How impeachment proceedings may affect the muni market
In the wake of the House of Representatives' vote to approve procedures for the impeachment inquiry’s next steps this week, the muni market is waiting to see what is in store.
On Wednesday, the House of Representatives passed a resolution, 232-196, approving guidelines for the next public phase of President Donald Trump’s impeachment proceedings. Depending on how actions during the impeachment inquiry play out, it could affect how much gets done and in the long run affect the economy, municipal experts say.
“It has basically taken what was already going to be a deeply partisan divided government and a sort of unprecedented president, and it’s taken it to the extreme,” said Chuck Samuels, general counsel to the National Association of Health and Educational Facilities Finance Authorities.
The inquiry started when a whistleblower complaint said Trump used his power to pressure the Ukranian government to investigate former Vice President Joe Biden and his son days after withholding a multimillion-dollar military-aid package. In September, House Speaker Nancy Pelosi announced her formal impeachment inquiry.
There is very little activity going on on the Hill, Samuels said. However, regulatory groups such as the Securities and Exchange Commission and the Municipal Securities Rulemaking Board will be mostly uninterrupted during the impeachment proceedings.
“The regulatory situation is not as frozen, but the legislative situation is pretty much in an abyss,” Samuels said. “Realistically people just hope that we can keep the government open. Anything beyond that is going to be like frosting on the cake.”
If the government is shut down, the SEC would be put on pause.
Throughout the impeachment proceedings, an already split Congress could get more divisive and could make for an olympian effort by legislators to compartmentalize the impeachment and get actions done on a bipartisan basis, Samuels said.
As an election is gearing up for 2020, Samuels expects no matter the outcome of the impeachment proceedings the House will take some action on infrastructure to raise their platform, as well as the Senate possibly moving forward to promote further tax cuts.
The Government Finance Officers Association is still focused on advocating for two bipartisan bills recently introduced to reinstate advance refunding and raise the bank qualified limit. The Municipal Bond Market Act of 2019 was introduced in July by Rep. Terri Sewell, D- Ala., and the Investing in Our Communities Act, by the bipartisan Municipal Finance Caucus, was introduced in May.
The two bills could be attached to a larger infrastructure bill, said Emily Brock, director of GFOA’s federal liaison center. With primaries coming soon, Brock sees an opportunity to continue to push for infrastructure, along with changes to advance refundings and bank qualified bonds.
“There’s still just the same amount of energy from our champions now as there ever was, so I still feel very, very pleased,” Brock said.
On the market side, there is currently not a lot of impact on the municipal bond market, said George Friedlander, managing partner at Court Street Group Research, but it could make it more likely for Democrats to win the presidency and the Senate, dramatically impacting the market.
“How the muni market functions post presidency is very much going to be determined whether the Democrats win the Senate and presidency or not,” Friedlander said. “I think the impeachment inquiry plays into that. I don’t see it having an independent effect.”
However, if Trump is impeached, it could create uncertainty about corporations’ decision-making and push down tax rates. The impeachment inquiries’ greatest effects will be on what it means for the next election, Friedlander added.
If Democrats do win the Senate and the presidency, Friedlander sees more progressive taxes including corporate taxes and more issuance as Democrats push for climate change infrastructure. Though increased issuance would be beneficial to the muni market, it would be countered by a more progressive tax code.
If Democrats win the presidency in 2020, policy moves, including executive orders, could be set to combat climate change, Friedlander writes in a Court Street Group Research report. New leadership could also include attempts to reduce the federal deficit.
For munis, a shift in Congress would mean new spending, higher tax rates on taxable instruments that compete with munis and the potential for some increased access to federal money, according to the report.
Two presidents have been impeached throughout American history — Andrew Johnson and Bill Clinton.
In 1998, the Republican-led House voted to impeach Clinton on charges of perjury and obstruction of justice. Some say that while Congress was going through the proceedings, Clinton was still able to pass legislation, while “compartmentalizing” his presidential functions.
The effects of Trump’s impeachment proceedings are not comparable to Clinton’s, Friedlander said.
“You also have to remember that Clinton was given great credit for walking and chewing gum before the impeachment at the same time he ran the government,” Friedlander said. “That’s a massive contrast from what we see out of this administration.”
During the proceedings, Clinton achieved a projected federal budget balance and surplus and ended the Balkan war, among other things.
If Trump responds badly during the impeachment process and focuses solely on it rather than other legislation, it could further slow the economy, Friedlander said.
“We just don’t know how he will respond,” Friedlander said. “It could be irrationally; it’s hard to tell. We’re already in a locked environment where no policy issues are being considered at the federal level.”
As for muni markets eager to see where the future of an infrastructure bill may go, Dee Wisor, attorney at Butler Snow Law Firm, isn’t optimistic that it will happen before the end of the year or before the 2020 election.
If infrastructure doesn’t move, with bank-qualified bond and advanced refunding legislation attached, Wisor wasn’t sure what other vehicles could be used besides the Highway Reauthorization Bill, which expires in 2020.
“The Republicans had the power for the first two years of the presidency and nothing moved on infrastructure, so I guess I’m not hopeful,” Wisor said.