Power is the fuel of our political economy. After months of debate the last portion of the federal budget has been passed. It remains unclear what was gained. Special claims funds were not eliminated, and the ballroom was not included.
Now we will have a fresh start on a new budget for the ensuing year. The proposed $1.5 Trillion budget for defense is bound to crowd out other priorities. We remain very unsure of the funding for FEMA as we start hurricane season. There are many other critical items that state and local governments will begin to be affected by. Reductions in Medicaid, SNAP benefits, and the list goes on. Backfilling will not be easy to achieve as we have stated before.
On the positive side, the economy keeps adding jobs. The monthly addition of 172,000 jobs far outpaced estimates and unemployment remained steady at 4.3%. What was more surprising was that 55,000 of the uptick in employment was attributable to Local Government hiring away from education. Perhaps, localities are sensing that this may be their last chance to add. The ranks also continue to be thinned by boomers retiring. Also, people who have lost private sector jobs may be more amenable to a public sector job. Whatever the reason, this increase is noteworthy.
On the market front, inflation and war continue to be of higher order considerations. The war is unknown at this point as to when it may conclude. The reporting has been confusing and rallying because the end in sight has proven to be too anticipatory. I would add that the Space X IPO is going to command the lion’s share of attention in coming days. The transaction is so large it has the possibility of unsettling the municipal bid environment. However, recent flows to mutual funds have been quite positive.
As for inflation and its effects, the Fed meeting in mid-month will be informative. Are we going to abandon the 2% target? It is starting to feel like Don Quixote on an unattainable quest. The new Fed Chair will give us more to think about, no doubt.
Municipal Matters
The flow remains positive and the market is absorbing most of the paper with ease. Rates have even cooperated, but we are now over 4.5% on the ten-year treasury once again given the strength of employment among other factors. This higher level could change the tone somewhat. In the meantime, we will see how some of the states are faring with CT, IL, MA, and TX all coming to market in the near term.
We have said for a long time that the question regarding tobacco bonds is not whether a default would happen but when. Now we have one. We have had restructurings in many cases. Perhaps, this could be the remedy once again. Otherwise, we will learn about haircuts.
Florida Tax Reform
Another display of power is underway in Florida on the policy front. The push is to lower property taxes statewide. At least some legislators had the good sense to except out schools from the proposal. I suppose the legislators still believe there is some value in educating children.
The reforms have now been approved to appear on the ballot in November. The threshold for passage is a 60% approval rate by the electorate. There appears to be substantial support for the initiative. I have not seen polling on the topic at this point.
The core of the proposal is to raise the Homestead Exemption (HE) to be applied against the valuation to $150,000 in 2027 and $250,000 in 2028. There is the concept to raise the HE in the outyears over time so that the tax would be eliminated except for schools.
Now we know that the property tax is the primary revenue for localities in providing core services to citizens. According to reports, the loss in total revenue to “Non-Schools” would approximate $4.6 billion. Given this order of magnitude, rating agencies will take notice.
Localities can choose to raise other fees and charges to offset the negative revenue hit. But it is doubtful the hit could be fully offset.
Any ratings reassessments would not be anticipated until after a successful vote in November. The entire approach to local government will have to change after an approval of the initiative. There are also no clear protections offered to GO bondholders.
John Hallacy
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