A blue wave may be best outcome for state budgets and the muni bond market

Key Points
  • State and local governments have been looking to Washington for more funding to make up for revenue shortfalls, but stimulus spending has become mired in politics and is unlikely before the election.
  • States and cities, and the public finance market, could get the most help if Democrats win the White House and majority control in Congress.
A man wearing a protective mask reads his cell phone at an entrance to the subway in New York City, September 22, 2020.
John Lamparski | Getty Images

The best hope for state and local governments looking for another dose of federal aid would be for a 'blue wave,' where Democrats win the White House and both houses of Congress in November.

So far, a plea by governors and mayors for more assistance has been lost in the battle between House Democrats and Senate Republicans. The House proposes more than $2 trillion on a major stimulus bill, including local government aid, and senate Republicans plan to bring up a $500 billion package next week that includes no state assistance.

States and local governments saw an abrupt drop off in tax revenues when they shut down in March, and many are nowhere near a return to normal. Moody's Analytics forecasts that state and local governments will see a "fiscal shock" of $450 billion, including revenue shortfalls over fiscal year 2021 and 2022.