In Illinois, the state income tax is a key topic. The temporary increase to 5% is set to expire at year-end, which would move the rate back down to 3.75%. The Democratic incumbent governor favors extending the tax increase, which would help pay state debt. The Republican challenger has other ideas.
In Pennsylvania, education funding is the top point of contention between the Republican incumbent governor and his challenger. The Democratic hopeful also has alluded to moving from a flat to a progressive income tax. Both of these states also face pension funding issues, and the winners’ policies around pension reform will be critical to how each state is viewed by the credit ratings agencies and the broader municipal market.
Few Bonds on the Ballot
Particularly notable about this Election Day is that there will be very few ballot initiatives at the state level. One worth mention, though, is California’s Proposition 2, the Rainy Day Budget Stabilization Act, which has the potential to significantly improve the state’s financial flexibility and credit rating going forward.
In addition, just two states, California and New York, are presenting voters with meaningful bond measures for approval. Bond initiatives are also negligible at the local level. This points to continued austerity across state and local governments. And it means municipal bond supply is likely to remain muted. In addition, states are starting to tackle issues that the federal government has been unable to address, mainly increases in the minimum wage and possible solutions for transportation funding.
What is the upshot for municipal investors? Constrained supply amid continued strong demand would be a performance positive. We continue to monitor this balance in forming our short- and long-term market outlook. In terms of party control, that tends to be harder to read (politics always is). Overall, we don’t see a great deal of change across the map. While one-party control generally implies quick solutions and less friction, it may be that mixed government, while messy and conflict-driven, produces more “checks and balances” that may lead to long-term fiscal balance between revenues and spending.
Peter Hayes, Managing Director, is head of BlackRock’s Municipal Bonds Group and a regular contributor to The Blog. You can find more of his posts here.