THE COWEN INSIGHT
Municipalities were reluctant to participate in our budget survey this year, citing extreme uncertainty. Results suggest underspend of 2020 budgets with capex declines in ’21 (first time in our 6 surveys). A lagged and lingering impact seems likely based on historical post recession spend.
US Munis Face Lack Of Momentum – When Not Answering Says A Lot
Our 6th annual spending survey was quite different than the previous five. Many municipalities were unwilling or unable to participate this year citing material uncertainty and rapidly changing internal conditions that could impact the durability of their answers.
Actual budget numbers seem far less relevant right now. To that point, less than 50% of respondents expect to spend 80-100% of their current opex budget. Into next year, participants expect LSD opex growth and for the first time since we started doing the survey, capex declines.
Certainly a lot can change if/when a vaccine arrives, but our survey has generally lined up well with reported results of covered companies with survey forecasts leading by ~6 months, and suggests momentum, at least at this point, will be challenged well into 2021, if not longer.
Historical Analysis of Recessionary Spending Trends Suggests Things Get Worse Before They Get Better – Will There Be Federal Support?
When faced with economic shocks, munis generally use opex as the first line of defense – consistent with survey results highlighting a 2020 underspend. That is only a temporary solution though. The repair/critical nature of that work remains and opex budgets tend not to be dramatically impacted on a forward basis.
Capex, however, takes longer to decline as projects underway are finished. It has more negative forward implications as new projects are pushed and/or scrapped. Looking at prior recessions, we found that it generally takes 1-2 years before capex spend actually goes negative. It also takes many years (7 on average based on CBO data) to recover prior highs. This episode could prove unusually problematic given concentrations in large cities. The top 20 counties in the US represent ~20% of the US population but 35% of muni bond issuance and a much higher percentage of opex spend. Lingering issues there will be felt severely in gross dollar terms.
Historically, the vast majority of spending is supplied by state and local sources. However, heading into an election, there is the prospect for federal help. Though the municipalities we surveyed were skeptical. The current Democrat Moving Forward Framework includes $86B for water. Cowen Washington Research Group strategist Chris Krueger believes 2021 will be the “Infrastructure Year” and outlines various scenarios in our report.
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