At a time of year when many of us celebrate our good fortune and try to remain upbeat about the possibilities for the year ahead, state and local budget planners are in the throes of constructing their respective budget introductions. By now, those same planners ordinarily would have had a fair amount of time to absorb the potential impacts of the federal budget as approved.
Alas, the federal budget is delayed and we careen toward the critical date. This means that those state and local budget planners will lack the critical federal inputs until early next year. Since most Executive Budgets are due in the January to early February timeframe, this means that state and local budgeteers will need to make their own best assessments as to the outcomes from the federal level.
Total federal budget outlays are estimated at $4.4 trillion for the year. Social Security is the largest item accounting for $1.04 trillion. Medicare and Medicaid account for $640 billion and $420 billion respectively. These Mandatory Programs at $2.7 trillion are responsible for 61.4% of Total Outlays.
Net interest on the national debt of $364 billion is becoming more pronounced given the federal debt issuance pacing. By the federal government’s own forecast, the net Interest is poised to double by 2025 to $727 billion for the year. Net Interest for fiscal 2019 is estimated to be approximately 8.2% of total outlays. If the federal level were a state, we would maintain the level is on the high side. Of course, states do not print dollars. We thought the folks in power would be anti-debt in nature. Guess we were wrong.
Mandatory Programs and Net Interest together comprise the non-discretionary portion of the budget and approximate 70% of Total Outlays. The discretionary part of the budget is $1.3 trillion, or approximately 30%. One nuance is that Defense Outlays account for an estimated $678 billion or 52% of this category. Considering other vantage points, most pundits would not consider defense spending to be truly discretionary in nature. In fact, the administration wants to propel this outlay much higher.
This discussion essentially equates Discretionary Non-Defense Outlays to $626 billion or only 14.2% of Total Outlays. As we know from our daily activities, Defense and Homeland Security spending are viewed in the light of tradeoffs with domestic spending. Who wins is ultimately up to Congress and the Administration.
Given the lower emphasis on domestic spending at the federal level, states and localities are being pressured to produce the additional funding for critical programs and for infrastructure spending. The Infrastructure Plan included in the proposed budget is essentially a carryover from the prior year.
My conviction is that the states and localities will need to be more creative over time. Going the P3 route makes a lot of sense and there is less resistance to the idea. Yet, gaining acceptance is many communities continues to be an opportunity.
The federal deficit is forecasted for fiscal 2019 at $984 billion. Deficits are forecasted at over $1 trillion for the future years. Of course, these amounts need to be raised by Treasury issuance at the same time that the FED is going about its business raising rates. We just have to conclude that the Muni/Treasury ratio will be changing in new and interesting ways since municipal issuance has been on the wane without advanced refunding. It is true that the new money supply in municipals is climbing. Out of the estimates I have seen so far for issuance for next year, the range approximates $340 billion to $375 billion, for what constitutes an incremental increase. These levels are not unreasonable considering there are not many prospects for new funding for projects beyond what exists today, unless and until some kind of Infrastructure plan is fully adopted.
The entire federal budget is also predicated on more than 3% Real GDP growth over the next few years. Given the warning signs being broadcast by the markets now, these levels may not be attainable. Perhaps, if the trade negotiations with China are successful, we may reach these levels once again.
The cost of the Wall at $5 billion is not a very large number in the context of a federal budget of $4.4 trillion. But, I just keep thinking how many schools could be funded with such an amount. By my back of the envelope calculation it would be at least 125.
The final thought about this year’s budget melee is one of duration. Having a partially agreed upon budget is helpful but there is a lot more to work through. I agree that a government shutdown of just a few days is not that critical in the big picture. However, if the duration of such an event would ever last a week or two, the direct and unintended consequences would mount post haste. We hope that a spirit of compromise is found once again. Otherwise, municipal traders will need to interpolate a lot more using other less common indicators.
