The administration's proposed federal budget is essentially D.O.A.
I have rarely witnessed a budget proposal that was so skewed in one direction. Clearly, Defense and Homeland Security are the greatest beneficiaries of the policy direction. It’s a given that the budget is not approved in its initial version (if ever approved).
Congress has managed to pass all its required appropriations measures on time only four times: in fiscal 1977 (the first full fiscal year under the current system), 1989, 1995 and 1997,
However, the administration’s introduction does shape the debate to come. The challenge for municipals is that domestic spending is generally being significantly trimmed. The only bright spot appears to be a $5 billion proposal for a major investment in infrastructure. This proposal is anticipated to grow to $50 billion by FY 2023. It is hard to say how much these amounts would filter down to the municipal market, if at all.
Out of the $4.7 trillion proposed FY 2020 budget, defense spending is recommended to increase to $726 billion from $674 billion in FY 2019. Non-Defense discretionary programs would increase from $685 billion in 2019 to $700 billion in 2020 for a much more modest increase. Mandatory programs that largely consist of Social Security, Medicare and Medicaid, are fairly flat with a recommendation of $2.841 trillion in 2020 versus $2.771 trillion in 2019. The one category that will increase precipitously no matter who is in charge is interest on the federal debt. The recommendation for 2020 is $479 billion versus $393 billion in 2019. The debt service carry is anticipated to climb to $823 billion in 2029 given $1 trillion deficits per annum that will need to be financed with Treasury issuance at least until FY 2022 with descending imbalances thereafter, according to plan. Net interest is scheduled to represent 2.1% of GDP in 2020 and is forecast to increase to 2.6% as early as 2023.
Individual categories foretell a much harder path for states and localities. Medicaid reforms being sought are $8.6 billion in FY 2020. The most significant change is in the form of a Medicaid community engagement requirement. No doubt there has been and will continue to be debate on this point. Medicaid-heavy states such as California, New York, and several others would be hard pressed to backfill any cuts. Other states would just pass on the effect.
It is hard to single out all of the cuts that are anticipated on the domestic spending side of the proposed outlays. The proposed $5.9 billion cut in the discretionary budget authority in FY 2020 for the Department of Transportation is staggering. Some would maintain that $5 billion of proposed Infrastructure authority would serve to offset some of the transportation cut, but we are not so certain. Mandatory transportation funding would be continued. At a time when different factions in the market are seeking ways to boost transportation funding, is this the correct message to be sent? States cannot fund projects solely with their own resources. Even if state gas taxes are raised, as some have been over the last several years and more proposals to do so continually emerge, there will be gaps in funding plans. To quote the policy behind the numbers: “The 2020 Budget continues certain important infrastructure investments, but in a way that also recognizes that the Federal Government is not — and should not be — the primary funder of the nation’s transportation systems.”
If adhered to in practice, this policy bent would really change the landscape. The FAST Act is due to expire this fiscal year and there will be the need to address the new multi-year plan in the near term. The administration continues to tout its $200 billion infrastructure plan that with leverage would produce a lot more improvements. The proposal has been around for two years and nothing much has happened beyond the outline.
Some would maintain that a stingy federal aid posture will lead to a greater reliance on the P3 approach. Certainly, P3s have been used to achieve results in shorter time frames. But, the P3 format works very well for very specifically defined projects and may not be the best solution for all applications.
Another area that is poised for a significant cut is the Department of Education. On a net basis, the cut equates to a 10% reduction from the level in 2019. I would agree that in the first instance, education is largely a state and local responsibility. For most individual schools, federal aid represents about 10% or less of total revenues. On the other hand, many of the federal programs have been in place for some time and there is a certain level of reliance on said funds. School choice is growing and there is support in this budget of $50 billion over 10 years for these programs. However, the vast bulk of enrollment at the elementary and secondary levels will continue to be in the public realm. Supporting school safety is of paramount importance, but there are many other educational needs that also need to be addressed.
My initial reaction to this budget proposal is shock. I have not seen many proposals that have been so lopsided. We can appreciate that this effort is just the initial volley in the long game of passing spending bills. We will need to see if the House comes up with its own proposal or whether the process will just be line item by line item, as has been the case for decades.
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