MuniLand

A well known political maxim is that politicians remain in office when they bring home benefits for their constituents. Nothing proves this point more than how the sequester process protects the senior citizen entitlement programs – Medicare and Social Security – while cutting federal spending for the most economically disadvantaged Americans. One of the nation’s most prominent sell-side analysts, Natalie Cohen of Wells Fargo, thinks the effects of these cuts have big consequences, and  eventually could even be socially destabilizing. From Cohen’s recent report:

Medicare is lightly touched (2 percent) and Social Security not at all. We see Congress protecting the programs that matter most to retirees while traditional anti-poverty programs, largely managed by state and local governments, are being rolled back.  In all, we see a more disturbing longer-term trend away from a vision of government that assures opportunity for all citizens while protecting the poor. Over the longer term, we believe this new approach will deepen the divide between ‘haves’ and ‘have not’s’ both generationally and racially, a trend that could lead to unrest, in our view.

Last December over 2,700 institutional investors voted Cohen the first place sell-side research director and generalist analyst in Smith’s Gradings municipal analyst poll. She is considered one of the leading thinkers in muniland.

Here is more of her analysis:

Many of the discretionary programs now subject to sequester were borne of the civil rights movements of the mid-1960’s. Programs designed to alleviate poverty and create opportunity such as Title I for disadvantaged schools, Head Start, Fair Housing and the current version of low-income rental assistance are examples. Apart from sequestration, the Voting Rights Act, also borne during that era, is now subject to challenge.

Although these programs, many of them focused on areas of concentrated poverty, were developed with lofty goals, they did not stanch the economic bloodletting of the Great Recession. Dionissi Aliprantis, Kyle Fee, and Nelson Oliver of the Federal Reserve Bank of Cleveland wrote in January, 2013:

Last week media was in a frenzy about the effects that federal spending cuts would have on states and cities under sequestration. Last Monday morning, the White House put out information including the graphic above to highlight the implications of spending cuts for the most vulnerable Americans. These are tough numbers, but there is no context provided to understand the magnitude of spending reductions.

I spent all week on Twitter trying to point out that cuts to state and local governments from the sequester would sting, but they would not chop off limbs. Media were reporting that communities would be devastated. Reports highlighted personal stories from employees who were worried about their jobs or loss of services. But almost all the frantic coverage failed to put the funding reductions for state and local governments in context. None of the coverage focused on the possibility that state governments could, and most likely would, damper or avert these cuts by finding internal efficiencies and re-prioritizing their own budgets.

A broader view was provided by Standard & Poor’s via Governing.com:

In fact, states and municipalities may already be fairly well prepared to handle the effects of sequestration, thanks to cutbacks and other austerity measures they’ve already made in response to a weaker revenue environment. Standard & Poor’s Ratings Services said in a report Thursday that sequestration  “may have only minor negative credit consequences for state and local governments and their affiliated entities.”

In three days from now, $85 billion in cuts to federal spending – known as the sequester – will go into effect. Democrats and Republicans voted on the sequester in July of 2011, and they have done very little until the past few weeks to change the composition or timing of the cuts, if they take effect. Now, after taking a week off from legislating, Obama and leaders of Congress are back to dueling on how all this will play out. As they are currently planned, cuts are across the board and don’t allow adjustments for priorities.

Carney doesn’t rule out, though, the President supporting a GOP flexibility bill. #Sequester.

— Stew (@StewSays) February 25, 2013

Some “flexibility” legislation is exactly what this process needs. The best approach for the portion of the money that flows to the states would be to block grant the spending. I wrote after President Obama was re-elected: