New Threat to Town, School District Budgets: Rising Rates​​​

Rising interest rates are squeezing cash-strapped towns and school systems that use short-term borrowing to keep cash flowing while they wait for property tax dollars to come in, the Wall Street Journal reported. A-rated cities and school districts are paying 3.16% for a one-year loan issued March 3, compared with 0.21% at the beginning of 2022, according to data from Refinitiv MMD. In places where local budgets are already burdened by inflation, rising borrowing costs add to the pressure to raise taxes or cut services. For most of the past decade, short-term borrowing has cost almost nothing and offered an easy solution for places with limited reserves and slow-to-arrive revenues. Altogether municipalities generally issue several billion dollars in short-term debt a month to cover day-to-day expenses like keeping traffic lights on and roads plowed. Some towns, counties and school systems have pulled back on these loans as rates have shot up, pushing short-term borrowing by government entities to its lowest level in more than a decade, according to an analysis of Bloomberg data by Municipal Market Analytics, a bond research firm. The analysis tracked a rolling 12-month average of short-term debt to be repaid with tax revenues. As rates rose, the amount borrowed fell from about $27 billion in January 2022 to about $19 billion last month. Federal pandemic aid and strong revenues over the past several years are also helping some municipalities avoid borrowing. Municipal debt, most of it backed by ultra-reliable taxes or revenue from essential services, tends to closely track interest rates. For investors, rising short-term muni rates typically mean more income from tax-exempt money-market funds, which had about $115 billion under management as of last week, according to the Investment Company Institute. The funds offer interest exempt from federal taxes and make it easy to withdraw your money. That is appealing, for example, to high-income families looking to park college savings for a soon-to-graduate high-school senior. But managers of those funds are navigating volatile prices and having a harder time finding new debt to buy, thanks in part to the decline in short-term borrowing. ​​​Read more.

Commentary: Nothing Redeems Crypto*​​​

Cryptocurrencies were already failing when FTX’s malfeasance came to light in November, but the company’s collapse accelerated the coming of the crypto ice age, according to a commentary in the Wall Street Journal. The status quo became impossible to defend, and the consensus on how to proceed has settled on two possibilities. One sees FTX as an example of why crypto needs more regulation. The other refuses to grant crypto the halo of regulation and argues it should be left to burn. Thanks to industry lobbying, discussions about regulation are already underway. It would likely require Securities and Exchange Commission registration for most crypto coins and exchanges and eliminate stablecoins that aren’t effectively money-market funds. This would largely clear the crypto landscape in the U.S., leaving only Bitcoin, Ethereum and stablecoins that are completely fiat-backed. Do the benefits of crypto markets outweigh the cost of regulating them? No. But letting crypto burn wouldn’t be costless, either. The financial pretensions of crypto need to be actively dismantled, according to the commentary. Contrary to what its marketing wizards tell us, crypto is neither money nor a vehicle for finance. It’s an elaborate simulation of finance that produces gains and losses. Users trade real money to gamble with what are essentially casino chips, but crypto isn’t even gambling. Casino odds are known, but the odds in crypto are subject to gross manipulation. Regulation might stabilize the house odds and the exchange rate for chips such as stablecoins, but it wouldn’t transform crypto into finance. The crypto failures of 2022 would have been worse without the minimal entanglement of crypto firms with the regulated financial system. Systemic liquidity and credit crises were avoided. At the same time, the connections between a handful of so-called crypto banks and the Federal Home Loan Bank system show how easily a cryptocurrency crisis might spill over. Regulating crypto would encourage denser, deeper connections, generating systemic risks. Letting crypto remain would allow further damage to accrue, particularly to the environment. Yet letting crypto burn would allow the most shameless actors to gamble on a quest for resurrection. Judges and trustees should help purge the system by pressing bankrupt crypto firms into liquidation without further delay, according to the commentary. Read more.

* The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Let's Chat[a]bot It: ABI's Annual Spring Meeting to Feature Ethics Session on AI ​​​

Don't miss ABI's Annual Spring Meeting April 20-22 in Washington, D.C.! This year's program will feature a timely plenary discussing cutting-edge issues involving the use of AI in law practice, such as ChatGPT, and ethical questions and potential pitfalls surrounding its use by lawyers and legal professionals. Register today!

U.S. Rent Growth Easing, but Remains a Burden for Many Tenants​​​

The cost of renting an apartment is easing after skyrocketing in recent years, though it remains painfully high for many Americans, the Associated Press reported. The U.S. median rent rose 2.4% in January from a year earlier to $1,942, the lowest annual increase since June 2021, according to data from Rent, which tracks listings for apartment and rental houses. The median rent peaked in August at $2,053, while the annual rate of growth topped out at nearly 18% in March last year, according to Rent. On a monthly basis, January’s national median rent was down about 2% from December, its fourth decline in five months, the company said. After surging in 2021 and most of 2022, rent growth has begun to moderate amid slowing demand and rising competition from new apartment construction, which has put pressure on landlords to ease rent increases. “It’s the inventory, the fact that rents have been so high, a lot of people uncertain about the economy and just staying put, not moving around as much,” said Jon Leckie, a researcher at Rent. Even with rent growth easing, the sharp increases in recent years have squeezed tenants’ budgets by gobbling up a bigger share of their income. The national average rent-to-income ratio reached 30% in the fourth quarter, according to Moody’s Analytics. That ratio was the highest it’s been in the more than 20 years Moody’s has been tracking it. Households that pay 30% or more of their income on rent are considered “cost-burdened” by the U.S. Department of Housing and Urban Development. “As the disparity between rent growth and income growth widens, Americans’ wallets feel financial distress as wage growth trails rent growth,” Moody’s economists wrote in a January report. It’s unlikely rents nationally will fall sharply, as demand for housing remains strong and the high mortgage rates that knocked the for-purchase housing market into a skid are forcing many would-be homebuyers to continue renting. Read more.

USTP to Resume Debtor Audits on March 13​​​

Effective March 13, 2023, the USTP will resume its designation of individual chapter 7 and chapter 13 cases for audit. These audits had been suspended in March 2020 due to public health concerns associated with the COVID-19 pandemic. As authorized in section 603(a) of Public Law 109-8, the USTP established procedures for independent audit firms to audit petitions, schedules and other information in consumer bankruptcy cases. Pursuant to 28 U.S.C. § 586(f), the USTP contracts with independent accounting firms to perform audits in cases designated by the USTP. Read more.

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Don’t Miss Experts Discussing Mediation Issues on a Special abiLIVE on March 14

Conducted in a Q&A format, an abiLIVE webinar on March 14 will feature a series of mediation hypotheticals/questions presented to Mediation Committee Co-Chair Connor Bifferato and Education Director Edward Schnitzer for discussion and/or debate. Register for FREE!

Analysis: Is the Inflation Scare Over? The Case For and Against Sticky Inflation​​​

Two years after inflation began its rapid ascent, investors, economists and policymakers remain divided on the path ahead, according to a Reuters analysis. Yes, headline inflation across major developed economies has retreated from multi-decade highs, inflationary impulses from COVID-19 such as rocketing used car and semiconductor prices are fading, and Europe's gas crisis has eased. But jobs markets are tight, and price pressures excluding volatile energy and food remain elevated. The stakes are high for policymakers and traders, who have been repeatedly wrongfooted by inflation. Here's the case for and against inflation falling quickly toward the 2% level most central banks target. Making the case for a swift retreat are energy prices, settling supply chains and a slightly looser labor market. With European natural gas prices at their lowest since August 2021, down 85% from last year's peak, euro area inflation is no longer in the double digits. U.S. inflation rose 6.4% in January, the smallest rise since October 2021, from a 9.1% high last June. Also, supply chain disruptions caused by COVID-19 and the war in Ukraine, key drivers of surging inflation, have eased sharply. And while labor markets are tight, the employment cost index the Fed watches is slowing and posted its smallest rise in a year in the fourth quarter. Making the case for sticky inflation are history, payroll levels and China’s economic reemergence. Since 1970, once price rises averaged 8% across 14 developed markets, it took at least six years for inflation to come back down to 3%, according to a Research Affiliates analysis. A Reuters poll forecast U.S. headline inflation at 2.7% by the end of 2023, with estimates as high as 4.6%. In addition, a tight U.S. labor market suggests that inflation will stay sticky, as the creation of 500,000 new jobs in January prompted a renewed ratcheting up of interest rate-hike bets. Wage rises may not be driving inflation now, but the risk is that they will. Lastly, China's economic reopening will add to global price pressures as trade and travel boosts demand from the world's largest commodities buyer. Read more.

Application Period for ABI’s 2023 Diversity and Inclusion Mentoring Program Open Until March 15​​​

Applications for 2023 mentees for ABI’s Diversity Mentoring Program are due 3/15! The program seeks to build personal and professional relationships while promoting diversity and leadership. To learn about eligibility requirements and apply, click here! 

Applications for U.S. Jobless Aid Rise by Most in 5 Months​​​

The number of Americans applying for unemployment benefits last week jumped by the most in five months, but layoffs remain historically low as the labor market continues to be largely unaffected by the Federal Reserve’s interest rate hikes, the Associated Press reported. Applications for jobless claims in the U.S. for the week ending March 4 rose by 21,000 to 211,000 from 190,000 the previous week, the Labor Department said Thursday. It’s the first time in eight weeks that claims have come in above 200,000. The four-week moving average of claims, which flattens out some of the weekly ups and downs, rose by 4,000 to 197,000, remaining below the 200,000 threshold for the seventh straight week. Last month, the Fed raised its main lending rate by 25 basis points, the eighth straight rate hike in its year-long battle against stubborn inflation. The central bank’s benchmark rate is now in a range of 4.5% to 4.75%, its highest level in 15 years, and some analysts are forecasting three or more increases that would push the lower end of that rate to 5.5%. Last month, the government reported that employers added a better-than-expected 517,000 jobs in January and that the unemployment rate dipped to 3.4%, the lowest level since 1969. Though the U.S. labor market remains strong, layoffs have been mounting in the technology sector, where many companies overhired after a pandemic boom. IBM, Microsoft, Amazon, Salesforce, Facebook parent Meta, Twitter and DoorDash have all announced layoffs in recent months. The real estate sector has also been battered by the Fed’s interest rate hikes. Higher mortgage rates — currently above 6% — have slowed home sales for 12 straight months. That’s almost in lockstep with the Fed’s rate hikes that began last March. Read more.

‘Seismic Shift’ Is Coming to Commercial Real Estate, Says CEO of Flexible Workspace Company​​​

Employees around the world were forced to adopt fully remote work for the first time when COVID-19 struck. But as the pandemic stretches into its third year, vaccines become more widespread and hospitalization rates drop, companies have been trying to lure employees back to working in the office full-time once more, Yahoo News reported. JPMorgan Chase’s Jamie Dimon has insisted that a hybrid style “doesn’t work.” Morgan Stanley CEO James Gorman says remote work isn’t an “employee choice,” and Disney’s Bob Iger has demanded that employees work in person four days a week. But despite top managers doing their best to get workers back into the office, many simply don’t want to go back to the way it was before. And it could have huge repercussions for real estate, according to the CEO of flexible workspace giant IWG. “A lot more people are demanding, and companies are allowing them to work close to home,” Mark Dixon told CNBC’s Squawk Box Europe on Tuesday. “This is a massive change for real estate. It’s a fundamental seismic shift where technology basically has allowed people to work from anywhere, and they are. “There’s this assumption that people actually like commuting into a central business district. They don’t,” he added. “It’s a complete waste of time and money, and they don’t want to do it.” But rather than despair about the office shakeup, Dixon said there are massive opportunities ahead for landlords and commercial real estate developers as they find new uses for their spaces, even if they consider getting rid of them completely. Some real estate developers are already converting offices into housing units, and new residential properties are being constructed with attention to “well-lit desk space,” says architect Jessica Hester. Traditional office spaces are also expected to empty out over the next 10 years. The national office vacancy rate was about 12% in 2019. By 2030, that number is expected to rise to 55% above the pre-pandemic figure, according to real estate firm Cushman & Wakefield. But Dixon added that although employees no longer prefer coming into offices every day or as frequently as they did before the pandemic, office spaces won’t be entirely obsolete. Employees still like the “drop in” space that offices create to meet colleagues, he said. Read more.

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