Pub15-2020-2021-Issue5

WWW.NEBANKERS.ORG 22 Dana Sparkman, The Baker Group Municipal Credit Update: Revisiting the Pandemic’s Effect on Municipal Credit Risk T HIS DISCLOSURE, OR SOMETHING like it, is now regularly included in documentation by municipal issuers. While we would love to have more details than that, the exact magnitude of the pandemic’s repercus- sions on state and local finances still cannot be accurately determined. However, we do have some clarity on the results of the 2020 fiscal year, given that most local government fiscal years close in June. The U.S. Census Bureau reports that total state tax revenue declined 29% in the second quarter of 2020 compared to the same quarter in 2019. The chart below exposes the states with the largest declines in total tax revenue when comparing Q2 2019 to Q2 2020. Most states did not cut funding to school districts in the 2020 fiscal year, but instead used one-time budgetary maneuvers to make ends meet. If state revenues continue to be Source: U.S. Census Bureau “The potential impact of the COVID-19 pandemic on the City cannot be quantified at this time, but the continued outbreak of COVID-19 could have an adverse effect on the City’s operations and financial condition.” depressed, they may be forced to make cuts across the board, including edu- cation. Vulnerability to state funding changes can be measured by analyzing the district’s dependence on state funds relative to total revenues. Of course, further federal aid would mitigate this risk. Congress is working on ideas for more aid, but none have fully passed at this time. The HEROES Act, passed by the House October 1, 2020 but not yet by the Senate, contains $676 billion in funds for state and local governments with $208 billion specifically allocated for education spending. The HEROES Act comes with an important restric- tion: states may not cut their budgets for education spending, which will help to further protect school districts from state funding cuts if enacted.