Cities and states wanting to get ahead of the Trump administration's unpredictable approach to allocating federal funds should consider disclosing their exposure to investors.
That's according to local officials and municipal market participants speaking this week at The Bond Buyer's infrastructure conference in Boston.
"Political risk needs to be reflected in the disclosure," said Megan Kilgore, the elected city auditor for triple-A rated Columbus, Ohio. Columbus created a dashboard to try to measure its exposure to federal risks like potentially lost grants, Kilgore said. Local officials need to step up to manage the uncertainty, Kilgore said. "There's a huge role that governance plays at the local level now," she said.
Political dysfunction is far and away the leading economic and policy concern for muni market participants, according to a new Bond Buyer infrastructure survey, with 47% of respondents saying it's their biggest challenge. That's followed by 10% who say their main challenge is confidence in the financial markets and/or market volatility.
The risks facing state and local governments from the uncertainty surrounding federal funds that support everything from infrastructure projects to operating budgets emerged as a theme throughout The Bond Buyer's conference. Even prior to this week's government shutdown, bond-issuing entities have been on pins and needles about federal funds. Since taking office in January, the Trump administration has frozen, paused, withdrawn or threatened to withdraw federal grants and funds across sectors. The fate of disaster funds from the Federal Emergency Management Agency is also uncertain. The risks may be rising to the level of materiality for investors that buy municipal bonds and rating agencies that rate the debt, participants said.
"Political risk is like any other risk," said Doug Kilcommons from Kroll Bond Ratings Agency. "What we're looking for is the acknowledgement on the governance side of these risks and what the plans are," he said. Issuers should get ahead of the risk by outlining their alternative plans, he said.
"Telling the story up front is also very important because it suggests alternatives, and it's actually more important to say that up front because then if something happens, it will give the investor more comfort that things are under control," he said. "With all the headlines and all the noise out there, if you hear about a grant being cut, if you haven't managed the narrative, an investor might think the credit is going to fall apart."
Investors themselves are increasingly reviewing credits for federal exposure, panelists said.
"Our investors are going to be doing more 'what if' scenarios and giving them information they need to say, if this grant were to be reduced, what that would mean for the bottom line — it's letting our investors know at a very granular level where the risk is," said Rob Hillman, managing director at Siebert Williams Shank.
Political risk is also translating into headwinds in the market, said Michael Gaughan, executive director of the Vermont Bond Bank. That was the case in April during a
"We're telling our borrowers with each deal, if there's any sort of turbulence in the market we're going to hang on," Gaughan said.
"Unfortunately what we've seen over the course of this year, there's a lot of noise coming out of Washington and not much in terms of certainty, so that makes the planning horizon difficult," Gaughan said.
