Municipal bond markets have largely recovered from the sharp, liquidity‑driven sell‑off that occurred at the height of the markets response to coronavirus‑induced economic damage.
However, the magnitude of the potential revenue shortfalls that state and local governments will suffer, while still uncertain in many instances, could set the stage for meaningful spending cuts in government employment, education budgets, and other services. These austerity measures would weigh on the US economic recovery.
The outlook for state and local government relief funding will be highly dependent upon the next presidential administration's agenda. Democratic nominee Joe Biden has indicated that, as president, he would prioritize a substantial increase in federal aid for state and local governments. Given President Donald Trump's current position in stimulus negotiations, his second‑term administration would be less likely to seek significant state and local relief.
But the balance of power in the Senate will determine the extent to which the next president can implement his agenda. A Republican majority (the status quo) would likely approve less funding for state and local governments than if Democrats held a Senate majority.
Municipal Budgets Crunched by the Coronavirus
T. Rowe Price's team of municipal credit analysts think that many state and local governments were reasonably well prepared for an economic contraction, having used the lengthy economic recovery that followed the 2008-2009 financial crisis to improve their fiscal health and build up reserves in rainy day funds.
Nevertheless, the sharp economic contraction has created significant uncertainty for state and local governments as they seek to address existing revenue losses and estimate future declines—key factors in planning their budgets for the 2021 fiscal year, which began on July 1 for many jurisdictions.
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