1) Many state and local governments have been under pressure due to the pandemic. What’s your outlook for this sector in 2021?

The January 5 runoff election for Georgia’s two Senate seats has tipped the delicate balance of power in the federal government from divided to unified with the new administration. This outcome has considerably altered the landscape for state and local governments, and for the municipal bond market itself. Last week’s statement from then President-elect Biden confirmed that direct additional aid to state and local governments and an infrastructure package would form a critical part of his administration’s economic policy agenda. Market participants appear to have welcomed both developments and we will assess the prospects of this agenda as the legislative session unfolds.

Revenue and capital outlay pressures remain, despite several states announcing less-severe-than-expected revenue declines. We believe this is a second-order effect of earlier rounds of fiscal and monetary support that helped fuel strong equity market gains and anticipated capital gain receipts. As an example, California’s revenues are highly sensitive to personal income taxes, yet recently reported revenues through November were 23% ahead of the state’s fiscal year 2021 expectations (July2020-June 2021). However, these announcements may not account for the reality that many states lowered revenue expectations substantially when formulating their budgets.

We expect fiscal pressure to remain significant over the medium term as the pandemic continues to weigh on large segments of the economy. Further, the revenue hit has varied widely, with some states facing substantial budget shortfalls. In our view, fiscal aid will likely be critical to limit deep cuts and additional layoffs. Of the 9.8 million nonfarm payroll jobs that have been lost during the recession, nearly 1.4 million have been in the state and local sector.i