Lame duck dysfunction and the year ahead
I thought I had a better understanding of how legislation is constructed in real time. I am revising my opinion.
The approach to putting an additional stimulus package together is starting to feel more akin to building a vehicle online on an auto manufacturers website. I will take the leather seats but not the lane departure warning system. Dividing the stimulus package into two basic packages is somewhat in the same mind frame. We offer one stimulus package that most reasonable legislators may agree on. Then, another stimulus package would be offered that almost no one may agree on. Will there be any takers on the latter?
Of course, the more controversial package includes state and local aid and legal protections for businesses pertaining to Covid-19 claims. Perhaps, bundling these two features together means that the basic stimulus package is more likely to pass. Indeed, lawmakers appear to be coalescing around a deal.
It has become apparent that even more creativity will be necessary to pass legislation in the upcoming Congress. The only problem is we do not have the luxury of time. Now that the pandemic caseload and death count continue to climb, more rapid action should be the order of the day. With New York and California moving forth on lockdowns, the economy is bound to suffer. Unemployment is already sending signals about climbing higher once again.
Many economists have strongly stated that at a minimum we should have a program of extended unemployment benefits. Such a program would prevent evictions and would help to reduce hunger that are both anticipated to increase in the near term.
Turning to state and local aid, there still appears to be great resistance to granting further relief. Perhaps our legislators want our states and localities to face financial peril. This outcome is favored if it does not happen in the state or locality from where they are elected.
Caps on legal liability due to Covid-19 may provide some protection at the margin, but such a program will not necessarily save a failing business.
Multiyear gaps are starting to be reported by various credits in the municipal market. Recent disclosure from New York City indicates that the outyear gaps are estimated at about $3 billion or more for the next several years. New York State has identified gaps of $8 billion to $9 billion in each of the next several years.
In the more likely event that more federal aid is not forthcoming, New York City has asked the state to borrow through the Transitional Finance Authority for operations. The state to date has been reluctant to grant the authority to do so. How many other credits will need to plug gaps in operations?
New Jersey has already accomplished such a sale. Some other credits are seeking authorization to sell pension obligation bonds. Such a borrowing would free up the budget to an extent but may also be a way to forgo the current year’s required contribution.
The irony here is that the weakness may lead to even more borrowing in the municipal market. With the Municipal Liquidity Facility sponsored by the Fed expiring at year end, a key alternative is off the table. Perhaps, some governments may be more inclined to pursue asset sales or privatizations. Any resistance to doing so may be diluted by necessity.
Volume estimates for next year vary from the $360 billion to $550 billion range. Of course, a lot of the outcome depends on the course of interest rates. As of the present, we have every reason to believe that the Fed will remain on hold for some time. I do not think we will have much risk of a contraction in volume. I also believe that the potential for more deficit financing especially in the absence of additional federal aid will drive the volume number higher. I have more conviction on volume in the $475 billion range. A steepening curve would serve to bring in more buyers on the long end including some unconventional buyers.
There are also many other factors in the municipal business to stay focused on. Climate change continues to wreak havoc on select locales and infrastructure. If hackers can compromise the Treasury Department, it is reasonable to believe that attacks on municipal entities will continue to mount. Although performance must be improved for pension assets for this year, the gaps and underfunding keep growing.
Not all is akimbo. The roll out of a vaccine with more to follow is underway. We have all heard how the logistics require time and funds. The positive effect will be more pronounced in the next fiscal year starting July 1. One may hope that fiscal 2021 is the transition year. Economic activity and revenues will increase once again.
In the interim, the municipal market can handle any supply that may be launched at workable spreads. All participants in the industry should benefit from some modicum of relief.