Two-year budget deal stabilizes federal aid to municipal governments

Bonds

The creditworthiness of the U.S. government will be intact for two years and the flow of federal aid to state and local governments will be assured under the two-year budget deal expected to be approved by the Senate and sent to President Trump for his signature.

Speaker Nancy Pelosi, D-Calif., at her weekly news conference on Friday, July 26, 2019.

Bloomberg News

The House approved the deal 284-149 late Thursday before beginning a six-week recess. The Senate also is expected to approve the deal before beginning its August recess a week later.

Fitch Ratings and Moody’s Investors Service issued statements highlighting the short-term positive impact of the deal.

“Congress’s suspension of the debt limit removes the tail risk of political brinkmanship pushing the U.S. government toward missing a future debt payment, an event that would have impaired U.S. sovereign creditworthiness and roiled global financial markets,” Moody’s Vice President and U.S. lead analyst William Foster said in a statement.

“The U.S. Treasury will now be able to issue new debt to fund the government’s operations and will no longer need to rely on limited extraordinary measures to assure continued service of outstanding debt,” Foster said.

Fitch Ratings said the budget deal “underscores the difficulties facing the U.S. in addressing the widening deficit. The federal government deficit increased to 3.9% of GDP in fiscal 2018 and is forecast to steadily increase further over the medium term, topping 4% this year.”

Once the president signs the bill, Treasury is expected to reopen the trading window for State and Local Government Securities.

The SLGS window has been closed since March 1, when Treasury began taking extraordinary measures to avoid breaching the debt limit.

SLGS are typically used by state and local governments and other entities that issue tax-exempt municipal bonds because of yield restrictions and arbitrage rebate requirements under the Internal Revenue Code.

The legislation will end sequestration cuts for discretionary programs in fiscal years 2020 and 2021 but will extend sequestration through 2029 for mandatory programs such as federal subsidies for direct-pay Build America Bonds.

Federal subsidy payments made to issuers of Build America Bonds and other direct-pay bonds have been cut by 6. 2% in fiscal 2019 under sequestration, shaving 2.17 percentage points off the 35% federal subsidy. The subsidy for the current fiscal year, as a result, is 32.83%.

The end to the caps on discretionary programs is good news for states and cities that rely on federal aid through programs such as Community Development Block Grants.

The budget agreement “is a good deal for cities,” said Michael Wallace, program director for community and economic development at the National League of Cities.

“I think frankly any compromise that creates certainty and removes some of the uncertainty around what federal spending is going to look like is welcome for us and for cities and for local leaders,” Wallace said.

“Over the last two years funding for city priorities like CDBG have been going slowly back up to amounts equal to what they were before the fiscal crisis, before the mortgage bubble popped,” said Wallace. “We think the budget deal will provide enough funding to at least keep our budget priorities level.”

House Appropriations Committee Chairwoman Nita Lowey, D-N.Y., said the deal replaces “reckless cuts” in President Trump’s proposed 2020 budget with “the largest-ever increase in base funding above sequestration levels.”

“With these more reasonable budget caps, we can undertake an orderly appropriations process to invest in critical domestic priorities,” Lowey said.

Although Trump urged congressional Republicans to support the deal, only 65 House Republicans voted in support while 132 opposed it.

“We are safeguarding the full faith and credit of the United States of America by achieving a lifting of the debt limit until July 31, 2021,” Speaker Nancy Pelosi, D-Calif., said in a floor speech urging colleagues to support the deal. “Perhaps, between now and then, we can work in a bipartisan way to address removing all doubt about whether the debt limit will be increased.”

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