Municipal bonds’ outlook won’t be impacted by the looming federal government shutdown, analysts at S&P Global Ratings wrote on Friday.
Congress is scrambling to pass 12 appropriations bills for the government’s 2024 spending, or a stopgap bill that temporarily keeps the government running until the full-year plan is made. If the legislators fail to achieve either of those options, the federal government would run out of money by midnight Saturday.
Many public-finance issuers of muni bonds—think states and local governments, school districts, and hospitals—use federal funding to help run their operations. Some agencies have also been issuing debt for things like public housing or transportation infrastructure, leveraging the grants they receive from the federal government.
But a short-term federal government shutdown won’t substantially weigh on their credit outlooks, according to a Friday note from S&P Global.
A temporary delay in receiving some federal funds could result in modestly weaker economic expansion, wrote the analysts. But over the past few years some state and local governments have been building up capital reserves to record highs or close to them, and their revenue continues to come in.
“Although states rely on federal funding for many programs, we note that the states’ above-average credit profile and stability reflect their autonomy to make budget adjustments as needed,” wrote the S&P analysts. “In our view, states’ improved liquidity positions them to manage any temporary delays.”
The conservative structures of public debt usually come with built-in payment cushions as well as access to alternative funding sources that would continue flowing even during a shutdown.
“Any federal payments that may be delayed to hospital systems, local governments, public schools, utilities, higher-education institutions or not-for-profits, can be accommodated by current cash positions or access to other sources of liquidity,” the analysts wrote.
In fact, many U.S. states have higher credit ratings than the federal government. In 2011, S&P famously downgraded the long-term credit rating of U.S. sovereign credit to AA+ from AAA, citing political polarization over the debt-ceiling squabble that year. In comparison, 15 states, including economic powerhouses Texas and Florida, received AAA ratings from the agency.
Still, there is long-term risk if the shutdown drags on for too long and liquidity runs dry. A continuing resolution could stave off a shutdown in the near term, but budgetary plans can’t be pushed off forever. According to the Fiscal Responsibility Act signed into law this June, if a continuing resolution were still in effect on Jan. 1, 2024, it would trigger spending limits 1% below fiscal 2023 levels and enforce caps on federal spending.
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