Munis mixed as inflation, Fed hang over

Munis mixed as inflation, Fed hang over

Municipals were weaker in spots in light trading Friday while U.S. Treasuries were weaker again on the short end on higher inflation reads. Equities rallied on a potential debt ceiling deal.

“A slew of hot economic data points are keeping the bond market selloff going strong,” noted Edward Moya, senior market analyst at OANDA.

The Fed’s preferred measure of inflation, core PCE, rose 0.4% in April and climbed up to 4.7% on an annual basis.

“Higher prices did not deter spending as that climbed more than expected to 0.8% in April,” Moya said. “Incomes ticked higher as expected to 0.4%, which suggests the consumer is still going to spend in the future.”

The U.S. economy is “too resilient and this will force the Fed to not only deliver more tightening but also to keep rates higher for much longer,” Moya said.

He said Fed rate cut bets will soon get pushed into next year as the economy “remains somewhat hot.”

“Although we expect the Fed will opt to keep the Fed Funds rate unchanged at its June 13-14 meeting, largely driven by concerns over the extent of credit tightening and banking sector stress, today’s PCE report joins a wider set of data flagging firmer-than-expected economic activity and unrelenting upward price pressures,” said Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets.

Levy said the strength of personal spending and inflation “is likely to tilt the Fed toward at least one more 25bp rate hike in Q3, possibly at its July 25-26 meeting, and will embolden hawkish Fed members to press the case for further rate hikes under the argument that rates remain insufficiently restrictive.”

Municipals were little changed Friday despite the moves in USTs, which are more focused on what’s coming from the Fed than on the debt ceiling.

“While we are hopeful that the debt ceiling standoff will be resolved, we would not be surprised if the markets are spooked yet again,” Barclays PLC said in a weekly report. “In that case, we would expect a flight to safety, and a UST rally. For now, Treasury yields have continued inching higher, increasing 5-20bp this week, with the yield curve inverting further, on investor concern that the Fed is not fully done with hiking rates.”

Typically tax-exempts outperform when Treasuries sell off, “but this time around municipals and USTs have moved in lock-step, and tax-exempts have actually underperformed, although on relatively light volume,” Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel wrote in the report.

Muni yield curves have become even more inverted, they said, adding “it seems that investors have finally started extending as the long end started performing and although the 10s20s portion of the curve remains uncharacteristically steep, it has started flattening.”

Ratios have adjusted higher, especially in the front end and the belly of the curve, Barclays noted.

The two-year muni-Treasury ratio Friday was at 69%, the three-year at 71%, the five-year at 71%, the 10-year at 71% and the 30-year at 91%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 70%, the three-year at 73%, the five-year at 71%, the 10-year at 72% and the 30-year at 92% at 3 p.m.

“Municipal valuations have become much more attractive, but a combination of concerns related to the debt ceiling, as well as heavier supply in early June gives us a little bit of a pause,” Barclays said. “Moreover, this year’s summer redemptions, while still large, should be substantially lower than in recent years, mostly due to lower redemptions attributed to current refundings.”

Despite this, they expect tax-exempts to perform relatively well in June “given their relative cheapness.” 

The new-issue calendar is estimated to be $6.1 billion. New York City is on the calendar with $1.6 billion of general obligation bonds and the city confirmed it would price the bonds after officials said earlier in the week that they had concerns about timing if an agreement to raise debt ceiling was not done.

The calendar is also led by a $750 million taxable corporate CUSIP deal from Sutter Health and $760 million of tax-exempt and taxable GOs from Connecticut.

Secondary trading
Ohio 5s of 2024 at 3.30%. Texas waters 5s of 2026 at 3.11%. Los Angeles Department of Water and Power 5s of 2026 at 2.93%. LADWP 5s of 2028 at 2.70%.

California 5s of 2030 at 2.82%. Wisconsin 5s of 2030 at 2.87%.

LADWP 5s of 2034 at 2.79%. Boston 5s of 2042 at 3.49%.

AAA scales
Refinitiv MMD’s scale was unchanged: The one-year was at 3.31% (unch) and 3.15% (unch) in two years. The five-year was at 2.83% (unch), the 10-year at 2.72% (unch) and the 30-year at 3.62% (unch) at 1 p.m.

The ICE AAA yield curve saw small cuts: 3.35% (unch) in 2024 and 3.20% (+1) in 2025. The five-year was at 2.84% (+1), the 10-year was at 2.75% (+2) and the 30-year was at 3.68% (+1) at 1 p.m.

Bloomberg BVAL was unchanged: 3.17% (unch) in 2024 and 3.07% (unch) in 2025. The five-year at 2.76% (unch), the 10-year at 2.68% (unch) and the 30-year at 3.72% (unch) at 1 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.56% (+3), the five-year at 3.93% (+2), the 10-year at 3.81% (-1) and the 30-year Treasury was yielding 3.96% (-3) at 1:30 p.m.

Primary to come
Sutter Health (A1/A+/A+/) is set to price $750 million of taxable corporate CUSIP bonds Thursday. Serials 2033, 2053. Citigroup Global Markets Inc.

Riverside County, California, is set to price Thursday $360 million of tax and revenue anticipation notes. J.P. Morgan Securities LLC.

Connecticut (Aa3/AA-/AA-/AA+) is set to price $360 million of general obligation bonds Thursday. Morgan Stanley & Co. LLC.

Connecticut is also set to price $350 million of taxable GOs Thursday. Morgan Stanley & Co. LLC.

The Massachusetts Educational Financing Authority (/AA//) is set to price $352.7 million of taxable education loan revenue bonds Thursday. Serials, 2028-2033, term 2044. RBC Capital Markets.
The Irvine Facilities Financing Authority (/AA+//) is set to price $325.51 million of Gateway Preserve Land Acquisition Project lease revenue bonds Thursday. Serials, 2027-2038, terms, 2043, 2048, 2053. Stifel, Nicolaus & Company, Inc.

The Maryland Stadium Authority (/AA/AA/) is set to price Thursday $233.98 million of football stadium issue revenue bonds, serials, 2025-2037. Raymond James & Associates, Inc.

The Iowa Finance Authority (Aaa//AAA/) is set to price Thursday $186.215 million of state revolving fund revenue green bonds, serials 2025-2043, terms 2048, 2053. RBC Capital Markets.

The Utah Board of Higher Education (Aa1/AA+//) is set to price Thursday $163.195 million of University of Utah general revenue bonds, serials 2026-2053. Wells Fargo Bank, N.A. Municipal Finance Group.
The Indiana Finance Authority (/BBB-//) is set to price Thursday $140.155 million of taxable CHF-Tippecanoe, LLC student housing project revenue bonds. RBC Capital Markets.

The South Carolina State Housing Finance and Development Authority (Aaa///) is set to price $106.19 million of mortgage revenue bonds, serials 2025-2035, terms, 2038, 2043, 2048, 2053, 2054. Citigroup Global Markets Inc.
The New Jersey Housing and Mortgage Finance Agency (/AA-//) is set to price Wednesday $104.645 million of multi-family non-AMT social revenue bonds. Barclays Capital Inc.

Elk Grove USD, California, (Aa2///) is set to sell $132.4 million of general obligation bonds at 11:35 a.m. eastern Wednesday.

Putnam County School District, Florida, (A2//A+/) is set to sell $100 million of general obligation bonds at 11 a.m. eastern Wednesday.

Clark County, Nevada, is set to sell $100 million of sales and excise tax revenue streets and highways bonds at 11:30 a.m. eastern Thursday.

Ventura County, California, is set to sell $90. million of tax and revenue anticipation notes at 11:45 a.m. eastern Thursday.

Illinois budget heads to vote; preserves rainy day, pension deposits, tobacco bond payoff

Illinois budget heads to vote; preserves rainy day, pension deposits, tobacco bond payoff

Illinois lawmakers expect to cast a final vote early Saturday on a nearly $50.7 billion budget that preserves scheduled deposits into the rainy day fund, Gov. J.B. Pritzker’s proposed $200 million pension supplemental pension payment and pay off of the state’s tobacco bonds.

Some of those plans appeared in possible jeopardy in recent weeks over rising Medicaid-related costs and revenue pressures.

The Senate cast its votes on the budget package including the bond authorization bill, budget implementation bill, and budget late Thursday after the Democratic majority failed to reach agreement by a self-imposed May 19 deadline. The legislature aims to vote ahead of May 31, after which a super three-fifths majority is required for legislation to take effect immediately.

“This budget does reflect our priorities,” state Sen. Elgie R. Sims Jr., majority caucus appropriations leader, fired back. “It reflects our shared priorities to move our state forward. It reflects our ability to invest in communities. What you call expenditures we call investments. What you call overspending we call building up.”

The governor, a Democrat, and the Democratic leaders — House Speaker Chris Welch and Senate President Don Harmon — announced a deal Wednesday, but the voting was delayed as negotiators remained at odds over some issues. The Senate sent the package late Thursday to the House which can begin voting after Midnight Friday.

“This budget makes transformative investments in the children and families of Illinois while building on our record of fiscal responsibility,” Pritzker said after the Senate vote.

The budget agreement preserves a $200 million supplemental pension contribution that follows a $300 million deposit and $200 million deposit made over the last two years in addition to the state’s statutory contribution.

The budget also leaves intact the statutory allocations from various sources that amount to $138 million for a deposit into the rainy day fund. The once-depleted fund is on course to hit the $2 billion mark by the end of fiscal 2024.

The fund received an infusion of $746 million in fiscal 2022 and $1.17 billion of deposits are expected in the current fiscal year that runs through June 30. The fiscal 2024 infusion comes from statutory measures put in place in the fiscal 2023 budget that includes a $45 million annual repayment of a $450 million state loan to the unemployment trust fund, 10% of cannabis revenues and a monthly transfer $3.75 million that begins July 1. The state is also raising its targeted balance to 7.5% of general fund revenues from 5%.

The budget package also pays off the remaining $450 million of state tobacco bonds saving the state $60 million in interest costs, which adds to the tab of short- and mid-term debt including billions in overdue bills paid off over the last two years.

The state’s progress in building up its rainy day fund, putting more toward pensions, and paying down debt helped drive several rounds of positive rating actions.

S&P Global Ratings in February raised the state’s rating to A-minus with a stable outlook from BBB-plus. Moody’s Investors Service in mid-March upgraded the state to A3 and stable from Baa1. Both rewarded the state for building reserves and paying down debts with surplus tax revenues.

Fitch Ratings followed in late March, lifting the state’s outlook to positive from stable on its BBB-plus rating, signaling the potential upgrade, possibly soon after passage of a fiscal 2024 budget that makes further progress on chronic fiscal strains. 

The positive momentum has helped trim state spreads. The state’s 10-year bond is currently set by Refinitiv MMD at a 110 basis point spread to the AAA benchmark compared to the 170 basis point range early in the year.

“It’s positive to see the proposed budget relies on fairly conservative revenue assumptions and provides additional funding for pensions and education,” Molly Shellhorn, senior research analyst for municipals at Nuveen, said after Wednesday’s agreement was announced. “Underfunding state commitments has been an issue in the past, but that does not appear to be the case this year, though there is some concern the state may be underestimating the full cost of health care for undocumented immigrants. Overall, investors are still viewing the budget positively.”

The general fund budget spends $50.6 billion of $50.7 billion, which is $140 million below fiscal 2023 spending, the Senate Democrats’ chief budget negotiator Sen. Elgie R. Sims Jr., D-Chicago, said on the floor.

It spends $18 billion on public education including a $560 million hike with the state meeting its $350 million annual increase in the evidence-based formula for school aid while also providing grants for early childhood education and to recruit teachers.

Universities will see a 7% increase of $81 million and community colleges receive a $19 million hike while an additional $100 million will go to the state’s grant program for lower-income families to help toward tuition. Human services spending rises by $2.2 billion to $19 billion. The bill passed in a 34-22 vote.

The bond authorization act was approved in an amended HB351. It authorizes $700 million of new general obligation borrowing and includes some modernization of the state’s various bond acts, according to Harmon, who presented the bill on the floor. It cleared in a 37-19 vote meeting the 36 vote three-fifths threshold needed for new GO bonding.

The budget implementation bill known as the BIMP which allows for various transfers of funds in an amended HB3817 includes the $200 million general fund transfer to make the supplemental pension payment.

It raises the local government distributive fund rate — which holds income taxes that flow to local governments — to 6.47%. Local governments will receive an additional $112.5 million in fiscal 2024, including $88 million from the percentage hike with the remainder coming from natural growth. It passed 36-20.

Republicans praised their inclusion in budget negotiations this year but during floor debate attacked the spending plan on multiple fronts, from dropping documents in their laps at the last minute, which is a perennial complaint, to where the state is directing its dollars and use of “balanced” in describing the budget.

There’s “some good stuff” in the budget like in the area of higher education but there’s been a “crowding out effect that has occurred in this budget,” said Sen. Chapin Rose, R-Mahomet. “This healthcare issue has crowded out so much” and misplaced priorities.

Rose was referencing what had emerged as a stumbling block in the budget over the last week due to the skyrocketing cost of a program established in 2021 that provides Medicaid-like healthcare coverage to noncitizens who are at least 42.

The cost ballooned to an estimated $1.1 billion with the budget proposal accounting for just a couple hundred million. As part of the budget agreement announced by Pritzker and leaders Wednesday, the legislature gave the governor’s officers various “tools” to hold the costs in check at $550 million. The tools include limiting future enrollment and maximizing federal funds.

Rose said the state should instead have prioritized a $4 per hour wage hike for developmentally disabled aides. The budget provides a $2.50 increase. He also said the state should have prioritized the 20% increase in Medicaid reimbursements hospitals were seeking. They instead received 10%.

The budget provides $40 million to Chicago to help with its costs aiding migrants seeking asylum who are being sent from Texas.

“This budget does reflect our priorities,” Sims fired back. “It reflects our shared priorities to move our state forward. It reflects our ability to invest in communities. What you call expenditures we call investments. What you call overspending we call building up.”

“Budgets like this, the spin would have us believe this is a balanced budget but this is not a balanced budget,” Sen. Win Stoller, R-East Peoria, said ahead of the BIMP passage. “In fact, it’s not even close to being a balanced budget.”

Stoller said the budget doesn’t account for expected raises that could carry a $200 million to $300 million tab and it’s unclear whether Pritzker can achieve the $550 million in healthcare savings to keep the noncitizen healthcare costs in line with approved levels.

Stoller also attacked the state’s lack of an actuarially determined contribution. The state’s statutory contribution based on a 50 year schedule to reach 90% funding in 2045 is $10 billion. The state will make a $200 million supplemental contribution but the ADC is $14.4 billion.

Clouds loom from the state’s latest revenue results.

Illinois revenues sunk in April by $1.8 billion from April 2022 collections — a trend seen in other states — leading both the Governor’s Office of Management and Budget and the legislature’s Commission on Government Forecasting and Accountability to trim revenue estimates for the current fiscal year that ends June 30.  

The governor’s budget office in a report to the Legislative Budget Oversight Commission this week cut this year’s revenue projections by $616 million to $50.7 billion after April revenues fell $849 million below the budgeted level while COGFA cut its estimate $728 million to $51.2 billion.

The latest estimates abruptly reversed the upward revision COGFA had made of $575 million two months ago, which had prompted talk of possible tax relief. Spending through April is also up by $319 million from budgeted levels, according to the governor’s budget office.

While revenues are faltering late in the current fiscal year, the governor’s budget office lifted its projections for the coming fiscal year by $532 million to $50.5 billion, moving it closer in alignment to COGFA which said in its latest revenue monthly report that it would hold steady with its 2024 estimate of $50.4 billion.

Tennessee eyes small modular nuclear reactors

Tennessee eyes small modular nuclear reactors

Tennessee is betting nuclear energy will make a comeback.

The state, which hosted labs that helped split the atom during World War II, has joined the race to develop and deploy the first commercial-grade variant of a scalable nuclear reactor that promises to provide an important piece of the nation’s green energy network.

After appropriating $50 million for nuclear energy development grants in the state’s new budget, Gov. Bill Lee a week ago signed Executive Order 101, creating a 15-member Nuclear Advisory Board to craft a new nuclear policy for the state.

The Tennessee Valley Authority’s Sequoyah Nuclear Plant near Soddy-Daisy, Tennessee. The TVA is pursuing simpler, less costly small modular reactor technology.

Tennessee Valley Authority

Tennessee is “ready-made” to advance new commercial nuclear technology, in part through supporting a plan by the U.S. government-owned Tennessee Valley Authority to develop and prove the concept of a Small Modular Reactor, or SMR, with General Electric.

The TVA supplies electricity to 153 local power companies serving 10 million people in Tennessee and parts of six surrounding states. It operates three traditional nuclear power generating stations, including two in Tennessee.

As demand and supply chain issues make solar, wind, and other traditional green energy options more costly, SMRs are making nuclear power cheaper and more accessible, said TVA spokesman Scott Fiedler.

Nuclear also offers zero-carbon energy production at a steady predictable rate.

“Renewables are variable and non-dispatchable and we need dispatchable power when the winds not blowing or the sun’s not shining,” he said “They actually complement renewables and get us to get to that aspirational goal of zero carbon by 2050.”

The TVA currently produces 60% of its electricity from renewables and under a new plan issued this year would use “a fleet of highly cost-effective” SMRs to get to 80% carbon reduction by 2035.

It approved $200 million in its new nuclear plan last year in pursuit of the goal, and while no commercial-grade model currently exists, the industry is very close, Fielder said, benefiting from years of federally funded research and supported by recently passed infrastructure and energy incentives.

The new reactors are customized for use with existing energy infrastructure and commercial implementation is already on its way, having drawn a great deal of private support over recent years. The TVA’s partnership with GE will take the company’s current SMR prototype and work on figuring out how to deploy it on public energy grids.

The TVA has already selected a site for the project and hopes for a marketable version sometime before 2030.

The project is still in the early permit approval process; if successful, Tennessee would be the first nation to deploy a commercial SMR.

Other states are also in pursuit of that title, including neighboring Virginia where authorities are also pursuing SMR development in a public-private collaboration.

Equity movement gains steam

Equity movement gains steam

The Equity in Infrastructure Project has named Everett Lott, director of the District of Columbia’s Department of Transportation, as vice chair of the organization which is dedicated to boosting opportunities for Historically Underutilized Businesses. 

“I know firsthand how increasing contracting opportunities for HUBs can change lives and communities for the better,” said Lott. “I am excited to engage my colleagues across the country with EIP’s mission.” 

Lott’s accomplishments at DDOT include rebuilding the Frederick Douglass Memorial Bridge. The bridge was completed last fall and spans the Anacostia River. It was built with $440 million in funding from federal grants and more than $250 million in local taxpayer dollars. Construction crews included 200 D.C. residents, and 45 minority and women-owned businesses. 

Everett Lott

“I know firsthand how increasing contracting opportunities for HUBs can change lives and communities for the better,” said Everett Lott, vice chair, EIP. “I am excited to engage my colleagues across the country with EIP’s mission.” 

Lott joins EIP Chair Phillip A. Washington, CEO of Denver International Airport, and John Porcari, former USDOT Deputy Secretary in leading an organization that dovetails with current administration’s equity goals. 

“We believe the administration and elected officials on a bipartisan basis are aligned with the Equity In Infrastructure Project in recognizing that the impact of longstanding inequities extends beyond specific communities and harms our nation’s overall ability to compete and succeed in the 21st century.” said Washington. 

EIP points to efforts made on the Chicago Transit Authority’s plan to extend the Red Line to the city’s far South Side as a move in the right direction. The project garnered support from the White House as the 2024 budget proposal includes putting $2.24 billion towards the $3.7 billion multi-year project. 

According to EIP, “The project will include different procurement methods including Small Business Enterprise set-asides to ensure the participation of small businesses on the project.”  

Although the RTF has been laboring under budget shortfalls due to lowered ridership levels, Illinois lawmakers have been signaling towards a boost in state funding to help finish the extension.  

The move towards diversity, equity, and inclusion continues to exert an influence at state and local levels. At the Government Finance Officers Association conference this week the topic was explored in a panel as GFOA members added their own personal experiences on the issue. 

EIP is looking at Lott’s experience in navigating the federal and state divide as a plus factor. “Everett Lott’s experience at the federal and local levels is a tremendous fit for our organization and will greatly benefit our coalition members as they work in their own communities and collectively work to improve the entire infrastructure sector,” said Porcari.  

EIP launched a year ago with 41 signatories now embracing its pledge. In early March during a conference held by the American Association of State Highway and Transportation Official, thirteen states took the pledge to create more opportunities for historically underutilized businesses.   

Federal policy is also pushing for more equity inclusion as infrastructure grant money starts to flow out to states. At the National League of Cities’ conference, also held in March, U.S. DOT officials called out efforts of the Reconnecting Communities program as a remedy for rectifying infrastructure mistakes made in the past during urban renewal.

It's time to talk about pension risks again

It’s time to talk about pension risks again

Municipal bond investors are paying more attention to the credit risks posed by public pension and other retirement liabilities. Municipal finance officers should prepare to address those questions when they apply for bond ratings and sell new issues and may want to consider bond insurance or other forms of credit enhancement to help build investor confidence.

Pension risks have been an important consideration for investors and rating agencies for more than a decade, but the COVID pandemic shifted the municipal bond market’s focus to more pressing questions, like the potential for defaults due to temporary disruptions in cash flows from sales taxes and other revenue sources during the initial lockdown period.

Les Richmond

Now that economic activity has largely resumed, investors and analysts are taking another look at longer-term issues, and the volatile stock market performance since the pandemic is raising concerns.

The returns on assets invested in public sector pension funds play a powerful role in determining pension risk — the possibility that pension costs can grow to such a degree as to impair a bond issuer’s ability to pay its debts. On the heels of fiscal 2021, in which pension asset performance was superb, fiscal 2022 was a down year that erased much of the fiscal 2021 gains, and 2023’s performance has been so-so. 

Those results increase the risk that the growing cost of retirement benefits will negatively impact municipal bond issuers’ credit strength. The ultimate impact of the subpar asset returns on pension risks is likely to vary widely among issuers, making transparent and active communication by issuers more important and valuable. Each plan’s funding level, investment choices and materiality of pension costs to the issuer’s overall budget will play a role in determining the degree to which pension risk changes, as will the issuer’s actions in response. 

BAM’s approach to pension and other post-employment benefits (OPEB) analysis focuses on the risk that retirement costs could consume resources that are otherwise necessary to fund operations and debt service, with stress scenarios that incorporate the following observations from past economic downturns:

Positive returns are not necessarily enough to avoid an increase in unfunded pension liabilities. Actuarial asset losses are measured against the assumed investment return: so if a plan with an assumed return of 7% posts a gain of 5%, it is still falling behind on an actuarial basis. The impact from actual losses can be severe. If instead there is a 10% investment loss in the fiscal year ending June 30, 2023 there would be an actuarial asset loss of -17%. 

In addition to asset losses, unfunded liabilities can increase due to plan liability increases: Inflation-driven wage growth, retiree pension cost-of-living adjustments which increase pension liabilities, and higher health care costs driving increasing OPEB liabilities can all have an impact.

Governments may find it hard to quickly increase pension contributions to match higher actuarial requirements — forcing even larger forecast contributions in the long term. Pension funding contributions and wages compete for the same budget dollars, and some state and local governments are already faced with difficult choices between pension funding and service delivery. Subpar investment performance by pension plan assets would only exacerbate that situation. 

Plan insolvency risk may rise. Actuaries annually project plan assets and liabilities far into the future to determine whether plan assets are always expected to be available to pay benefits. If they’re not, the point at which assets run out is called the “depletion date.” 

If pension assets underperform or funding policies change, plans that currently project a depletion date may find that event happening earlier; other plans not currently projecting a depletion date may now find that they have one. That can have a severe impact on a government’s finances, because at asset depletion the transition to paying retiree benefits directly may require a sudden increase in expenses. Any increase in likelihood, or acceleration, of asset depletion, is a risk increase. 

Plan sponsor actions can affect pension/OPEB credit risk. State and local governments took a number of actions in response to revenue declines during and following the 2008-09 Great Recession, such as workforce downsizing and salary freezes (or cuts). There was also an uptick in pension/OPEB reforms, and efforts to increase contribution rates once the economy began to recover. All of these actions can possibly have a material impact on pension/OPEB plan liabilities. However, the range of possible impacts is wide and individualized to the issuer level — disclosure remains key.

Investor and rating agency questions about pension risks are likely to be exacerbated by a lack of real-time financial information, which can lead to uncertainty, volatility, and elevated “headline risk.” The first financial statements quantifying the investment-related actuarial losses are not likely to be filed until late this year, and the full implications may not be fully incorporated into public financial statements for years to come. Public-sector finance officers should prepare now for pension risks to become even more central to municipal bond credit analysis. 

This commentary originally appeared in “GFOA Today,” The Bond Buyer’s publication that was distributed to delegates at the Government Finance Officers Association’s annual meeting in Portland, Ore., earlier this week.

Les Richmond is Vice President and Pension Actuary for Build America Mutual and serves as an advisor to the Government Finance Officer’s Association’s Committee on Retirement and Benefits Administration.

Cities should scrutinize bank relationships amid turmoil

Cities should scrutinize bank relationships amid turmoil

Cities and towns should take a hard look at the banks that hold their public funds in light of the recent turmoil in the bank industry.

That was the message from panelists speaking Monday at the Government Finance Officers Association’s annual conference in Portland.

“You might want to change up how you’re doing your banking,” said Cory Kampf, chief financial officer of Anoka County, Minnesota. “If you hear about banks being downgraded … those are things to pay attention to and understand where your bank is,” Kampf said, suggesting some local governments may want to issue Requests for Proposals for new services. “Understand the totality of their deposits and liquidity.”

Following turmoil in the banking sector that led to the collapse of Silicon Valley Bank and others, cities and towns should review their banking relationships to ensure public deposits are protected.


The March collapse of Silicon Valley Bank and New York’s Signature Bank, followed by JPMorgan Chase & Co.’s acquisition of First Republic Bank, has prompted worries about the health of regional banks across the country. Local governments, which are charged with protecting public deposits, need to pay attention to whether their banks – many of which are smaller, community banks – can meet federal collateralization requirements, panelists said.

The Federal Deposit Insurance Corporation insures deposits that are less than $250,000, a threshold below what many municipal entities hold. Bank accounts with more than $250,000 must be collateralized consistent with state law in order to be guaranteed by the FDIC. In the event of a bank failure, the FDIC will honor the collateralization agreement, but does not guarantee that the collateral will be sufficient to cover the amount of the uninsured funds.

“Can banks collateralize and protect your assets? Not all can,” said Jonathon Millard, senior vice president and market executive at Bank of America. “Understand the mix of collateral that your bank provides, because the cost of collateral is driving their appetite for deposits,” Millard said. “Having a well-capitalized partner is important,” he added. “In an abundance of caution, it makes sense to have multiple partners.”

In early May, the New Mexico State Treasury and Auditor sent a joint alert warning that some local governments are bypassing bank collateralization requirements “by adding multiple employees or elected officials to bank accounts” to secure $250,000 account per signer.

“This practice is not consistent with state or federal law,” the notice said.  “We trust that this alert will direct attention to the importance of the underlying issue — safeguarding public funds.”

New Chicago mayor hasn't shown his hand on pensions and taxes

New Chicago mayor hasn’t shown his hand on pensions and taxes

Chicago Mayor Brandon Johnson won’t say yet whether he intends to leave in place his predecessor’s executive order earmarking a budget surplus for future supplemental pension contributions.  

He also hasn’t committed to which of the tax proposals he advocated the campaign that brought him to the mayor’s office this month he will pursue first.

The municipal market is following both issues closely as signs of the fiscal trajectory Johnson will take the city in and his commitment to maintaining the city’s positive budget momentum while managing downtown’s recovery from COVID-19, public safety struggles, and staking out his investment priorities.

“We have not made a decision,” Chicago Mayor Brandon Johnson, who took office May 15, said Wednesday in response to a question about former Mayor Lori Lightfoot’s executive orders.

Bloomberg News

“We have not made a decision,” Johnson, who took office May 15, said Wednesday in response to a question on former Mayor Lori Lightfoot’s executive orders that was posed during the traditional mayoral news conference that follows City Council meetings.

On her way out, Lightfoot signed a series of executive orders including one that establishes a pension advance fund and authorizes the city to assign a projected $642 million 2022 and 2023 budget surplus to cover supplemental pension contributions for 2024, 2025, and 2026.

“With this Executive Order, we are solidifying that legacy to help ensure pension stability for City workers and put Chicago on a strong financial path forward,” Lightfoot said in the directive. The order ensures “that this advance payment is funded through 2026 and serves as a one-time bridge to when the City expects to receive casino revenues to support pension payments.”

A top Johnson advisor said the administration is still waiting on the advice of the incoming Chief Financial Officer Jill Jaworski and budget director Annette Guzman, who both start June 1, on the impact of the executive order on the city’s flexibility to manage its budget and spending priorities.

“We are waiting on them to get their feet on the ground to really get in depth on what those executive orders mean for the 2024 budget and what options we have,” Johnson senior advisor Jason Lee said in an interview this week. “From a values perspective, one, the mayor is wholeheartedly committed to protecting retirement security… and two, he’s 100% committed to being a good fiscal steward for the residents and taxpayers of Chicago.”

That means “both making sure we are not overburdening our residents with property taxes, fines, and fees and other regressive forms of revenues, and two, that we are making investments in things that Chicagoans have told us they want which are safe communities, safe and reliable public transportation, affordable housing, etc. so we have to balance all of those priorities and we have to do it in a responsible way and we want as much flexibility to do that while still again being responsible,” Lee said.

“We will look at that and our team will assess what kind of constraints that does or doesn’t put and whether that’s helpful to meet our priorities,” Lee said of the executive order.

If Johnson does end up canceling the pension order, Lee said it shouldn’t be taken as a lack of support for the supplemental pension policy — those decisions lay ahead with the input of Jaworski and Guzman.

The city established an advance funding policy with the 2023 budget that calls for a supplemental contribution — $242 million this year — that is sufficient to stave off growth in the unfunded liabilities and ovoid the need to sell off assets to meet annuitant obligations in a bad investment year.

The action along with movement toward structural budget balance, drove a series of positive rating actions most notably from Moody’s Investors Service which in November lifted the city’s rating out from junk territory.

After ramping up payments in recent years, all four pension funds are receiving an actuarially “calculated” contribution aimed at reaching a 90% funded ratio beginning in 2055, but it still falls short of the “actuarially determined contribution” recommended by actuaries.

Even with a supplemental contribution in the $200 million range next year, the city would still fall $330 million short of funding the ADC, according to the city’s mid-year fiscal forecast.

The city’s statutory payment rises from $2.4 billion this year to $2.7 billion in 2028. The city has $33.7 billion of net pension liabilities with the funded ratios of its four pension funds ranging from 21% to 46%, for an average of 23%, the lowest among major cities.

On another front, the city could prevail in the waning days of the state’s legislative session on in its request to delay until the fall veto session passage of bills that raise the benefits for Chicago firefighters who started after 2010 when a tier two was established. Former city CFO Jennie Huang Bennett warned earlier this month the changes carry a long term price tag of $3 billion.

Backers argue the changes were promised to Chicago police and firefighter funds when the state consolidated suburban and downstate pension funds and provided the same changes.

Sponsors say they are also needed as part of a “fix” to avoid running afoul of Social Security’s rules that require public pensions at least match what an employee would receive if they paid into Social Security.

Sources said the Johnson administration asked that the bills’ passage be delayed until the fall veto session to give the city time to consider how to absorb the costs. A delay also provides more time for a more sweeping discussion over the summer on a statewide Tier 2 fix and other pension funding matters to take place.

Lee declined to comment on negotiations but said, again, it’s about balance.

“There is an understanding and willingness to look at this and make sure that whatever we do we are meeting our responsibility to people who have worked on the front lines and we are doing so in a way that gives confidence and comfort to the taxpayers that they can sustainably bear this cost,” Lee said.

A separate bill is pending for Chicago’s police fund that makes permanent a cost-of-living adjustment lawmakers previously approved every few years. Over Lightfoot’s objections, Gov. J.B. Pritzker signed legislation in 2021 that did the same for the firefighters.

That enhancement for Chicago firefighters adds $180 million to the fund’s existing unfunded liabilities and $16 million to $17 million in additional annual costs that add up to $700 million by 2055, according to a review from Segal. That too is expected to be held.

During the campaign, Johnson laid out a fiscal blueprint that called for raising $800 million in new revenue by implementing a surcharge on suburbanites traveling into the city for work, reinstating the head tax on employees of large companies in some cases, imposing a jet fuel tax, raising the real estate transfer tax, and raising the hotel tax. Johnson also wants to impose a transaction tax on securities trades.

Johnson has since dropped the commuter tax from his agenda and federal approval is unlikely for the jet fuel tax. Gov. J.B. Pritzker shot down the transaction tax, which would need state approval to enact, earlier this month over worries that the city’s commodities and derivatives exchanges would relocate. CME Group Inc. Chief Executive Officer Terry Duffy last week reiterated that warning.  

Johnson said his tax plan, along with management efficiencies totaling $2 billion, would eliminate the city’s structural deficit and allow for new investments without raising property taxes. Johnson also wants to cancel Lightfoot’s shift last year that allows for an automatic property tax increase tied to inflation. The city skipped the automatic trigger in the 2023 budget due to buoyant tax collections.

Asked what tax proposals were on the front burner, Johnson did not commit Wednesday. “Our conversations are really about what our needs are. I think it’s important to start there,” he said.

The city operates on a  $16.4 billion all-funds spending package including a $5.4 billion corporate fund and holds sway over a number of sister agencies.

Lee elaborated on the administration’s thinking. The administration put the package on the table from its “vantage point” during the campaign and wants business and other stakeholders to now weigh in.

“For ideas that you have particular concerns about….bring your ideas,” Lee said.

With the state legislative session slated to end in the coming days, Lee said the city will likely refine its plans and potential requests of lawmakers in the coming months and return in either the fall veto session or the 2024 session for legislative changes needed.

“Maybe the package looks very different,” he said. “We want to be very judicious and thoughtful.”

Johnson prevailed during his first council meeting in winning approval for his committee leadership structure, which should give him the edge in pursuing his agenda.

It came after the council had attempted to strike a more independent note by passing its own reorganization in March. Alderperson Pat Dowell, who had previously chaired the budget committee, takes over the finance committee.

City crime also weighs on the market’s sentiments and on Thursday Johnson stood beside other city and police officials and community leaders to lay out Memorial Day weekend activities and efforts to curb violence that typically is more pronounced during summer holidays. Johnson announced a $2.5 million investment to fund violence prevention and youth outreach efforts across the city by funding the work of 253 grassroots organizations.

Munis softer in the belly; short USTs selloff on debt impasse

Munis softer in the belly; short USTs selloff on debt impasse

Municipals were weaker in the belly of the curve Thursday while U.S. Treasury yields sold off on the short end on Fed speak and continued concerns over the debt ceiling impasse. Equities were mixed near the close.

Despite the rally in tech stocks, USTs and munis are reacting to uneven economic data and a potential U.S. default.

“As the risk of default grows, it comes as no surprise that the credit rating agencies are preparing for the worst-case scenarios,” said Edward Moya, senior market analyst for the Americas at OANDA. “The decision by Fitch Ratings to put the U.S. credit rating at risk of downgrade is a necessary step and will likely trigger limited market stress. Markets should be growing more nervous as we get closer the real X-date which is probably in the first week of June. “

Triple-A yields rose one to four basis points while USTs were off by upwards of 17 basis points on the two-year near the close.

The two-year muni-Treasury ratio Thursday was at 70%, the three-year at 72%, the five-year at 73%, the 10-year at 71% and the 30-year at 91%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the two-year at 72%, the three-year at 75%, the five-year at 73%, the 10-year at 73% and the 30-year at 92% at 3 p.m.

Outflows continue as Refinitiv Lipper reported investors pulled $847.068 million from municipal bond mutual funds for the week ending Wednesday, $420.675 million of which was high-yield.  

While the market saw weakness, there have been some more constructive trades over the past two sessions.

“The fact that better two-way flows have developed speaks to some green shoots forming following what has been quite an uncharacteristic May trading cycle with the broad market down 1.4%,” noted Kim Olsan, senior vice president at FHN Financial. 

Olsan said a generic master muni index over the last 10 years has had only two negative May returns — 2013 with a 1.2% loss on the heels of the Taper Tantrum and in 2015 with a modest 0.3% loss — against what is an average annual gain for the month of 1.2%.  

“Whether the current market has more room to adjust will depend on reception of new issues as June’s estimated $36 billion of maturities or calls are credited, a 56% increase from May’s figures,” she said. “Momentum is still weighted toward bidders having more bargaining power as older new-issue production is cycled out to make way for upcoming supply.” 

Supply scarcity
The potential volume for the holiday-shortened week is estimated at $1.6 billion with $979 million of negotiated deals and $629 million of competitive loans on tap.

The calendar is led by a $750 million taxable corporate CUSIP deal from Sutter Health and $760 million of tax-exempt and taxable GOs from Connecticut.

Bond Buyer 30-day visible supply sits at $8.68 billion.

Supply continues to be down year-over-year and cities and states may start to pause borrowing plans as the nation heads toward a breach of its debt limit as soon as next week, issuers said.

“This year’s gross supply currently stands at over 25% below last year’s levels and nearly 14% beneath the 10-year average,” said Morgan Stanley strategists Matthew Gastall and Daryl Helsing.

It is not surprising that “despite hovering near 30-year averages in the ‘belly’ and long-end of the yield curve, higher interest rates have increased the cost-of-capital for many state and local government borrowings,” they said.

As a result, they said, new-money deals and refinancings have slowed. The demand, though, hasn’t stopped.

They said “many municipal investors have capitalized on higher rates, while redemption-driven reinvestment demand has also remained healthy.”

Morgan Stanley strategists said, “this spring’s pre-summer ‘supply push’ may fail to issue enough debt to surpass the monies being returned to investors.”

As constructive as these developments may appear for current pricing, they noted, the imbalance may actually intensify this summer.

The muni market’s “seasonal transitions are often highly consistent,” they said, for “while the total par-values of monies issued and redeemed change each year … the trends are typically very similar.”

Morgan Stanley strategists noted new-issue supply is often “healthy between late February and the July 4 holiday, as well as during the autumn period from October to mid-December.”

These supply “accelerations often coincide with a reduction in redemption-driven reinvestment demand,” they said.

Therefore, the “bearish” settings for price action can “help to improve entry points for buy-and-hold, household investors,” they said.

The opposite tends to happen in the summer months and during the holidays, the report said.

“Though primary volume is currently running at a notably lower pace, this activity may decline further if supply wanes this summer,” they said. “Such a consideration has encouraged us to question what the condition of our market will be like when investor interest returns this fall.”

Secondary trading
Ohio 5s of 2024 at 3.31%. Washington 5s of 2024 at 3.51%. North Carolina 5s of 2025 at 3.18%.

Maryland 5s of 2026 at 3.06%. California 5s of 2028 at 2.87%. New York City TFA 5s of 2028 at 2.94%. Washington 5s of 2028 at 2.94%.

California 5s of 2030 at 2.85%. Georgia 5s of 2030 at 2.73%.

Frederick, Maryland, 5s of 2034 at 2.89%.

New York City water 5s of 2047 at 3.97%.

AAA scales
Refinitiv MMD’s scale was cut in the belly: The one-year was at 3.31% (unch) and 3.15% (unch) in two years. The five-year was at 2.83% (+3), the 10-year at 2.72% (+2) and the 30-year at 3.62% (unch) at 3 p.m.

The ICE AAA yield curve saw small cuts: 3.35% (unch) in 2024 and 3.19% (+1) in 2025. The five-year was at 2.83% (+3), the 10-year was at 2.73% (+1) and the 30-year was at 3.68% (unch) at 3 p.m.

The IHS Markit municipal curve was cut up to two basis points: 3.30% (unch) in 2024 and 3.15% (unch) in 2025. The five-year was at 2.80% (unch), the 10-year was at 2.71% (+2) and the 30-year yield was at 3.62% (unch), according to a 3 p.m. read.

Bloomberg BVAL was cut up to two basis points: 3.17% (+1) in 2024 and 3.07% (+1) in 2025. The five-year at 2.76% (+2), the 10-year at 2.68% (+2) and the 30-year at 3.72% (+1) at 3 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.53% (+18), the five-year at 3.91% (+11), the 10-year at 3.82% (+9) and the 30-year Treasury was yielding 4.00% (+3) at 3:30 p.m.

Mutual fund details
Refinitiv Lipper reported $847.068 million of outflows from municipal bond mutual fund outflows for the week that ended Wednesday following $187.393 million of outflows the previous week.

Exchange-traded muni funds reported outflows of $587,000 after outflows of $115.279 million in the previous week. Ex-ETFs muni funds saw outflows of $846.49 million after $72.114 million in the prior week.

Long-term muni bond funds had outflows of $ 346.922 million in the latest week after inflows of $94.697 million in the previous week. Intermediate-term funds had outflows of $216.852 million after inflows of $1.469 million in the prior week.

National funds had outflows of $736.341 million after outflows of $164.422 million the previous week while high-yield muni funds reported outflows of $420.675 million after outflows of $73.128 million the week prior.

Primary to come
Sutter Health (A1/A+/A+/) is set to price $750 million of taxable corporate CUSIP bonds Thursday. Serials 2033, 2053. Citigroup Global Markets Inc.

Riverside County, California, is set to price Thursday $360 million of tax and revenue anticipation notes. J.P. Morgan Securities LLC.

Connecticut (Aa3/AA-/AA-/AA+) is set to price $360 million of general obligation bonds Thursday. Morgan Stanley & Co. LLC.

Connecticut is also set to price $350 million of taxable GOs Thursday. Morgan Stanley & Co. LLC.

The Massachusetts Educational Financing Authority (/AA//) is set to price $352.7 million of taxable education loan revenue bonds Thursday. Serials, 2028-2033, term 2044. RBC Capital Markets.
The Irvine Facilities Financing Authority (/AA+//) is set to price $325.51 million of Gateway Preserve Land Acquisition Project lease revenue bonds Thursday. Serials, 2027-2038, terms, 2043, 2048, 2053. Stifel, Nicolaus & Company, Inc.

The Maryland Stadium Authority (/AA/AA/) is set to price Thursday $233.98 million of football stadium issue revenue bonds, serials, 2025-2037. Raymond James & Associates, Inc.

The Iowa Finance Authority (Aaa//AAA/) is set to price Thursday $186.215 million of state revolving fund revenue green bonds, serials 2025-2043, terms 2048, 2053. RBC Capital Markets.

The Utah Board of Higher Education (Aa1/AA+//) is set to price Thursday $163.195 million of University of Utah general revenue bonds, serials 2026-2053. Wells Fargo Bank, N.A. Municipal Finance Group.
The Indiana Finance Authority (/BBB-//) is set to price Thursday $140.155 million of taxable CHF-Tippecanoe, LLC student housing project revenue bonds. RBC Capital Markets.

The South Carolina State Housing Finance and Development Authority (Aaa///) is set to price $106.19 million of mortgage revenue bonds, serials 2025-2035, terms, 2038, 2043, 2048, 2053, 2054. Citigroup Global Markets Inc.
The New Jersey Housing and Mortgage Finance Agency (/AA-//) is set to price Wednesday $104.645 million of multi-family non-AMT social revenue bonds. Barclays Capital Inc.

Elk Grove USD, California, (Aa2///) is set to sell $132.4 million of general obligation bonds at 11:35 a.m. eastern Wednesday.

Putnam County School District, Florida, (A2//A+/) is set to sell $100 million of general obligation bonds at 11 a.m. eastern Wednesday.

Clark County, Nevada, is set to sell $100 million of sales and excise tax revenue streets and highways bonds at 11:30 a.m. eastern Thursday.

Ventura County, California, is set to sell $90. million of tax and revenue anticipation notes at 11:45 a.m. eastern Thursday.

Jessica Lerner contributed to this report.

California school bond measure passes Senate, headed to Assembly

California school bond measure passes Senate, headed to Assembly

California lawmakers are betting voters have had a change of heart regarding the need for a statewide school bond measure.

The state Senate approved on Wednesday a $15.5 billion school construction bond measure that would go before voters in March that is similar to the $15 billion Proposition 13, a failed school bond measure that garnered only 47% voter support in March 2020, with a simple majority needed for passage.

The measure now heads to the Assembly. If it passes there, the governor would have to sign it and then a simple majority of voters would need to approve.

Senate Bill 28, introduced by state Sen. Steven Glazer, D-Orinda, would provide funding for the construction and modernization of the state’s preschools, public schools, community colleges and state universities. He introduced a similar measure last year, that also passed the Senate, but failed to make it out of the Assembly’s education committee.

Supporters of SB 28 believe, in part, that Proposition 13 failed, because it sowed confusion among voters, since it was labeled the same as the Proposition 13 approved by voters in 1978 that restricts property taxes from rising more than 2% annually unless the property changes hands.

“For the first time in over two decades, California voters rejected a statewide bond, Proposition 13, for public school construction in March 2020,” said Glazer in a Senate analysis. “With Proposition 13’s defeat, the state has run out of matching funding for school construction.”

California State Sen. Steven Glazer, D-Orinda, takes a second stab at getting a statewide school bond construction measure approved.

California State Senate

Assemblymember Patrick O’Donnell, D-Long Beach, the author of the failed March 2020 school bond measure, introduced legislation to retire ballot number 13 to remedy future confusion.

School bond measure Proposition 13 was the first statewide education-related bond issue voters had rejected since 1994. Since then, voters have approved six bond measures for school facilities.

About two-thirds of the state’s school facilities are more than 25 years old and it would cost more than $117 billion to modernize schools and colleges in the next decade, according to the Public Policy Institute of California.

A study found that from school years 2015-16 to 2018-19, 108 schools in 60 districts were closed at least once due to poor facility conditions, including gas leaks, heating system failures, broken water pipes, pest infestations and mold, asbestos and lead contamination, Glazer said in a Senate analysis.

The UC and CSU systems have identified $13.8 billion in deferred maintenance needs, according to the Senate analysis.

SB 28 also increases the local bonding capacities for non-unified school districts to 2% from 1.25% of the taxable property in the district, and for unified school districts to 4% from 2.5%. School districts would also have to submit a five-year facilities master plan to the Office of Public School Construction to receive funds.

It also would require the Board of Trustees of the CSU and the Regents of the UC, as a condition of receiving funds, to adopt a five-year affordable student housing plan for each campus.

Assembly Bill 247, a similar measure introduced jointly by Assemblymembers Al Muratsuchi, D-Torrance; Lori Wilson, D-Suisun City; and Mike Fong, D-Alhambra, would place a $14 billion school bond before voters in March. It would provide school construction funding for transitional kindergarten through community college, but leaves out the two state university college systems. That measure is headed for a third vote in the Assembly.

“California needs a statewide school facilities bond to invest in our children to meet 21st century educational needs,” Muratsuchi, chair of the Assembly Education Committee, said in a statement. The state has “critical school facility needs, including transitional kindergarten and early childhood education, natural disaster response, universal high-speed internet access, lead abatement, and extreme heat and other climate change adaptation.”

In previous years, when similar measures were introduced, lawmakers have combined multi-billion bond measures into one effort before placing it before voters.

The last statewide general obligation bond, Proposition 51, was approved by voters in November 2016. Proposition 51 authorized a total of $9 billion in state general obligation bond funds — $7 billion for K-12 education facilities and $2 billion for community college facilities. Of the $7 billion for K-12 education, $3 billion was for new construction, $3 billion was for modernization, and $1 billion was for charter schools and vocational education facilities.

Winter Storm Uri continues to blow through the bond market

Winter Storm Uri continues to blow through the bond market

A fierce winter storm that hit several states more than two years ago is still churning out bond-related events, with a Texas utility refunding taxable tendered debt with tax-free bonds thanks to a private letter ruling, and an Oklahoma deal falling short on a debt service payment.

Billions of dollars of debt has been sold for public and private utilities to pay for natural gas and power purchases they made at sky-high prices during Winter Storm Uri, which pummeled the Southwest with snow, ice, and high winds amid record low temperatures in February 2021. The bond issues, authorized by state legislatures, regulators, and local governments, allowed the costs to be spread out over time to lessen the impact on customers’ utility bills. 

Armed with an Internal Revenue Service private letter ruling, San Antonio’s CPS Energy sold tax-exempt bonds this week to pay a tender offer for taxable bonds issued in 2022 that financed a portion of more than $900 million in unexpected costs incurred during the storm, according to Cory Kuchinsky, the city-owned public utility’s chief financial officer.

CPS Energy crews repair damage from Winter Storm Uri in February 2021. The San Antonio, Texas, utility is still managing financial repercussions from the storm.

CPS Energy

“Ultimately it is about savings for our customers, so it’s a net positive for everyone here in San Antonio,” he said ahead of the deal’s pricing.

The city council approved a plan that is expected to amortize the storm-related costs over 25 years with additional fuel charges on customers’ monthly bills.  

CPS Energy, the nation’s largest community-owned provider of electric and natural gas services, saw record winter demand for electricity and natural gas amid soaring prices for the commodities. It became a power purchaser when its generation plants were unable at times to produce enough energy. The resulting financial pressures led to bond rating downgrades in March 2021.

The March 3 private letter ruling affirmed that certain Winter Storm Uri-related costs and charges incurred by the utility can be refinanced on a tax-exempt basis due to the extraordinary nature of those costs, the preliminary official statement for the tax-exempt refunding bonds said.

A tender offer was launched earlier this month to entice bondholders to turn in their bonds at a premium of up to 4% above current market values for the debt, according to the utility.

Bondholders opted to return and the utility accepted nearly 32% of the $405.35 million of 2022 bonds targeted for the tender, the utility disclosed in a notice posted Wednesday on the Municipal Securities Rulemaking Board’s EMMA website.

The revenue refunding issue involving the tender, which was structured with maturities from 2028 to 2044, was priced May 23 with a top yield of 4.40% for bonds due in 2043 with a 4% coupon. The bonds were rated AA-minus by Fitch Ratings and S&P Global Ratings and Aa2 by Moody’s Investors Service.

The private letter ruling applied to the $133.2 million Series 2023B that priced this week, together with a $456.8 million Series 2023A, in a deal led by Loop Capital and JPMorgan.

PFM and Estrada Hinojosa were co-municipal advisors. McCall Parkhurst & Horton and Kassahn and Ortiz were co-bond counsel.

S&P said since the storm, CPS Energy has prioritized the preservation of on-balance-sheet liquidity, disputed some natural gas costs related to the storm, and refined its power supply strategy. 

“The rating in part reflects our view of CPS Energy’s most recent electric and gas base-rate increase of 3.85% and fuel adjustment effective March 1, 2022, which we believe will support continued healthy coverage in the near term despite an increase in debt service requirements to more than $465 million in fiscal 2024 from $422 million in fiscal 2023,” S&P said in a report. 

It added that another factor is the need for more frequent rate increases over five years for the utility’s $4.3 billion capital program and for increased debt service payments.

A negative rating outlook is due to rate affordability pressures given already high customer delinquencies. 

“While recent financial metrics have been solid, we could lower the rating if higher retail rates necessary to discharge financial obligations related to the severe weather event of February 2021 and in support of capital projects exacerbate affordability and delinquency,” the report said. 

Fitch, which also has a negative outlook on its rating, said CPS Energy’s financial profile “has exhibited some weakening in the past three years as the utility used long-term debt to finance a portion of the elevated purchased power and natural gas fuel costs incurred during the February 2021 winter storm event.”

Meanwhile, CPS Energy is suing three of its natural gas suppliers in Bexar County District Court claiming more than $350 million in charges during the storm were unconscionable and violated Texas public policy. 

Depending on the outcome of the litigation, the utility could take advantage of the IRS ruling in the future to issue tax-free bonds, Kuchinsky said. 

Winter Storm Uri pummeled states with snow, ice, and high winds amid record-low temperatures in February 2021, with huge demand boosting natural gas and electricity prices to sky-high levels.

Bloomberg News

In Oklahoma, one of the four storm-related taxable bond deals the state development finance authority issued last year for utilities reported revenue from winter-event securitization charges on ratepayers’ bills fell short of a $68.27 million May 1 debt service payment.

The $1.35 billion bond issue for Oklahoma Natural Gas Company, the largest of the four deals, tapped a debt service reserve fund for nearly $1.148 million to make the payment, as well as to cover about $507,000 in ongoing financing costs that were due, according to a disclosure notice posted on the EMMA website.

The notice said the deal’s servicer “anticipates, but cannot guarantee” enough revenue will be collected for the Nov. 1 bond payment, ongoing financing fees, and to replenish the debt service reserve fund to its required level. 

A true-up mechanism to ensure sufficient collections from customers was included in the Oklahoma deals. An Oklahoma Natural Gas Company spokesman said a proposed adjustment to the winter-event securitization charge will be submitted to the state’s public utility division, which will have 30 days to review it.

“I don’t have any concerns about the other three bond issues and I really don’t have concerns about this one,” said Michael Davis, the Oklahoma Development Finance Authority’s president and CEO . “For whatever reason their collections did not meet projections and they were short, but going forward we won’t have that issue.” 

Fitch, which rated the bonds for Oklahoma Natural Gas AAA, said in a commentary published Monday that while there was no immediate rating impact from the inaccurate estimate of the required charges, it will continue to monitor future charges to ensure the debt service reserve fund is fully replenished to its target level. 

A $3.5 billion taxable Texas deal was sold in March for natural gas utilities under a 2021 state law authorizing securitization financing for natural gas providers to extend the period over which their customers pay back high costs incurred during the storm.

The deal included a limited make-whole redemption over the next three years in the event Texas lawmakers decide to appropriate state money to pay off all or some of the debt.

The fate of such an appropriation was unclear as the legislative session headed into its final days.

Siebert sets up shop in Indiana with banking hire

Siebert sets up shop in Indiana with banking hire

Siebert Williams Shank & Co. LLC has hired veteran public finance banker Nathan Flynn to establish a branch office in Indianapolis with an eye on broadening the firm’s coverage of borrowers in the Midwest and Southeast while also adding to the firm’s project finance and structuring chops.

Flynn starts at the firm as a managing director June 5. He will report to Sean Werdlow, a senior managing director. Last October Flynn left KeyBanc Capital Markets, where he had managed the state’s public-sector group and helped expand the firm’s public finance business across the state and worked with the bank’s P3 practice.

Flynn will focus on expanding coverage of Midwest and Southeast borrowers and assist on structuring and project financing more broadly.

“This was not a geographic hire. This was us being extremely opportunistic about getting talent at the firm” who brings deep client relationships and a skill set that meets issuer needs involving idea creation, multi-year capital programs and navigating market conditions, Gary Hall, president of the SWS’ infrastructure and public finance group, said in an interview Wednesday.

“Right now our issuers are asking for more than just access to capital markets. You really need to have bankers that can differentiate” your firm “in this overly competitive market” amid a sharp drop in volume, Hall said. “Having someone with Nathan’s project finance and technical experience will be exceedingly helpful to our coverage as we expand our footprint throughout the Southeast and Big 10 region.”

“Having someone with Nathan’s project finance and technical experience will be exceedingly helpful to our coverage as we expand our footprint throughout the Southeast and Big 10 region,” said Siebert’s Gary Hall.

Hall said he’s long respected Flynn as a competitor and sought him out.

During his tenure at KeyBanc, he was the lead engagement advisor for the University of Toledo’s P3 tax-exempt debt-funded parking concession. Before joining KeyBanc in 2020, Flynn worked at Crowe LLP, where he was a senior manager tasked with creating a pricing services practice and strengthening the firm’s capital market and municipal advisory practice.

Prior to joining Crowe in 2017, Flynn worked at Fifth Third Securities where he was a managing director and launched a Midwest large issuer practice. Before joining Fifth Third in 2014, Flynn spent 11 years at William Blair & Co. where he was head of the financial structuring group. Earlier in his career, he worked in banking at JPMorgan.

Flynn said Siebert appealed to him because of his respect for Hall and other senior leaders, Siebert’s existing project finance strategies, and commitment to public finance.  

“I have faith in leadership that they are doing things the right way and trying to grow the business,” Flynn said. “In an environment where a lot of firms are doing layoffs, reducing staff and have hiring freezes, Siebert has added people. They are strategically going out and adding high caliber [employees] in an environment where a lot of people are doing the opposite.”  

Earlier this year, Siebert hired Edward Tishelman as senior managing director and head of muni sales and trading as well as Marvin Markus and Mark Liff as managing directors to bolster its infrastructure and higher education divisions.

Flynn said Siebert was also a good fit for his skills on project finance that typically involve months-long, in-depth work. Siebert is “about doing the deep dive and working on difficult projects, projects that do require” more complicated work, he said.

With an Indianapolis presence, the firm now has 20 offices including its dual headquarters in New York and Oakland, California, where Hall is located. The firm ranked 15th so far this year among senior managers nationally on negotiated and competitive sales and was 14th last year, according to Refinitiv. The firm ranked ninth among senior managers on negotiated work through the first quarter.  

Hall, a partner who earlier this year was named president of the infrastructure and public finance department after having served as head of the investment banking for the division, said he remains on the hunt for opportunistic hires with plans to deepen the bench on kindergarten-through-12th grade financings in California, Michigan, and Texas.

Having made several hires in the higher education sphere, the housing and healthcare sectors remain on a longer-term horizon, he said.

FINRA fines member firm and former chief executive for markups

FINRA fines member firm and former chief executive for markups

The Financial Industry Regulatory Authority has fined Little Rock, Arkansas-based Crews and Associates $50,000 and its former head trader and chief executive Rush F. Harding $30,000 for their roles in selling municipal bonds with markups to an affiliated bank, with Harding having violated MSRB Rule G-18 on best execution and Rule G-17 on conduct and the firm violating Rule G-27 on supervision.

Crews has been censured and within sixty days, must provide in writing evidence the firm remediated the issue identified and implemented a written supervisory system to guard against the problems that arose. Harding, the co-founder of Crews, who was with the firm from its inception in 1979 to 2021, was charged separately by FINRA and in addition to his $30,000 fine, he received a one-year suspension from associating with any FINRA member in any capacity.

The conduct came to light when the firm was filing paperwork to fire Harding after completing an internal review. According to the form, the investigation concluded that Harding, over a four-year period, “inserted additional trading activity with other broker dealers,” that his “actions concealed that he was receiving brokerage commissions beyond his agreed upon compensation,” and that the trades were conducted in contravention of his arrangement with the client.


The transactions in question occurred from June 2017 to June 2021, when FINRA found Harding violated MSRB rules in connection with 94 municipal securities transactions with a bank affiliate. The firm had agreed it would not charge markups to its affiliate, but Harding circumvented his firm’s prohibition by indirectly selling marked-up bonds to the affiliate from the Crews’ general inventory account using third-party broker-dealers. 

The affiliated bank then paid $918,476 in markups as a result of Harding’s conduct, FINRA said, and Harding willfully violated MSRB Rules G-18 on best execution and G-17 on conduct.

Crews did not account for Harding’s conducting of indirect sales in its supervisory systems and therefore violated MSRB Rule G-27 on supervision.

“The firm did not discover, and therefore did not review for, potential indirect sales of bonds in general inventory to its affiliate through third-party intermediaries until Aug. 2021,” FINRA said. “In addition, the firm’s written supervisory procedures to date do not address the conflict presented when placing bonds in the affiliate-related account (precluding a markup) versus general inventory (entailing a markup).” 

Crews was sanctioned by the Securities and Exchange Commission in August 2021 for willfully violating MSRB Rule G-17 by recommending, through Harding, that a customer buy bonds through a tender offer without disclosing to the customer the conflict of interest arising from a Crews affiliate holding the same securities. They also violated MSRB Rule G-27 on supervision and were censured, issued a cease and desist and fined $244,072.

The Commission also sanctioned Harding and imposed a total of $146,481 in disgorgement, prejudgment interest and civil penalties.

Crews and Associates did not immediately respond to requests for comment for this story.

Fitch warns of U.S. downgrade amid debt ceiling showdown

Fitch warns of U.S. downgrade amid debt ceiling showdown

Fitch Ratings has warned it may downgrade the United States’ AAA credit amid a worsening showdown over the country’s debt limit.

The agency late Wednesday put the nation’s issuer default rating on rating watch negative. The warning comes as Washington has been unable to reach a deal to avoid breaching the nation’s $31.4 trillion debt limit, and remains on a path to run out of borrowing capacity as early as June 1, the so-called X date.

The move to rating watch negative is the first concrete action from a ratings agency during the current political impasse. In 2011, S&P Global Ratings cut the U.S. credit to AA-plus from AAA during a similar standoff.

A downgrade of the U.S. sovereign would reverberate throughout the municipal bond market, carrying both near-term effects like higher borrowing costs and longer-term consequences like fewer federal funds for municipal credits.

House Speaker Kevin McCarthy, R-Calif., said markets should not fear a default but also noted that the two sides remain far apart.


“Fitch still expects a resolution to the debt limit before the X-date,” the agency said in its report. “However, we believe risks have risen that the debt limit will not be raised or suspended before the X-date and consequently that the government could begin to miss payments on some of its obligations. The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness.”

The White House and Republicans met again Wednesday but the talks seemed to yield little. House Speaker Kevin McCarthy, R-Calif., said after the meeting that he does not expect a default but also that the two sides remain far apart.

In a later appearance on Fox Business, McCarthy sought to reassure rattled investors.

“I would not, if I was in the markets, be afraid of anything in this process,” McCarthy said. “We will come to an agreement when we get it, worthy of the American public, and there should not be any fear.”

Fitch also noted that governance in the U.S. is “a weakness” compared to its AAA-rated peers.

“The contested 2020 presidential election, brinkmanship over the debt limit to advance political agendas, and failure to reach consensus on the country’s fiscal challenges are recent signs of the deterioration in governance,” the agency said. “Political partisanship has brought about repeated debt-limit brinkmanship and led to near-default episodes that could erode confidence in the government’s repayment capacity.”

Fitch named several actions that could lead to a downgrade, including if Congress doesn’t raise the debt ceiling and the U.S. prioritizes debt payments but fails to meet other financial obligations, or if the debt limit is raised or suspended beyond the short term but “a significant and sustained rise in the general government debt/GDP ratio and/or a decline in the coherence and creditability of U.S. policymaking” restricts the nation’s financial flexibility.

A downgrade of the U.S. sovereign would reverberate throughout the municipal bond market. The most immediate downgrades would be to debt directly linked to the federal government, such as housing bonds, grant anticipation revenue bonds – which are secured by federal transportation grants – and military housing bonds. Pre-refunded bonds that have an escrow set up with Treasuries could also take a hit.

Earlier this month, Moody’s Investors Service outlined potential impacts in case of a downgrade. Low-rated credits would feel the heat from market volatility even if a deal is reached while the “vast majority” of state and local governments would be resilient, Moody’s said.

Minnesota passes budget, record bonding bill and stadium bond payoff

Minnesota passes budget, record bonding bill and stadium bond payoff

Minnesota lawmakers ended their 2023 session after passing a two-year budget with new funding for schools and social services, a $2.6 billion capital package, and a tax package that raises some taxes and fees on top earners and corporations while providing rebates for others and paying off debt for the NFL Vikings’ stadium.

The budget uses much of a $17.5 billion surplus. The final budget was built on the state’s revised February economic forecast that marked a change from recent history in that it incorporated inflation into the projections.

Inflation raised projected spending by $1.4 billion in the next biennium while revenues were held steady. About $12.5 billion of the surplus had been carried over after it went unspent due to political divisions.

“The work we’ve done this session will make a generational impact on our state,” Minnesota Gov. Tim Walz said in a statement.

Bloomberg News

The capital budget, known as the bonding bill, stands out as the state’s largest ever. Lawmakers typically tackle the bonding bill in even years with the biennial operating plan the top focus of the odd years, but previous packages stalled over the last two years amid political divisions.

The November election altered the landscape. Gov. Tim Walz, a member of the Democratic-Farmer-Labor Party, won a second term. DFLer’s retained the House and the GOP lost its Senate majority, smoothing the path for Walz and his fellow Democrats to pursue their agenda.

“The work we’ve done this session will make a generational impact on our state – it will lower costs, improve lives, and cut child poverty,” Walz said in a statement. “We’re going to put resources behind the educators that teach our children. We’re going to rebuild our roads. And we’re going to give money directly back to Minnesotans who need it most, whether through direct checks or the child tax credit.”

Republican members complained that they were left out of negotiations and slammed the level of new spending and tax hikes. “It’s stunning that Democrats are still raising taxes by billions of dollars even though we have a $19 billion surplus,” Sen. Andrew Mathews, R-Princeton, said in a statement.

Spending rises by nearly 40% in the $72 billion budget compared to the current $52 billion spending plan that covers the biennium through June 30. State officials stressed that much of the increase focuses on one-time items, so structural balance is maintained.

The budget directs an additional $2.2 billion toward kindergarten through 12th grade public schools. The state going forward will index the per pupil formula to inflation although it’s capped at 3%. The budget spends an additional $1 billion on human services, housing, and the environment.

The transportation package in the budget raises the gas tax indexing it to the rate of inflation with a 3% cap and levies a 50-cent fee on deliveries that exceed $100. The gas tax change will lift the current rate of 28.5 cents per gallon by five cents by 2027 and generate $155 million over two years.

The budget’s tax package provides $3 billion in tax relief through one-time rebates and by hiking the tax credit for lower income families. The budget relies on an additional $1 billion from a tax change for top earners or on investment income of more than $1 million and a tax change for corporations on their international operations.

The tax package pays down state bonds issued to finance construction of a new stadium for the National Football League’s Minnesota Vikings and allows 36 cities or counties to seek voter approval for a local option sales tax after a two-year moratorium ends.

Local city and county governments are in line for an infusion of $300 million for public safety spending with another $80 million hike in local government direct aid.

Sales taxes in the Twin Cities metropolitan region will rise by .25% to pay for housing issues while Metro transit would receive a boost from a .75% sales tax that’s expected to raise about $440 million annually. Local counties would also benefit from the tax.

The $2.6 billion capital budget relies on $1.5 billion of borrowing with the rest being funded with cash. One bill, HF669 , authorizes $1.3 billion of general obligation borrowing to be repaid with general funds and $219 million of borrowing that would repaid with transportation funds. Another $225 million of general funds goes toward the package. The separate HF670 authorizes $851 million in general fund cash for more than 190 projects.

New general obligation bonding authority requires a three-fifths majority and Democrats were able to win GOP votes by agreeing to their demands to send $300 million to nursing homes.

Walz had proposed earlier this year a $3.3 billion capital package and earlier this month Democrats said they would pursue a cash-only package if they couldn’t secure needed GOP votes. The state typically taps its bonding authorization for capital spending in a sale in late summer or early fall.

Lawmakers dropped a requirement on nursing staff levels from a nursing-related bill. Minnesota-based Mayo Clinic had threatened to cancel $4 billion in planned investments if the state moved forward with the measure. Lawmakers exempted the system but that led to other pushback and ultimately the staffing rule was dropped.

The legislature didn’t pass a funding request from the University of Minnesota for aid that would pave the way for its separation from Fairview Health Services.

The university has put a $950 million price tag on the cost to acquire and operate its flagship academic health care facilities now operated under an affiliation agreement with Fairview which plans to merge with South Dakota-based Sanford Health. Walz and lawmakers suggested a special session could be held later this year to deal with the request.

Lawmakers did pass a measure that if signed by Walz would impede the merger unless it sheds the university-related assets. The bill prohibits out-of-state entities like Sanford from owning university facilities.

The legislation also gives Attorney General Keith Ellison’s additional powers in the office’s regulatory review of mergers over anti-competitive practices. Fairview said after passage it would continue to pursue the merger proposal and would comply with the law if signed by Walz.

With the stadium bond reserve expected to grow to $366 million in the current biennium and reach $678 million in the next, Walz had proposed retiring later this year the outstanding bonds issued for U.S. Bank Stadium ahead of the scheduled 2043 maturity. The move would save $200 million in interest.

The state sold $462 million of appropriation bonds in 2014 to cover most of its $350 million contribution and Minneapolis’ $150 million contribution toward the $1 billion project after establishing a new form of gambling, electronic pull tabs, to help repay the appropriation-backed bonds. Revenue has surged beyond expectations allowing for the early pay off.

The measure in HF1938 taps the current reserve account to pay off the bonds and then repeals the reserve account and transfers future funds to the general fund. It also repeals payments to the state from 2016 to 2020 from Minneapolis that covered its share of the public funding and reduces local sales taxes retained by the state.

The state carries triple-A ratings from Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings after a Moody’s upgrade in July.

Munis weaker in spots while FOMC takes focus

Munis weaker in spots while FOMC takes focus

Municipals were steady to weaker in spots Wednesday, while U.S. Treasury yields rose several basis points in conjunction with the release of the Federal Open Market Committee minutes that showed members split on whether interest rates will be raised further. Stocks sold off.

After cuts up to 10 basis points Tuesday, triple-A yields were cut up to another four basis points, depending on the scale and UST yields rose two to five basis points.

Ratios rose slightly. The two-year muni-Treasury ratio Wednesday was at 73%, the three-year at 75%, the five-year at 74%, the 10-year at 73% and the 30-year at 92%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the two-year at 73%, the three-year at 76%, the five-year at 73%, the 10-year at 74% and the 30-year at 93% at 4 p.m.

“We have seen cuts along the curve so far this week, reflecting some catch-up to recent Treasury moves and overall market weakness,” Shaun Burgess, portfolio manager and analyst at Cumberland Advisors said Wednesday.

“The market is oddly mixed, with weakness on the new-issue side contrasted with good bids on the Silicon Valley Bank and Signature Bank lists being put out,” he said.

More outflows from mutual funds were reported Wednesday by the Investment Company Institute, showing investors pulled another $137 million out of municipal bond mutual funds in the week ending May 17, after $290 million of outflows the previous week. Exchange-traded funds saw outflows to the tune of $158 million after $258 million of inflows the week prior.

In the primary market Wednesday, Barclays Capital priced for the Metropolitan Washington Airports Authority (Aa3/AA-/AA-/) $437.455 million of AMT airport system revenue and refunding bonds, Series 2023A, with 5s of 10/2024 at 3.88%, 5s of 2028 at 3.75%, 5s of 2033 at 3.81%, 5s of 2038 at 4.25%. 5.25s of 2043 at 4.37%, 5.25s of 2048 at 4.45%, 5.25s of 2053 at 4.50% and 4.5s of 2053 at 4.75%, callable 10/1/2032.

Jefferies priced for the Pennsylvania Housing Finance Agency (Aa1/AA+//) is set to price $389.065 million of non-AMT single-family mortgage revenue social bonds, Series 2023 -142A, with all bonds pricing at par – 3.4s of 10/2028, 4s of 4/2033, 4.05s of 10/2033, 4.85s of 10/2043 and 4.9s of 10/2050 – except 4.5s of 10/2038 at 4.60%, 5s of 10/2043 at 4.85% and 5.5s of 10/2053 at 4.25%.

Barclays Capital priced for San Antonio, Texas, (Aa3/A+/AA-/) $100 million of electric and gas systems variable rate junior lien revenue and refunding bonds, Series 2023, with 3.65s of 2/2053 with a mandatory put date of 12/1/2026 at par, callable 9/1/2026.

Rate hikes less certain
The FOMC minutes showed the need for further interest rate hikes is “less certain,” members “generally” believe, as the banking crisis and the lagging impact of previous rate increases work their way through the economy.

“Participants agreed that it would be important to closely monitor incoming information and assess the implications for monetary policy,” the minutes state.

Many members wanted to “retain optionality” on policy, the minutes say. Some expect inflation will be “unacceptably slow” in dropping to 2%, and thus more tightening will be needed “at future meetings.”

Still “several participants” said if the economy follows “their current outlooks, then further policy firming after this meeting may not be necessary.”

The factors that will help members determine policy include “the degree and timing with which cumulative policy tightening restrained economic activity.” Some members saw evidence prior “tightening was beginning to have its intended effect.

The panel is “very uncertain” about the impact of the banking crisis on tightening credit and cutting inflation, which will weigh on their decisions.

The minutes show the FOMC sees inflation as “substantially elevated,” with tight labor markets and modest economic expansion.

A few members saw upside risk to growth, but most saw downside risk.

Munis see some positive factors
There are several positive factors for munis in the coming months, said Nick Vendetti, municipal bond fund portfolio manager with Allspring Global Investments.

There are no indications that the technical factors coming to fruition in the summer will slow down now, he said.  June 1 and July 1 will be “big maturity and coupon payment dates,” where “a lot of money needs to be reinvested,” he said.

“The summer tends to be a great time to own bonds [but] a little bit more difficult time to buy bonds,” he said. “Now is a great entry point for investors to ride that summer wave” due to those strong technical factors.

Vendetti said there will be “continued flows into municipal bond products and fixed-income products in general.”

An “infinite amount has flown into money market funds, and at some point, that money is going to have to go somewhere else,” he said, noting the “first step for a lot of that money is going to be into fixed income.”

For high-income taxpayers, he said much of that money will be in tax-exempt portfolios.

“That’s going to be largely supportive of the market through the next three months from a demand perspective, and that’s going to be met with continued very low supply,” he said.

Vendetti added that issuers have “certainly benefited from the fact that we wrote a gigantic stimulus check.”

“A lot of that money showed up on their balance sheets, and that’s allowed them to delay debt borrowings for a little while, and they’re going to be able to continue to delay on that list for the next three months largely,” he said.

Vendetti said issuers are also still coming to terms with “what it means to issue debt in a significantly higher rate environment. How are they going to structure it? What are their debt carrying costs going to look like so on and so forth?”

Secondary trading
Maryland 5s of 2024 at 3.31%. North Carolina 5s of 2024 at 3.40%-3.34%. Connecticut 5s of 2025 at 3.36% versus 2.93% on 5/16.

Georgia 5s of 2028 at 2.81% versus 2.78% Tuesday and 2.34% on 5/11. Triborough Bridge and Tunnel Authority 5s of 2029 at 2.89%-2.82%. California 5s of 2030 at 2.76%-2.77% versus 2.40% on 5/2.

Triborough Bridge and Tunnel Authority 5s of 2032 at 2.71%-2.69%. Wisconsin 5s of 2034 at 2.85% versus 2.80%-2.81% Tuesday and 2.46% on 5/15. NYC TFA 5s of 2034 at 3.04%-3.00% versus 2.57% on 5/9 and 2/55%-2.56% on 5/3.

NYC TFA 5s of 2045 at 3.97%-3.98% versus 3.63% on 5/11. LA DWP 5s of 2052 at 3.91% versus 3.64% on 5/9.

AAA scales
Refinitiv MMD’s scale was cut: The one-year was at 3.31% (unch) and 3.15% (unch) in two years. The five-year was at 2.80% (+3), the 10-year at 2.70% (+3) and the 30-year at 3.62% (unch) at 3 p.m.

The ICE AAA yield curve was changed up to two basis points: 3.35% (-2) in 2024 and 3.19% (flat) in 2025. The five-year was at 2.80% (-1), the 10-year was at 2.72% (+1) and the 30-year was at 3.68% (-2) at 4 p.m.

The IHS Markit municipal curve was cut up to four basis points: 3.30% (unch) in 2024 and 3.15% (unch) in 2025. The five-year was at 2.80% (+3), the 10-year was at 2.69% (+3) and the 30-year yield was at 3.62% (unch), according to a 4 p.m. read.

Bloomberg BVAL was cut up to two basis points: 3.15% (unch) in 2024 and 3.04% (unch) in 2025. The five-year at 2.72% (+2), the 10-year at 2.64% (+1) and the 30-year at 3.65% (unch) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 4.357% (+2), the three-year was at 4.046% (+5), the five-year at 3.801% (+4), the 10-year at 3.733% (+3), the 20-year at 4.116% (+3) and the 30-year Treasury was yielding 3.971% (+2) at 4 p.m.

FOMC minutes redux
Since the May FOMC meeting, Morgan Stanley Research strategists said “communication from policymakers has shown a clear division on the path forward for rates.”

The FOMC meeting minutes “show a committee that is split on whether there will be need to raise interest rates further,” according to James Knightley, chief international economist at ING.

Some members, he said, “felt that based on the news flow to date, getting inflation back to target ‘could continue to be unacceptably slow,’ which would mean ‘additional policy firming would likely be warranted at future meetings.'”

However, Knightley noted that “several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.”

He said “several” probably exceeds “some” but noted the key takeaway is that “many participants focused on the need to retain optionality after this meeting- i.e. data dependency.”

Morgan Stanley Research strategists concurred, saying “What was agreed upon [from the FOMC] is the need to retain flexibility and be data dependent.”

They believe “it won’t be difficult to get consensus on a June pause if it is coupled with the promise that further hikes could be needed if the data do not cooperate.”

In terms of the economic backdrop, Knightley said “inflation remained ‘unacceptably high’; although participants judged that risks to the outlook for economic activity were weighted to the downside.”

Federal Reserve staff, he said, “continue to forecast that ‘the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery.'”

“A substantial portion of the minutes were once again dedicated to monitoring the impact of tighter lending standards on economic activity, but there seemed to be less concern of banking instability than in the prior minutes,” according to Morgan Stanley Research strategists.

The minutes showed that “overall, the credit quality of most businesses and households remained solid but deteriorated somewhat for businesses with lower credit ratings and for households with lower credit scores,” they said.

“Further, some participants noted that ‘developments in the banking sector appeared to have had only a modest effect so far on credit availability for firms,'” they said.

Several participants do not think “tighter credit availability will necessarily lead to lower inflation, given that both supply and demand for credit are moderating,” Morgan Stanley Research strategists said.

Participants, they said, “gauged risks to inflation to the upside, though less so compared with March.”

The Fed acknowledged that “a ‘timely’ increase in the U.S. debt ceiling is essential [to] avoid the risk of severely adverse dislocations in the financial system and the broader economy,” according to Knightly.

Their concerns will be higher now, he said.

The tone of the minutes, Knightley said “reflects the balance of the Fed comments we have subsequently heard.”

Fed Chair Jerome Powell seems to be leaning toward a pause, but “the hawks are still pushing for more action.”

Others, he noted, “are more open to the idea of a pause given the 500bp of hikes enacted since March last year has been the most aggressive and rapid period of monetary policy tightening for 40 years.”

With “monetary policy operating with long lags before it really has an impact on the economy there are several FOMC members making the case, similarly to Jerome Powell, that they considering skipping the June meeting and reconsider the situation in July,” according to Knightley.

The market, he said, “has significantly repriced the outlook for Fed policy.”

Just two weeks ago, market participants were “looking at rates having peaked and a first 25bp rate cut coming in September with nearly 100bp of cuts by the January 2024 FOMC meeting,” he said.

Now, Knightley said “there is a 30% chance of a 25bp hike and a 65% chance by the July FOMC meeting.”

He added cuts are still priced before the end of 2023, but nowhere near to the same extent.

What happens next “will come down to the data and events, such as inflation, jobs, the debt ceiling showdown and what is happening with the state of the banking sector and the impact on the flow of credit,” he said.

The June decision for many FOMC participants, Morgan Stanley Research strategists noted, may come down to the May consumer price index data.

Morgan Stanley strategists forecast the May core CPI to increase 0.30% for the month, slowing from the pace in April, they said.

They think the May CPI print will “show a slowdown in core services, which includes our expectation that the downward trend in housing resumes.”

Policymakers in particular, they noted, “will be focused on non-housing services inflation so as usual, the devil will be in the details.”

Primary on Tuesday:
Wells Fargo Bank priced for the Department of Water and Power for the city of Los Angeles (Aa2/AA+/AA/) $495.530 million of water system revenue bonds, 2023 Series A, with 5s of 7/2023 at 3.30%, 5s of 2028 at 2.68%, 5s of 2033 at 2.74%, 5s of 2038 at 3.33%, 5s of 2043 at 3.66%, 5s of 2049 at 3.94% and 5.25s of 2053 at 3.93%, callable 7/1/2033.

Primary to come:
The New Jersey Transportation Trust Fund Authority (A2/A-/A/A/) will price $674 million of Series AA transportation program bonds on Thursday. Jefferies.

The authority (A2/A-/A/) is also set to price $262.780 million of Series A transportation system bonds on Thursday. Jefferies.

Christine Albano contributed to this story.

California spreads largely unchanged after negative outlook

California spreads largely unchanged after negative outlook

The secondary market has yet to react to California’s negative outlook from Moody’s Investors Service, as credit spreads have generally tracked the recent market selloff.

While Municipal Market Analytics acknowledged that California faces some economic headwinds, the firm was surprised at how quickly Moody’s revised the outlook after the governor’s May budget revisions were announced.

The systems the state put in place after the 2008 financial crash, including voter-approved taxes and a reserve fund, appear to be holding the state in good stead despite this year’s volatility, said Matt Fabian, an MMA partner.

“I think the amount of resources they have and the structural improvements should be recognized,” Fabian said Tuesday in an interview. “We were surprised at how quickly the switch to a negative outlook came, because it seemed fast for such a large and well-run state.”

“We were surprised at how quickly the switch to a negative outlook came, because it seemed fast for such a large and well-run state,” said Matt Fabian, a partner with Municipal Market Analytics.

Moody’s revised the outlook to negative from stable May 18 citing the state’s revenue uncertainty just six days after Gov. Gavin Newsom released his May revise.

The rating agency also affirmed the Aa2 rating on the state’s general obligation bonds, citing the state’s massive economic base and healthy budget reserves and liquidity.

The outlook change hasn’t affected secondary trading of the state’s paper. California yields have risen in recent trading, but mostly along with general market moves as the market has sold off. Though trading on California debt has generally been choppy over the past year or so.

“It’s unlikely the outlook change drives California prices cheaper or wider,” Fabian said. “If there is a generic market sell-off and California bonds cheapen during that, it would present a buying opportunity.”

Refinitiv MMD 10-year California spreads have averaged +9.3 basis points in the 10-year range for the past year, Refinitiv MMD’s Daniel Berger noted Tuesday morning. The spread hit a three-year low of +1 basis points on February 9.

Fabian noted in the MMA’s Monday Outlook that state bond spreads have held within a 0-20 basis point range over the last year to its AAA scale, but they may “be vulnerable to widening if California holders either sell or demand relative price concession to take down new primary loans.”

As the governor plans to reverse the mid-pandemic tactic of using excess receipts in lieu of borrowing, there may be more new-money borrowing than in prior years, he said.

In his May revise, Newsom announced the state’s projected deficit for fiscal year 2024 had grown by more than $9 billion to $31.5 billion as revenues came in below the January forecast. The state doesn’t plan to tap the $22.5 billion budget reserve, and will instead cut spending and shift some projects from pay-go to bonds.

The governor said when he introduced the budget in January, the state would issue $4.3 billion in bonds, rather than using cash to fund some projects.

“We had a $73 billion surplus in fiscal year 2020-21 and a $100 billion surplus in fiscal year 2021-22, so we did not need bonds, but we will be tapping bonds this year,” Newsom said in January.

The budgetary steps recommended by Newsom to reduce the deficit in his budget revisions are sustainable, plus the governor left reserves largely untouched, Fabian said.

“While the California numbers are a disappointment, a coming-to-ground on the part of state capital-gains-dependent tax revenues has been inevitable, in particular following stock market losses in 2022, equivocation in 2023,” Fabian wrote.

The state is notoriously dependent on high-net taxpayers who account for about 50% of income tax revenues, Newsom said in his May revise presentation. That dependence on capital gains also means state revenues swing up and down along with the stock market.

If the budget gap continues to widen in 2024 and the state is forced to use more one-time solutions, rather than looking to reoccurring solutions, Fabian said, he could see more justification around an outlook revision.

“The state deficit comes through uncertainty around revenues, but the state hasn’t yet seen revenues collapse, they are just projecting revenues will be hurt,” Fabian said.

MMA also thinks the state’s ratings could be a tad higher to AA or AA-plus, relative to its default risk. The state holds a AA-minus rating from S&P Global Ratings with a positive outlook and holds a AA rating from Fitch Ratings with a stable outlook.

“We tend to think states are generally underrated relative to their default risk,” Fabian said. “California is a huge state with immense taxable resources and it has a structural payment priority for its GO bonds.

Revenues are volatile, but “they have made a lot of structural improvements in their processes in last 10 years, including how they sequester money in reserves and the controls around spending,” Fabian said.

“While it’s possible the state could return to 2003-era shenanigans, it seems less likely because of the structural improvements they have made in the system,” Fabian said, referring to bygone practices of regularly issuing revenue anticipation notes and even bonding to pay for operations. That debt that has since been paid off.

Debt ceiling standoff in Washington may start to hurt issuance

Debt ceiling standoff in Washington may start to hurt issuance

Cities and states may start to pause borrowing plans as the nation heads toward a breach of its debt limit as soon as next week.

“If the debt ceiling is not raised, it’s going to be a brave new world,” said David Womack, deputy director at New York City’s Office of Management and Budget. “It will come at us hard and fast and all we can do is be prepared for more volatility,” Womack said, speaking Monday at a panel at the Government Finance Officers Association’s annual conference in Portland, Oregon.

David Womack, deputy director of New York City’s Office of Management and Budget, said the debt limit standoff is already causing uncertainty in the primary market.

All eyes are on Washington as the White House and Republicans try to hammer out a deal to avoid the nation’s first default by breaching its $31.4 trillion debt limit as soon as June 1. After the two sides met again Wednesday, House Speaker Kevin McCarthy repeated that he’s optimistic a default can be avoided although “we are still far apart.”

“I’m hoping we can make progress,” McCarthy said. “We’re not going to default.”

The uncertainty is hanging over markets, with stocks, Treasuries and munis all weaker. Muni yields spiked higher by as much as 30 basis points last week, in part due to relatively high issuance. But as the impasse persists, issuers are expected to become more reluctant to bring deals to market amid the uncertainty.

Womack said New York City had planned to bring a refunding to market next week but now may pause the deal depending on what happens in Washington.

The standoff is already hurting short-term rates and delaying borrowing plans could dampen local economies, warned National League of Cities CEO and Executive Director Clarence E. Anthony.

“Short-term rates are already at significantly higher levels than in recent history. A default by the federal government would likely cause those rates to skyrocket temporarily, making it unfeasible for local governments to utilize short-term borrowing facilities,” Anthony said in a statement.

“Cities, towns and villages would have to delay or cancel many projects, such as bridges and sewer system upgrades, until interest rates return to normal. This would impact infrastructure projects and the jobs they create particularly hard, disrupting local economies, municipal budgets and much-needed infrastructure improvements in communities across the country.”

As the uncertainty continues, smaller issuers will tap the brakes on coming to market although large and more frequent issuers are forced to finance in good times and bad, Womack said.

“If you don’t have to come to market, you can just sit it out, but some of us in this room don’t have that luxury,” Womack said.

“As a refunding, we don’t have to do it right now [but] the new money [deals are] what I’m worried about because we can’t delay those too long or we will get out of sync with our capital needs.”

The state of Illinois, which sold $2.5 billion of bonds in April, timed the deal in part because it “recognized [the debt ceiling impasse] might be brewing,” said Paul Chatalas, the state’s director of capital markets, who spoke on the panel with Womack. “In the back of our minds we wanted to get ahead of it,” Chatalas said.

“If we were looking to issue anytime here on out, the key would be flexibility because we issue in good and bad markets,” he said. “When we need the funds, we need the funds. We can’t and shouldn’t try to time the market, but we can make nips and tucks if you have the flexibility.”

GFOA sent out an alert Monday recommending its members take “immediate action” in light of the Washington standoff.

Cities should review investment portfolios, and confirm holdings in U.S. Treasuries and the date these investments mature, the GFOA said.

Municipalities should also know if those investments are needed for obligations like debt payments, and should keep some cash in hand to meet obligations in case of a U.S. default.

Governments should also be aware of any escrows backed by U.S. Treasuries or State and Local Government Securities series, the association said.

If Washington fails to find a solution, “in the debt realm, it’s going to become very real very fast,” Chatalas said.

Lawsuit's dismissal upheld; more to come from Oklahoma Supreme Court on turnpike

Lawsuit’s dismissal upheld; more to come from Oklahoma Supreme Court on turnpike

The Oklahoma Supreme Court upheld the dismissal of a lawsuit challenging a turnpike extension plan while it weighs whether initial bonds to finance the $5 billion, 15-year project are valid.

In an opinion Tuesday, the high court left intact a December decision by a Cleveland County District Court judge granting the Oklahoma Turnpike Authority’s motion to dismiss on jurisdictional grounds the case brought by property owners in the path of the ACCESS (Advancing and Connecting Communities and Economies Safely Statewide) Oklahoma plan.

But plaintiffs’ claims that OTA lacks authorization to build and bond finance the South Extension, East-West Connector, and Tri-City Connector projects continue to be before the Supreme Court as it determines whether $500 million of revenue bonds the agency would issue to jumpstart funding for the project are valid.

The Oklahoma Turnpike Authority is awaiting a decision by the state Supreme Court on the validity of bonds to begin financing a $5 billion project that includes toll road extensions.

Adobe Stock

“Really all the Supreme Court is saying is that since it’s going to decide the fate of the new turnpikes anyway, it’s going to decide them in the bond validation case,” Robert Norman, the plaintiffs’ lawyer, said in a statement. 

In concurring with the high court’s unanimous opinion, Vice-Chief Justice Dustin P. Rowe stressed “our holding in this matter has no bearing on the outcome of the Oklahoma Turnpike Authority’s request to validate the issuance of the bond package to finance the ACCESS Oklahoma projects currently pending before us.”

OTA, which asked the high court in August to validate the bonds, said it agrees with the Supreme Court’s decision.

“We understand this opinion does not address nor resolve the (bond) validation proceeding,” it said in a statement. “As such, the timing of the OTA’s ability to issue revenue bonds in the public financial markets remains unclear and further ACCESS Oklahoma-related activities continue to be on pause.”

Last month, OTA halted construction work related to the project over concerns about its access to the municipal bond market in the wake of ongoing litigation and an investigative audit of the agency ordered by the state attorney general.

Meanwhile, Gov. Kevin Stitt vetoed the only OTA-related reform legislation to make it to his desk.

The bill, which was passed with veto-proof majorities in both chambers, would strip the governor of his sole ability to appoint the six-member OTA board of directors, giving two appointments each to the governor, House speaker, and Senate president pro tempore. It also would reduce new board members’ terms to six years from eight years, allow for a member’s removal for cause, and prohibit members from voting on any issue in which they have a direct financial interest.

In his May 19 veto message, Stitt said the bill would “codify legislative superiority and control over the operation of an executive branch agency and would enable the legislature to exercise unconstitutionally coercive influence over the executive department.”

He added it would also subject the OTA’s makeup and decisions to “legitimate legal challenges.”

State revenues weaken as personal income and sales taxes decline

State revenues weaken as personal income and sales taxes decline

While most U.S. states came out of the pandemic in relatively good economic shape, some warning signs are starting to emerge as money flowing into state coffers starts to slow.

Municipal bond issuers may see their revenue streams come under pressure from a variety of possible threats.

Inflation obscured the impact of declining revenue in many states, with numbers up in dollar terms but below the consumer price index. But the trend is accelerating, even as federal COVID-19 aid peters out amid worries that the federal government will hit its debt limit and default.

Lucy Dadayan is a senior research associate with the Urban-Brookings Tax Policy Center at the Urban Institute
“The bottom line is that the strong revenue growth in 2021 and 2022 was unusual and temporary,” said Lucy Dadayan, senior research associate with the Urban-Brookings Tax Policy Center at the Urban Institute.

Urban Institute

Weakening revenues should be a red flag for the states, particularly for those still planning to enact tax cuts, said Lucy Dadayan, principal research associate with the Urban-Brookings Tax Policy Center at the Urban Institute and author of a report on the subject.

“The revenue weakness and the declines have been much anticipated — the boom that we saw in 2021 and 2022 should have been viewed with caution because the revenue growth was fueled by temporary factors,” she told The Bond Buyer.

She said high inflation artificially increased state revenues along with an unusually strong stock market and increased initial public offering activity.

Dadayan also noted that revenues rose because the pandemic artificially boosted spending on goods because business closures meant that people couldn’t spend on services, which usually bring in less tax revenue.

“The enormous amount of federal aid injected into the economy, as well as the direct aid to the states and localities, helped a lot,” she said. “But the bottom line is that the strong revenue growth in 2021 and 2022 was unusual and temporary — and now revenue growth is normalizing in some states and declining in other states because of the disappearing federal aid and other temporary factors, enacted tax cuts, and weakness in the economy.”

According to the institute’s data, 36 of the 47 states with information reported declines in inflation-adjusted total state tax revenues in March compared to the same month last year, while 26 states reported declines in nominal terms.

A nominal number is unadjusted for inflation while a “real” number is adjusted to account for changes over time.

Total state tax revenues in March fell 9.4% in nominal terms and dropped 13.8% in real terms compared to March 2022. Nominal collections were down for the fourth straight month while inflation-adjusted revenue collections declined for the eighth month in a row.

In January through April, state tax revenue declined in 25 states compared to the same period last year.

The year-over-year median state decline was less dramatic, 2.0% in nominal terms and 6.8% in real terms.

Data show that from July through March, which for 46 states corresponds to the first nine months of their fiscal year, total state tax revenues declined by 1.5% in nominal terms and by 7.9% in real terms compared to the same period a year earlier.

Inflation-adjusted growth was mixed among the major sources of state tax revenue, with personal income taxes dropping 15.8%, corporate income taxes declining by 9.2% while sales tax revenues increased 0.6%.

Drilling down, the weakness in personal income tax revenues was more widespread when compared to sales tax revenues. But sales tax revenues have also started decreasing.

“It’s alarming that the number of states reporting declines in sales tax revenues has increased in the past two months,” the report said. “And these declines are in nominal terms. If we adjust numbers to inflation, the revenue picture is far more dire.”

Personal income tax revenues showed double digit declines in 26 states in nominal terms in the months of March and April combined compared to the same period last year.

The declines were caused by multiple factors, the institute said, such as drops in the stock market, income tax rate cuts in some jurisdictions, the push back of income tax filing dates in a few states such as California, and cuts in bonus payments.

The report said the weakening in state tax revenues in recent months was also in part caused by government policy decisions.

“Due to federal fiscal support and strong revenue growth over the past two years, a number of states issued rebates to taxpayers, passed tax rate cuts, expanded targeted income tax breaks, and established gas and sales tax holidays over the last two years,” the report said.

It noted that several states used budget surpluses to issue rebate checks ranging from as little as $75 a taxpayer in Illinois to as high as $1,500 per taxpayer in New Jersey.

“These rebates cost states billions of dollars, but were a more targeted response to budget surpluses than permanent cuts in tax rates given growing economic uncertainty,” the report said.

High inflation, higher interest rates, financial market volatility, weakening home prices and the banking crisis are all likely to lead to a continuing slowdown in economic activity, the institute said, which in turn will lead to further weakness in state tax revenue collections.

Dadayan said several states have already been revising their revenue forecasts downwards and some states are now projecting deficits and budget gaps.

“The most important thing is that states should stop enacting any tax cuts given the uncertainties in the economy,” she said. “I hope no state will enact any permanent tax cuts given this gloomy picture for the state budgets.”

According to the Tax Foundation, five states do not have statewide sales taxes: Alaska, Delaware, Montana, New Hampshire and Oregon.

The five states with the highest average combined state and local sales tax rates are Louisiana at 9.550%, Tennessee at 9.548%, Arkansas 9.46%, Alabama 9.25%, and Oklahoma 8.98%. The five states with the lowest average combined rates are Alaska at 1.76%, Hawaii 4.44%, Wyoming 5.36%, Wisconsin 5.43%, and Maine 5.50%.

Seven states have no personal income tax. They are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming. Two more don’t tax personal income but New Hampshire taxes interest and dividends and Washington taxes capital gains.

Eleven states have a flat personal income tax — Arizona, Colorado, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, North Carolina, Pennsylvania and Utah — while the rest have a system of graduated rates.

States and localities have seen federal aid provided during the pandemic dwindle.

Permanent state tax cuts, such as those spearheaded this year by West Virginia Gov. Jim Justice, are risky as the economy slows and federal pandemic aid expires, according to an Urban-Brookings Tax Policy Center report.

West Virginia governor’s office

An effort by congressional Republicans to claw back any unspent pandemic aid sent to states is unlikely to gain any traction, according to municipal market advocates at the Government Finance Officers Association meeting. But it highlights the new reality of a stingier and cost conscious Congress that will affect many states’ ability to ask for additional financial help.

Congress is still working to avert a government shutdown on or around June 1, the day Treasury Secretary Janet Yellen has said the U.S. would run out of money to pay its bills.

The House and Senate are both likely to vote next week on any deal to raise the debt limit ahead of the June 1 deadline.

Other headwinds remain for state and local entities.

While the inflation picture has in some ways improved over the past year, worries still remain, according to a special economic commentary issued by Wells Fargo on Monday.

“After reaching 9.1% last June, headline CPI is back under 5% year-over-year, and unlike the environment a year ago, pipeline price pressures are clearly weakening,” Wells Fargo said. “But in other ways the picture has grown more concerning. The magnitude of the core inflation slowdown has been paltry in comparison to the problem and leaves inflation still way too high for the Federal Reserve.”

Wells Fargo says its baseline scenario sees “a demand-sapping recession and gradual unwinding of pandemic-era supply issues help put inflation firmly on a downward path, but are not enough to get core inflation back to the Fed’s target on a sustained basis by Q2 of next year.”

In its upside scenario, a recession is avoided or significantly delayed thanks to more resilient spending and hiring, generating both the ability and need for businesses to continue to raise prices at a strong rate. The Fed is slow to recognize policy is not yet sufficiently restrictive, keeping core PCE inflation at or above 3%.

And in its downside scenario market share concerns resurface and businesses begin to battle more on price. Supply constraints prove to have been more influential in inflation’s rise, and in turn, their unwinding leads to a sharper reduction in inflation. Core PCE rounds to 2% by this time next year.

“As implied by the name, we see our baseline scenario, in which core inflation slows materially but remains closer to 3% than 2% in a year’s time, as the most likely outcome for inflation ahead,” Wells Fargo said. “However, we’d weight the balance of risks as skewed to the upside as inflation carries momentum and economic activity has continued to hang in surprisingly well.”

S&P raises city of Miami one notch to AA

S&P raises city of Miami one notch to AA

S&P Global Ratings Services raised the city of Miami, Florida’s long-term and underlying ratings on its limited ad valorem bonds and non-ad valorem bonds to AA from AA-minus. The outlook is stable.

“The upgrade reflects our view of Miami’s economic growth and income improvement, coupled with moderation of debt,” S&P said last week.

Miami Mayor Francis Suarez speaks during a groundbreaking ceremony for One Brickell City Centre on May 4.

Bloomberg News

“While everyone is watching the federal government experience a debt crisis and come close to defaulting on our nation’s debt for the first time in history, Miami’s credit rating was just recently upgraded — meaning that Miami’s government has never been in better financial health,” Mayor Francis Suarez said on Tuesday.

S&P said its rating on Miami is supported by its view of the city’s solid tax base growth, healthy labor market and role as an anchor for the Miami-Fort Lauderdale metropolitan statistical area.

The agency also cited an estimated improvement in net performance and reserves for fiscal 2022, although these could be pressured in the long term due to high fixed costs, labor contract renegotiations and the city’s additional debt plans.

S&P also looked at the environmental, social, and governance factors that could affect the city.

“We view the city’s environmental risks as elevated, given Miami’s location and susceptibility to acute and chronic physical risks,” S&P said. “The city projects the sea level to rise 14-21 inches by 2070; however, Miami maintains a standing committee to address capital improvements and risk mitigants related to sea levels, and passed a general obligation bond measure that, in part, is designed to directly address projects related to rising sea levels.”

S&P said its stable outlook “incorporates our forward-looking view that Miami will maintain a stable credit profile given its robust economic growth and good financial profile. We do not expect to change the rating within the two-year outlook horizon.”

“This [rating upgrade] was accomplished while reducing our taxes to the lowest rate in history, maintaining a savings of $188 million in cash and having a mid-year surplus of around $30 million,” Suarez said. “It’s no wonder why we continue to be number one in wage growth. And have the lowest unemployment in America.”

The city has an Aa2 long-term issuer rating from Moody’s Investors Service while its senior revenue bonds are rated A3. The credit has a stable outlook.

Fitch Ratings assigns an AA rating to Miami’s issuer default rating and an AA-minus to the city’s special obligation non-ad valorem revenue bonds. The outlook is stable.