The TD Cowen Insight
Our 9th Annual U.S. Municipal Spending Survey tracks opex and capex outlooks at ~50 municipalities across the U.S. with a focus on larger cities to ensure adequate population and spending coverage.
In a significant shift from last year’s survey, 100% of respondents now expect to receive federal infrastructure funding in the current year, up from 36% last year. Federal infrastructure spending is a support mechanism that is only just beginning to flow into budget expectations. Overall municipal budget growth should remain consistent with 2023 in the LSD/MSD range with the complexion shifting more from opex growth to capex acceleration.
Federal Government May Become a More Steady Source of Funds
Large and unexpected rain events in the Western US last year provided reprieve from water scarcity conditions that seemed to be at a critical tipping point. Clearly, this is a salve, not a solution. Large, longstanding, and potentially behavior-altering decisions will soon have to be made regarding water, particularly in that region of country.
Recent fiscal measures have directed federal funding toward key water priorities. It wouldn’t be shocking if the federal government becomes more of a steady source of funds going forward (predominantly funding comes from state/local sources). While the timing of specific projects has been somewhat slow, the money is there, and is expected to be spent. In our survey this year, 100% of participants expect to receive federal infrastructure funding this year as part of their budget, compared to only 36% last year.
2023 Budget Spend More Favorable Than Year Prior
2023 budget spend compared favorably to expectations given a year ago. The gap between budget and actual is shrinking. This year, 64% of participants expect to spend between 80-100% of their opex budget (vs. 30% last year). 36% expect to spend that range in capex (vs. only 2% last year).
In terms of sizing, opex growth expectations appear to be normalizing but consistent. Most are expecting growth, but at a slightly lower magnitude vs. last year. Capex growth is accelerating materially into 2024. 56% of respondents (42% on population weighted basis) are expecting growth over 5%, well above the 16-18% seen last year.
9th Annual Municipal Spending Survey Overview
In our 9th Annual Municipal Spending Survey, we received budget outlooks directly from 50 municipalities (both large and small) across the U.S. We also collaborated with our colleagues at TD Cowen Washington Research Group on progress regarding policy decisions affecting the broader water space. Our work suggests that funding conditions remain firm, and that federal support, in terms of actual dollars deployed related to passed legislation, remains very early stage. We also provide takeaways from WEFTEC around emerging contaminants and digital transition.
Order Backlogs Are a Shock Absorber to Potential Negative Variability
The trend throughout our broader coverage of late has been one of order degradation and outright declines. The quality and durability of backlogs that have been built up to historic levels in many cases will now be tested. While backlogs can provide revenue protection, a scenario like this is generally unfavorable for equity performance. We’d expect municipal trends to look attractive in comparison, and broadly speaking, backlogs in that market are more normalized already given utilities are typically not customers to “over order”. In terms of infrastructure funding, we’re more inclined to think of it as a shock absorber to potential negative variability rather than a pure accelerator of growth.
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