A new wave of deficit borrowing is headed for the municipal-bond market to close gaping budget holes caused by the coronavirus shutdowns, Bloomberg is reporting this week.
The report noted that New Jersey lawmakers agreed last week to borrow $10 billion to finance half of the state's estimated budget gap, while Illinois plans to sell as much as $5 billion in notes to a municipal facility set up by the Federal Reserve. New York state authorized $11 billion in short-term borrowing that may be refinanced on a long-term basis, if necessary, and New York City is seeking the legislature's approval to borrow $5 billion.
“It's pretty simple math,” said Patrick Brett, the head of Citigroup Inc.'s municipal debt capital markets business. “Hundreds of billions of dollars of deficits opened up really quickly. They're all not going to get plugged with cuts, they're all not going to get plugged with tax increases.”
Unlike the federal government, U.S. states are required to balance their budgets, though they frequently rely on short-term loans. Those deficits are poised to swell now as coronavirus lock-downs hold back sales and income-tax revenue -- and as costs rise for healthcare, unemployment assistance and social services. Municipalities will need at least $500 billion in additional federal aid over the next two years to avoid inflicting a major blow to the economy, according to Moody's Analytics.
When the economy slows, states typically terminate or furlough employees, put off public-works projects or borrow before raising taxes. Since the coronavirus pandemic hit the U.S., states and local governments have cut nearly 1.5 million jobs, far more than were eliminated after the last recession.
The size of the borrowing wave will depend on how much aid comes from Washington, the report says. Republicans and Democrats are negotiating to pass another round of economic relief during the last week of July.
Democrats in the House approved a $3 trillion measure that included about $1 trillion for state and local governments. Republicans have set a $1 trillion ceiling on another stimulus. Barclays Plc municipal strategists estimate states and local governments will get $200 billion to $500 billion.
While most states began the fiscal year on July 1 with full-year budgets in place, coronavirus infections have accelerated in Florida, Texas, California and Arizona since mid-June, prompting renewed lockdowns in some cases and weighing on an economic recovery. Uncertainty over tax collections and spending on government services means states will likely need to meet in special sessions to revise their budgets, according to Municipal Market Analytics.
While borrowing to fund operations is a negative sign to bond-rating analysts and investors, they may be more forgiving with states and local governments facing the biggest fiscal crisis since the Great Depression. “People are viewing this as a one-in-a-century kind of event,” Citigroup's Brett said. “Even many of those who would generally oppose deficit borrowing are saying this is an act of God, and we should borrow.”
In something of a side note, Bloomberg also reporting that in a controversial move, a landmark 40-year-old law that's been key to the growth of renewable energy in the U.S. is being effectively overhauled, threatening to curb demand for solar projects.
Federal regulators recently proposed new limits on which energy projects fall under the Public Utility Regulatory Policies Act, which had helped spur an entire generation of solar and wind farms across the country. More than 30% of solar facilities online today benefit from the law, according to Bloomberg. “The proposed changes may alter prospects for future investment.”
The overhaul highlights how far renewables have come since 1978, when the law was enacted to boost competition within the power sector and encourage new technologies. Wind and solar costs have declined precipitously and renewables now make up about 20% of U.S. energy generation.
“Most of the renewable energy projects developed these days are done outside of the Utilities Regulatory Act” said Federal Energy Regulatory Commission Chairman Neil Chatterjee, who sees that fact as proof that renewables can compete in our markets. He does not expect that to change.
Current regulations mandate that if a developer can build a project for less than a utility can, the developer can request a contract to sell power to that utility. Under the changes proposed last week by the energy commission, utilities are only obligated to buy power from facilities that are 5 megawatts or smaller. Formerly, the limit was 20 megawatts.
That means solar arrays between 5 and 20 megawatts “will no longer have unfettered access to utilities that they've had for over 40 years,” said BNEF power analyst Brianna Lazerwitz. While current contracts wouldn't be affected, the projects could face uncertainty once those contracts expire.
The new rules will “stifle competition, allowing utilities to strengthen their monopolies and raise costs for customers,” Washington-based Solar Energy Industries Association said. “We will continue advocating for reforms that strengthen the Act and allow solar to compete nationwide.”
So, we will see. Certainly, pressure on states and municipalities to offset the virus' impacts will be debated hotly, as will any new rules for solar and wind farms – so, this fall's economic policy debates will be extremely important and producers should watch closely policies and rules emerge, Washington Insider believes.
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