearly, assistance from the federal level will be provided in this case. And yet, there are still calls to end FEMA. Whatever would come in its place will be scaled down and will be more reliant on the states. The states will have trouble grappling with this new requirement. In the past, FEMA funds were applied first to disaster mitigation and then the states and localities would draw on their own coverages or on their own resources. Under the proposed scenario, there will be no buffer from the federal level to at least provide the necessary initial liquidity. The rating agencies will be particularly interested in what steps emerge from all of this.
Shifting responsibilities to the states appears to be a trend with staying power.
Another matter has surfaced where the administration wants to have some kind of direct control. Taking the reins at the Kennedy center may not be providing enough of a challenge. It has been said that the administration desires to “clean up” the District of Columbia and New York City. In the former case, Congress already has direct control and oversight over the District in terms of its budget and in other matters. The federal level delayed adoption of the District’s budget this year. What will be proposed? As you know, Home Rule has always been supported in the District. It appears that there is some rethinking going on. We would like to know since the District has relatively high ratings that may be influenced. The market would like to know.
In the second case, New York City is a subdivision of New York State. Does the commentary indicate that New York State is to be cut out of the process? New York City has billions of outstanding debt with a large proportion of the total held by retail investors. Should we be undermining the confidence of those investors who have a great deal at stake? Besides, whoever is elected Mayor in the upcoming contest will be a duly elected official put there by the electorate. Are we to upend this fundamental principle?
Perhaps, the commentary is tantamount to off hand rambling musings. However, bondholders will need to know at some point.
Rates are back up with the ten year at 4.37% as of this writing. Most pundits expect that the Fed will demur from taking action at its upcoming meeting. Most economists maintain that the economy is in good shape despite some signs of weakness. Those signs are not sufficient for the Fed to take action in its judgment. So far, inflation has yet to reemerge with the tariff concerns. The jawboning is grating but is not likely to caution a reconsideration in the near term. Equities remain strong and keep establishing new highs but all participants are on watch about any sudden course correction.
Perhaps, we should all build cash reserves and just head for the beach.
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