MuniLand – Proposed FY’17 Federal Budget Impact on State and Local Governments

A few weeks ago President Obama released his last federal budget, which, as always, will have an impact on state and local governments. Also typical is a fierce battle in Congress over what the final details of the plan will look like as the budget is debated on Capitol Hill. Broadly, the proposed budget is a net positive for municipalities as many new spending initiatives would help alleviate certain financial pressures. One such measure is extending the period over which the federal government would pay 100% of the cost of Medicaid payments for an individual under the Affordable Care Act. Extending Medicaid payments would be a credit positive for state-backed municipal credits, as it pushes out a jump in required expenditures. For the southern and western states, the budget proposes a modest allocation of about $260 million in funds for water security projects that would help alleviate drought conditions. On transportation, the budget calls for a $10.25 per barrel tax on crude oil, the proceeds of which would go towards infrastructure projects. It should be noted that Republicans have publically resisted this idea already. One big picture item that we’ll be watching closely is a potential tax reform that includes a partial tax on municipal bond interest income for the wealthiest households. State and local interests are expected to put up a fierce lobbying effort to maintain the status quo, and like the numerous times this issue has been on the table in the past, we don’t expect the measure to gain much traction. The proposed budget is full of a variety of initiatives that would both positively and negatively impact the credit quality and market dynamics of the tax-exempt bond market. However, we must remember that the first round of the budget process is just a proposal, and that negotiations will significantly change the final FY’17 budget.

Sources: Governing.com and SNWAM Research