Midterm elections are just over a week away. While not teeming with the excitement of a presidential election year, there are a few things worth watching as it relates to the municipal market.
Implications of One-Party Dominance in the Senate
Come Nov. 4, 36 states will hold gubernatorial elections and 46 states will hold state legislative elections. Midterm elections are unique in that Republicans usually have a greater voter turnout. That’s particularly noteworthy this year, when the odds of the GOP gaining a majority in the Senate seem greater than not.
Senate Republicans currently hold 45 seats and need to gain a net six seats to win a majority. This is meaningful to state and local governments, as one-party congressional control could lead to more getting done. That said, we do not believe individual tax reform is likely to be one of those items.
Single-party dominance at the federal level would match the trend we’ve seen in state government. The map below shows that, currently, 36 states are controlled by one political party.
Ones to Watch: Illinois and Pennsylvania
At the gubernatorial level, it’s Illinois and Pennsylvania that matter most. Current polls suggest a party change leading to split control could be in the cards in both cases. Given the fiscal problems and recent ratings downgrades in these two states, their gubernatorial and legislative races are important to municipal investors.
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.
The opinions expressed are those of Peter Hayes as of October 26, 2014 and are subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of any individual holdings or market sectors.
This material does not constitute any specific legal, tax or accounting advice. Please consult with qualified professionals for this type of advice.
©2014 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners. iS-13833