One of the best muniland research teams, Blackrock, is out with its State of the States and Local Governments report. If you have time to read the 12-page report, you will get a very balanced roadmap of the challenges that municipal governments are facing.
The one area where I felt that the report broke new ground was its emphasis on the uncertainty that state and local fiscal processes face, thanks to the federal government. Here is what the report says (emphasis Blackrock):
Ironically, the greatest threats to state fiscal integrity are not primarily endemic fiscal matters or economic conditions, but rather, the effects of federal policies. First, capping tax exemption is a potential problem for the entire municipal asset class, although offsetting factors would certainly alleviate the impact. For states, as well as local governments, a tax cap could mean higher borrowing costs. Still, as has been the case recently, increased borrowing costs would likely translate into program reductions or cost-shifting to local governments. As stated earlier, we believe passage of the cap will be difficult in the current political environment and is unlikely in 2013.
The threat to cap or eliminate the tax exemption for municipal bonds has been floating around for over two years, and it causes concern for public officials. RBC’s Chris Mauro wrote in a note Wednesday that any change to the muni bond tax exemption would likely go through a traditional legislative process and not be jammed into the continuing resolution. From Mauro’s note:
Yesterday, House Ways and Means Committee Chairman Dave Camp announced that the Committee would hold a hearing next Tuesday, March 19, entitled ‘Tax Reform and Tax Provisions Affecting State and Local Governments.’ According to the Committee’s hearing advisory, the focus of the hearing will be the ‘federal provisions that affect state and local governments, and how those provisions should be viewed in the context of comprehensive tax reform.’ In other words, the bulk of the discussion will be centered on the itemized deduction for state and local taxes and the municipal bond interest exemption.