Leaded or Unleaded?

by Deidra Krys-Rusoff Senior Vice President

Market Response to the Fed

Financial markets were volatile this week, influenced by mixed messages from the Federal Reserve. The Fed minutes released on Wednesday were dovish, suggesting little chance of a Fed rate hike, while San Francisco Fed President Williams made hawkish comments backing a rate hike just a day later. The S&P 500 slipped down .5 percent after reaching all-time highs. Crude oil is trading up slightly amid speculation that producers will be limiting output. Bonds sold off slightly, with yields rising to 1.59 percent at the time of this writing.

Leaded or Unleaded?

That was a question asked by gas station attendants around the U.S. prior to 1996, when the U.S. Clean Air Act banned the sale of leaded fuel for use in on-road vehicles. Now parents are asking this question every time they turn on the faucet to get their child a glass of water.

The Flint water crisis brought this question to the forefront, when it was discovered that a water source change brought corrosive water through lead pipes, exposing thousands of children to elevated lead levels. Flint is hardly alone. High lead levels have been found across the country: Sebring, Ohio; Durham, North Carolina; and Washington, D.C. — to name just a few.

Congress passed the Safe Drinking Water Act in 1974 and amended the act in 1986 to provide protection to the nation’s drinking supply. Most municipal water sources are well within the Environmental Protection Agency’s actionable limits, but the old leaded pipes that connect schools and homes to the water system may be contaminating the water we drink. Old pipes and faucet fixtures are creating issues for many school districts, from Boston, Massachusetts to Portland, Oregon. We expect to see more stories as school districts and public entities with older buildings test their water quality.

The costs to fix this growing problem are enormous. The infrastructure costs of this crisis have already cost Flint and the state of Michigan over $200 million in lead pipe replacements and related infrastructure updates. Closer to home, the Portland Public Schools have estimated that it will cost $196 million to fix the districts lead pipes and fixtures. Nationally, the EPA estimates that it will cost at least $384 billion in deferred maintenance to keep our drinking supply safe.

The costs of fixing our nation’s water quality will significantly impact the budgets of local municipal water districts, school districts, cities and taxpayers around the nation. Congress is researching options to address financing the water infrastructure needs of local communities including options such as: a federal water infrastructure trust fund, lifting restrictions on private activity bonds for water infrastructure and reinstating the authority for issuance of Build America Bonds.

Ferguson Wellman's fixed income team is following the ongoing situation and monitoring the costs and impacts upon municipal credits. Furthermore, the equity team is researching companies that may be able to capitalize upon such infrastructure updates.

Takeaways for the Week:

  • The chances of a Fed Funds rate hike by year-end have increased to about 50 percent
  • Fixing national water quality will require substantial infrastructure spending by federal, state and local governments
  • Ferguson Wellman is monitoring credit quality and researching investment opportunities that will arise from the water crisis