Survey says: 2023 issuance will be the same; rates will rise

Survey says: 2023 issuance will be the same; rates will rise

On the heels of municipal bond issuance disappointing in 2022, nearly two-thirds of market participants in a Bond Buyer live market survey said they expect 2023 issuance to remain around last year’s levels.

The muni market saw $384.086 billion of debt issued in 2022, down 21% year-over-year, as issuers were flush with cash and rising interest rates stymied refundings and taxable issuances.

Of the market participants surveyed, 66% percent think 2023 issuance will remain around 2022 levels, while 24% think it will be lower than last year and 10% think it will rebound to around 2020 and 2021 levels.

This split is in line with firms’ mixed issuance forecasts for 2023.

“If you look at the predictions for this year, I’ve seen anywhere from $350 billion to $500 billion,” Rick Kolman, managing director and head of Municipal Securities Group at Academy Securities, said at The Bond Buyer National Outlook conference Thursday during a live market survey, sponsored by Fitch Ratings. “There is a huge range.”

For issuers, he said, it’s not just about where rates are but stability. “When [bond issuers] hear instability, volatility, it definitely slows them down,” he said.

However, he expects less volatility this year. “I think that’s going to bring some confidence back to the muni market,” he said. “So I’m more optimistic that we might actually do better than we think.”

Despite the lower volume in 2022, ESG-labeled bonds remained about the same last year versus 2021, propelled by an increase in the social and green portions of issuance.

With the growing focus on ESG factors, most think ESG-label/designate issuance will continue to increase over the next two to five years. Seventy percent of respondents believe the growing focus on ESG factors will see moderate growth, while 26% think it will be significant growth. Only 4% think it will have no impact on growth.

Nathaniel Singer, senior director at PFM, pointed to a deal from Chicago several weeks ago with social and non-social bonds and found no pricing difference. In fact, there were some matching maturities with the same coupon, call features and ratings for the social and non-social bonds, and based on market demand, the social bonds priced three to five basis points through the non-social bonds.

“As long as you get a pricing benefit, it’s going to accelerate the growth of the sector,” he said.

But with that growth comes the need for discussions about the standardization of disclosure, the need for universal language and materiality.

“The call for standardization and disclosure that is not overly burdensome to the issuer is extremely important,” said Diana Hamilton, president at Sycamore Advisors.

Bond outflows and bid wanteds reached record levels in 2022, which contributed to municipal underperformance versus USTs.

“It was a really rough year,” Kolman said. The good news, he noted, is there have been multi-week, multi-billion-dollar inflows in January.

Outflows will stabilize this year, according to 41% of market participants, while 31% think outflows and bid wanteds will continue and 28% think inflows will rise and bid wanteds will decline.

“So, if we’re going to be in a little more of a stable range, I don’t think that we’re going to have that negative tone in the market from the bond outflows,” Kolman said. “I believe it’s going be more of a positive tone overall.”

For the most part, munis are off to a good start in 2023. As of Friday, on a year-to-date basis, the muni five-year has decreased 50 basis points, the 10-year fell 49 basis points and the 30-year decreased 35 basis points, according to ICE Data Services.

Over the next six to 12 months, 42% of survey respondents believe muni rates will rise, while 31% think rates will fluctuate. Only 19% said rates will fall, and 8% think muni rates have peaked and will remain at their current levels.

The Fed hiked interest rates seven times in 2022 and most recently implemented a 25 basis point rate increase at the Federal Open Market Committee meeting Wednesday.

There is no consensus among economists on rates, said Hamilton, noting some predict a quarter point rate hike at the March meeting, while others think there will be a quarter point rate hike in March and at the May meeting.

She said the market read Fed Chair Jerome Powell’s press conference as dovish, so “they’re pricing in rate cuts later on.” But that was before Friday’s massive gain in nonfarm payrolls.

Arlene Bohner, Diana Hamilton, Rick Kolman and Nathaniel Singer (left to right) host the live markets survey at The Bond Buyer National Outlook conference Thursday.

Wherever rates end up, 89% of market participants responding believe interest rates will have the biggest impact on the public finance industry in 2023.

However, the panelists disagreed with the live survey results.

Hamilton and Kolman thought stability would have the greatest impact on the industry. Kolman said he spoke to many issuers last year and they said, “I want some stability. I want it to be calm. And that was kind of a driving force and a lot of the conversation.”

But, as Hamilton reminded him, “We live in an uncertain world.”

Market participants listed inflation/operating expenses (54%) and labor pressure (27%) as the factors that will have the greatest impact on issuer credit this year, with Arlene Bohner, head of Fitch Ratings’ U.S. Public Finance Department, believing the latter would have the biggest impact.

“Labor pressure is the thing we’re hearing from all of our issuers that they’re having trouble dealing with, both from the standpoint of being in a rising wage environment, and also a difficulty in procuring actual people to fill the jobs that they need to fill,” she said. This, she said, is of particular concern for hospitals and healthcare.

“Some of them are having to come up with innovative ways of dealing with their staffing challenges,” she said.

If issuance doesn’t return to 2021 levels, 84% of respondents said there will be staff reductions, while 16% think staffing will remain appropriate at current levels.

“Most of our clients flush with cash; they have a lot of opportunities,” Singer said. “But things are going to start getting harder because we’re starting to see some deficits pop up.”

“Maybe the Fed overdid things,” he said. “So we are starting to see the economy start to slow down. But I think the markets will start getting more difficult, and issuers are going to need our help.”

In 2022, rating upgrades outnumbered downgrades. For this year, 53% answered there would be a relative balance between upgrades and downgrades, 36% said downgrades will outnumber upgrades and 11% think upgrades will outnumber downgrades.

Most of Fitch’s public finance sectors have a deteriorating outlook for 2023, which means the operating environment for most issuers is going to be more challenging, said Bohner.

“This year, they’re going to face more headwinds, but in many cases, many issuers are entering into this more difficult environment better positioned than they’ve been in a very long time,” she said.

This, though, may not translate into rating changes.

“We think many public finance issuers just inherently have resilience and ability to control their operating budget and, and some of them have built up resilience throughout the pandemic,” she said.

Texas school bond guarantee program capacity falls below $27 million

Texas school bond guarantee program capacity falls below $27 million

The triple-A Texas program that guarantees public school bonds is quickly using up its already limited capacity, ending December with only a projected $26.65 million available.

Amid a slew of school debt approved by voters last year, the Permanent School Fund program has experienced high demand that shrank its projected available capacity from $3.97 billion at the end of August to $410 million on Nov. 30.

Carolyn Perez, a spokeswoman for the program, said Friday it is still operating. 

“Currently, there are no plans to close it down,” she said in an email. “With the help of members of the Texas congressional delegation, both legislative and regulatory solutions currently are still being pursued.”

The program is capped at $117.32 billion under federal law.

Not only does it bestow triple-A ratings on school bonds, investors like PSF-wrapped bonds due to their liquidity.

The program last reached capacity in 2009, forcing the Texas Education Agency to stop accepting applications. It reopened in early 2010 after the Internal Revenue Service increased the limit in December 2009.

After legislation to permanently remove the IRS limit stalled in Congress last fall, U.S. Rep. Lloyd Doggett, D-Texas, in January introduced the Keeping Texas School Construction Costs Down Act of 2023.

The TEA has been giving schools with the lowest property wealth per average daily attendance priority for the guarantee, leaving many districts to sell bonds based on their own underlying credit ratings.

Fitch Ratings said it expects minimal negative effects on the credit profiles of school districts that issue debt without the PSF guarantee.

“Those districts forced to issue without the guarantee will face increased borrowing costs, but these costs should be easily absorbed by wealthy, higher-rated districts,” the rating agency said in a report Tuesday. “Although the prioritization of lower credit quality school districts could weaken the program’s aggregate pool quality over time if the program’s guarantee cap is not raised, Fitch’s cash flow modeling demonstrates that the program has ample cushion to mitigate this risk.”

Despite the scarcity of the guarantee, Texas school districts are still heading to the municipal bond market.

Lamar Consolidated Independent School District in the Houston area has $648.6 million of bonds pricing next week through Raymond James without the PSF guarantee.

Ahead of the sale, Moody’s Investors Service downgraded the district’s rating to Aa3 from Aa2, while S&P Global Ratings revised the outlook on its AA rating to negative.

“The outlook revision reflects the district’s significant new-money debt plans, which, when fully carried out, are expected to increase its overall debt burden and carrying charges to levels that are above those of similarly rated peers and could ultimately pressure operations in the long term if anticipated valuation growth is not realized,” S&P analyst Emily Powers said in a statement.

Terrell Palmer, president of Post Oak Municipal Advisors, Lamar’s financial advisor, said bond insurance will be available if it provides a benefit.

“The interest rate on the bonds will be slightly higher, however well below the rate assumed with the bond election in November,” he said in an email, adding the higher rate will not impact the tax rate promised to voters, who approved about $1.5 billion of bonds for the growing district Nov. 8.     

Colin MacNaught, CEO & co-founder of BondLink, said with almost 75% of Texas school districts now selling bonds without the PSF guarantee, he recommends giving investors more time to dig into their unenhanced credit. 

“Nothing beats robust disclosure and signaling to investors that you have a system in place to provide regular updates even if you’re not in the bond market every year,” he said in an email.

American Dream mall misses another debt payment

American Dream mall misses another debt payment

The developers of the American Dream mall in East Rutherford, New Jersey, have missed another scheduled debt service payment on the bonds issued to bankroll its construction.

Triple Five, owner and developer of American Dream, missed a payment due on $287 million of limited obligation grant revenue bonds issued through the Public Finance Authority in 2017 as part of a mix of debt used to restart construction on the stalled Xanadu project and develop the massive mall and entertainment complex next to New Jersey’s Meadowlands sports complex seven miles west of Manhattan.

“Trustee has not received any revenues for payment of the Feb. 1 debt service and the reserve account does not have sufficient funds to make such payment,” bond trustee U.S. Banksaid in a notice posted on the Municipal Securities Rulemaking Board’s EMMA disclosure website.

American-Dream-Mall-New-Jersey
The exterior of the American Dream mall in East Rutherford, New Jersey, on August 22, 2022.

Adobe Stock

The developers also missed the Aug. 1 debt service payment.

The mall has struggled since opening its doors to the public in late 2019 just as debt service payments were to come due on more than $1 billion of municipal bonds taken by the company.  In addition to the grant anticipation bonds, the PFA also sold $800 million in revenue bonds backed by payments in lieu of taxes.

The trustee had to take $2.6 million from the debt service reserve to make a Dec. 1 interest payment on those PILOT bonds.

“They’ve fallen so much behind on paying off their debt, especially with the hit they took from the pandemic,” said former Mayor Jim Cassella of East Rutherford who was in office when the development deal was negotiated. “They cannot generate enough income to catch up; there’s cash flow for sure but it’s just not busy enough.”

On top of a gradual but sustained decline in profits for big box retailers, the mall has also fought against strong national economic headwinds since opening.

Only $878.50 remains in the reserve account for the grant-backed bonds, US Bank said.

Government entities like East Rutherford that were involved with the project and due to receive scheduled PILOT payments are generally not seeing those funds, Cassella said, with “a very small portion of what they are owed” making its way to municipalities so far. 

Triple Five also reportedly defaulted on $1.7 billion in private construction loans in February of 2021, allowing creditors to take a 49% stake in another of the developer’s holdings, the Mall of America in Minnesota, the only U.S. mall bigger than American Dream, which was collateral in the original lending agreement.

In November, Triple Five was granted a four-year extension on that debt by a group of creditors led by JP Morgan in an agreement some experts hoped might ease overall pressure and allow the company to address its pending municipal obligations.

“It seems like every week we hear of another one of the lenders not receiving their payment and the question that has to be asked is, is this just the way they do business?” Cassella said.

POB issuance plunge expected to continue

POB issuance plunge expected to continue

As interest rates continue to rise, the draw of pension obligation bonds appears to be falling fast.

A financial instrument that has appealed to many municipalities to remedy underfunded pension plans is once again looking like a losing borrow and bet scheme.

“Typically, the biggest risk with POBs is market timing risk,” said Todd Kanaster, Director at S&P Global Ratings. “If the market takes a downturn within the first few years following issuance, it may be hard to overcome.”

POBs are taxable bonds issued by state and local governments to pump revenue into underfunded pension plans. The premise is based on a gamble that the bond proceeds will be invested, usually in the stock market, which will provide enough return to cover the debt service while bolstering the pensions. 

Todd Kanaster, Director at S&P Global Ratings.
“Typically, the biggest risk with POBs is market timing risk,” said Todd Kanaster, Director at S&P Global Ratings. “If the market takes a downturn within the first few years following issuance, it may be hard to overcome.”

Bear Gutierrez/Bear Gutierrez

But many muni thought leaders have been and remain skeptical about the basic arithmetic.  

“When you take out a pension bond, you’re really moving a liability from your your left front pocket to your right front pocket,” said Bill Glasgall, Senior Director, Public Finance, Volcker Alliance.        

During times of low interest rates and a soaring stock market the promise of free money can be hard to resist by an issuer eyeing a struggling pension fund.

“Pension funding bonds should not be viewed as a short-term budgetary gimmick or as a silver bullet for unsound contribution practices,” said Omar Daghestani, Managing Director, Public Finance, Stifel. “It is important to view pension funding bonds in the context of a broader, long-term strategy that addresses prior structural imbalances and maintains flexibility to deal with future changes in plan assumptions, longevity, investment returns, and other factors.” 

S&P recently released a report predicting a continuing move away from POBs.  Per the report, “POB and OPEB obligation bond issuance has been accelerating in the U.S. while interest rates have been low, but that shifted when interest rates spiked in 2022. A higher interest rate environment will likely lead to fewer opportunistic POB issuances, although we expect issued POBs will continue to be used as a budget stabilizer for volatile or rapidly increasing amortizations.” 

Municipalities who invest in POBs are not naturally more vulnerable to credit rating scrutiny.

“I have worked on over 42 issues totaling $2.5 billion of pension funding bonds over the past three years. All those issues have achieved a neutral or positive rating impact.” said Daghestani  

The high-risk transactions still fall under sound financial planning, if executed correctly “Typically, POB issuance is in line with current credit views and so doesn’t have a major impact on the rating,” said Kanaster. “POB issuance is only part of the overall credit picture and generally reflects broader considerations. An issuer with well-regarded management policies may be more likely to have well-regarded procedures in place for POB issuance.” 

Even though many large municipalities embraced POB’s during the good times, the Government Finance Officers Association remains opposed to the instruments, as stated on its website, “POBs are complex instruments that carry considerable risk.” For municipalities who blow through the warning signs the organization has discussed banging out a list of POB best practice bullet points but so far it is sticking with its disapproval. 

The fund managers have their own check-list. “Best practice is specific to each issuer, relative to the fund provisions, state statues and other considerations,” said Daghestani. “Pension funding bonds benefit from spreading expected savings over the term of the structure, not extending the amortization and use of a contingency reserve fund. Fixed rate debt and use of a 10-year par call are also good policy.”    

Data from an earlier report released by S&P Global in October of last year projected a 60% drop of POB issuances The states heavily relying on POBs are Michigan, Illinois, Arizona, and California. California used to be the largest source of POBs but reduced its issuance in 2022 while Illinois boosted theirs.

The Arizona State Retirement System developed an innovative public finance program designed to reduce the impact of slumping POB proceeds by way of a contribution prepayment plan. Coconino County, kicked in a $50.8 million debt-financed payment while Pinal County added close to $110 million.

The numbers attached to the problem can be overwhelming. Stifel estimates that aggregate unfunded pension liability for the 44,000 U.S. municipalities range from $1 trillion to $4 trillion, the upper end of that range being the size of all outstanding municipal debt combined.

Solutions to the problem may extend beyond economics.

“Substantive reforms are helpful and are an important element of any financing, but the cashflow benefits are usually limited initially and require significant legislative work,” said Daghestani. 

Other creative financing alternatives to POBs are also generating some looks. Contemplating the sale of public assets is another possibility but privatization comes with its own set of risks.

“Numerous state, state and local governments have lots of lots of assets that are not managed particularly well. This could be air rights, land, buildings, solar, solar panel rights, and broadband,” said Glasgall. 

Assuming the Federal Reserve’s tightening fiscal policy eventually yields results in the form of lower interest rates and a boost to the market, POBs could make a triumphant return.

“We have seen, over the past five years, increasing POB issuance as rates were low, dropping precipitously last year as rates increased,” said Kanaster. “If inflation does come back down, it would stand to reason that issuance and interest may pick up accordingly.

Panel discusses benefits of ESG disclosure

Panel discusses benefits of ESG disclosure

Environmental, social, and governance-related disclosure benefits municipal issuers, according to a panel of municipal professionals.

Risks issuers face currently weren’t a consideration 50 years ago, noted Richard Freund, associate director at CDP North America, at a session at The Bond Buyer’s National Outlook Conference Thursday.

Risk is risk and impact is impact, said Freund. Issuers should include ESG in disclosures when it makes sense.

Jamiyl Flemming

Siebert Williams Shank Senior Vice President Jamiyl Flemming said the ESG label can be an effective marketing tool for bonds.

Providing good ESG disclosure will prevent outside bodies from forcing this sort of disclosure on the industry, said Dave Sanchez, director of the Office of Municipal Securities at the U.S. Securities and Exchange Commission.

While disclosure of ESG factors that affect credit quality is valuable, Jamiyl Flemming, senior vice president at Siebert Williams Shank, said the term can also be used as a marketing tool for bonds.

Many investors want some sort of consideration whether ESG issues are potentially impacting issuers’ credit, said Freund.

“Show me you thought about it,” is the attitude they have. If the answer is “no,” tell investors and they will accept it. If the answer is “yes,” explain how the risk will be mitigated. Not addressing the topic at all worries potential investors who will then turn away, Freund said.

The label has earned some small pricing benefits in the primary market, Flemming said, but it is more commonly beneficial in the secondary market.

Flemming said he’s seen little opposition to the term’s use in the municipal bond world. Rather, he said, issuers are sometimes opposed to feeling mandated to use the term.

Addressing the notion the concept is not financially responsible, Flemming said, hopefully over time data can be collected to show that investing in environmentally friendly things is profitable.

ESG investors always want more information, said Karen Daly, senior managing director at Kroll Bond Rating Agency.

The standardization of the ESG information provided is important, Flemming said. He predicted issuers willsoon include more environmental data in disclosure.

Storms pummeled California, but not its credit ratings, S&P says

Storms pummeled California, but not its credit ratings, S&P says

The series of rain storms that pummeled California through January caused major damage, but initially appear to have limited credit impact, according to S&P Global Ratings analysts.

The storms caused $533 million in governmental infrastructure damage to local jurisdictions and $113 million to state infrastructure, according to S&P.

“From our initial review, it appears that no issuers suffered damage to a degree that resulted in weakening of overall credit quality,” S&P analysts wrote in the Jan. 30 report. “Many communities will still be determining the level of damage in the weeks and months to come.”

While the report opines the storm had limited credit impact to date, S&P analyst Tim Tung noted in an interview that FEMA reimbursements only cover infrastructure and replacement costs, not related disruptions to property tax revenue streams if storm-damaged houses are assessed at a lower level, for instance.

California’s series of atmospheric rivers caused an estimated $646 million in damage to state and local infrastructure, S&P Global Ratings said.

Bloomberg News

Given the state could be paying roughly a quarter of the $646 million in estimated infrastructure damages, about $160 million, it’s not considered monumental in a state that has a $200 billion-plus general fund budget, Tung said.

The report focused on state and local infrastructure damage, not damage to private businesses or homes.

“There were a couple of factors as to why we believe, it wasn’t more impactful to jurisdictions,” Tung said. “Most of the agencies have been able to build and enhance reserves. When you look at the liquidity of the local jurisdictions, they are very strong right now.”

The local jurisdictions and state also benefit from President Joe Biden’s emergency disaster declaration, because that means the Federal Emergency and Management Agency will reimburse the state and local governments for some infrastructure repair and replacement.

For the first 60 days, federal government covers 100% of emergency repairs, which includes debris removal, Tung said. FEMA will pay 75% of the cost for more permanent repairs, with the state picking up 18.75% and local governments paying 6.75%, he said.

“That’s the typical reimbursement,” Tung said. “The federal share of the costs can’t be less than 75%.”

What aids the favorable credit implications is the combination of it being a period when reserve levels for the state and local governments are stronger than they have been historically and the federal aid coming as a result of the disaster declaration, Tung said.

The damage, also largely hit coastal areas like Santa Barbara, San Luis Obispo, Santa Cruz and Ventura County, counties that have diverse economies and are more resilient in the ability to rebuild, Tung said.

Though the storms brought needed water, the state is not out of the woods when it comes to the multi-year drought, according to the California Department of Water Resources.

DWR officials cautioned against reading too much about the long-term effects of the series of storms on the state’s water problems, or the multi-year drought.

DWR did have some good news for the 27 million people who depend on water from the State Water Project, a complex system of reservoirs, canals and dams that provides water to San Francisco, Los Angeles and farms in the Central Valley.

It announced during a Jan. 27 press conference that it would be upping the amount of water it allocates from the system to 30% from 5%, an amount state water districts that serve 27 million users in the state haven’t seen since 2019. The SWP hasn’t provided a 100% allocation since 2006, according to DWR.

“We are pleased that we can increase the allocation now and provide more water to local water agencies,” DWR Director Karla Nemeth said. “These storms made clear the importance of our efforts to modernize our existing water infrastructure for an era of intensified drought and flood. Given these dramatic swings, these storm flows are badly needed to refill groundwater basins and support recycled water plants.”

Tung echoed Nemeth in emphasizing that the storms have not solved the state’s water problems, though they do provide some immediate relief.

The storms increased the snowpack to above 200% above average in the mountains; and that is a critical source of water storage, but this is unlikely to alleviate the persistent drought conditions, experienced over the course of several years, Tung said.

“We are definitely in a long-term drought on the Colorado River,” Tung said. “This is something water district managers will be working on for quite some time.”

Common sense guides Goldberg, the Massachusetts treasurer

Common sense guides Goldberg, the Massachusetts treasurer

Massachusetts State Treasurer Deborah Goldberg’s simple advice for municipal bond industry professionals in uncertain times: make practical decisions.

“I come from a long line of practical businesspeople, grocers as a matter of fact,” she told attendees at a keynote address kicking off The Bond Buyer’s annual National Outlook Conference Thursday in New York. “Evaluate the economy through the lens of the grocer or retailer; what is selling and where in the country is it selling?”

Inflation, overseas conflict, soaring energy costs, and supply side issues will continue to stymie economies of all sizes throughout 2023, Goldberg said, all holding the potential to dramatically slow down new bond issuances and capital projects and turn economies inwards once more.

Massachusetts State Treasurer Deborah Goldberg advised Bond Buyer Outlook conference attendees to plan long-term and stick to a “common sense” approach.

Gerard Gaskin

She advised professionals to plan long-term and stick to a “common sense” approach, something she credits with helping her shoulder the weight of the many new responsibilities her office took on at the onset of the COVID-19 pandemic.

Goldberg, first elected treasurer in 2014 and reelected twice since then, led the treasurer’s office throughout the pandemic as it worked to develop and implement new funding and support schemes on the state and individual level while continuing to issue Massachusetts debt.

Cohesion among industry professionals in the public and private spheres was key to Massachusetts’ success then and will surely be so going forward, she said.

“My management approach to everything is to get everyone in the room and figure out what’s the best thing for the consumer,” Goldberg said. “I think that one of our challenges is that in many cases each individual local community is trying to make their own decisions about what they’re going to be doing.”

Maintaining offices and employees dedicated to the public service task at hand would make establishing and maintaining that connection much easier, she advised.

“I can assure you with absolute certainty is that our national economic outlook is completely uncertain,” she said. “Build a culture and cohesiveness that fosters collaboration and resiliency; it’s those qualities that allow you to think long term and develop policies and strategies to help ride the ups and downs.”

New York State's fiscal 2024 budget hits $227 billion as reserves stay high

New York State’s fiscal 2024 budget hits $227 billion as reserves stay high

New York Gov. Kathy Hochul unveiled her $227 billion executive budget proposal for fiscal 2024, up 2.4% from the final $220 billion fiscal 2023 budget that was approved in April.

The state’s fiscal year begins on April 1. Last year, the state budget was approved a week late.

“I’m committed to doing everything in my power to make the Empire State a more affordable, more livable, safer place for all New Yorkers,” Hochul said.

N.Y. Gov. Kathy Hochul presents the fiscal 2024 executive budget proposal in the Red Room at the State Capitol in Albany on Wednesday.

Mike Groll/Office of Gov. Kathy Hochul

The budget Hochul presented is balanced. Deposits to reserves that had been planned for fiscal 2024 and 2025 will be completed by the end of the current fiscal year — two years ahead of schedule — for a total of $24 billion set aside for a rainy day, according to the Hochul administration.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said that while the total proposed state budget increased by 2.4% overall, or $5 billion, the proposed state operating fund budget is up 6.1%.

The operating surplus is a result of still having federal funds from COVID relief as well as higher than budgeted tax revenues, Cure told The Bond Buyer.

“The increase in the budget is of some concern as there are projected deficits between fiscal 2025-27 totaling $22 billion, which includes the expectation of a recession and declines in revenues,” he said. “New York State’s budget can be particularly prone to recessions as there is a high dependence on a very progressive income tax system and a reliance on capital gains taxes. The vulnerability stems from the state’s reliance on a relatively few number of people, on a percentage of the population, that supplies an inordinate amount of revenues and the risk of relocation.”

He said that somewhat alleviating this deficit concern is the increase in reserves that will add up to $20 billion, or 15% of state spending. Also, he noted there were no revenue predictions from the new legal cannabis industry.

The budget watchers at the nonprofit Citizens Budget Commission commended keeping reserve levels high, but were wary about any future tax hikes or service cuts without implementing any cost savings in recurring state programs.

“With state coffers temporarily bulging, but significant fiscal and economic risks looming, the governor’s budget wisely accelerates and adds deposits to the state’s reserves and provides welcome support for migrant-related costs,” CBC President Andrew Rein said in a statement.

“While the reserve deposits help buttress New York against a recession, the budget also extends the temporary business tax surcharge and adds money for recurring programs without offsetting savings to support them in the future, setting the stage for potential future service cuts and unfortunately extending our nation-leading combined corporate tax rates,” he said.

Higher-than-expected tax receipts have contributed to a general fund surplus of $8.7 billion, acting state Budget Director Sandra Beattie said at a technical briefing after the budget presentation.

“More than half of the surplus will be used to accelerate deposits to principal reserves … a further $600 million will be used to fund deposits to the Retiree Health Trust Fund that were scheduled in later years, bringing the balance to $1.2 billion.”

She added that to ensure the state can abide by the limits imposed by the Debt Reform Act, $1 billion will be used to recapitalize the debt reduction reserve.

“This executive budget is a bit of a caretaker budget with an increase in spending at just over 2%,” John Hallacy, founder of John Hallacy Consulting LLC, told The Bond Buyer. “More significant funding increases include education, Medicaid and mental health.”

The budget would include $9.1 billion in mass transit operating support, including $809 million in operating support for non-MTA authorities. 

It would allocate almost $7 billion to the second year of a $32.8 billion five-year state DOT capital plan to improve highways, bridges, rail, aviation infrastructure, non-MTA transit, and DOT facilities including $1.2 billion for local roads and bridges and $1.3 billion for Penn Station.

“The governor has also proposed having the city increase its contribution to the MTA by at least $500 million annually,” New York City Mayor Eric Adams said in a statement. “The city annually contributes approximately $2 billion to the MTA in direct and in-kind contributions and, while we recognize the significant fiscal challenges the MTA faces, we are concerned that this increased commitment could further strain our already-limited resources.”

Rein said mass transit is crucial to the state’s economy.

“The governor wisely chose to propose a long-run plan rather than kick the can down the road. A multi-pronged strategy is reasonable; however, one major prong should be savings from MTA management and labor,” Rein said.

“The MTA, which is projecting severe operating deficits, is getting some relief — $800 million is from an increase in the MTA’s regional payroll tax,” Cure said. “This has been a relatively steady source of revenues for the MTA. The state will also provide $300 million in one-time aid to address issues caused by the pandemic.”

The MTA is expected to find $400 million in operating efficiencies which, in the past, hasn’t been successfully achieved, Cure said.

“There is also the expectation, beginning in 2026, of using a portion of revenues from downstate casino licensing fees and annual tax revenue to subsidize the MTA,” Cure said. “This would require additional state legislation as revenues from casinos are supposed to be dedicated to education.”

He said the MTA needs to start collecting revenues from congestion pricing to deal with its significant backlog of deferred maintenance and capital needs.

“There was no mention as to when congestion pricing will be implemented as the debate continues over which groups will receive exemptions,” he said.

Most also expect subway and bus fares will be raised to $3.00 from $2.75, which may be more difficult to implement since using mass transit has become more of a social equity issue as working-class peopleusually don’t have the luxury of working from home, he noted.

New York City Comptroller Brad Lander gave the state budget a mixed review.

“While the governor’s executive budget prioritizes important new investments in childcare and mental health services, and includes much-needed funding to support asylum seekers, in several other key ways this budget does not yet provide a solid foundation for the challenges we face ahead,” Lander said in a statement.

“At the same time, however, the governor’s budget would require the City of New York to chip in nearly half a billion dollars more for the Metropolitan Transit Authority. Just as the shift to remote and hybrid work hit the MTA’s farebox revenues, so too it hit the city’s commercial property tax revenues and redistributed them to the rest of the region.”

He said that rather than hiking fares, an increased share of payroll taxes, revenue from new casinos and the implementation of congestion pricing are the right ways to replace farebox revenue and make long-overdue upgrades to ancient signal technology and repairs.

“The state should not stick the city with the bill to sustain our regional public transit system,” Lander said.

New York State Republican Chairman Nick Langworthy called the budget a complete and unmitigated disaster. His party is outnumbered more than 2-to-1 in both houses of the state legislature.

“Hochul’s budget puts all New Yorkers on the hook to pay for President Biden’s failure to fix the border, increases taxes by $1.6 billion on businesses, shifts a billion dollars of Medicaid costs to county taxpayers, and shockingly fails to use all the tools at her disposal as governor to make the changes to our broken criminal justice system that would make New Yorkers safer,” he said in a statement.

“General obligation debt is dwindling while other forms of long term obligations continue to climb appreciably,” Hallacy said. “The stated debt service carry is manageable, but there are many other forms of debt that must be serviced.”

Issuers across New York State ranked first in the nation for municipal bond issuance in 2022, up from number three in 2021, selling more than $49.39 billion of debt last year, according to Refinitiv.

The state’s general obligation bonds are rated Aa2 by Moody’s Investors Service and AA-plus by S&P Global Ratings, Fitch Ratings and Kroll Bond Rating Agency.

“There are not many policy proposals tied to the budget but there are a few that may prove contentious,” Cure said. “This includes loosening the cap on the number of charter schools in New York City, bail reform and indexing the minimum wage to inflation.”

Hallacy said that looking forward there were two notes of caution mentioned in the budget documents — the state’s population loss and the outyear gaps.

“Of course, the influx of migrants will eventually affect the population number, but outmigration is a factor to continue to monitor,” he said.

“The second cautionary note is about the outyear gaps that are larger than in the recent past. No actions are included to moderate these amounts so it stands to reason that they will moderate to an extent,” he said. “The state does not have much financial flexibility on the revenue side going forward.”

Assured remains on top of bond insurance rankings

Assured remains on top of bond insurance rankings

The top two municipal bond insurers wrapped $28.224 billion in 2022, a 30.1% decrease from the $37.486 billion of deals done in 2021, according to Refinitiv data.

The industry par amount for the top two issuers was achieved in 1,419 deals in 2022 versus 2,197 deals in 2021.

Munis firmer across the curve, outflows return

Munis firmer across the curve, outflows return

Municipals were firmer Thursday as municipal bond mutual fund outflows returned, while U.S. Treasuries were steady and equities ended mixed.

The three-year muni-UST ratio was at 55%, the five-year at 57%, the 10-year at 63% and the 30-year at 88%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 55%, the five at 57%, the 10 at 63% and the 30 at 89% at 4 p.m.

Triple-A benchmarks were bumped up to seven basis points the day after the Federal Open Market Committee hiked rates 25 basis points.

A few developments in recent sessions “may have staying power should the new outlook on upcoming FOMC actions gain traction,” said Kim Olsan, a senior vice president of municipal bond trading at FHN Financial.

Ultra-low ratios inside 10 years “didn’t allow for much of a response, other than in California where trading is now firmly through 2% in AA- and AAA-rated names (select New York prints between 5 and 10 years on the curve have similar handles),” she noted.

Currently, “buyers in these super-specialty states can acquiesce to lower ranges” based on the net tax equivalent yield benefit, but “further price gains would likely require a longer-term supply crunch,” according to Olsan.

The offset to a firmer curve, she said, is that issuers’ financing opportunities improve, especially in the refunding category.

“Trailing 12-month average monthly supply is $31 billion as high rates challenged issuance,” she said. “That level is 47% above what last month generated, but conditions could present themselves to increase volume.”

Intermediate yields “have traded to a 60% retracement of last year’s average 2.45% MMD rate and the 1.55% low from January 2022,” she said.

Another leg down in yield would “potentially test the 2.00% area on either limited supply or greater demand,” Olsan said.

If fund flow reporting is any measure of buyer interest, “the demand component may factor more prominently in coming weeks,” she said.

However, outflows returned as Lipper reported $361.649 million was pulled from municipal bond mutual funds in the week ending Wednesday after $1.277 billion of inflows the week prior.

High-yield saw $59.788 million of outflows after $652.279 million of inflows the week prior, while exchange-traded funds saw outflows of $713.581 million after $610.812 million of outflows the previous week.

Despite outflows this week, both Lipper and the Investment Company Institute recorded multi-week, multi-billion dollar inflows.

“The downstream effect being seen so far is 1) large-scale names (i.e., Ohio GOs, AA-utilities) are trading closer in spread to respective AAA spot levels and 2) wider-trading names (i.e. single-A airports) are compressing after dramatic widening last year,” she said.

Longer-term rate direction, she noted, “is more complicated with the variety of coupon structures in play.”

“Friendlier outlooks on inflation will carry performance in 4% coupons — already this year several issues have implemented longer 4s as buyer interest has been renewed,” she said.

The rate hike impact on muni yields in 2022 “could offer some guidance for the coming months,” Olsan noted.

“Seasonality (heavier supply and redemption cycles) was a factor in how much of a reaction the hikes had on the muni yield curve,” she said.

March, April, June and August brought higher supply figures “with both March and June coinciding with rate hikes,” she noted.

Short- and long-term yields “corrected higher but also led to a curve flattening,” she said.

January’s MMD slope “closed at 133 basis points but by August had flattened to 108 basis points,” she said. “A moderation or pause in hikes over the next several months could present flatter conditions,” per Olsan.

The inherent tax-exemption and strong credit quality — as well as current market technicals — are sustaining strong demand for municipal bonds, according to Wesly Pate, senior portfolio manager at Income Research + Management.

“Overall municipal market health and investor demand remain exceptional as indicated by ratios, spreads, and new issue subscription levels,” Pate said.  

Two of the sector’s characteristics — tax-exemption and high credit quality — are contributing to the strong demand, he noted.

“Municipal credit proved resilient throughout the pandemic and through recent inflation-driven market turbulence,” Pate explained.  

“The market has historically seen rather benign impacts from debt-ceiling related measures and a lack of near-term political headwinds from either elections or legislative measures is leaving the market mostly unfazed,” he continued.  

“Lack of supply coupled with a highly sought tax-haven continues to buoy the asset class,” Pate said.

The benefits of the tax exemption are proportionate to yields, according to Pate. “Amid the current higher rates, this results in meaningful value, he added. 

Strong credit footing leaves the municipal market well positioned against recessionary concerns overall, according to Pate. “Lack of supply coupled with overall higher yields will remain supportive of market health and likely keep ratios inside of longer-term averages,” he said.

However, Pate expects to see a softening of ratios from the current exceptionally low levels. “While an obvious harbinger is not present, rarely does the market hold these relative levels for an extended period,” he said. 

In the primary market Thursday, Piper Sandler priced for the Fort Worth Independent School District, Texas, (Aaa///) $274.890 million of PSF-insured unlimited tax school building bonds, Series 2023, with 5s of 2/2024 at 2.34%, 5s of 2028 at 2.09%, 5s of 2033 at 2.28%, 5s of 2038 at 2.96%, 4s of 2042 at 3.73% and 4s of 2048 at 3.98%, callable 2/15/2033.

Secondary trading
California 5s of 2024 at 2.24%. Florida Board of Education 5s of 2025 at 2.15%. LA DWP 5s of 2026 at 1.98% versus 2.02% Wednesday.

Triborough Bridge and Tunnel Authority 5s of 2028 at 2.09% versus 2.21%-2.22% Wednesday and 2.37%-2.30% original Friday. Massachusetts 5s of 2029 at 2.06%-2.02% versus 2.10% Tuesday. Texas Water Development Board 5s of 2030 at 2.11%-2.10% versus 2.20%.

Spokane County School District #81, Washington, 5s of 2038 at 2.87%-2.85%. Austin ISD, Texas, 5s of 2039 at 3.10% versus 3.13%-3.10% on 1/26 and 3.10% original on 1/19. Kansas Development Finance Authority 5s of 2040 at 2.96%.

Washington 5s of 2047 at 3.33% versus 3.42% original on 1/23. Illinois Finance Authority 5s of 2047 at 3.89%-3.87% versus 4.01%-3.99% Monday and 4.32%-4.30% on 1/10. Massachusetts 5s of 2048 at 3.47% versus 3.44% Wednesday and 3.37% on 1/20.

AAA scales
Refinitiv MMD’s scale was bumped up to seven basis points. The one-year was at 2.27% (unch) and 2.14% (-2) in two years. The five-year was at 1.99% (-4), the 10-year at 2.13% (-6) and the 30-year at 3.13% (-7) at 3 p.m.

The ICE AAA yield curve was bumped three to six basis points: at 2.27% (-3) in 2024 and 2.19% (-3) in 2025. The five-year was at 2.00% (-6), the 10-year was at 2.10% (-6) and the 30-year yield was at 3.16% (-5) at 4 p.m.

The IHS Markit municipal curve was bumped two to seven basis points: 2.29% (-2) in 2024 and 2.14% (-2) in 2025. The five-year was at 2.04% (-2), the 10-year was at 2.13%(-7) and the 30-year yield was at 3.11% (-7) at a 4 p.m. read.

Bloomberg BVAL was bumped one to six basis points: 2.29% (-1) in 2024 and 2.12% (-2) in 2025. The five-year at 2.03% (-5), the 10-year at 2.16% (-5) and the 30-year at 3.17% (-6).

Treasuries were little changed.

The two-year UST was yielding 4.098% (+1), the three-year was at 3.771% (+1), the five-year at 3.488% (flat), the seven-year at 3.444% (flat), the 10-year at 3.398% (flat), the 20-year at 3.663% (-1) and the 30-year Treasury was yielding 3.550% (-1) at 4 p.m.

Fed redux
“For investors, the most important takeaway [from the Federal Open Market Committee meeting] is that the focus in 2023 has shifted from rapidly rising inflation to slowing economic growth,” said Whitney Watson, deputy co-head of fixed income at Goldman Sachs Asset Management.

This backdrop “will see the correlation between bonds and risk assets turn less positive, or even negative,” she said.

“The improved hedging properties of bonds combined with higher income and total return potential presents investors with the most opportunistic environment in fixed income markets in more than a decade, even after the strong performance seen in January,” Watson said.

It won’t be easy for the Fed to achieve 2% inflation, said Robert Bayston, head of U.S. government and mortgage portfolios at Insight Investment. “Although we believe core inflation is likely to improve to the 3% to 4% region by the summer, keeping it there and achieving the ‘last mile’ journey to the Fed’s 2% target remains difficult.”

While the Fed has made progress, “it has not yet won the war on inflation, and we see markets as too optimistic about the trajectory of rates in 2023 and beyond,” he said.

As such, Bayston believes “investors should tread carefully.”

Scott Anderson, chief economist at Bank of the West, agreed. “Market optimism is overdone both on the rate expectation side and the disinflation side.”

Fed Chair Jerome Powell “kept all options on the table for upcoming FOMC meetings,” he said, noting “the market view of future inflation and Fed rate policy appears to be somewhat different than the Fed’s median at the last FOMC meeting, but didn’t completely rule out that the market has it wrong,” he said.

“The language of the policy statement and Chair Powell’s press conference underscored the Fed’s shift away from aggressive rate hikes and toward slowly feeling out the appropriate terminal rate by moving in smaller increments,” said Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets and a member of the Shadow Open Market Committee.

The policy statement, he noted, “included new language suggesting the committee will use past and incoming data to determine the ‘extent’ of future hikes rather than the ‘pace’ (with the latter featuring in the December policy statement).”

Economists were split over whether March would be the final rate hike for the Fed.

“Regardless of the Fed’s rhetoric, we continue to believe that the Fed will pause after one more rate hike in March,” said Joseph Kalish, chief global macro strategist at Ned Davis Research. “Softer labor markets are the key for giving the Fed confidence that inflation is heading back to its 2% target.”

“We expect one final 25bp hike in March,” said James Knightley ING Chief International economist. “Recessionary forces will then make the case for rate cuts later in the year.”

Meanwhile, others thought another rate hike would happen in May.

Anderson believes “the Fed will need to raise the Fed funds rate another 50 basis points before pausing.” He expects 25 basis point hikes in March and May then “a prolonged pause.”

“The market continues to fight the Fed, putting an 82% probability of a 25 basis point rate hike in March and only a 38% probability of another 25 basis point rate in May with a full 50 basis points of Fed rate cuts before the end of the year,” he said.

And Levy continues to expect the “Fed to hike rates by 25bp at both the March and May meetings, to a terminal rate of 5.00-5.25%, although the final hike in May is likely to be a close call.”

Though economic slowdown “might make the case for a pause in the May meeting, a lot of easing in the labor markets is needed before the Fed is likely to prove willing to cut rates,” said Christian Scherrmann, U.S. economist at DWS Group.

While the market sees cuts in 2023, he does not expect any before 2024.

Economic data could play a role in the Fed’s decision-making.

“Weaker economic data between now and May, could lead the Fed to pause before the low end of the range gets to 5.00%,” said James Ragan, director of wealth management research at D.A. Davidson.

As the year moves along, he is “concerned about recession signals.”

“This includes severe weakness in housing, PMI surveys that point to contraction, recession signals from the Conference Board’s Leading Economic Index (and the inverted yield curve),” Ragan said. “We believe that equity markets are not sufficiently considering the potential for a more severe economic downturn or recession.”

Mutual fund details
Refinitiv Lipper reported $361.649 million of municipal bond mutual fund outflows for the week ended Wednesday following $1.277 billion of inflows the previous week.

Exchange-traded muni funds reported outflows of $713.581 million after outflows of $610.812 million in the previous week. Ex-ETFs, muni funds saw inflows of $351.932 million after inflows of $1.887 billion in the prior week.

Long-term muni bond funds had inflows of $231.352 million in the latest week after inflows of $924.075 million in the previous week. Intermediate-term funds had outflows of $24.783 million after inflows of $312.132 million in the prior week.

National funds had outflows of $52.125 million after inflows of $1.233 billion the previous week while high-yield muni funds reported outflows of $59.788 million after inflows of $652.279 million the week prior.

Illinois reverses decade-long fiscal tide in interim 2022 audit

Illinois reverses decade-long fiscal tide in interim 2022 audit

Illinois chipped away at its long-term obligations in fiscal 2022 with healthy tax revenue growth and federal funds allowing the state to halt a decade long dive deep into negative territory, according to a recently published interim audit.

The state’s net position of governmental activities, which covers government services and tax collections and provides a deeper view of the state’s assets measured against debts and other obligations remained deep in the red at a negative $185.4 billion but it was improved from fiscal 2021’s $199.2 billion deficit.

When factoring into the overall equation business-type activities — the Unemployment Compensation Trust Fund, Water Revolving Fund, and Prepaid Tuition Fund — the net deficit of $181.6 billion improved 9% from $198.9 billion a year earlier.

“There was a pause in the deterioration after a decade of worsening liabilities so you have to acknowledge that,” said Richard Ciccarone, president of Merritt Research Services.

“There was a pause in the deterioration after a decade of worsening liabilities so you have to acknowledge that,” said Richard Ciccarone, president of Merritt Research Services. “The state got a breather here between the federal monies and an economic recovery. Hopefully it’s enough of a breather so that they can use this platform to make additional improvements they need to make.”

Income and sales taxes along with federal funds and a drop in pension and retiree health liabilities and other debts all helped bolster the numbers reported in a brief, interim audit of the financial results for the fiscal year that ended June 30 that was published by state Comptroller Susana Mendoza at the end of 2022.

While the interim report provides just a snapshot of fiscal 2022 results without the explanations offered by the full report, they underscore the state’s fiscal upswing that drove a series of bond rating upgrades that lifted the state to the Baa1/BBB-plus level. The state entered the pandemic with its ratings one cut away from junk at Baa3/BBB-minus.  

“They had the wind at their back in fiscal year 2022. Hopefully, they positioned themselves for to keep the momentum going forward,” Ciccarone said. “The verdict on whether the state can sustain it and maintain a stable footing it still out.”

The improvement reversed an at least a 10-year downward slide in the net position for governmental activities, according to an analysis Auditor General Frank Mautino’s office published in June.

The $47.9 billion 2013 deficit swelled to $121.2 billion in 2014 and then ballooned again in 2017 to $182.6 billion from $131.6 billion amid a political battle that left the state without a budget but with a mountain of unpaid bills. It steadily worsened hitting $197.8 billion in 2020 and then $199.2 billion in fiscal 2021.

Illinois’ fiscal 2021 deficit stood out as the worst among nine states that were in the red with five states excluded because they had not yet published their results, according to the auditor general’s analysis.

The results provide a look backward and broader picture of the state’s fiscal condition that benefitted from economic and legislative actions as the gaps from early in the COVID-19 pandemic eased with the help of federal relief including $8 billion in American Relief Plan Act funds and an economic recovery sent tax revenues surging.

Gov. J.B. Pritzker and lawmakers tapped federal relief to pay down a portion of its $4.5 billion federal unemployment trust loan, make $500 million in supplemental pension contributions, pay down a backlog of bills, and rebuild a depleted budget stabilization fund bringing its rainy day fund to $1.85 billion with recent budget surpluses.

The latest series of one-time spending measures followed the state’s revised fiscal 2023 revenue forecast released in the Economic and Fiscal Policy Report which raised general fund projected revenues by $3.69 billion to $45.26 billion. When adding in federal dollars the state expects to total revenues of $50.1 billion in the current fiscal year.

Those actions will also benefit the future fiscal 2023 results but inflation, an economic downturn that damages revenue collections, and pension investment losses all threaten further progress and pensions remain a burdensome strain.

Revenues rose to $112.9 billion from $95.1 billion with operating grants up $7 billion and income taxes skyrocketing to $36.6 billion from $28.3 billion while sales taxes rose by $1.6 billion. Expenses fell to $185.4 billion from $199.2 billion.

The state’s total assets in fiscal 2022 rose by $14.3 billion to $75.8 billion. Total liabilities decreased by $22.3 billion to $248 billion. The state’s largest liability balances are its net pension liability of $139.8 billion and the other post-employment benefits liability of $46.6 billion.

Long-term liabilities dropped to $218.3 billion from $241.5 billion as the net pension liability declined from $151.6 billion and OPEBs declined from $56.5 billion. General obligation debt of $27.1 billion mostly held steady.

“The state needs to find a way pay down the pension liabilities. Reform doesn’t come easy for the state and the longer they wait the worse the problem will get,” Ciccarone said.

The state faces a tough path to any pension or retiree healthcare reforms with limited options beyond pouring more funding into the system because the state constitution bans benefit cuts. Pritzker opposes asking voters to amend the constitution.

With the system just 44% funded, if there is a significant market downturn, the unfunded actuarial liability and the required state contribution rate could both increase significantly, putting the sustainability of the systems further into question, actuarial reports warn.

Pritzker will unveil his proposed fiscal 2024 budget Feb. 15.

Mendoza will press in the upcoming regular legislative session for passage of House Bill 5851 that puts in place additional triggers for future automatic deposits in both the pension and budget stabilization funds.

The state has long received a black mark from fiscal watchdogs for being at the back of the line, sometimes the last, to file its audited financial results which are completed by Mautino and published by the comptroller.

The fiscal 2021 audit was released a year after the fiscal close but that beat the timing of the previous year. A 120-day time frame is the Government Finance Officers Association’s recommended practice.

The comptroller says the office must wait on the auditor general’s office to complete its work while the auditor general says delays in state reporting are to blame. Officials have also blamed system updates and say that should shrink the delay.

With some data in hand Mendoza in 2019 and again in 2021 published interim audits as the auditor general completes its review.

“In order to provide the public with the financial information that has been currently reported to the IOC by state agencies, the IOC is exercising its statutory authority to issue an interim ACFR report,” the report says.

Ciccarone said having the interim report out now is a step in the right direction but it doesn’t replace the need for timely reporting of the full numbers.

Revenues midway through fiscal 2023 are slowing but remain in positive territory, according to the latest monthly report from the legislature’s Commission on Government Forecasting and Accountability. Warnings of a recession that could cut deeply into state tax collections and other economic activity cloud how the remainder of the year will pan out.

General fund revenues grew $90 million in December compared to December 2021, primarily on the strength of $311 million in federal sources. Personal income taxes grew by $9 million and sales tax fell for the first time in fiscal 2023 by $56 million from the previous December. Corporate income taxes rose $182 million.

“After months of robust levels of growth for much of the fiscal year…personal income tax and sales tax receipts, experienced a noticeable slowdown in December,” COGFA Revenue Manage Eric Noggle wrote. “While this weaker performance is noteworthy, it will take a couple more months of data to see whether this is the start of a significant downward trend in these receipts, or if the slowdown is simply due to a timing element related to the reporting of receipts over the last month.”

Through the first half of the fiscal year, general fund revenues are up $1.7 billion at $23.2 billion. When including the one-time federal ARPA reimbursements received earlier in the year, the year-over-year increase improves to $2 billion.

New Jersey lawmakers introduce bipartisan bill to lift SALT cap

New Jersey lawmakers introduce bipartisan bill to lift SALT cap

A pair of New Jersey lawmakers have introduced a bipartisan House bill to lift the cap on state and local tax deductions.

HR 680, introduced Jan. 31 by Democratic Rep. Mikie Sherrill and Republican Rep. Mike Lawler, would lift the $10,000 cap to $100,000 for individuals and $200,00 for married taxpayers, significantly lifting the current cap and eliminating the so-called “marriage penalty.” The bill has been referred to the House Ways and Means Committee.

The SALT deduction cap, passed in 2017 as part of the Tax Cuts and Jobs Act, is set to sunset at the end of 2025.

“Since day one, my constituents have asked Congress to right the wrongs of the 2017 GOP tax bill, which punished residents in states like New Jersey with double taxation,” said Sherrill in a statement, adding that the bill would eliminate the cap for 99% of taxpayers in her district.

New Jersey Rep. Mikie Sherrill says her bill would eliminate the SALT deduction cap for 99% of taxpayers in her district.

Bloomberg

Del. Eleanor Holmes Norton, D-D.C., and Rep. Mike Levin, D-Calif., are co-sponsors.

The SALT cap is a closely-watched issue in the municipal bond market, where its biggest impact is on high-tax state issuers like New Jersey, New York and California, which argue that the cap cramps their own taxing flexibility. Investors that hold or trade bonds from those states say the cap affects demand for paper from those states.

Rep. Mike Garcia, R-Calif., introduced similar legislation, the SALT Fairness Act of 2023, in early January. The bill has been referred to the House Ways and Means Committee.

Republicans, who hold a narrow majority in the House, are generally opposed to lifting the cap, and last year introduced a bill that would extend the cap for another three years. Republicans from high-tax states are unlikely to support an extension of the cap. Newly elected Rep. Andrew Garbarino from New York, for example, is co-chair of the bipartisan SALT Caucus as is California Republican Young Kim. Sherrill is a vice chair on the caucus.  

“There’s a reason New York leads the nation in out-migration and it has nothing to do with the weather,” said Lawler in a statement. “The cost-of-living is crushing families of all backgrounds and the SALT cap is a big reason why. The Tax Relief for Middle Class Families Act will lift the cap on the SALT contribution by tenfold, giving real relief to families across our country.”

Similar legislation introduced every year since 2018 has failed to advance.

Oregon's new governor delivers 'mission-focused' budget proposal

Oregon’s new governor delivers ‘mission-focused’ budget proposal

Oregon’s new governor zeroed in on three priorities — housing, education and mental illness — in a $32.1 billion biennium budget proposal that she characterized as “mission focused.”

Tina Kotek was elected in November, replacing termed-out fellow Democrat Kate Brown.

“The 2023-25 governor’s recommended budget starts and ends with the housing and homelessness crisis because housing is fundamental to everything else in a person’s life,” Kotek said.

“The housing crisis is one of the largest emergencies we have ever faced in Oregon,” said Gov. Tina Kotek.

Oregon Governor’s Office

The state has 18,000 homeless people, 11,000 of whom are unsheltered, according to the governor’s budget.

Kotek also prioritized reducing homelessness in her Jan. 9 inaugural address during which she declared a state of emergency.

“The housing crisis is one of the largest emergencies we have ever faced in Oregon and the human suffering it causes to individuals, families and communities is unacceptable,” Kotek said. “I have called on the legislature to support an urgent $130 million homelessness package as quickly as possible in the legislative session.”

On her first day in office, Kotek signed an executive order establishing a statewide housing production target of 36,000 homes per year, and Tuesday, she recommended in her budget a $1.02 billion investment in affordable housing production and preservation. That figure represents an 80% increase in housing over recent construction trends, according to the budget document.

Her executive order established a bipartisan housing production advisory council to establish a framework for meeting that target.

She has also proposed the creation of a new office called the Housing Production and Accountability Office to provide technical assistance to local governments and housing developers to reduce land use and permitting barriers to housing production.

“We will not reach our housing production target, overnight, or even in a year,” Kotek said. “But every step closer is a step in the right direction, and I will continue building partnerships with local government and private sector developers to make real progress.”

Kotek follows Hawaii Gov. Josh Green and Washington Gov. Jay Inslee, both Democrats, in making housing a top priority in their budget addresses.

Green also declared a state of emergency on the issue, and Inslee proposed a $4 billion general obligation bond referendum to ramp up housing construction.

Kotek’s budget includes plans to issue $770 million in GOs to build more affordable homes for renters and new homeowners.

The $130 million appropriation she wants the legislature to approve by June would be used to build permanent supportive housing and maintain rent assistance and services.

Her budget proposal separately would include $118 million from the lottery and general fund to preserve existing affordable homes, including manufactured housing.

Kotek arrives in the governor’s office after nine years as speaker of the state House of Representatives.

She had to win a three-way race to win the governor’s office that included a former Democrat running as an independent, threatening to siphon of Democratic votes. But Kotek ultimately prevailed with 47% of the vote to 43.5% for Republican Christine Drazan.

She will enjoy solid Democratic majorities in the legislature.

In his first speech as House speaker Jan. 9, Dan Rayfield, D-Corvallis, called for lawmakers to deliver a housing package within 60 days.

“Oregonians have called out for fast, decisive action to fix this crisis,” he said. “We have to deliver.”

Minority Republicans signaled they would fight against additional funding to combat homelessness. Her entire housing package totals more than $1 billion.

In a statement, the House Republican Caucus said the governor is neglecting other crises the state is facing beyond the three she emphasized in her budget.

“As the caucus that represents every corner of our state, one of our greatest concerns remains that the governor’s proposed homelessness initiative does not reach beyond the urban centers of our state,” the statement said. “If Gov. Kotek is going to stay “Mission Focused” on being a governor for all of Oregon, this must start now.”

In a press conference following her budget reveal, Kotek said she represents all Oregonians, and that the affordable housing and homelessness crisis is a statewide issue.

The Republicans also noted that the state has spent almost $1 billion on the homelessness crisis during the 2020-2022 biennium.

“This was done under Gov. Kotek’s watch as speaker,” the House Republican Caucus said. “Now, Gov. Kotek wants to spend another $305 million over the next two years, not including $705 million in debt refinancing authority.”

House Republicans said they are concerned that spending on homelessness could result in increased agency fees for Oregon taxpayers. They added, however, that they are “optimistic” that the governor will honor her promise to not raise taxes, and supported her move to pay a kicker, which gives the state’s taxpayers a tax refund if revenues exceed a certain threshold.

“According to the most recent revenue forecast, Oregon families will receive an average of $5,200 back on their taxes in the form of a surplus credit known as the “Kicker,” said Senate Republican Leader Tim Knopp,R-Bend. “I’m relieved to see that the Governor’s proposed budget doesn’t pull money from the kicker – it’s the right thing to do.”

The House Republican Caucus said housing, education and mental illness should be priorities, but it just wants to add to the list.

“We are disappointed there was no initial mention of other crises impacting our state such as transportation backlogs, a severe drought impacting our agriculture industry, public safety in our communities, or Oregon’s severe public defender crisis,” House Republicans said.

“I’m relieved to see that the Governor’s proposed budget doesn’t pull money from the kicker – it’s the right thing to do,” said Oregon Senate Republican Leader Tim Knopp, R-Bend.

Oregon Senate Republican Leader Tim Knopp’s Office

Oregon is entering a challenging and complex budget environment with about $3.5 billion of one-time funding, spurred by resources from the federal government, about to expire, Kotek said.

She recommended keeping the existing $2 billion of reserve funds in place, and redirecting $765 million that would have been automatically added to these reserves into targeted spending that she says are aimed at better serving Oregonians in these three key areas.

“This vision for Oregon’s future cannot be realized in one budget cycle. But this plan provides a roadmap for how we are going to reach our state’s long-term goals,” she said.

“There will be no new taxes,” Kotek said. “We are relying on the dollars that go into reserves to meet the goals of the budget.”

She added that the $2 billion in reserves represents the highest number Oregon has ever had.

“As someone, who has worked through two recessions and multiple downturns, I want to protect those dollars,” Kotek said.

The governor added that she supports plans to work with Washington state to rebuild the Interstate 5 bridge that connects the two states, and wants lawmakers and the Oregon Department of Transportation to work on finding revenue sources other than raising gas taxes to pay for the project.

“I have been a strong, strong supporter of replacing that bridge,” Kotek said. “I live right next to it, and in my budget I have continued funding for its design, but I am also telling ODOT that they need a funding plan so that they aren’t solely relying on the gas tax.”

She added given the cutbacks Oregonians are having to make to deal with inflation, she doesn’t want to add an additional burden of increasing gas taxes.

Her transportation proposal provides funding to make the voluntary pay-by-the-mile road usage program mandatory. The budget called the program an alternative method to raise revenue to offset the ongoing decline of fuel tax revenues.

The budget also includes funding for 15 capital improvement projects to upgrade existing ODOT facilities during the 2023-25 biennium and support for the three ODT revenue generating bond programs.

The state expects to receive $1.2 billion from 2022 to 2026 through the federal Infrastructure Investment Job Act.

“The issues I am focusing on are concerns for both Republicans and Democrats,” Kotek said. “We might disagree on some of the strategies, but it focuses on statewide issues.”

She added that there are no service cuts in the budget because she wanted to insure that Oregonians could tap needed services.

Ways and Means Co-Chair Senator Elizabeth Steiner, D-Portland, said lawmakers “are aligned with the governor on the priorities that must be protected as we work to craft a balanced budget.”

“We are facing a complex budget year that will require us to make some hard choices,” Steiner said.

Debt ceiling standoff may dampen muni supply

Debt ceiling standoff may dampen muni supply

A prolonged showdown over the U.S. debt limit may depress muni bond supply the first half of the year as issuers pull back amid political volatility and potential spending cuts.

With supply already weak just a month into the year — and following last year’s lackluster levels — a battle over the debt limit may worsen the situation, said Vikram Rai, Citi’s head of municipal strategy.

“The worry is the debt ceiling crisis will further reduce issuance as issuers sit out market volatility,” Rai said. That will “further frustrate investors who are waiting to put their cash to work.”

The debate over lifting the U.S. debt limit, last raised in December 2021, is expected to be particularly acrimonious this year. House Republicans are determined to link any increase with budget cuts or other fiscal reforms, and a failure by House Speaker Kevin McCarthy to win concessions from Democrats could endanger his seat. The two sides have until June at the earliest before the U.S. hits its $31.4 trillion limit.

House Speaker Kevin McCarthy has pledged to link any debt ceiling increase to spending cuts or other fiscal reforms.

Bloomberg News

The political uncertainty could eat into the number of what Rai calls “clean weeks” for issuance.

Issuance is already light during the 13 holiday weeks of the year, Rai said. Supply is also lower during weeks the Federal Open Market Committee meets, such as this week, where issuance is a paltry $847 million.

Adding the eight FOMC weeks to the 13 holiday weeks “leaves only 31 clean weeks for issuance,” Rai said.

If, during those 31 weeks, “supposing there’s volatility around the debt ceiling crisis, issuers will want to pull back,” he said. That could mean pushing issuance forward into a calendar that’s traditionally already back-loaded in the end of the year.

“No one wants to come to market in a $14 billion week,” he said.

Citi had predicted gross municipal supply for 2023 to land around $450 billion, but now is “already concerned about the year supply forecast,” Rai said.

Barclays does not expect a U.S. default, but notes that a similar standoff in 2011 sparked a rally in Treasuries that saw its yields drop nearly 100 basis points. Munis, meanwhile, lagged the rally, said Mikhail Foux, Barclays head of municipal strategy and research.

“The biggest factor is market volatility and for the Muni/Treasury ratio, that’s where you going to see the biggest effect,” Foux said. “We expect some kind of risk-off rally.”

Foux said he expects issuance to remain relatively unaffected by the debt limit debate, unless market volatility becomes pronounced, or if the Treasury Department moves to suspend sales of State and Local Government series securities, which would mean less refundings.

“You’re going to see some market volatility but not a lot less issuance, unless we have a situation where the market is really volatile, because clearly no one wants to issue at that time,” he said.

Foux said he’s fairly optimistic that the standoff is resolved before the so-called X Date, which Barclays estimates will hit in August.

“Neither side wants a repeat of 2011,” when S&P Global Ratings downgraded the U.S., Foux said.

“There’s a pretty decent chance we resolve it before that, but if not that will create all kinds of issues for various sectors.”

Meanwhile, Biden administration officials are warning that budget cuts or a return to fiscal 2022 discretionary spending levels, as House Republicans have proposed, would hurt state and local spending on infrastructure projects and the execution of the $1.2 trillion Infrastructure Investment and Jobs Act.

“We’d build less,” said White House infrastructure coordinator Mitch Landrieu during a press gaggle Tuesday in response to a question about the impact of spending cuts or budget gaps on infrastructure spending.

“If you have less money, you build less,” he said.

Board threatens 0.21% payment for PREPA bondholders who don't settle

Board threatens 0.21% payment for PREPA bondholders who don’t settle

The Puerto Rico Oversight Board threatened to pay as little as 0.21% of par to Puerto Rico Electric Power Authority bondholders who don’t accept its settlement offer.

The main PREPA bondholder group challenged to the assumptions behind the Oversight Board’s offer.

The less-than-1% payout scenario is based on the board winning in the adversary proceeding on bondholders’ lien scope and recourse rights.

Susheel Kirpalani

Syncora Guarantee Attorney Susheel Kirpalani said PREPA bonds have more default protections for bondholders than did the pre-default Puerto Rico Highways and Transportation bonds.

The board offered, in an EMMA posting Wednesday, a recovery of approximately 50% on the PREPA bonds to uninsured bondholders.

“Rather than risking nearly no recovery on your Bond Claims, this settlement offer allows you to settle for payment in the form of new bonds of approximately half your claims with the possibility of receiving more depending on how many bondholders settle and the outcome of the litigation over the two contentions described above,” the EMMA notice said.

In a Puerto Rico bankruptcy omnibus hearing on Wednesday, Oversight Board attorney Martin Bienenstock said the board might be nearing deals with some creditors in the bankruptcy.

In response, Ad Hoc Group of PREPA Bondholders attorney Amy Caton said her clients, who hold more than $4 billion of the bonds, were not near a deal. The latest submission, she said, offers worse terms than those the board offered in December negotiations. The group plans to file an objection to the board’s proposed disclosure statement on Friday.

The bond Trust Agreement effectively gives the bond trustee and bondholders claims to only money in three PREPA accounts at the time of the bankruptcy petition, all of them small in value, Bienenstock said.

Bankruptcy creditors can’t make claims on future income, Bienenstock and Unsecured Creditors Committee attorney Pedro Jimenez said.

PREPA bankruptcy Judge Laura Taylor Swain asked if there was value to the contractual obligation of PREPA to take an action, which could be seen in the bankruptcy as an “unsecured claim.”

Bienenstock replied, in part, that section 804 of the Trust Agreement says the remedy for a breach in covenants is collection from only certain funds. He acknowledged the agreement says other PREPA money could be collected, but the context suggests these would be limited to money from the funds.

Ad Hoc Group of PREPA Bondholders Attorney Thomas Mayer said bondholders agreed to be paid from the sinking fund, which PREPA agreed to put money into. Since entering the bankruptcy, PREPA stopped putting money into the fund, and bondholders have a right to seek that money, Mayer said.

While one U.S. case might indicate a creditor cannot get a claim on future revenues, this case is irrelevant, Mayer said, because what matters is Puerto Rico law, and the act that addresses PREPA authorizes a pledge on future revenues.

Mayer told Swain if she were to rule that the U.S. bankruptcy code only allows her to look at accumulated revenues and not future revenues, “that ruling would invalidate every revenue bond in this country under every Chapter 9 that will ever be filed. That’s not what Congress wanted.”

Authority revenues are pledged to the bond trustee in several places in the bond trust agreement, Mayer said. Additionally, there is one passage that pledges the holding of a few small funds and “any other moneys available” to the bondholders.

The board is trying to make the one lien addressed to the bondholders control the other liens for the bond trustee, he argued. But this makes no sense, Mayer said. Furthermore, he said, the “any other moneys available” in the bondholder pledge is a broad pledge.

Syncora Guarantee Attorney Susheel Kirpalanisaid the PREPA bonds were different from the Puerto Rico Highways and Transportation bonds, which Swain ruled gave bondholders limited remedies to address the default.

The bondholders were not arguing they had a “non-dischargeable equitable right” to be paid in full, Mayer said, rather, that in the bankruptcy they have a “claim” to the money.

Assured Guaranty Attorney Mark Ellenberg pointed to part of the trust agreement that said bonds issued based on the 1947 indenture should be paid from a particular PREPA fund but once those bonds were paid out, bonds should just be paid from “revenue.” Now that all 1947 indenture bonds have been retired, the existing bonds have the wider claim.

Swain said she would rule “as promptly as I can.”

Governor's $114.8 billion Florida budget plan has $15 billion of reserves

Governor’s $114.8 billion Florida budget plan has $15 billion of reserves

Florida Gov. Ron DeSantis on Wednesday presented a proposed fiscal 2023–2024 budget of $114.8 billion, which includes total reserves totaling more than $15 billion.

“Our budget proposal not only builds on the successes of the past four years, but ensures that Florida will continue to thrive,” DeSantis said in a statement.

DeSantis, a Republican, coasted to reelection in November in elections that expanded GOP legislative majorities that were already willing rubber stamps for the governor.

Florida Gov. Ron DeSantis introduced a $114.8 billion budget that would include a $15 billion reserve.

Bloomberg News

DeSantis’ proposed budget is up from the $112 billion current budget lawmakers passed last year.

The budget proposal contains an across-the-board 5% pay increase for all state employees; an additional 10% increase over the statewide average for certain “hard-to-hire” positions of importance for state government; and an increase for correctional officers to $23 per hour.

The budget would provide $100 million for the Florida Job Growth Grant Fund, which supports additional economic growth in Florida by providing local areas with funding for proposed public infrastructure and workforce training projects.

It also would provide another $100 million to continue the state marketing and promotion efforts of VISIT FLORIDA, the state’s official tourism marketing corporation.

Four permanent tax cuts and more than 10 temporary tax cuts are being proposed.

The permanent tax cutswould be sales tax exemptions on baby and toddler necessities; cribs and strollers; over-the-counter pet medications; and, in a performative nod to a culture war that has reached the appliance market, gas stoves.

Temporary holidays would include tax exemptions on children’s books, children’s toys, children’s athletic equipment, certain household items and clothing, disaster preparedness items, outdoor recreation items, dental and oral hygiene products, pet food, hand and power tools, energy star appliances, and natural gas.

Key spending proposals in education include a $200 million increase to $1 billion of funding for salary increases for new and veteran teachers and other eligible instructional personnel; and $1.6 billion for early childhood education.

The $26 billion of proposed funding would send $14.1 billion to the state’s K-12 public school system, $1.5 billion to the Florida College System; and $3.1 billion to the State University System.

The budget does not include any tuition or fee increases for Florida’s colleges and universities.

DeSantis has recommended spending more than $614 million on Everglades restoration projects and $370 million for targeted water quality improvements.

Under the budget, the state Department of Transportation would get $14.7 billion, of which $13.4 billion would be provided for the State Transportation Work Program, an ongoing five-year plan for completion of transportation infrastructure projects, including the construction and maintenance of Florida’s roads, bridges, railroads and ports.

Additionally, in another nod to the culture war audience, the budget contains a recommendation for $12 million in funding to “continue implementation of the governor’s initiative to protect Floridians against the harms resulting from illegal immigration by facilitating the transport of unauthorized aliens from any point of origin in the U.S. to any jurisdiction.”

Texas sale taxes hit record in January amid slower growth rate

Texas sale taxes hit record in January amid slower growth rate

Sales tax collections in Texas soared to a record $4.11 billion in January, although the growth rate for the state budget’s biggest revenue source slowed.

State Comptroller Glenn Hegar reported Wednesday the 6.6% increase compared to January 2022 was the lowest “in the 22 months since the end of pandemic restrictions.”

While sales tax collections hit a record $4.11 billion in January, Texas Comptroller Glenn Hegar warned the growth rate slowed, reflecting lower inflation and slowing growth in real economic activity.

Texas Comptroller’s Office

“This reflects slowing in the rate of inflation and slowing growth in real economic activity as well,” he said in a statement. “Unfortunately, inflation continues to erode the purchasing power of Texas consumers as the consumer price index rate for December was 6.5%.”

Business spending accounted for the biggest gains, led by the mining sector, while retail receipts grew only slightly, with big box and department stores declining and dollar stores up sharply from a year ago, according to Hegar.

The majority of January sales tax revenue is based on sales made in December and remitted to the state agency last month.

Texas last reported record monthly sales tax collections of $3.96 billion in November 2022 that was up 11.2% from the prior year.

Energy production taxes slowed or fell last month, with the oil tax generating $486 million, which was 14% higher than in January 2022, and natural gas tax revenue falling 13% at $322 million.

Texas collected a record $6.36 billion in oil production taxes and $4.47 billion in natural gas production taxes in fiscal 2022 amid high demand and high prices for fossil fuels.

The strong performance of energy production and sales taxes led Hegar to forecast a record $32.7 billion budget surplus at the end of the current fiscal 2022-23 biennium.

The state’s elected officials are gearing up to tap the surplus for a big property tax cut.

S&P slashes Chicago suburb's GO rating over default event on unrated bonds

S&P slashes Chicago suburb’s GO rating over default event on unrated bonds

Bolingbrook, Illinois, was downgraded seven notches by S&P Global Ratings, which cited the Chicago suburb’s unwillingness to cover shortages on unrated sales tax revenue bonds as a management and governance risk.

The village of 73,000said the downgrade “sets a harmful and disruptive precedent for any credit secured by specific revenues that do not pledge the taxing power of the related municipality.”

S&P cut the village’s underlying GO rating to BBB-minus from AA Thursday as rebuke for failing “to support a capital obligation” by missing five sinking payments owed on a January 2024 term bond from the $47.7 million unrated 2005 issue.

Mary Alexander-Basta is mayor of Bolingbrook, Illinois, which says a seven-notch downgrade from S&P Global Ratings mis

Village of Bolingbrook

The bonds are secured by sales tax revenues in a specially designated area for a retail development project. The missed sinking fund deposits that began in 2020 were disclosed in October by the bond trustee and trigger an event of default under the bond indenture.

“The likelihood of default upon the term bonds maturity results in a weaker management assessment for the village under our criteria,” S&P analyst Andrew Truckenmiller said. “As a result of the weaker management score, our rating on the village’s GO debt is capped” at BBB-minus. The village has $200 million of direct debt. The outlook on the GOs is stable.

The village government told S&P that pledged revenues will likely fall short of meeting both the 2024 and 2026 term maturities and the village lacks a formalized plan to use other available resources to satisfy the debt service obligations.

Those factors drive a weaker management assessment and raise governance risk under S&P’s local government criteria with Bolingbrook labeled as “vulnerable” under those metrics.

“The recurring events of default under the trust indenture and the likelihood that the village will default upon the term bonds maturity represents a weak risk management, culture, and oversight governance in our opinion,” Truckenmiller said. “In our view, the 2005 sales tax bonds are obligations of the village and a lack of support for them reflects weak governance practices.”

S&P’s local government GO rating methodology which has been in place since 2013 guided the action and has resulted in similar actions for other GO credits, analysts said.

Environmental, social, and governance credit factors for the change fall under “risk management, culture, and oversight.”

Village officials criticized S&P’s decision and appealed the rating committee’s decision when first notified.

“The village disagreed with S&P’s application of its ‘U.S. Local Governments General Obligations Ratings’ methodology and provided substantial evidence of why negative performance on a standalone credit unrelated to the village’s issuer credit rating should not impair its ICR on appeal. S&P denied that appeal,” said a statement emailed by village Finance Director Rosa Cojulun.

The statement noted that the unrated bonds were sold to sophisticated buyers based on the project’s risk and limited scope of the pledge and that the limited offering memorandum included substantial language disclosing that the bonds are neither a debt, liability, general obligation or even a moral obligation of the village.

The Series 2005 bonds paid interest rates of 5.75%, 6.25%, and 6% on 2015, 2024, and 2026 term maturities, respectively, and are also not subject to any continuing disclosure rules.

“The village believes S&P’s rating action attempts to cause a de facto conversion of the Series 2005 Bonds to a general obligation of the village by force of its downgrade,” the statement read. “The village believes this is a misapplication of its rating criteria and further sets a harmful and disruptive precedent for any credit secured by specific revenues that do not pledge the taxing power of the related municipality.”

The village statement goes on to say it would consider using general revenues to cover the shortages a “poor financial management” that “would benefit a few sophisticated investors to the detriment of thousands of taxpayers in the village of Bolingbrook.”

The bonds were issued to help finance a retail center anchored by a Bass Pro Shop and a Macy’s, as part of a sales tax district that also included an already operating Ikea store, the offering memorandum said.

Pledged revenues have fallen short of projections needed to meet debt service demands and reserves have been exhausted leading to a shortage of approximately $2.6 million, according to S&P. About $20 million remains outstanding.

The village holds a healthy general fund balance of $50 million which is equal to 64% of revenues, so “the village’s lack of action to support the 2005 sales tax revenue bonds reflects an unwillingness, not an inability, to pay debt service on time and in full,” S&P said.

The report gives the village high financial marks but “very weak management” and “very weak debt and long term liabilities” grades.

S&P said Bolingbrook’s rating may be downgraded to junk if debt service is not paid in full on the sales tax revenue bonds or if the fallout from the potential 2024 term bond default pressures the village’s operations, budgetary flexibility, or liquidity profile.

S&P could lift the BBB-minus cap and reward the village with a multi-notch cap if officials demonstrate a willingness to pay all debt service requirements in full and on time.

S&P noted that many of the GO issues carry bond insurance from Assured Guaranty.
“It would be safe to assume this credit will have difficulty gaining market access in the future,” said Michael Pietronico, chief executive officer at Miller Tabak Asset Management, who had noticed the missed sinking fund deposits but does not hold Bolingbrook bonds.

Moody’s assigns its A2 underlying rating to Bolingbrook GOs.

The Bolingbrook situation provides a reminder of the risk for investors associated with narrow pledges for project financings that don’t carry a GO or appropriation pledge and the risk for borrowers who might believe their GO is insulated and won’t suffer any fallout if a project financing falters.

Munis slightly firmer after Fed hikes rates 25bp

Munis slightly firmer after Fed hikes rates 25bp

Municipals were a little firmer in some spots while Treasuries rallied across the board, with yields falling double-digits following the Federal Reserve hiking rates 25 basis points. Equities ended up.

“Investors are acknowledging that the Fed is nearing the end of its rate tightening cycle which is supporting a relief rally in stocks and lower bond yields, said Bryce Doty, senior vice president at Sit Investment Associates. “We agree and expect the Fed to only raise rates one more time given rapidly slowing core inflation. The positive market reaction is despite Powell trying to sound hawkish.”

The three-year muni-UST ratio was at 55%, the five-year at 57%, the 10-year at 64% and the 30-year at 90%, according to Refinitiv MMD’s 3 p.m. ET read. ICE Data Services had the three at 54%, the five at 57%, the 10 at 63% and the 30 at 88% at 4 p.m.

“One of our themes for 2022 was the pronounced drop in municipal volume year-over-year given the elevated levels of market volatility as the Fed launched an aggressive tightening campaign to arrest the highest inflation witnessed in 40 years,” said Jeffrey Lipton, managing director of credit research at Oppenheimer Inc.

This week’s dearth of new-issue supply, he said, is in more typical response to a scheduled Federal Open Market Committee meeting “whereby issuers are hesitant to make long-term commitments amid potentially surprising policy guidance, not that we see this as a meaningful likelihood of occurrence,” he said.

January 2023 was “one of the slowest issuance months for overall recorded January supply,” he noted.

There is still “a hang-over effect from last year and perhaps it may take some time before issuers have sufficient comfort to access the market,” he said. “A further downward migration in yields would likely open up refunding opportunities and there would be compelling motivation to lock in more attractive borrowing terms for new-money purposes.”

Expect “mid-single digit positive returns” on munis in 2023, he said.

Despite munis ending 2022 in the red due to “rising bond yields and resultant price erosion,” Lipton said, “the attractive cash-flows had created a strong ‘carry’ component to performance, providing an offset to the principal losses as well as defensive attributes ahead of a potential recession.”

He noted, this “dynamic will likely extend into 2023 with realistic opportunities for price appreciation.”

Much of the muni outperformance of Treasuries is ascribed to “very supportive technicals rooted in thinner primary supply and very present demand for product, particularly given ample reinvestment needs,” according to Lipton.

Returns this month represent the strongest January since 2009, per Bloomberg data.

“In sharp contrast to much of 2022, the new year begins with very encouraging monthly portfolio statements as there seems to be light at the end of the Fed’s tightening tunnel with technicals moving the outperformance needle,” he said.

The stronger market bias “has led the way for a long-awaited return to positive flows into municipal bond mutual funds,” with $4.8 billion being deposited over the past three weeks per Refinitiv Lipper.

With heavy demand needs continuing through February, he said “the tone should remain positive and we expect another month of favorable returns and further inflows.”

Bloomberg data shows total principal maturities, calls, and interest are around $38 billion for February, while the 30-day long-term forward supply is about $2.32 billion.

Lipton expects “this supply number to build once the FOMC meeting has concluded as we are already seeing some sizable names on the calendar.”

“Supply is expected to accelerate in March, and if technicals soften, there could be a dilution in monthly performance,” he said.

Given this, he expects “continued yield and income opportunities to support more visible inflows and overall positive performance throughout the coming months, although a divergent trajectory could come about in limited fashion.”

Inflows continued with the Investment Company Institute reporting investors added $2.942 billion to mutual funds in the week ending Jan. 25, after $2.083 billion of inflows the previous week.

Exchange-traded funds saw outflows of $788 million after $162 million of inflows the week prior, per ICI data.

Secondary trading
Georgia 5s of 2024 at 2.20% versus 2.34% Tuesday. NYC 5s of 2024 at 2.41%-2.40%. California 5s of 2025 at 2.09%.

Triborough Bridge and Tunnel Authority 5s of 2029 at 2.12%. Anne Arundel County, Maryland, 5s of 2030 at 2.09%. Massachusetts 5s of 2031 at 2.12%.

Triborough Bridge and Tunnel Authority 5s of 2037 at 2.96%-2.95% versus 3.02% original on Friday. Kansas Development Finance Authority 5s of 2038 at 2.95%-2.97% versus 2.91% Monday and 2.91% Friday. NYC 5s of 2038 at 3.09% versus 3.05%-3.07% on 1/24.

LA DWP 5s of 2047 at 3.32% versus 3.35%-3.36% Tuesday and 3.47%-3.44% on 1/11. West Valley-Mission Community College District, Pennsylvania, 5s of 2047 at 3.24%-3.23% versus 3.31% on 1/13.

AAA scales
Refinitiv MMD’s scale was little changed. The one-year was at 2.27% (unch, -1bp Feb. roll) and 2.16% (unch, -1bp Feb. roll) in two years. The five-year was at 2.03% (-2, no Feb. roll), the 10-year at 2.19% (unch, no Feb. roll) and the 30-year at 3.20% (unch) at 3 p.m.

The ICE AAA yield curve was bumped one to two basis points: at 2.30% (-1) in 2024 and 2.22% (-1) in 2025. The five-year was at 2.06% (-1), the 10-year was at 2.15% (-1) and the 30-year yield was at 3.20% (-2) at 4 p.m.

The IHS Markit municipal curve was unchanged: 2.31% in 2024 and 2.16% in 2025. The five-year was at 2.06%, the 10-year was at 2.20% and the 30-year yield was at 3.18% at a 4 p.m. read.

Bloomberg BVAL was bumped up to two basis points: 2.31% (-1) in 2024 and 2.14% (-1) in 2025. The five-year at 2.08% (-2), the 10-year at 2.21% (-1) and the 30-year at 3.23% (unch).

Treasuries rallied.

The two-year UST was yielding 4.089% (-10), the three-year was at 3.757% (-13), the five-year at 3.485% (-13), the seven-year at 3.447% (-12), the 10-year at 3.402% (-9), the 20-year at 3.673% (-9) and the 30-year Treasury was yielding 3.559% (-7) at 4 p.m.

FOMC sees ‘ongoing increases’
In addition to a 25-basis point rate hike to bring the fed funds target rate to a range between 4.5% and 4.75%, the Federal Open Market Committee said it expects “ongoing increases.”

“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” the statement proclaimed.

The latest Summary of Economic Projections, released after the prior meeting, showed officials expect rates to rise to 5.125% this year.

The panel noted in this post-meeting statement a “robust” employment situation with inflation waning but still “elevated.”

“The Committee is strongly committed to returning inflation to its 2 percent objective,” the statement noted.

Andrzej Skiba, head of U.S. Fixed Income, RBC Global Asset Management, said the statement was “a bit more hawkish than the market expected,” by suggesting at least two more rate hikes. But he felt Fed Chair Jerome Powell’s press conference “was less hawkish than expected.”

Specifically, he pointed to Powell’s belief inflation can be tamed without a major economic downturn or increase in unemployment. “Despite a major easing in financial conditions, there was no major pushback against investors’ recent optimism,” Skiba said. As a result, he noted, markets “quickly reversed initial losses.”

“The big criticism of the Fed this time last year was that it had fallen behind the curve, after being blindsided by surging inflation,” noted James McCann, deputy chief economist at abrdn. “After a series of outsized interest rate hikes, today’s more familiar feeling 25bps move shows a central bank more comfortable with where its policy stance sits at present.”

While inflation has shown signs of slowing, he said, “the job remains far from done, and the Fed continues to signal that a series on ongoing rate hikes will be needed to drag price growth to target.”

Still, McCann expects just “one more hike,” with a midyear recession to “derail its tightening cycle.”

The quarter-point hike “suggests the Fed feels it is now getting interest rates quite close to a level that it believes is ‘sufficiently restrictive,'” said Fitch Chief Economist Brian Coulton. He said the Fed will bring rates above 5% and keep them there through the year. “In other words, no pivot to rate cuts in late 2023.”

In his press conference, Powell said rates were not yet sufficiently restrictive and he was pleased that inflation is coming down without an increase in unemployment. Still, he said, “the job is not yet done” and “it would be very premature to declare victory.”

When asked if the hard part of reducing inflation is still ahead, Powell said, “we don’t know.” He doesn’t expect rate cuts this year, but added that could change if inflation comes down much faster than expected.

Jan Szilagyi, CEO and co-founder of Toggle AI, called the press conference “hawkish” because of the inflation focus. As a result, he sees a continued “standoff between the Fed and the market.”

“Whether the Fed hikes the overnight rate once more as futures believe, or potentially twice as indicated in the FOMC’s projections, the Fed is closer to the end of the current tightening cycle than the beginning,” said Phillip Neuhart, director of market and economic research at First Citizens Bank Wealth Management.

But he added, that doesn’t mean “the FOMC will be in a rush to cut rates.”

Payden & Rygel Principal and Chief Economist Jeffrey Cleveland noted, “Powell and the FOMC are increasingly at odds with the bond market.”

Before the announcement, the U.S. bond market expected a terminal rate near 5%, “and then begin reducing the overnight rate at mid-year,” he said. “Many investors are much more confident than the Fed that inflation will slow sharply this year.”

But Cleveland noted Powell’s statement that at least half of the items in core inflation are not yet decelerating.

Sit’s Doty said he found it interesting that Powell said “members of the Fed are looking for over half of the underlying non-housing components of core CPI to have inflation below 2%. Powell said that currently 56% of those components are running above the 2% target. So pretty close to the point where the Fed could have a ’cause to pause.'”

Still, he found it strange “that Powell believes the current 4.5% lower bound of the fed funds is not restrictive … partially based on the fact it can’t be since inflation is still high,” which Doty called “a simply bizarre analysis.”

He added, “rates are clearly restricting economic activity by nearly every measure.”

As for the difference of opinion between the Fed and the market, Payden’s Cleveland said, “Our view is more in line with the U.S. central bank. We see inflation moderating this year, but not as quickly as the bond market hopes/expects.”

As such, he said, “cuts in the federal funds rate are highly unlikely in 2023 given our economic outlook. Inflation is still far from the Fed’s objective and the labor market is very tight.”

A pause is possible in the second half of the year, Cleveland said, but in order for the FOMC to cut rates this year, “we’d have to see a complete meltdown in the labor market and an inflation slump.”

Primary to come:
The Fort Worth Independent School District, Texas, (Aaa///) is set to price Thursday $277.370 million of PSF-insured unlimited tax school building bonds, Series 2023. Piper Sandler.

The Colorado Housing and Finance Authority (Aaa/AAA//) is set to price Thursday $125 million of taxable single-family mortgage bonds, including $84 million of Class I bonds, 2023 Series A-1, serials 2023-2033, terms 2038 and 2049; $21 million of Class II adjustable rate bonds, 2023 Series A-2, term 2043; and $20 million of GNMA MBS Pass-Through Program, Class I bonds, 2023 Series B, term 2053. RBC Capital Markets.

Competitive:
Newark, New Jersey, is set to sell $35.598 million of qualified general capital improvement bonds, Series 2023, at 11:30 a.m. eastern Thursday.

The Clark County School District Finance Corp., Kentucky, (A1///) is set to sell $22.645 million of school building revenue bonds, Series of 2023, at 12 p.m. eastern Thursday.

Co-op gets federal loan for rural power in Alabama and Mississippi

Co-op gets federal loan for rural power in Alabama and Mississippi

The Department of Agriculture this weekannounced that 64 projects proposed by power cooperatives and utility companies across the country to improve rural power systems were approved for federal loans.

The loans come from the department’s Office of Rural Development Electric Grid Infrastructure Loan and Loan Guarantee Program, which aims to help finance new and improved electric distribution, transmission, and generation facilities in rural areas, as well as demand-side management, energy conservation programs, and on-grid and off-grid renewable energy systems.

“These critical investments will benefit rural people and businesses in many ways for decades to come,” Secretary of Agriculture Tom Vilsack said in a statement. “This funding will help rural cooperatives and utilities invest in changes that make our energy more efficient, more reliable, and more affordable.”

“This funding will help rural cooperatives and utilities invest in changes that make our energy more efficient, more reliable, and more affordable,” Secretary of Agriculture Tom Vilsack said.

The Singing River Electric Power Association, a cooperative serving 77,614 customers across Alabama and Mississippi, will use its $215 million allotment, one of the largest single endowments granted, to lay 770 miles of new transmission lines and associated infrastructure across rural townshipsin Mobile and Jefferson counties in Alabama, among others.

The Electric Grid Infrastructure Loan program provides insured loans and loan guarantees to utility provers and cooperatives for the development of power distribution and transmission facilities, green energy improvements, and broadband networks in rural areas.

Projects were approved across 24 states, but the largest slice of the $2.7 billion went to the Southeast, where 23 separate projects in seven states were allocated $1.2 billion in loans. The two states approved for the most were Georgia with $312 million and Florida, with $368 million.

The program also contains funding for expanding “smart grid” technology that can “be a catalyst for broadband and other telecommunications services in unserved and underserved rural areas in addition to improving grid security and reliability,” according to the release.

It is the second announcement of federal support addressing rural infrastructure needs in Alabama recently.

On Thursday, the U.S. Department of Energy announced the state would receive $192 million via the American Rescue Plan’s $10 billion Capital Projects Fund to widen access to broadband networks in rural areas.

The Biden administration has pumped millions into rural infrastructure issues by opening several funding streams state and municipal authorities and utility providers can tap to bankroll projects.