Multiple municipal-friendly legislative items could be on the table to benefit state and local governments.

Earlier this month, HilltopSecurities Head of Municipal Strategy and Credit Tom Kozlik emphasized in his Jan. 11 commentary that the financial consequences of COVID-19 have continued to place pressure on state and local governments working to fill revenue gaps in their budgets. According to his Jan. 14 commentary, Kozlik believes relief could be on the horizon in the form of a first-stage $1.9 trillion rescue package that includes $350 billion for state and local governments. However, he reminded readers that aid for state and local governments continues to be a roadblock and warned that the $350 billion in aid is not a sure thing.

Kozlik expects D.C. lawmakers to propose a second-stage package in the coming weeks that focuses on infrastructure. As he referenced in his Jan. 8 commentary, the results of January’s runoff elections that resulted in Democratic control of the Senate, in addition to their control of the House, and the White House will likely lead to a pro-spend legislative program to benefit municipalities.

“The near-term consequence of the Democrats’ legislative agenda, if executed, could provide a significant boost to the economy and the municipal bond market,” said Kozlik.

According to Kozlik, items already included in the HEROES Act or the Moving Forward Act might be on the table as part of a relief package for municipalities.

The HEROES Act

Kozlik said in his May 12, 2020 commentary that what matters most in the HEROES Act for the municipal bond market are its provisions that could potentially bolster credit quality. He also mentioned in his Jan. 11, 2021 commentary that the HEROES Act includes nearly $1 trillion in aid that state and local governments would be able to use for budget relief.

“The HEROES Act has been a priority for the Democrats and could be a centerpiece for upcoming legislation,” said Kozlik. “This would go far to help manage state and municipal budget shortfalls.”

The Moving Forward Act

Kozlik believes there are two notable municipal bond-friendly elements of the $1.5 trillion Moving Forward Act, according to his Jan. 8 commentary. The first would be the permanent reinstatement of tax-exempt advance refundings, which would provide municipalities a more tax efficient way to issue debt.

“The threat to the municipal bond tax-exemption reached its pinnacle in November and December 2017 when private activity bonds and advance refundings hit the chopping block. Since then, the reinstatement of advance refundings with tax-exempt bonds have been on the wish list for many, if not most municipal bond issuers,” said Kozlik.

Kozlik noted a sequester-proof infrastructure bond program, such as Build America Bonds (BABs), as the other important municipal issuer-friendly item in the Moving Forward Act.

“A reinstatement of taxable, subsidized BABs have been on many issuer’s minds since Congress surprisingly allowed them to expire at the end of 2010. However, it’s worth noting that issuers soured on BABs after the federal government’s subsidy was slightly reduced as part of the 2013 sequestration,” said Kozlik.

According to Kozlik, the nature of the sixth phase COVID-19 relief package and its impact on state and local governments will become clearer as President Joe Biden begins his term. However, he expects the package, if passed as proposed, to provide major benefits to municipalities during a time when they need it most.