Political brinkmanship has the nation’s credit rating headed towards a race against the clock in the U.S. Senate, though the crisis now appears near resolution after the House Wednesday night passed the 99-page Fiscal Responsibility Act of 2023, a bipartisan effort to avoid default.
Municipal market participants are moved to cautious optimism about the latest events. There was much on the line for the muni market, as a variety of state and local credits stood to be negatively impacted by a downgrade of the U.S. debt rating that was sure to come from a default. The deal as passed by the House also avoids clawbacks of certain federal money issuers were unwilling to concede, a major fear a few weeks ago.
“Certainly, the big takeaway is the ARPA direct allocations to counties are not impacted by the debt ceiling deal,” said Nicole Weissman, director of strategic communications, National Association of Counties. “With this issue behind us, we’re certainly looking forward to working with our federal partners on other bipartisan priorities, like the state and local tax reduction and bank-qualified bonds.”
The National League of Cities is on the same page. “NLC is encouraged by the strong bipartisan support and believes it bodes well for other priorities important to municipalities, including advanced refunding,” said Mike Gleeson, legislative director, finance administration and intergovernmental relations, National League of Cities.
While the proposal leaves State and Local Fiscal Recovery Funds intact it intends to claw back $28 billion of unspent COVID-19 relief funds. The legislation is expected to pass in the Senate, possibly with a few riders attached and has tepid support from the White House.
The bill caps discretionary spending for six years — but with a sequester mechanism in place only for the first two years. It also rescinds enforcement funding for the Internal Revenue Service and streamlines energy infrastructure project permitting.
The bill passed 314-117 with Democrats coming to the rescue and providing more yes votes than Republicans. The scenario sets up an uncertain future for the rest of the session.
“They’re already six months into the first year for this Congress, it’s literally a quarter of the way through,” said Emily Brock, director, federal liaison center, Government Finance Officers Association. “I think there’s a branding happening that allows us to understand who’s ready to play the game on bipartisan efforts, including those that are useful in bolstering and enhancing the municipal market.”
The Bond Dealers of America is gazing ahead to next year hoping the right bill will show up at the right time. “We are still looking at 2024 for some type of possible tax package for the muni priorities to ride on,” said Brett Bolton, VP, federal legislative, regulatory policy, BDA. ”It’s too early to tell if this deal will impact that potential deal, but we continue to work to place these issues in the forefront of leadership’s mind.”
There’s also concern that McCarthy may have overextended his influence to muscle the current legislation through.
“It’s too early to give judgement on the possibility of bipartisan actions further down the road but I think its inarguable that Speaker McCarthy used a good bit of his political capital and goodwill within his caucus to get this bill across the finish line,” said Bolton.
GFOA sees the effort as a positive sign and is hoping the legislative acid test will lead towards more progress. ”I think that there’s cautious optimism that we can weather these political discussions, even though we thought that McCarthy was sort of fragile,” said Brock. “He’s clearly not. It’s happened and an agreement has been made. This is a badge for him to lead a house that can do bipartisan things.”