MuniThink

10 wishes for the new year in municipals

Published December 31, 2018, 10:18 a.m. EST

Updated June 01, 2021, 1:41 p.m. EDT

4 Min Read

We really need to have a comprehensive infrastructure plan from the federal level. We are all weary of writing about the prospects. We greatly desire the opportunity to write about something definitive and concrete. No pun intended. I have rarely witnessed a development that has been so highly anticipated that has not come to fruition. We will say it again. The states and localities cannot achieve the goal with their own means. Some funds from elsewhere are required. Let’s face the facts, even the truckers have gone on record as saying they are supportive of a gas tax increase. Alternative methods may prove to be great, but they would require more time to implement. We have high hopes for the new Congress in this regard. Let’s take some of the upside in the economy and apply same to reinvestment in economic progress. If the private sector wants to help, all the better.

John Hallacy, head of municipal research at Bank of America Merrill Lynch Global Research, listens at the Bloomberg State & Municipal Finance Conference in New York, U.S., on Wednesday, Nov. 2, 2011. During this year's budget season, states face more challenges than ever as they set financial priorities against the backdrop of lower property tax revenue, lower sales tax revenue and high unemployment. Photographer: Peter Foley/Bloomberg *** Local Caption *** John Hallacy

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We have been considering disclosure improvements forever. We are now about to be dealing with some new requirements in February. When secondary market disclosure came into effect, we did not have all of the data tools and digital sophistication that we have today. Let’s decide on some more standards without endless legal wrangling and just get it done. It looks like the Tower Amendment will never be repealed; still, we should be able to achieve improvements short of that possibility.

The status of the trade negotiations has many effects on public assets of all kinds. Ports across the land continue to dredge, install sophisticated cranes and off-loading equipment, and expand the on-shore storage and warehousing facilities. This investment needs to continue because we know that the tide of imports will never be completely reversed. We look to the March deadline for some hope that the negotiations with China will be less emotional and on point.

As LIBOR is replaced, there are many technical aspects that need to be carefully considered. We are not certain that SOFR is the solution but it appears to be the best alternative at this time. Even if the Fed goes easier next year, we believe that variable rate issuance will be on the rise. There are also many other short-term products — lines of credit, letters of credit, and swaps — that will require some clear resolution. When I ask most industry participants about swaps I usually get some form of push back. But if the economy slows measurably and perceived risk on rates increases, we could see even some limited renaissance in those transactions.

Three notch downgrades and significant criteria revamps should be very carefully considered if at all. The three-notch downgrade is more of a sign of how current the surveillance effort is. We really do not think there should be many of these actions. The run on cash develops long before the severe decline takes place. There should be enough time to discover the incidence of financial distress before the cliff risk happens. As for criteria changes, there needs to be significant rationales for the updates. In some cases, the existing language has not anticipated what exists today and needs to be overhauled. But some fundamental shift needs to take place before abandonment of all of the existing methods.

Puerto Rico continues to need to be resolved in a thoughtful and practical way as well as in a legal sense. We need to remember that a lot of mom & pops out there own the bonds and not just hedge funds.

We know we cannot “fight the Fed.” Although there now is a drumbeat for the Fed to take a pause in raising rates, we by no means believe that this is a foregone conclusion. We just hope that the Q&A after the meetings will provide more insight as to future direction and the weighting of factors. We fully appreciate that the Fed needs to function independently. We are also not too concerned about inflation, given that the downdraft in the markets will serve to slow spending over time. Trade is more of the wild card.

We must remain vigilant about preserving the tax exemption. There is some sense that with the new Congress the threat has passed. However, given the size of the federal budget imbalance, we still remain concerned that municipals may be “easy pickings” in order to offset other items in the budget. We laud the groups that continue to press on this front.

Technology continues to have a great deal of promise in our market. From being able to execute retail secondary trades to discovery of bonds with particular characteristics, we need to continue on the path to improvement. Even the discovery of which bonds have LIBOR as a reference would be a great improvement. Applying AI to the selection of bonds in our market is absolutely state of the art given our 1.6 million CUSIPS and multiple maturities. We continue to seek out the improvements in this regard. Translating the abstract into understandable language also is a plus.

We would like to encourage more public discourse of all matters municipal. We are encouraged to see that the SEC, the MSRB, and other regulators and groups are doing so. We believe that we all benefit if we have a vibrant municipally focused press. There is no substitute. Remaining silent should not be the option.

We wish you a happy, healthy and productive year ahead.

John Hallacy

President

John Hallacy has a long tenure in the municipal business, predominantly as head of municipal research for Bank of America Merrill Lynch. John has... Read full bio