Bonds

Surprise deal averts federal shutdown, market participants await more of the same

Many muni market thought leaders were caught off guard by the weekend congressional action that averted a government shutdown by way of enlisting help from House Democrats.

“I was surprised,” said Brett Bolton,  V.P., federal legislative and regulatory policy, Bond Dealers of America. “Not surprised that the Speaker took the measure he took, but waiting to the last minute. If you’re going to work with the Democrats, why wait to the last minute?” 

Republican House Speaker Kevin McCarthy passed the resolution with help from Democrats, angering some members of his caucus who disliked the deal and setting himself up for a challenge to remain as House Speaker.

The deal was struck on Saturday night with three hours to spare resulting in a 45-day continuing resolution that kicks the budgetary headaches to Nov. 17. The deal includes no new funding for Ukraine, but it does push FAA reauthorization through while refilling a funding shortage at FEMA – a key issue for states and local governments.

“I was surprised,” said Brett Bolton,  V.P., federal legislative and regulatory policy, Bond Dealers of America. “Not surprised that the Speaker took the measure he took, but waiting to the last minute. If you’re going to work with the Democrats, why wait to the last minute?” 

The short-term effects of a government shutdown on the muni market were not a big concern for members of the Government Finance Officers Association. “We did a lot of preparation work for the shutdown but it was not the top thing that was worrying them,” said Emily Brock, director of the GFOA’s federal liaison center.

According to Brock, staying in compliance with federal spending restrictions are a bigger concern. “People are reporting how they’re spending ARPA funds,” she says. “If there’s a technical hiccup or a glitch or if the people who maintain those programs go home, who’s out of compliance, and who’s responsible for compliance?” 

To deal with what’s become a routine and recurring problem of federal budgetary dysfunction, the GFOA is crafting a checklist for budget officers. Brock said, “That checklist will include what do you need to think about two weeks before? What do you need to think about two weeks in? What do you need to think about one month in?” 

During a shutdown the first blows are usually absorbed by the military, national parks and the employees of federal agencies. Programs most threatened include HHS’s Temporary Assistance for Needy Families and the USDA’s, Special Supplemental Nutrition Program for Women, Infants, and Children.  

Congressional observers are also looking for signs of how the weekend drama will affect the country’s credit rating. “The rating agencies and especially Moody’s are not just watching the political ping-pong lawmakers are playing with these deadlines,” said Tom Kozlik, managing director, head of public policy and municipal strategy, Hilltop Securities. “The most important component is the trajectory of U.S. federal spending. The shutdown drama is a distraction from the real key issues of spending, rising debt,  and interest.” 

Prior to the shutdown, Standard & Poor’s was pegging the most immediate exposures for U.S. public finance issuers to federal government funding streams used to provide operating assistance, along with “principal and interest payments on debt  issued by state or regional agencies used for public housing or transportation infrastructure.”

S&P was also predicting minimal impact if the crisis was resolved quickly, due to “strong debt service coverage levels, accumulated liquidity, debt service reserves, conservative financial structures with built-in payment cushions, and access by federal agencies to non-appropriated funding sources.”  

Ongoing palace intrigue regarding McCarthy’s ability to retain his position after cutting a deal with the opposition remains unresolved as does a permanent solution to budget challenges. Muni leaders are looking for a dramatic rerun next month.  

 ”There is no reason to think that we will not be going through exactly the same last-minute drama in November,” said  Chuck Samuels,  Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities. “It’s emblematic of a substantially dysfunctional political system.”

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