Cumberland Advisors Market Commentary – Municipal Employment

The positive jobs growth news, showing an increase of 638,000 jobs in October and a full one percent reduction in the unemployment rate to 6.9%, masked a decline in government employment. Private jobs were up by 906,000, led by an increase of 271,000 in hospitality and leisure, a sector that has been hit particularly hard by pandemic shutdowns. Government jobs, however, fell by 268,000. The majority of the losses were in state and local education, 61,000 and 98,000 respectively. The loss of 147,000 temporary 2020 census workers contributed to a net loss in federal employment of 138,000. The loss of public education jobs as well as private education job losses of 21,500 is likely reflective of the extent of remote learning and the reduced need for support staff.

Market Commentary - Cumberland Advisors - Municipal Employment - Patricia Healy, CFA

State and local employment constitute 13% of the total non-farm payroll, and slow growth in state and local employment after last decade’s financial crisis contributed to a slow recovery. Compared with October 2019, state and local government employment last month was off 6%. There could be further job losses as municipalities rein in spending and cut programs and services to address revenue shortfalls.

The “Cities Fiscal Conditions 2020” report by the National League of Cities found that nearly 90% of cities will be less able to meet the fiscal needs of their communities in fiscal year 2021 than they were in FY 2020. The league noted that they have not seen a lack of fiscal capacity like this since the low point of the Great Recession, which took years to develop, while this most recent decline was rapid. Further, the report shows that, on average, cities anticipate a 13% decline in FY 2021 general fund revenues, compared to FY 2020. The trajectory of the COVID-19 pandemic has been more protracted than originally anticipated, so we take these estimates with a grain of salt.

The level of state and local employment will depend on the reopening of the economy, further federal stimulus, and the trajectory of the virus, including the availability and acceptance of a vaccine. As we have mentioned in past reports, municipalities were in a strong position prior to the shutdown of the economy, with ample reserve positions. They can cut services and employment and reduce capital spending, as well as refinance and possibly stretch out debt repayment schedules. Raising taxes and fees at this time, on the other hand, would be difficult. The fact that total employment is improving will be a help to municipalities, as their revenues are affected by the overall health of their service area economies. We are still 10 million jobs away from pre-pandemic levels.

At Cumberland Advisors we closely watch employment and other economic data, and we monitor the actions municipalities are taking to try to attain budgetary balance. We also watch for actions the federal government is taking to help municipal governments. We had upgraded our holdings prior to the pandemic, because there was little additional yield in lower-rated bonds. AA-rated bond issuers generally have diverse service area economies and conservative financial and debt management and are well positioned to manage through crisis.

Patricia Healy, CFA
Senior Vice President of Research and Portfolio Manager
Email | Bio

A postscript: You’re invited to join me at a Nov 17, 2020 talk titled, “Post-Election Financial Markets” along with other colleagues from Cumberland Advisors.

It’s a virtual discussion and the details can be found here:

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