Municipal Bonds Unaffected by Potential Government Shutdown

Analysts at S&P Global Ratings have indicated that the outlook for municipal bonds will remain stable regardless of a potential federal government shutdown. Congress is currently racing to pass 12 appropriations bills for the government’s 2024 spending, or a stopgap bill to keep operations running until a full-year plan is established. Failure to achieve either option would result in a lack of funding by midnight Saturday.

Municipalities, such as states, local governments, school districts, and hospitals, heavily rely on federal funding to facilitate their operations. Furthermore, some agencies utilize federal grants to issue debt for projects related to public housing or transportation infrastructure. However, S&P Global notes that a short-term government shutdown would not significantly impact the credit outlook for these entities.

While a temporary delay in federal funds could potentially hinder economic expansion, analysts highlight that many state and local governments have accumulated substantial capital reserves over the past few years. Additionally, their revenue streams remain intact. Consequently, S&P Global emphasizes that states possess the ability to adjust their budgets as necessary to mitigate any temporary setbacks.

In conclusion, the improved liquidity and credit profiles of states contribute to their resilience in managing potential delays in federal funding.

The Impact of Public Debt on Shutdowns

Public debt is a critical factor in the functioning of government operations, especially during shutdowns. These conservative structures of public debt offer advantages such as built-in payment cushions and access to alternative funding sources that continue to flow even in times of shutdown.

The analysts highlight that current cash positions or access to other sources of liquidity can help accommodate any delayed federal payments to hospital systems, local governments, public schools, utilities, higher-education institutions, or not-for-profits. This reassurance alleviates concerns about disrupted services in these key sectors.

Interestingly, many U.S. states actually possess higher credit ratings than the federal government itself. In 2011, S&P downgraded the long-term credit rating of U.S. sovereign credit to AA+ from AAA due to political polarization surrounding the debt-ceiling dispute. In contrast, 15 states, including economic powerhouses like Texas and Florida, maintained their AAA ratings.

However, the risk of a prolonged shutdown leading to liquidity depletion remains a long-term concern. While a continuing resolution can temporarily prevent a shutdown, it cannot indefinitely postpone budgetary plans. Should a continuing resolution still be in effect on Jan. 1, 2024, it would trigger spending limits 1% below fiscal 2023 levels and impose caps on federal spending under the Fiscal Responsibility Act enacted this past June.

It is crucial to monitor the situation closely to ensure that the impact of public debt and potential shutdowns is managed effectively.

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