SIFMA Research tracks issuance, trading, and outstanding data for the U.S. municipal bond market. Issuance data is broken out by bond type, bid type, capital type, tax type, coupon type and callable status and includes average maturity. Trading volume data shows total and average daily volume and has customer bought/customer sold/dealer trade breakouts. Outstanding data includes holders’ statistics. Data is downloadable by monthly, quarterly and annual statistics including trend analysis.

YTD statistics include:

• Issuance (as of August) $381.2 billion, +35.5% Y/Y
• Trading (as of August) $13.0 billion ADV, +3.6% Y/Y
• Outstanding (as of 2Q24) $4.1 trillion, +1.8% Y/Y

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October 2, 2024

The passage of the American Rescue Plan Act (ARPA) in 2021 provided a lifeline for local governments through its State and Local Fiscal Recovery Funds (SLFRF) program, which awarded every municipality a portion of $65.1 billion in funding. June 2024 marked three years since initial disbursement, and the next three months are the home stretch for cities, towns and villages to obligate the funding they received under the SLFRF program. ARPA regulations require local governments to return grant funding that remains unobligated beyond the end-of-year deadline to the U.S. Department of Treasury, rendering this deadline one of the most important for cities, towns and villages. With three months left until the Dec. 31, 2024 obligation deadline, local governments must obligate funding now or risk potential clawbacks of these funds.

To assist municipal government with remaining unobligated fiscal recovery funds, NLC and the U.S. Treasury hosted a webinar to clarify and answer questions related to the obligation deadline. Local leaders and grant administrators can watch the webinar here. Other resources include the Obligation Interim Final Rule (IFR), the U.S. Treasury’s FAQ with updated obligation answers and Obligation IFR Quick Reference Guide.

How do you know if you’ve obligated your funds?

The US Code of Federal Regulations defines “obligation” as “an order placed for property and services and entering into contracts, subawards, and similar transactions that require payment.” The U.S. Treasury has further clarified that “similar transactions that require payment” may include certain interagency agreements and, under certain circumstances, payroll expenses for recipients’ employees. Consequently, municipalities must do more than budget their SLFRF dollars — they must allow extra time to place orders and negotiate contracts. Finalizing obligations, including funds used for revenue replacement, includes reporting the obligation through the normal reporting process. Subrecipients are not subject to the Dec. 31, 2024 obligation deadline. Subrecipients and contractors do not need to take additional steps to obligate funds after entering a subaward or contract with the recipient.

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National League of Cities

By: Patrick Rochford, Julia Bauer & Michael Wallace

October 1, 2024

Fitch Ratings-New York/Chicago-04 October 2024: Fitch Ratings has published an updated criteria report titled “U.S. Public Finance Prerefunded Bonds Rating Criteria.” It updates the prior report published on Dec. 14, 2020.

No changes to Fitch’s underlying methodology were made, and the key elements of Fitch’s prerefunded bonds rating criteria remain consistent with those of its prior criteria report.

The full report is available at www.fitchratings.com.

Fitch Ratings-New York-03 October 2024: U.S. public finance issuers affected by Hurricane Helene will require time to recover from severe flooding, substantial property damage and the tragic loss of life, Fitch Ratings says. However, these issuers’ ratings should largely remain stable amid challenges posed by the devastation. While the full extent of property damage in the Southeast will not be known for weeks, Fitch is monitoring various U.S. public finance credits affected by the hurricane, which was one of the largest storms to ever hit the U.S.

Federal relief funds, state support, insurance claims and private resources will help rebuild and drive post-disaster economic activity. We expect the pace of recovery to be slow due to the extensive devastation, compounded by uncertainty related to uninsured homeowners and businesses. Standard homeowners’ insurance does not typically cover flood damage.

We expect state and local government ratings to remain stable throughout the recovery. Timely federal intervention, primarily through the Federal Emergency Management Agency (FEMA), is key to supporting fiscal stability for governments affected by the storm. The most affected states (Florida, Georgia, Tennessee, North and South Carolina) all have ample dedicated operating reserves totalling over several billion dollars each, as well substantial additional resources to cover short-term recovery and rebuilding costs.

Most Fitch-rated local municipalities have a high degree of fiscal resilience and robust reserves to manage storm expenses as they await reimbursement from federal and state disaster aid programs. Certain issuers will be more challenged as recovery costs could weaken reserves, and extensive property damage could lead to higher property tax delinquencies. Tax bases could also be affected if hurricane damage leads to permanent relocations or if increased insurance costs or insurance unavailability discourage homeowners and businesses from rebuilding.

Our insurance team has initially estimated an insured loss range from $5 billion to $10 billion. Florida’s state-owned property insurer Citizens Property Insurance Corporation (AA/Stable), the insurer of last resort, has leading market share in both personal and commercial lines. Both Citizens and the Florida Hurricane Catastrophe Fund (AA/Stable), the state-sponsored reinsurer, have ample liquidity to address initial claims or reimbursements. They can also issue debt and levy emergency assessments on nearly every property and casualty insurance policy in the state for as long as debt is outstanding to cover claims volume. However, the potential for significant leverage on the assessed base could weigh on residents and businesses.

Power utility lines were heavily damaged in areas across the Southeast, and there are still nearly one million customers without power. Extensive mutual aid agreements among utilities outline the framework for assistance and cooperation to get power restored as quickly and safely as possible, but it will likely take time in areas with extensive damage. Power utilities typically manage costs associated with extreme weather events through robust cash reserves and liquidity facilities designed to bridge the timing between restoration costs and reimbursement by FEMA. FEMA typically reimburses around 75% of restoration costs.

Most Fitch-rated water and sewer utilities affected by the hurricane have robust liquidity and should be able to absorb initial storm costs. However, storm surges and flooding can overwhelm systems, causing sewer overflows that may result in water quality issues. Fitch is still assessing the full impact of the storm on utilities.

While we are still monitoring our rated not-for-profit hospital and life plan community (LPC) portfolio, most facilities appear to have avoided significant damage. Nevertheless, necessary repairs or clean up could cause business interruption. Hospitals and LPCs will benefit from FEMA aid and business interruption insurance, although receipt of these funds could take time.

View the S&P Ratings and Outlooks.

Key Takeaways

• U.S. community college demand metrics are showing signs of rebounding following material declines in recent years, spurred by the impact of the pandemic.
• Despite the exhaustion of federal relief funds, community colleges posted relatively consistent margins for fiscal 2023 compared with pre-pandemic levels, while strengthening liquidity in the same year due to improved state funding and prudent management.
• Financial resource ratios have remained relatively consistent over the past three years while debt levels and leverage ratios indicated modest increases likely due to higher construction costs and market conditions over the same time horizon.

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1 Oct, 2024

COMMENTARY | Limited budgets, smaller customer bases and skeleton crews put a heavier PFAS burden on rural systems; polluters should be held accountable.

In the United States, 95% of all public water systems have less than 10,000 customers (79% serve fewer than 500 people), and nearly 85% of those systems have three or fewer full-time employees. With such small staffs, many historically have suffered from “management limitations, lack of long-term planning, and difficulty understanding current and future regulations.”

The Environmental Protection Agency has now released final Maximum Contaminant Levels (MCLs) for PFAS (per- and polyfluoroalkyl substances, aka “forever chemicals”) in drinking water. The regulation targets six specific compounds and has two key deadlines: initial monitoring for these PFAS by April 2027 and mitigation of these PFAS, if detected above the MCLs, by April 2029.

The costs of meeting these two deadlines may include: monitoring and testing; piloting, designing and installing a treatment system; operator training; operation and maintenance of the treatment system; disposal and/or destruction of PFAS-contaminated filter media; and public notification regarding PFAS levels and violations. The EPA has estimated that the costs of monitoring, communication and treatment alone could reach as high as $1.5 billion per year. The costs of not meeting these deadlines may include penalties and liability.

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Route Fifty

By Mike DiGiannantonio,
SL Environmental Law Group

September 30, 2024

These exchange-traded funds could be especially attractive if tax cuts aren’t extended at the end of 2025

Against a backdrop of falling interest rates and tax uncertainty with 2017’s tax law set to expire next year, individual investors are turning to state-specific muni ETFs.

ETFs offer investors lower taxes than mutual funds or individual munis because they rebalance and reinvest with the goal of keeping taxable events at a minimum. ETFs also allow investors to get started in municipal bonds at a low cost and exit relatively easily if they wish. Mutual funds, by contrast, tend to have higher minimum investments and trade only once a day.

“We are seeing a significant shift in preference among investors,” says Alex Petrone, director of fixed income for Rockefeller Asset Management, which issues state-specific muni ETFs.

State-specific ETFs

ETFs’ tax efficiency and investment flexibility could come in handy if certain provisions of 2017’s Tax Cuts and Jobs Act expire at the end of 2025, as is currently set.

Historically, tax-exempt municipal bonds become more popular if personal income taxes increase. If the current tax cuts fully expire at the end of 2025 and personal income-tax rates revert to pre-2017 levels, taxes will increase across all tax brackets. Interest payments from tax-exempt municipal bonds are tax-free at the federal level, which can help offset increases in income tax.

What’s more, the fate of the $10,000 cap on state and local tax deductions—the so-called SALT deduction—could stoke more demand for state-specific muni ETFs. Democrats have indicated they will let the cap expire if it can be offset by increases in other tax revenue. The Republican position is less clear; former President Donald Trump said recently he is open to eliminating the cap, marking a shift from his previous position to keep it. Congressional Republicans have supported keeping the cap in place in the past as well.

If the SALT cap is retained or lowered, muni pros say that could make in-state bond investments more attractive over the long term as interest payments from in-state bonds are generally tax-exempt if the investor is local. The cap is already giving a boost to these bonds, but they could look better on a relative basis if personal income-tax rates rise but the SALT cap is retained.

While passive state-specific muni ETFs have been around since at least 2007, issuers have been launching more of them thanks to increased investor interest. Since 2023, at least eight new funds have launched, bringing in more than $500 million in investments.

So far these funds focus on California and New York, which along with Texas, are the largest issuers of municipal bonds, accounting for about 40% of total issuance.

These funds are actively managed, which tends to make them more expensive than passive funds. They have expense ratios ranging from 0.35% to 0.55% compared with 0.05% to 0.10% for passive funds.

Timeline matters

Investing in state-specific ETFs may also be one way to diversify a municipal-bond portfolio. These ETFs have bonds that when considered together are of intermediate time to maturity—about 10 years. Longer-term bonds have different risk profiles than short-term bonds. If interest rates continue to go down and bond prices rise, investing in bonds with a longer time to maturity means that investors could lock in the higher prices for longer if they start to adjust their portfolios now.

Matthew Hage, municipal-bonds portfolio manager at investment manager MacKay Shields, says that as interest rates rose in recent years, both taxable and tax-exempt bonds had higher yields with shorter maturities because they were trading at a higher price. Now that interest rates are falling again, it may be time for investors to change how they invest in bonds. Hage says if investors are willing to invest in longer-term bonds, those bonds will have higher yields, which means higher income.

“The reinvestment window sneaks up on you pretty quickly if you are reaching it every three to six months with short-dated maturities,” he says. “There is an opportunity now to lock in higher yields for a longer duration and protect against downside risk.”

The Wall Street Journal

By Bailey McCann

Oct. 4, 2024 10:00 am ET

Cooper Howard, Schwab Center for Financial Research’s director of fixed income strategy, discusses recent trends in state and local government hiring and what Federal Reserve rate cuts means for municipal bond issuance in 2025. He speaks on “Bloomberg The Close.”

Watch video.

Bloomberg Markets: The Close – Muni Moment

October 4th, 2024, 10:19 AM PDT

The third quarter of 2024 saw a rally in both the Treasury bond market and the municipal bond market.

The Treasury bond market saw the 10-year U.S. Treasury bond yield move from 4.479 at the beginning of the quarter to 3.797 on Sept. 26. The move in munis was more muted, with 10-year AAA munis going from 2.84 to 2.63 over the course of the quarter.

To wit, the end of the second quarter saw the 10-year bond yield move from a 4.28% on the eve of the June 27 Biden-Trump debate to 4.47% by July 1. We believe this change was a direct result of President Biden’s poor debate performance and a market assumption that we were looking at a sweep of both houses of Congress as well as the White House by Republicans. The thought process is that undivided government tends to produce unchecked spending and that the markets view this outcome as potentially inflationary.

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Cumberland Advisors

by John R. Mousseau

Mon, October 7, 2024

• The Boston-based asset manager isn’t new to this trend
• Conversion shows the growing popularity of muni ETFs

Fidelity Investments is looking to convert two of its municipal-bond mutual funds into exchange-traded funds, a move that underscores the popularity of the $10 trillion US arena.

The two funds impacted are the $170 million Fidelity Municipal Bond Index Fund and the Fidelity Municipal Core Plus Bond Fund, which has less than $70 million in assets. Both are expected to be converted next year, according to two separate regulatory filings.

“These conversions can deliver new opportunities and value for our existing shareholders, while also expanding our solutions to help meet demand for access to innovative strategies in an ETF wrapper,” said Greg Friedman, Fidelity’s head of ETF management and strategy, in an emailed statement.

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Bloomberg Markets

By Amanda Albright

October 3, 2024

Key Takeaways

• U.S. not-for-profit transportation infrastructure enterprise (TIE) financial medians improved in fiscal 2023 across the asset classes given continued revenue and activity growth (passengers, tolled transactions, and tonnage) and a combination of management actions such as increasing rates, fees, and charges and reserves.
• S&P Global Ratings expects that stable-to-improving demand and revenue trends and proactive management practices will continue to mitigate the impact of higher debt for larger issuers and of rising operations-and-maintenance (O&M) costs to support financial medians into fiscal 2024.
• Despite 14% median growth in operating expenses attributable to inflationary pressures combined with higher debt outstanding, virtually all TIE medians improved as S&P Global Ratings-calculated median net revenue available for debt service increased, resulting in improved overall coverage, debt capacity, and cash reserves.
• Improved financial metrics contributed to overwhelmingly positive rating actions with 32 upgrades and one downgrade from Sept. 1, 2023, through Sept. 1, 2024.

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25 Sep, 2024

Fitch Ratings’ State Housing Finance Agencies Sector Monitor provides annual comparative financial information and ratios for state housing finance agencies (HFAs). This report, covering 51 HFAs, contains aggregated financial ratios for fiscal year (FY) 2023 and the previous four fiscal years and is an update to Fitch’s October 2023 publication, “State Housing Finance Agencies — Peer Review,” which provided updated FY 2022 financial information for 51 HFAs. Also provided are survey results from the HFAs and a full comparison of individual financial results across the sector.

Access Report

Thu 26 Sep, 2024

Key Takeaways

• The U.S. higher education sector is struggling with student demographic pressures and affordability considerations on one hand and rising expenses on the other, though ample financial resources and brand recognition buoy the top institutions.
• In a trend reversal, inflation outpaced tuition increases in the past five years, while instruction expenses lagged even further behind as universities cut costs.
• Although interest rate trends inform debt issuance across the sector, we see the greatest correlation at the lowest-rated private schools.

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25 Sep, 2024

Fitch Ratings-New York/Chicago/San Francisco-26 September 2024: The Federal Reserve’s 50-bp rate cut last week will help to spur stronger asset growth for U.S. state housing finance agencies (HFAs) after a year of renewed activity, according to a new Fitch Ratings report.

In fiscal year 2023, HFAs significantly increased their aggregate assets and debt. The rebound in debt issuance for affordable housing lending, coupled with competitive mortgage rates and down payment assistance, led to a notable 10.4% rise in total loans.

“Despite pressures from heightened operating expenses and bond rates, HFAs maintained stable net operating revenues and leveraged their strong financial positions to support ongoing affordable housing needs,” said Senior Director Karen Fitzgerald. “The trend towards fixed-rate debt issuance over variable-rate debt further highlights their prudent financial management, demonstrating stability and profitability in a fluctuating economic landscape.”

More restrictive bank lending standards has also helped precipitate stronger demand for loans as HFAs are able to underwrite loans to borrowers who may not currently qualify for loans from conventional lenders. However, the increase in demand for HFA loan products is somewhat tempered by the continued deterioration in housing affordability, especially for first-time homebuyers, according to Fitch Director, Kasia Reed.

“While lower rates make home purchases more affordable, supply remains an issue and constrains the demand unless more sellers enter the market in a lower rate environment,” said Reed. “Additionally, lower rates may begin to increase prepayment speeds under more recent HFA bond programs as homeowners with higher mortgage rates look to refinance at lower rates.”

Fitch’s “State HFAs Sector Monitor: 2024” is available at www.fitchratings.com.

The Disclosure Committee is pleased to announce that it has released the final version of the Best Practices in Disclosure for State Revolving Fund Revenue Bonds.

Click here for the press release. Click here to read the paper.

• Muni refunding bond volume is up more than 70% since 2023
• MTA, Chicago have plans to refinance debt in the coming months

States and local governments are refinancing more debt than in years, seizing on lower borrowing costs and signaling a wave of such bond sales as the Federal Reserve prepares to cut interest rates even further.

Municipal bonds sold only to refund existing debt have topped $66 billion so far this year, an increase of nearly three-quarters from the same pace in 2023. Those deals represent nearly 20% of all state and local government debt sales, the largest share since 2021 — a year when 10-year municipal bond yields dropped below 1%, according to data compiled by Bloomberg.

“The refunding surge started around the beginning of the summer when there were more clear indications of where the interest-rate direction is going,” said Alice Cheng, vice president and municipal credit analyst at Janney Montgomery Scott. “Working with issuers and bankers, I know that everybody is looking at any opportunities for refunding.”

The reopened window is a win for governments who have had limited refinancing opportunities since the Fed started raising interest rates in 2022. And such sales can save cities, states and towns major cash. Chicago, for example, estimates it can reclaim about $70 million of debt-service costs through a proposed $1.5 billion refunding sale to help close its budget deficit.

Refunding Sales Increase on Rate Picture
Share of muni bond sales sold to refinance existing debt

Some of the biggest issuers in the $4 trillion municipal bond market are taking advantage of the window to refinance. The Metropolitan Transportation Authority plans to sell $872 million of new bonds to raise funds to retire and refund existing debt in a competitive sale on Oct. 1, according to preliminary offering documents dated Wednesday.

The Chicago Transit Authority — which runs bus and train service in the Windy City — is also among issuers looking to refinance for savings. The agency is considering issuing a new deal in the next several months to refund $555 million of bonds sold in 2014, said Tom McKone, chief financial officer of the CTA. Most municipal transactions have a 10-year call option, meaning debt sold a decade ago is now able to be refinanced.

“We do see rates coming down and rates are attractive,” McKone said.

Despite the elevated amount of refinancing sales this year, issuance is expected to continue climbing into 2025, said Drew Gurley, managing director of municipal underwriting at Siebert Williams Shank.

“There’s a lot of callable bonds that are available, so I’m expecting a lot of refundings,” he said. “I don’t see that issuance will fall off a cliff.”

Bloomberg Markets

By Shruti Singh and Lily Meier

September 26, 2024

— With assistance from Erin Hudson 

• Record new issue supply continues as investor demand keeps up
• Muni market is set for a gain of 0.9% during September

The municipal market is set for its best third quarter since 2011, with a return of about 2.6% during the three-month period.

As the Federal Reserve begins cutting interest rates, investors are snapping up the bonds to lock in the higher yields offered by the securities while they still last.

The rally comes despite a surge in new bond sales, an instance that would typically pressure prices. Issuance in September totaled nearly $46 billion, the second-highest total for the month since at least 2013, according to data compiled by Bloomberg. Despite that, the muni market is poised to see a gain of 0.9% during the month, marking the best performance for a September since 2013.

Continue reading.

Bloomberg Markets

By Erin Hudson and Amanda Albright

September 27, 2024

As a recent study documents, federal fiscal stimulus created a budget windfall for states. Most cut taxes, and some now must scramble to make up for shortfalls. Congress is likely to impose tighter restrictions on future countercyclical aid, so it’s a time for all levels of government to get their acts together.

Those of us who live near the ocean understand wave action. A surging wall of water approaches the shore, then crests and retreats. Often there’s an undertow that follows. That’s pretty much the story for state revenues over the period from 2020, when the COVID-19 pandemic began, to the present. States received massive amounts of federal countercyclical aid from Congress, while at the same time their sales tax receipts surged as homebound residents spent a substantial portion of their own federal helicopter money on everything from Pelotons to designer handbags.

In ways never seen before in the annals of public finance, a good number of states actually made money on the pandemic — for a year, anyway. Flush with this unanticipated windfall, 48 states and the District of Columbia cut taxes or issued one-time rebates. Even though Congress had enacted rules to discourage use of the federal money for state-level tax cuts, governors and legislators quickly found ways around that by pointing to their good fortune from locally collected revenues.

Now that the economy has normalized and their federal money has largely been spent, a number of states are struggling to make ends meet. Three dozen of them experienced a revenue drop in the past year, and at least five now have serious budget shortfalls. Nonetheless, most states reportedly met their fiscal 2024 budget projections, which had anticipated lower revenues. For most, the problem now is what to do to balance their budgets after all those high-tide tax cuts.

Continue reading.

governing.com

OPINION | Sept. 24, 2024 • Girard Miller

• Vanguard, AllianceBernstein accuse BC Ziegler of fraud
• Phoenix-area venue collapsed 17 months after opening

Municipal bond funds that lost more than $200 million after a sprawling Arizona sports complex collapsed into bankruptcy sued the investment bank that underwrote the debt for the project and the father-and-son team that developed and managed it.

The Vanguard Group Inc., AllianceBernstein Holding LP and Macquarie Group’s Delaware Funds allege in a lawsuit filed earlier this month that they were defrauded by Chicago-based bond dealer BC Ziegler, the underwriter of $280 million of municipal securities for the project, and by Randy and Chad Miller.

The lawsuit in Arizona Superior Court in Maricopa County also named law firm Gust Rosenfeld, which acted as counsel on the securities that were issued through the Arizona Industrial Development Authority in 2020 and 2021. The three asset management companies owned about 70% of the debt.

The bond offerings for the Phoenix-area complex, known as Legacy Park, were based on sham financial projections and failed to inform investors that millions of dollars of bond proceeds were diverted to pay the Millers and support operations, the funds alleged.

Contracts

At least seven organizations the Millers said were lined up to use the park, including English soccer giants Manchester United and a youth affiliate of Major League Soccer’s Real Salt Lake, have said they never signed “pre-contracts” or “letters of intent” cited in the bond prospectus circulated among investors who purchased the bonds, Bloomberg previously reported.

Related Story: Muni Bond Blowup Exposes Flaws in $600 Billion Corner of Market

“Defendants falsely inflated the purported demand for Legacy Sports Park, evidenced by so-called letters of intent, many of which turned out to be fabricated,” the funds said in the complaint. The mutual funds “relied on the materially false and misleading information in the offering memorandum, including the materially false financial projections and the risks related to to the project.”

Michael Grimm, a spokesman for Ziegler, said the allegations in the suit had no merit and the investment bank intends to vigorously defend itself. Randy Miller declined to comment as did his attorney. An attorney for Chad Miller didn’t respond to a request and neither did Gust Rosenfeld.

Representatives for AllianceBernstein and Delaware Funds didn’t provide a comment. A spokesperson for Vanguard declined to comment.

Ziegler was paid about $5.7 million to underwrite the two bond offerings. Gust made about $340,000. The lawsuit is the second brought by bondholders against Ziegler. An entity formed by Saybrook Fund Advisors, an investor in distressed municipal debt, sued the bank in November 2023.

Legacy Cares, a nonprofit set up by the Millers to own the 320-acre complex, filed bankruptcy in May 2023, saying construction setbacks, labor shortages and supply-chain delays amid the pandemic delayed the park’s opening, resulting in lost revenue. The facility, with a set of fields and courts for soccer, football, baseball, basketball and other sports, was sold last October for $26 million. Bondholders received $2.4 million in cash and an 11% equity stake in the new owners.

While offering documents for the bonds said the complex would bring in $100 million in its first year, by the time the park opened it generated about $30 million and operated at a $15 million loss.

Financial Projections

In addition to basing their financial projections, in part, on allegedly fraudulent commitments to use Legacy Sports Park, the bond offering said that the Oak View Group, a firm hired to manage non-sport operations like food and beverage and parking, would contribute $10 million to the development. OVG never made the investment, according to the lawsuit.

“Defendants never updated the offering memorandum or otherwise informed investors about the material change in cash flows,” the lawsuit said.

Ziegler and the Millers also failed to update their initial financial projections for a June 2021 bond sale even though numerous teams canceled their booking because of the Covid-19 pandemic.

The more than 1,000-page offering prospectus for the 2020 bond offering characterized Randy Miller, a former minor—league baseball player, as a successful businessman with wide-ranging connections to the sports industry, citing his associations with the United States Football League’s Arizona Outlaws and the Phoenix Giants, which last played in the ’80s.

But it omitted the elder Miller’s three personal bankruptcy filings and connections to a Texas investment fraud involving a business entity he controlled. Miller was never charged in the Texas case.

Randy Miller was paid $1 million when the 2020 bond issue closed and both he and Chad Miller received $40,000 per month as operators of the park, the funds’ lawsuit alleged. The Millers used more than $7 million of bond proceeds to pay “exorbitant” salaries to themselves, family and friends, the suit said. None of these payments were disclosed to bond investors, the complaint said.

Another $1.2 million of bond proceeds was used to settle a securities fraud lawsuit against the Millers.

“These omissions were highly material given that they improperly diverted proceeds form the bond offering, and concealed facts that impugned the integrity and credibility of the Millers,” the lawsuit said.

Bloomberg Industries

By Martin Z Braun

September 23, 2024

Watch video.

Muni Moment – Bloomberg Markets: The Close

September 26th, 2024

Cities and counties are selling bonds to cover costs from storms and drought

Extreme weather is pressuring local budgets, sticking Americans with the bill and putting the $4 trillion market for state and local bonds at the center of the climate-change fight.

Clyde, Texas, will likely face increased borrowing costs after the city defaulted on debt last month during a drought. Higher parking fees at the beach in Naples, Fla., are helping repay bonds sold to rebuild the city’s hurricane-damaged pier. Residents of Texas, Louisiana and Oklahoma will spend the next two decades chipping away at the multibillion-dollar cost of maintaining power during a 2021 winter storm.

“We’ll be paying off the bond for the four days of electricity for years to come,” said Georgetown, Texas, Mayor Josh Schroeder.

Continue reading.

The Wall Street Journal

By Heather Gillers

Sept. 26, 2024

Americans often foot the bill for the increasing demands that heat, water and wind are putting on local communities. Frequently, they are paying interest, too.

When winter storm Uri brought a week of freezing weather in 2021, infrastructure built for warmer temperatures broke down. Energy prices skyrocketed, making it costly for energy companies to maintain electricity and gas for homes and businesses.

In 2022 and 2023, amid some of the highest rates in recent years, Texas, Louisiana and Oklahoma sold municipal bonds to reimburse the companies for the resulting costs. (The Louisiana bonds also paid for some hurricane-related energy costs.)

Continue reading.

The Wall Street Journal

by Heather Gillers

Sept 27, 2024

High-yield municipal bonds have more price volatility and credit risk, but they have outperformed investment-grade munis dramatically over the past 15 years

Some investors focus on growth while others are interested in current income. For that second group, broader horizons within the bond market can lead to better returns over the long haul. You might be surprised to see that diversified high-yield (or junk) bond portfolios can be the best performers, as long as the portfolio managers do a good job analyzing credit risk.

John Miller is the head and chief investment officer of the High Yield Municipal Credit Team at First Eagle Investments in New York. He oversees the First Eagle High Yield Municipal Fund and the First Eagle Short Duration High Yield Municipal Fund. He is based in Chicago and joined First Eagle in January, after leaving Nuveen last April.

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morningstar.com

By Philip van Doorn

Sep 24, 2024

It’s no secret that the commercial real estate market has been struggling for a while now. However, muni bond fundamentals remain strong.

Ever since hybrid and remote schedules became more popular work practices, commercial real estate has struggled. According to a Q2 2024 report from Moody’s, the office sector vacancy rate sits at 20.1%. Moody’s adds that this is the first time in history that the office sector vacancy rate surpassed 20%.

While some investors may worry about how office vacancies could affect municipal bonds, experts say there is no need to be concerned. In recent insights, the Eaton Vance team notes that the major cities have “significant time to address the potential budget shortfalls”, adding that cities have plenty of options to rebalance their budgets.

Continue reading.

etftrends.com

by Nick Wodeshick

September 24, 2024

“Once you reach a certain level of wealth, the conversation shifts. We aren’t talking about accumulating anymore; we’re talking about preserving.”

This is how Nick Goetze, managing director of Fixed Income Solutions at Raymond James, frames things when he talks about bonds. And when it comes to preserving your wealth, some bonds are built differently.

“The first priority with bonds is principal preservation,” says Nick. “In certain high-tax situations, individual investment-grade municipal bonds can be one of the better options to accomplish that goal.”

Tax appeal

Issued by city, local and state governments, municipal bonds are loans used to build infrastructure – road expansions, new hospitals, school improvements, water and sewer maintenance, etc. What makes them an attractive opportunity for high-net-worth investors is how they are – or aren’t – taxed.

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advisorperspectives.com

by Team of Raymond James, 9/27/24

NORWALK, Conn., Sept. 20, 2024 (GLOBE NEWSWIRE) — CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for August 2024. The report, which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity over the next quarter, found a sharp increase in request volume for new corporate and municipal identifiers.

North American corporate CUSIP requests totaled 7,602 in August, which is up 18.9% on a monthly basis. On a year-over-year basis, North American corporate requests closed the month up 11.5%. The monthly volume surge was driven by a 19.2% increase in request volume for U.S. corporate debt and a 13.6% increase in volume for U.S. corporate equities. Request volumes for short-term certificates of deposit (22.2%) and longer-term certificates of deposit (60.0%) also rose sharply in August.

The aggregate total of identifier requests for new municipal securities – including municipal bonds, long-term and short-term notes, and commercial paper – rose 20.8% versus July totals. On a year-over-year basis, overall municipal volumes are up 8.8%. Texas led state-level municipal request volume with a total of 305 new CUSIP requests in August, followed by New York (119) and California (59).

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The Federal Reserve intended for its first rate cut in four years to stimulate the broader economy, but the decision will also gradually effect state and local budgets.

The Federal Reserve intended for today’s interest rate cut of 0.5 percentage points to stimulate the broader economy, but this shift in monetary policy also represents a subtle but important change in the operating environment for state budgets. Interest rates affect every aspect of government finance, from revenue to infrastructure projects, and although the effects on state and local budgets will be gradual, the first rate cut in four years sends a message.

“This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained,” Federal Reserve Chair Jerome Powell said at a press conference after announcing the cut. He also cautioned that the Fed is “not on any preset course—we will continue to make our decisions meeting by meeting.”

One of the most immediate impacts of lower rates will be lower borrowing costs for state and local governments seeking to finance critical projects, particularly infrastructure, and make other long-term investments. The higher interest rates of recent years have discouraged borrowing and, as Utah Legislative Fiscal Analyst Jonathan Ball noted during an interview with The Pew Charitable Trusts, this has led some lawmakers to tap historically large general fund and other cash balances to pay for capital projects.

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Route Fifty

By Justin Theal and Liz Farmer

September 18, 2024

Fitch Ratings-New York-19 September 2024: U.S. states are settling into a new normal of slower revenue growth after the Federal Reserve’s first interest rate cut in four years, according to Fitch Ratings analysts during a webinar yesterday. Fitch economists project a sizeable slowdown in growth for 2025 and a series of interest rate cuts through 2026. The labor market and job growth are already slowing down, and the same trend appears likely for for state budgets.

“Managing expenditures to revenues is nothing new to states, but the pandemic was an extraordinary outlier that states had to adjust to in the moment,” said Senior Director Karen Krop. “States had already learned the importance of building fiscal resilience during good times from the global financial crisis, and this lesson helped them weather the pandemic.”

By adding to their coffers in recent years, states have been able to head off negative peformance pressure and smoothly downshift from what Krop called “first booming, then slowing, then normal growth.”

After cresting in 2023, the wave of new state tax cuts appears to be ending. Senior Director and U.S. state government group head Eric Kim pointed to California, Illinois and New Jersey as states that have recently raised taxes in part to address budget gaps.

Time will tell how the direction of the broader economy post-rate cuts will affect the state labor picture. Kim noted a wide range of disparity in terms of non-farm payrolls growth across the states; through July, Idaho and Utah grew over 10% growth above pre-pandemic levels, while Hawaii, Louisiana and Maryland were stalled below pre-pandemic employment levels.

Additional information is available in Fitch’s state budget report at www.fitchratings.com.

Key Takeaways

• S&P Global Ratings’ median rating for all U.S. housing finance agency (HFA) mortgage revenue bond (MRB) programs is ‘AA+’ with a stable outlook.
• The median minimum asset-to-liability (A/L) parity for all MRB programs was stable at 123% (compared with 122% in 2023) while median credit losses declined.
• Credit quality for single-family and multifamily MRB programs generally remained stable or slightly improved as prepayments slowed, loan quality stabilized, and A/L parity remained largely unchanged.
• HFA management teams continue to meet their mission by balancing the provision of affordable housing solutions through a measured debt issuance plan, which we believe will result in ongoing rating stability for MRB programs.

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19 Sep, 2024

• US airports have sold more than $12 billion of debt this year
• Facilities in Charleston, Fort Myers to issue in coming weeks

An influx of travelers passing through US airports has created a frenzied borrowing boom to raise cash for expansion projects.

Facilities in South Carolina, California, New York and Florida have plans to tap the municipal bond market in the coming weeks, adding to the $12.3 billion of airport debt already sold this year, according to data compiled by Bloomberg. That volume marks a more than 100% increase from the same period a year ago. Proceeds from the sales will be used to finance new renovation projects designed to improve passengers’ experiences.

“Airports are congested, there’s a lot more flights and we just need more improvements,” said Mikhail Foux, head of municipal strategy at Barclays Plc. “Traffic through airports is through the roof right now.”

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Bloomberg Markets

By Lily Meier

September 19, 2024

Fitch Ratings-Austin/New York-17 September 2024: U.S. senior care facilities face an uphill battle in trying to retain staff over time as a pivotal milestone around baby boomers inches closer, according to Fitch Ratings in its latest labor tracker for the sector.

Labor shortages, increased costs and a gradual shift toward home-based care are all contributing to keep employment at life plan communities (LPCs) and skilled nursing facilities (SNFs) below pre-pandemic levels. Conversely, assisted living facilities (ALFs) and the private sector have surpassed their pre-pandemic employment figures. Fitch’s latest findings confirm an ongoing labor shortage that will take time to address, according to Director Richard Park.

“Demographic trends favor long-term demand growth for senior services with the last of the Baby Boomer Generation turning 65 by 2030,” said Park. “However, service providers will need enhanced strategies to boost their workforce pipeline amid weak payroll recovery.”

The health care and social assistance job openings rate continues to decline steadily, from 7.9% in January to 6% as of July. However, quit rates are still elevated compared to the 4.2% average rate between 2010-2019.

Elsewhere, LPCs payrolls are up by approximately 0.17% from January to July of this year. Additionally, ALFs have grown by around 2.15% while SNFs, where workforce challenges are still quite acute compared to pre-pandemic, have seen payrolls rise by 1.43%. Average hourly earnings are also showing signs of leveling off and stabilizing.

Fitch’s latest “Life Plan Communities Labor Tracker: September 2024” is available at www.fitchratings.com.

Highlights

• The U.S. Environmental Protection Agency (EPA) on Sept. 6, 2024, announced the availability of $6.5 billion in Water Infrastructure Finance and Innovation Act (WIFIA) funding and $1 billion in State Infrastructure Financing Authority (SWIFIA) funding.
• WIFIA funds long-term loans to finance critical water infrastructure projects to address public health, replace lead service lines, improve climate resilience improvements, improve infrastructure in disadvantaged communities and address emerging contaminants such as per- and polyfluoroalkyl substances (PFAS).
• Given the increased attention to emerging contaminants and regulations setting limits on the presence of PFAS in water systems, this funding is expected to alleviate compliance costs.

The U.S. Environmental Protection Agency (EPA) on Sept. 6, 2024, announced the availability of $6.5 billion in Water Infrastructure Finance and Innovation Act (WIFIA) funding and $1 billion in State Infrastructure Financing Authority (SWIFIA) funding.

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Holland & Knight LLP – Dianne R. Phillips, Meaghan A Colligan, Amy L. Edwards, Michael Galano , Lauri A Hettinger and Molly Broughton

September 19 2024

New Mexico will use artificial intelligence to monitor satellite images to identify leaks before they become major problems.

In 2022, residents in Chama, New Mexico, a Rocky Mountain village with less than 1,000 people near the Colorado border, seemingly overnight found their water taps had stopped working.

The state responded by sending in gallons of bottled water to prevent catastrophe. A subsequent investigation revealed that an unaddressed leak in the village’s water system caused the disruption. New Mexico sent Chama $800,000 in capital funds to fix it and other water infrastructure needs. But it wouldn’t be the last time the village suffered a water-related incident, this summer residents had to restrict their water use after a plant shutdown.

The fragility of the water supply statewide has been on display for a while now, a dam near Albuquerque, its largest city, has been out of commission for three years. That and the other water-related incidents prompted New Mexico to unveil a 50-year action plan in January to address water scarcity.

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Route Fifty

By Chris Teale

September 18, 2024

• Only 2% of proceeds initiate entirely unique green projects
• Global market for the bonds has grown to more than $3 trillion

Almost all green bonds issued in the US fail to drive real action to tackle climate change, undermining the merits of a global market that’s grown to more than $3 trillion, according to a study.

An analysis of the first green bonds sold by corporate and municipal issuers between 2013 to 2022 found that about 2% of proceeds were used to fund projects that are genuinely unique or don’t replicate existing work, Pauline Lam and Jeffrey Wurgler said in a working paper published this month by the National Bureau of Economic Research.

Roughly 30% of proceeds from corporate green bonds and 45% in the case of municipal bonds were used to refinance ordinary debt, while in many other instances funds were directed to expanding existing projects or to new developments that were similar to previous work.

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Bloomberg Green

By Ishika Mookerjee

September 19, 2024

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Bloomberg Markets: The Close – Muni Moment

September 20th, 2024

• Ongoing wave of new issue deals will keep muni values cheap
• Strategists advise positioning portfolios now before election

Municipal bonds are looking attractive compared to taxable debt, with valuations at or close to their cheapest levels this year.

State and local government securities are poised to get even cheaper in coming months following the Federal Reserve’s 50 basis point cut this week, according to strategists at Bank of America Corp., as well as Goldman Sachs Asset Management and Barclays Plc, who are advising investors that it might be a good time to buy.

According to Bank of America strategists led by Yingchen Li, the current cheapening doesn’t reflect weakness in the tax-exempt market but rather richness in the taxable space. Those valuations could shift if muni supply wavers.

“If the new issuance calendar shows any signs of slowing off the torrid pace when Election Day approaches, we believe significant ratio richening should be expected,” wrote Li in a Friday note. “We continue to advise investors to take positions while the muni market rally remains slow and ratios are somewhat cheap.”

The 10-year muni-Treasury ratio — a key measure of relative value — hit its highest level of the year earlier this week. The greater that figure, the cheaper municipal bonds appear on a relative basis.

So far in 2024, investors have piled into municipal bonds. Inflows into muni funds exceeded $700 million for the week ending Sept 18, marking 12 straight weeks of expansion, according to LSEG Lipper Global Fund Flows data.

Joseph Wenzel, head of municipal funds and institutional accounts platform at Goldman Sachs Asset Management, said he expects tax-exempt securities to cheapen as record-setting new issue supply continues to pick up, speaking in a webinar Wednesday.

Barclays’ municipal strategists Mikhail Foux and Clare Pickering highlighted a similar sentiment in a Friday research note, saying that the “challenging” technicals of the muni market — namely record levels of supply — could buck the historical pattern of muni ratios declining after the first rate cut in an easing cycle.

“Even though investors should keep in mind the risk of ‘red wave’ in November, we would consider adding in October if valuations become more attractive,” the group wrote.

Bloomberg Markets

By Erin Hudson and Maxwell Adler

September 20, 2024

• New bond sales head for record year as pace quickens 38%
• Bankers, buyers happy for opportunity after lackluster years

For Beth Coolidge, the record pace of municipal bond sales this year means only an occasional day off rather than week-long vacations. The head of public finance at Oppenheimer & Co. isn’t complaining.

“You have to be available when the work is available, because we did see a drop in issuance the last few years,” she said. “You don’t want to take a week off because you feel like you are going to miss something.”

Most bankers and investors say the crush of new deals is unlikely to ebb until after Election Day on Nov. 5. State and local governments are motivated to complete borrowing for infrastructure and other projects before a new president and Congress add the potential for market volatility.

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Bloomberg Markets

By Shruti Singh

September 18, 2024

• Fed is expected to lower interest rates later this week
• Muni sales topped $14 billion in the week ended Friday

Municipal bond buyers scooped up an abundance of debt sales last week, eager to lock in higher yields before the Federal Reserve is widely expected to lower interest rates for the first time in more than four years.

States and local governments sold more than $14 billion of debt in the week ended Friday, one of the largest weekly amounts of the year and 79% more than the five-year weekly average, according to data compiled by Bloomberg. Borrowers are rushing to market ahead of potential volatility before the US presidential election in November. Long-term municipal bond issuance is up more than one-third over 2023’s pace.

“These next couple of weeks are basically the last chance to stock up on decent yields,” said Dora Lee, research director at Belle Haven Investments. She said that recent transactions, including one by New York City, garnered healthy demand from investors.

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Bloomberg Markets

By Danielle Moran and Martin Z Braun

September 16, 2024

The Federal Reserve nearing its first interest rate cut since 2020. So enthusiasm for fixed income assets is increasing, and muni bonds are part of that trend. That could be good news for exchange traded funds such as the ALPS Intermediate Municipal Bond ETF (MNBD).

The actively managed ETF has been a steady performer over the course of this year. And it hit a new 52-week high on Monday. That confirms it has ample leverage to the concept of lower interest rates. That’s to be expected. But it’s still encouraging to see MNBD and other municipal bonds behave accordingly in advance of monetary easing.

MNBD’s recently encouraging price action is noteworthy for another reason. It’s also reflective of buyers proving receptive to a spate of new issuance in the municipal bond market. City and state governments have recently sold a significant amount of bonds. Those new issues have easily absorbed, indicating there’s increasing appetite for munis ahead of monetary easing.

MNBD Tailwinds Emerging

Municipal bonds, including MNBD holdings, are being boosted by the notion of lower borrowing costs. But the asset class is also catching a bid. That’s because some experts believe volatility for risk assets will increase as Election Day nears.

“States and local governments sold more than $14 billion of debt in the week ended Friday, one of the largest weekly amounts of the year and 79% more than the five-year weekly average, according to data compiled by Bloomberg. Borrowers are rushing to market ahead of potential volatility before the US presidential election in November. Long-term municipal bond issuance is up more than one-third over 2023’s pace,” reported Bloomberg.

Owing to its status as an actively managed ETF with a trailing 12-month yield of 3.38%, MNBD could be an ideal avenue for investors looking to skirt equity market turbulence while accruing benefits delivered by Fed rate cuts.

MNBD is relevant for other reasons. Its 3.38% trailing 12-month yield is well in excess of the average 2.61% found on the highest-rated munis with 10-year maturities. Additionally, municipal bonds are seen as attractively valued relative to Treasurys. As for the supply issue, it could fall in the coming days before rebounding.

“Sales are expected to drop off this week as governments generally avoid coming to market when the Federal Open Market Committee meets. However, issuance is likely to inch back up with about six weeks until the election. Borrowers have already lined up about $15.5 billion of sales over the next 30 days,” according to Bloomberg.

etftrends.com

by Todd Shriber

September 17, 2024

Forthcoming market volatility from an election year may have fixed income investors shying away from bonds. However, it’s an ideal time to get municipal debt exposure, especially in the current market environment.

“In the current environment, which includes a too-close-to-call U.S. election and trillions of investable assets parked in cash, there’s opportunity in municipal bonds,” noted James M. D’Arcy, an active municipal fixed income portfolio manager at Vanguard.

At the start of 2024, private and public entities have issued bonds with the expectation of coming rate cuts. Now, municipalities are issuing bonds at increased pace. That’s providing a plethora of opportunities for fixed income investors to scoop up these debt issues.

“Usually, we see an annual increase in new municipal bond issues around October and November. However, this year, we’re seeing that increase now, particularly as issuers rush to complete new deals before Election Day,” added D’arcy. “At the same time, municipalities are issuing more bonds than they have for years.”

Underpinned by Strong Fundamentals

Situated between safe haven Treasury notes and investment-grade corporate bonds are munis. Currently, strong fundamentals currently underpin these local government debt issues. And that makes funds like the Vanguard Tax-Exempt Bond ETF (VTEB) an ideal option.

“In many ways, the fundamentals that support local governments are stronger today than we’ve seen for a long time,” D’Arcy said. State reserves and rainy-day funds are the highest we’ve seen in decades.

VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index. That index measures the performance of the investment-grade segment of the U.S. municipal bond market. With volatility ahead in the election year, this getting quality is ideal to weather any market fluctuation storms.

“Munis are a high-quality asset class—more than 85% of the market is rated A or higher—with a strong fundamental risk profile,” D’Arcy added. “That’s particularly true when compared to corporate bonds. Even the amount investors are compensated for going down in credit quality—credit spreads—remains attractive in the muni space, even in the current yield environment.”

VTEB is an ideal solution for investors wanting muni exposure but not wanting to sift through the mass of options available to them. The fund tracks an index including municipal bonds from issuers. Those issuers are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax.

etftrends.com

by Ben Hernandez

September 20, 2024

Some of the largest municipal bond ETFs are passively managed, but did you know that these index-tracking funds exclude a significant portion of the muni bond market?

Notably, the two largest ETFs in this category are passively managed and account for nearly 75% of overall municipal bond ETF assets.1 While passive ETFs, including these giants, are attractive due to their low fees, these funds miss out on some compelling areas of the municipal bond market due to the rules that define their construction.

What sectors are often excluded from passive muni ETFs?

By design, a passive ETF’s portfolio is tied to its underlying benchmark. Examining the rules governing these benchmarks can shed light on which segments of the municipal bond market aren’t represented within their associated ETFs.

Commonly excluded areas of the market include housing bonds, tobacco bonds, and bonds that are subject to the alternative minimum tax. Conduit bonds, which are a specific type of municipal bond issued by a governmental entity but primarily for the benefit of for-profit institutions like hospitals and universities, can also be excluded from the index. Due to these exclusions, it’s estimated that the largest passive municipal bond ETFs lack exposure to around one-fifth of the municipal bond market.

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jhinvestments.com

September 20, 2024

BlackRock Inc., the world’s largest asset manager, is converting a municipal bond mutual fund into an ETF and revamping another, following a trend among issuers seeking to capitalize on growing demand for exchange-traded funds.

The New York-based firm plans to convert its $1.7 billion BlackRock High Yield Municipal Fund into an ETF and revamp its existing $195.84 million BlackRock High Yield Muni Income Bond ETF (HYMU) into an iShares-branded product. The mutual fund conversion, set to close on Feb. 7, will result in the creation of the iShares High Yield Muni Active ETF, according to a filing with the Securities and Exchange Commission.

ETFs are snatching an ever-increasing market share from mutual funds—so far this year ETFs raked in $588.1 billion and mutual funds bled $217 billion, Morningstar said recently. To accommodate demand issuers have converted dozens of mutual funds to ETFs since the first transition from Guinness Atkinson in March 2021, and Bloomberg ETF analyst Eric Balchunas has said that $1 trillion worth of mutual funds may convert to ETFs, which are easier to trade, by 2033.

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etf.com

by DJ Shaw
Finance Reporter

Sep 20, 2024

View the NASBO summaries.

Fitch Ratings-New York-09 September 2024: U.S. states are taking a slow and steady approach to their fiscal 2025 budgets, according to Fitch Ratings in its latest annual report.

State budgets are in fiscally sound positions with extraordinary post-pandemic revenue performance buying them time to strengthen their financial operations. This prudent approach is proving useful, says Senior Director Karen Krop.

“States have returned to more typical budgeting practices for fiscal 2025, with modest revenue growth expectations and a need to address some expenditure pressure,” said Krop. “The end result is still robust dedicated operating reserves, with some states dipping into accumulated balances for one-time spending and others tapping rainy day funds to help balance their budgets.”

The wave of significant tax policy changes seems to have peaked. Fewer states are incorporating tax cuts into their budgets, with some notable exceptions. Few states are raising revenues, although California did so on a temporary basis to address its revenue gap. New Jersey and Illinois similarly raised revenues.

Slower revenue growth means states are moderating spending expectations after relatively high budget growth during and after the pandemic. They continue to fund high-priority initiatives, including addressing homelessness and housing affordability. Several states, including Massachusetts, New York, Utah, Vermont, and Oregon, are investing in programs. “States are also allocating resources for natural disaster response, such as wildfire recovery in California and Hawaii, flood damage response in Vermont, and adding funds for emergency preparedness in Florida,” said Krop.

‘2025 U.S. State Budgets Back to Normal’ is available at www.fitchratings.com.

This criteria article presents S&P Global Ratings’ new methodology for rating U.S. governments.

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[Free Registration Required.]

In this article, S&P Global Ratings provides the institutional framework (IF) assessments it derives from the application of the criteria “Methodology For Rating U.S. Governments,” published Sept. 9, 2024. This commentary is intended to be read in conjunction with those criteria.

Key Publication Information

• This article is related to “Methodology For Rating U.S. Governments,” Sept. 9, 2024.
• We will update this publication periodically to summarize our latest institutional framework assessments for U.S. local government portfolios.

Institutional Framework Assessments

The IF is the set of formal rules and laws–as well as practices, customs, and precedents–that shape the environment in which U.S. governments operate. Our assessment is mostly qualitative and considers the historical track record as well as changes that are likely to shape the framework. As stated in the U.S. governments criteria, factors in our assessment are:

• Predictability;
• Revenue and expenditure balance and system support; and
• Transparency and accountability.

State constitutions and state laws broadly dictate the terms under which U.S. governments operate. Therefore, we assess the institutional framework by state and type of government. When the legal or practical environment for a specific local government differs from the norm in its state, we assess that specific government accordingly. Special districts generally receive the same IF assessment as municipalities in that state.

The table shows our assessments for 136 institutional frameworks in the U.S.

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[Free Registration Required.]

On Jan. 11, 2024, S&P Global Ratings published a request for comment (RFC) on its proposed revisions to the approach it uses to rate U.S. governments. Following feedback from the market, we finalized and published our criteria, titled “Methodology For Rating U.S. Governments,” on Sept. 9, 2024.

We’d like to thank investors, issuers, and other intermediaries who provided feedback. This RFC process summary provides an overview of the changes between the RFC and the final criteria as well as the rationale behind those changes.

External Written Comments Received From Market Participants That Led To Significant Analytical Changes To The Final Criteria

Comment: One commenter recommended that the methodology reflect whether state or local governments assess the need for capital investments and measure and report liabilities for current and future deferred maintenance and preservation needs. They suggested this could be assessed as part of the Management: Long-term planning subfactor or as an adjustment to the Management factor. The commenter also recommended we assess a government’s pension stress testing and risk reporting as an adjustment within the Debt and liabilities, Management, or Institutional framework sections of the criteria.

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• Risky muni returns are beating US corporate high-yield debt
• Atlanta and Miami projects sold high-yield muni debt this year

High-end real estate developments are tapping the municipal-bond market, leading to a slew of so-called luxury dirt deals and fueling returns for investors willing to take on the risk.

This year, state and local debt buyers have helped finance a vacation-home golf enclave in Florida, a resort near Zion National Park and a $4.2 billion redevelopment in Atlanta’s downtown. The deals — all high-yield and sold exclusively to sophisticated investors — represent a niche corner of a market that typically raises money to build schools, roads and bridges.

Some of these offerings have been oversubscribed and repriced tighter, helping to boost returns for junk-rated muni-bonds to a 7.2% gain this year, outpacing their investment-grade counterparts by more than 5 percentage points, according to data compiled by Bloomberg. The risky state and local debt is also beating US high-yield corporate debt.

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Bloomberg Markets

By Sri Taylor

September 11, 2024

Rainfall patterns are changing. What can local leaders do to curb the growing risks?

In Brief:

• Floods are the most common and expensive weather-related disaster.
• Changing rain patterns are increasing their frequency.
• A study by a Virginia sanitation district offers an example of infrastructure planning that takes climate into account.

The 10 warmest years since record-keeping began 150 years ago were all in the last decade. Warmer air absorbs more moisture, and this moisture is now more and more likely to come down in buckets, increasing the frequency and scale of flood risks to communities.

Climate impacts are making an already-bad situation worse, says Mami Hara, CEO of the nonprofit US Water Alliance. “We were already in a deep hole from underinvestment and systemic inequities of infrastructure investment and services,” Hara says.

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governing.com

by Carl Smith

Sept. 12, 2024

The prospect of declining interest rates presents a significant opportunity for municipal debt issuance and capital project activity among local governments.

For sophisticated investors, understanding the dynamics at play is crucial. Lower interest rates reduce the cost of borrowing, which can incentivize municipalities to issue new debt or refinance existing obligations. As the yield curve slowly normalizes, issuers can secure long-term financing at more favorable rates, thereby lowering the overall debt service costs. This environment often encourages local governments to accelerate capital projects that were previously shelved due to higher borrowing costs.

In this article, we will take a closer look at the interest rate forecast and how it may foster an attractive issuance timeframe for municipal governments.

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dividend.com

by Jayden Sangha

Sep 12, 2024

With potential rate cuts on the horizon, long-term municipal bonds are emerging as an attractive option due to their higher yields, tax benefits, and potential for price appreciation.

The Case for Long-Term Munis: Positioning for Rate Cuts

The Federal Funds rate has held steady at 5.33% for over a year, but the Federal Reserve (Fed) is now signaling that this period may be coming to an end. With potential rate cuts on the horizon in September, long-term municipal bonds are becoming more attractive. This blog will explore why now could be the ideal time to consider reallocating into long-term munis.

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VanEck

by Drew Anderson
Product Analyst

September 13, 2024

A forthcoming presidential election might create some angst among prospective investors in municipal bonds. However, history typically shows that election years don’t produce major volatility swings.

Because presidential candidates can bring differing policy agendas to the table, the implications on municipal bonds could cause a degree of worry. However, historically speaking, they don’t make much of an impact.

“Historically, presidential elections have generally had limited bearing on muni market returns,” noted AllianceBernstein, confirming that powerful economic events had more of an impact on munis than elections.

If recent history is an indicator, a presidential election year should actually be a good time to invest in munis.

“Republicans and Democrats each won three elections since 2000, and muni bond returns were positive for each election calendar year and the year after in four of the six periods,” AllianceBernstein added.

If that helps to quell any anxiety, one fund investors will want to consider for muni exposure is the Vanguard Tax-Exempt Bond ETF (VTEB). The ETF cracked the list of top muni bond funds to consider in U.S. News.

“These are debt instruments issued by states, cities, counties and other governmental entities to raise funds to pay for public projects such as roads, bridges and schools,” noted Nathan Will, principal and head of municipal credit research at Vanguard.

If investors are concerned about credit quality, they shouldn’t be, as most munis are situated between its safe haven Treasury and investment-grade corporate bond peers.

“Municipal bonds are generally a high-quality asset class with a very low historical default rate,” Will added. “What sets them apart is the combination of strong credit fundamentals and the opportunity to earn tax-exempt income.”

Diversification and Liquidity

VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. Overall, this index includes municipal bonds from issuers, primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax.

Overall, muni funds can offer distinct advantages to fixed income investors. Aside from their tax exempt income distributions are their diversification and liquidity.

“There are several advantages to using a fund structure for investing in municipal bonds,” said Stuart Gillin, assistant vice president and investment advisor at Baker Boyer Bank. “Municipal bond funds provide diversification that can be difficult for investors to achieve on their own and are more liquid than individual bonds.”

etftrends.com

by Ben Hernandez

September 11, 2024

“You don’t want to be late to this party,” Jennifer Johnston, director of research at Franklin Templeton’s Municipal Department, says while explaining why it’s a great time to invest in the municipal bond market on “Bloomberg The Close.”

Watch video.

Bloomberg Markets: The Close – Muni Moment

September 12th, 2024, 1:57 PM PDT

SIFMA Research tracks issuance, trading, and outstanding data for the U.S. municipal bond market. Issuance data is broken out by bond type, bid type, capital type, tax type, coupon type and callable status and includes average maturity. Trading volume data shows total and average daily volume and has customer bought/customer sold/dealer trade breakouts. Outstanding data includes holders’ statistics. Data is downloadable by monthly, quarterly and annual statistics including trend analysis.

YTD statistics include:

• Issuance (as of August) $335.5 billion, +34.0% Y/Y
• Trading (as of August) $13.0 billion ADV, +4.1% Y/Y
• Outstanding (as of 1Q24) $4.1 trillion, +1.0% Y/Y

Download xls

September 3, 2024

In my experience working with city governments, I’ve seen firsthand cities like Los Angeles, Chicago, Sacramento, and St. Louis struggle with resource constraints and grapple with the significant challenges cities face in balancing budgets, maintaining public services and managing infrastructure needs. Today’s situation has become increasingly dire for many municipalities that once relied on robust federal funding and a strong market. Recent economic shifts have intensified these issues.

What is a fiscal cliff?

A fiscal cliff, a term that underscores the urgency and potential abruptness of the financial crisis, occurs when local governments experience a sudden and severe economic downturn due to declining revenues and increasing expenditures. This can be triggered by various factors, including reduced tax revenues during economic slumps, decreased state and federal aid, and rising costs for public services, infrastructure, pensions and health care. It means that immediate action is needed to prevent severe repercussions.

The fiscal crisis facing cities is a result of a perfect storm: the reduction of federal grant dollars, reduced tax revenues, increased demands, especially in urban areas, and rising inflation. These factors mean that governments must do more with less. It’s why all city leaders, not just those in finance, must be well-versed in the different types of budgetary concerns and how to navigate them.

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americancityandcounty.com

Written by Abhi Nemani

28th August 2024

• Visible supply totals $21 billion for the next 30 days
• Muni-Treasury ratio has cheapened on influx of new sales

States and local governments are poised to sell debt at the fastest clip in four years as borrowers aim to get ahead potential volatility from the US presidential election in November.

Municipal bond issuers like cities and school districts have already teed up $21 billion of debt sales over the next 30 days, the highest visible supply since October 2020, according to data compiled by Bloomberg. That index represents a fraction of what actually comes to market, given that deals are often announced with less than one-month’s notice.

“This is all in response to the election this year,” said Kyle Javes, head of municipal fixed income at Piper Sandler Cos. He said that borrowers remember the market disruption that followed prior presidential elections and are eager to avoid any major swings. “We have been advising all of our clients to make sure that they get their transactions in ahead of the election if they have needs to borrow,” he said.

Continue reading.

Bloomberg Markets

By Erin Hudson and Sri Taylor

September 5, 2024

• This year has seen the most muni deals of $1 billion or more
• Los Angeles school district, Illinois plan large bond sales

It’s already a record-setting year for muni-bond sales, and the relentless pace of mega-deals — those over $1 billion — is displaying little signs of slowing.

State and local governments rushing to raise cash ahead of the presidential election in November have driven sales to $325 billion so far this year, an all-time high for the period, according to data compiled by Bloomberg going back to 2013. Some $65 billion of those offerings are mega-deals, the most in at least a decade.

And more jumbo debt sales are planned for September. The pipeline of scheduled deals rose to about $20 billion as of Wednesday, the highest in more than two years, according to a Bloomberg index of scheduled sales over the next 30 days. That figure typically represents a fraction of what comes to market as many deals are announced with less than a month’s notice.

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Bloomberg Markets

By Amanda Albright

September 4, 2024

• CreditSights sees $22.8 billion muni bond redemptions in month
• Fed rate cut could alter September muni losing streak

September is already shaping up to be a tough month for investors in the municipal debt market, with a supply-demand mismatch threatening to squeeze performance.

The total amount of redemptions to be paid out by local governments this month totals $22.8 billion, less than half of what was paid out in August and roughly 21% less than 2024’s monthly average, according to data from CreditSights Inc. That drop is set to reduce the baked-in demand that has supported the market for much of the summer.

At the same time, roughly $19.3 billion of new issuance is expected over the next 30 days — the most since June — according to data compiled by Bloomberg.

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Bloomberg Markets

By Nic Querolo

September 3, 2024

Continuing market uncertainty bodes well for municipal bonds now and in the near future, according to Dan Close, the head of municipals for Nuveen, a global asset management firm.

With their tax-free status on the federal level and in some states, municipal bonds remain in demand by investors and benefit from current market conditions, Close said. The debt products can be issued by municipalities, counties, states or special purpose districts.

“A lot of the favorable position of munis is driven by the federal tax code,” Close said. “And if the highest bracket for income tax reverts to 39.6% from 37%, the tax break for munis will be even more valuable.” Unless Congress acts to keep the rate at 37%, it will return to the higher level at the end of 2025,

In addition, the current yield on some munis of just under 5% is the highest it has been in recent history, Close said.

“Looking at all industry sectors, municipal bonds for essential services, like water and sewer projects, are particularly in demand and should continue to perform well to the benefit of investors’ portfolios,” he added.

Healthcare, software and insurance brokers, as well as public and private infrastructure, also are well positioned to withstand economic downturns, which should lead investors to secure attractive returns, Close said. A long-anticipated recession is still a possibility, according to economists.

“High-quality municipal bonds with entities that have good credit ratings are a good income source for any portfolio and are especially beneficial for residents of high-tax states such as New York and California,” he said.

Financial Advisor

by Karen DeMasters

August 30, 2024

Municipal bonds are issued by state and local municipalities, and as such, can provide investors with federal tax-free income. The bonds are backed by taxes, revenues linked to the projects they are funding or as a general obligation of the municipality itself.

Because of their tax-advantaged characteristics, municipal bonds often have yields lower than U.S. Treasury bonds, which are backed by the U.S. government. As such, municipal bonds are often evaluated as a percent of the yield you get on a comparable U.S. Treasury. This is often used by investors as a valuation metric for the asset class: The higher the figure, the “more discounted” municipal bonds are relative to Treasuries.

Recently, municipal ratios have risen to their highest levels of 2024, indicating potential value for U.S. taxpayers. Yields as percent of 10-year Treasuries reached 70% from their tights of 57% in March. Municipal yields get more attractive as supply is increased (more supply = higher yields to entice investors to fund sales). So far this year, municipalities have issued $315 billion, which marks the highest sales at this point of the year in a decade.

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J.P. Morgan

Alan Wynne
Global Investment Strategist

Published Aug 29, 2024

• Two recession indicators are currently flashing, which has some investors on edge.
• Charles Schwab offers four reasons why anxious investors should consider buying municipal bonds.
• These assets offer high credit ratings, and typically perform well at the start of a recession.

While economists remain split on whether the US is rolling toward a recession, at least two notable gauges are flashing clear-cut warnings that a downturn is imminent. For those uncomfortable with this, municipal bonds could offer some relief, Charles Schwab suggested.

The Sahm Rule says the US is in a recession when the three-month moving average in the unemployment average rate moves 0.5% from a 12-month low. This occurred in July.

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businessinsider.com

by Filip De Mott

Aug 27, 2024

• It hired about a dozen people from Citigroup’s closed unit
• Company replaced Citi as bookrunner on Alabama county deal

Raymond James Financial Inc. is scaling the rankings of municipal-bond underwriters after large banks withdrew from the business.

The St. Petersburg, Florida-based company has jumped to seventh place so far this year, its highest position in at least a decade. That’s while it was on a hiring spree, adding nearly 60 people to its public-finance division over three years.

Following the exit of Citigroup Inc. and UBS Group AG from the muni market, Raymond James, Janney Montgomery Scott and other shops have scooped up talent to gain market share. Much of the hiring came when sales contracted after a period of aggressive interest rate hikes, a bet that the market would eventually rebound.

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Bloomberg Markets

By Amanda Albright

August 28, 2024

Fitch Ratings – New York – 22 Aug 2024: Fitch Ratings has placed 18 U.S. Life Plan Communities (LPCs) Under Criteria Observation (UCO), following the publication of Fitch’s revised ‘U.S. Public Finance Not-For-Profit Life Plan Community Rating Criteria’ on Aug. 19, 2024.

The ratings placed on UCO will require additional information and analysis to fully assess the effect of the criteria on the ratings. While these ratings may be affected by the criteria changes, not all of the ratings designated as UCO will necessarily change. Placement on the UCO list does not indicate a change in the issuer’s underlying credit profile, nor does it affect existing Rating Outlooks or Rating Watch statuses. Fitch will review all the ratings designated as UCO as soon as practicable, but no later than six months following the date of the criteria release.

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View the Report.

Mon 19 Aug, 2024

Due to high mortgage interest rates and persistently high real estate prices, a median priced home is now unaffordable for a median income American household. Conditions are most acute for households in highly populated areas and earning less than the U.S. median income, over 63% of which now spend greater than 30% of household income on housing. Demand for assistance from U.S. affordable housing issuers has risen, leading to a 32% year-to-date increase in debt issuance over 2023 highs. At some point, not-for-profit housing issuers, particularly multifamily lenders, may struggle to preserve credit quality by deploying reserves to meet affordable housing needs.

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With little precedent for such a big federal investment in cybersecurity, states have largely had to write their own playbooks on how to distribute the funds to local governments.

More than two years ago, the federal government began handing out millions of dollars to states to shore up their cybersecurity amid a growing threat of ransomware attacks and data breaches.

The much-needed investment will ultimately pay out an unprecedented $1 billion over four years. The State and Local Cybersecurity Grant Program under the 2021 infrastructure law is a first-of-its-kind investment, which has meant states have largely had to create their own playbooks.

At an event hosted this week by Route Fifty, those different approaches were highlighted as two states on opposite coasts detailed how they’ve gone about shoring up their cyber defenses under the historic grant program.

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Route Fifty

by Chris Teale

August 20, 2024

As heavy rains overwhelm aging pipes, Boston and New York City are choosing very different paths forward.

At the end of July 2023, 3.07 inches of rain fell on Boston in a single day. The city’s sewer systems were overwhelmed, resulting in a discharge of sewage into Boston Harbor that prompted a public health warning. The summer of 2023 would turn out to be Boston’s second-rainiest on record.

About two months later, 8.65 inches of rain fell on New York City — higher than any September day since Hurricane Donna in 1960. The city’s low-lying areas were deluged, and half of its subway lines were suspended as water inundated underground stations.

East Coast cities are increasingly susceptible to flooding due to climate change. But changing weather patterns are only half of the problem — the other is inadequate infrastructure. In particular, these recent flood events were made worse by Boston and New York’s combined sewer systems, which carry both stormwater and sewage in the same pipes. When such a system reaches capacity during heavy rainfall or storm surge events, it backs up, sending a mixture of stormwater and raw sewage into waterways (and sometimes also into streets and homes).

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Route Fifty

By Angelica Ang,
Grist

August 22, 2024

As we inch closer to a Fed rate decision and a Presidential election, focusing on municipal credit will take on a heavier emphasis. Hosts Eric Kazatsky and Karen Altamirano are joined by Jennifer Johnston, Director of Research for Franklin Templeton Fixed Income. Bringing over three decades of experience, Jennifer is responsible for leading the group’s credit research efforts across all municipal bond sectors. She gives us her perspective on how technology enhances the credit research role and some areas of concern during the back portion of this year and beyond.

Listen to the Podcast.

Aug 20, 2024

When investors think about municipal bonds, safety and stability often come to mind. Afterall, a city or state government has the ability to tax their citizens to help pay for the bonds. As a result, munis often form the cornerstone of many conservative fixed-income investor’s portfolios. But not all munis are safe and steady, some are a tad on the risky side. But for investors looking to pick up extra yields, these bonds could be a real opportunity.

Today, that opportunity lies within munis tied to senior living and nursing homes.

The senior living sector has long been one of the riskiest in the high-yield muni space — skewing default rates higher for all muni bonds. Those issues have only gotten worse since the pandemic. But with an aging population and increased elderly care needed, the sector could provide an interesting blend of risk and reward for some income seekers.

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dividend.com

by Aaron Levitt

Aug 26, 2024

In terms of population, the universe of actively managed municipal bond exchange traded funds is growing at a prodigious pace. That makes sense because there are multiple reasons why the combination of municipal bonds and active management can reward investors.

The ALPS Intermediate Municipal Bond ETF (MNBD) is one of the established names in the active muni ETF patch. MNBD, which turned two years old in May, attempts to beat the Bloomberg Municipal Bond 1-15 Year Blend Index. Admittedly, year-to-date isn’t the best measuring stick of muni bond ETF performance. That’s because this is a long-term asset class. Still, that doesn’t diminish the point that MNBD is beating the widely followed ICE AMT-Free US National Municipal Index by a 2-to-1 margin this year.

Advisors know some perks can be accrued when munis meet active management. These include superior flexibility when it comes to managing credit and interest rate risk as well as the ability of active managers to more readily identify valuation opportunities than can muni indexes. Some other points in favor of MNBD should be considered.

MNBD Hidden Advantages

While municipal bonds are a massive corner of the broader fixed income market, some issues with this form of debt make indexing challenging.

“Municipal bonds are a highly illiquid and fragmented market. This makes indexing difficult and creates more opportunities for active managers than more liquid markets. This favorable arena is reflected in assets; 87% of all muni fund assets are in funds where managers choose the bonds rather than mimic and index,” notes Morningstar’s Gabe Alpert.

That’s not to say passive muni ETFs are “bad” products. Instead, municipal bonds’ liquidity, or lack thereof, highlights potential advantages with actively managed funds such as MNBD.

Another reason active management makes sense with municipal debt is because these bonds take various forms. This includes general obligation, revenue, and enhancement program bonds, among others. Each subsection of the muni space brings with it opportunities and risks. That can be viewed as further confirmation of the potency of active management. It could also bode well for the long-term adoption of ETFs such as MNBD.

“As demand for ETFs grew, firms launched muni-bond ETFs. Due to the difficulty of launching active ETFs until a regulatory change in 2019, before then, there were only 19 of these funds. Between 2019 and 2024, an average of 7.5 active muni ETFs were listed each year. This is compared with an average of 3.5 index muni ETFs. Flows have followed, with 60% of 2024 flows to muni ETFs going to active funds despite making up only 15% of assets,” concludes Alpert.

etftrends.com

by Todd Shriber

August 26, 2024

NORWALK, Conn., Aug. 14, 2024 (GLOBE NEWSWIRE) — CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for July 2024. The report, which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity over the next quarter, found a slowdown in request volume for new corporate and municipal identifiers for a second consecutive month.

North American corporate requests totaled 6,391 in July, which is down 2.6% on a monthly basis. On a year-over-year basis, North American corporate requests closed the month up 7.9%. The monthly volume decline was driven by a 15.6% decrease in request volume for U.S. corporate debt and a 21.1% decrease in volume for Canadian corporate securities. Request volumes for short-term certificates of deposit (-10.1%) and longer-term certificates of deposit (-10.2%) also slowed in July.

The aggregate total of identifier requests for new municipal securities – including municipal bonds, long-term and short-term notes, and commercial paper – fell 18.1% versus June totals. On a year-over-year basis, overall municipal volumes are up 7.6%. Texas led state-level municipal request volume with a total of 180 new CUSIP requests in July, followed by New York (161) and California (67).

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CUSIP Global Services

Wed, Aug 14, 2024

• Huntington leads Chicago sale as senior manager for first time
• San Antonio Water System picks Truist to underwrite, remarket

From San Antonio to Chicago, US municipalities are inviting in new rosters of banks to manage borrowings after two big players’ exits opened up a roughly $50 billion opportunity for firms that are still in the business.

Market heavyweight Citigroup Inc. and UBS Group AG began pulling away from munis over the last year, marking the biggest retreat in the sector since the financial crisis. While shrinking profit margins in the muni industry contributed to their decisions, other bulge-bracket firms and up-and-coming regional underwriters remain committed.

These muni players are eager to fill any gaps, and there’s a big incentive: The shift is happening just as US state and local borrowers flood the market with record amounts of debt.

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Bloomberg Markets

By Shruti Singh

August 15, 2024

• Chicago originally planned to sell $643 million in debt Aug. 7
• Tennessee hospital system that delayed bond deal also priced

Two municipal bond sales that were previously delayed during a particularly volatile stretch in fixed income markets were offered to investors Wednesday.

Chicago returned to the $4 trillion state and local government debt market one week later than planned, as did Erlanger Health, a hospital system based in Chattanooga, Tennessee. The sales come after two key economic data releases showed inflation easing — increasing confidence among investors that the Federal Reserve will cut interest rates in September.

The Windy City had originally planned to issue $643 million in tax-exempt bonds on Aug. 7 but moved the deal to day-to-day status to await a more stable market. Erlanger Health had delayed a roughly $316 million deal on Aug. 8, citing “recent market volatility and yield expectations falling short” of their targets.

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Bloomberg Markets

By Shruti Singh

August 14, 2024

• US pandemic aid, even inflation, propped up municipal coffers
• Strong credit cycle likely challenged by waning federal money

Municipal bankruptcies are becoming a distant memory for tax-exempt bond investors thanks to the strength of US state and city balance sheets. Some strategists warn the sunsetting of federal aid may ratchet up credit fears.

Wednesday will mark a record 449 days since Hazel Hawkins Memorial Hospital filed for Chapter 9 protection on May 23, 2023, surpassing the previous longest stretch from June 2021 through September 2022, Bank of America Corp. analysts advised in a note last week. And it’s been seven years since a bankruptcy-like filing for Puerto Rico rocked the market, as similar events by Jefferson County, Alabama, Detroit and Orange County, California, had in past decades.

Investors continue to flock to the muni market, helped by solid returns and improved issuer creditworthiness. State and local governments for the past few years have been buoyed by hundreds of billions in federal dollars allocated to provide financial stability during the pandemic era.

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Bloomberg Markets

By Erin Hudson

August 13, 2024

• The $40 million sale marks biggest ever for Riverbanks Zoo
• Zoo expects to return to the muni market again in a few years

In a summer that’s shaping up to be one of the busiest ever for municipal bond sales, investors have snapped up deals financing everything from airport projects and public transit systems to school districts. This week, they lent $40 million to spruce up one of largest zoos on the East Coast.

The Riverbanks Zoo and Garden located in Columbia, South Carolina, raised the cash to finance a gondola, hillside primate forest and observation deck plus other enhancements. The facility, which spans 170 acres and houses thousands of animals, receives more than 1 million visitors each year.

Zoo bonds are a rarity in the municipal bond market, which has seen issuance surge this year and typically finances more traditional infrastructure like roads and schools. Riverbanks, for example, comes to market roughly once a decade to finance upgrades of its facilities, said the zoo’s Chief Executive Officer and President Tommy Stringfellow. It can take years to construct and populate new exhibits, he said.

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Bloomberg Markets

By Erin Hudson

August 16, 2024

Fitch Ratings-Austin/New York-15 August 2024: Despite ongoing challenges, recent positive developments could help U.S. Not For Profit hospitals achieve a ‘Neutral’ sector outlook sooner, according to Fitch Ratings analysts in a sector webinar yesterday.

According to sector head Kevin Holloran and senior director Mark Pascaris, hospital operations have stabilized, while the chasm between revenue growth and expense growth has leveled out. Fitch’s 2023 statistics reveal 7.6% expense growth for hospitals versus 7% revenue growth, a more favorable comparison following the 9.5% expense growth against 5.8% revenue growth of 2022. However, credit ‘trifurcation’ remains an issue and will remain so well into 2025, according to Holloran, at which point the environment should start to normalize, with a credit ‘bifurcation’ emerging soon after.

According to Pascaris, the vast majority of NFP hospitals (65%-75%) will be somewhere in the middle, steadily working to improve operating margins. Additionally, struggles will intensify and may accelerate for 5%-10% of health systems, while an equal number on the opposite end of the spectrum will thrive in stronger markets.

Countering the recent moderate upswing are ongoing struggles for hospitals. Median days cash on hand continues to decline, dropping to 211.3 in 2023 from 216.2 in 2022, and down from a high of 260.3 in 2021. The imbalance between revenues and expenses remains a structural issue for the sector. Although the labor situation is improving, it still falls short of pre-pandemic levels. However, Holloran noted that the labor environment is stabilizing overall.

Improving labor productivity remains a high priority for NFP hospitals, with the advent of AI offering intriguing possibilities over time. Hospitals may need to redesign standard processes and partially incorporate AI advancements, although the significant cost of AI will be a limiting factor for many health systems.

Fitch’s webinar follows the release of the agency’s latest NFP hospital medians report, available at www.fitchratings.com.

Fitch Ratings-Austin/New York-15 August 2024: Fitch Ratings’ medians for U.S. not-for-profit (NFP) hospitals and health systems indicate the sector is slowly beginning to recover following seismic post-pandemic revenue declines. Fitch addresses this trend in its latest Fitch Analytical Comparative Tool (FACT) for the sector.

“Liquidity has held steady for NFP hospitals over the last several months while median operating incomes are beginning to stabilize,” said Fitch Senior Director Kevin Holloran. “However, the sector is grappling with stubborn inflation and formidable labor challenges. We are unlikely to achieve any degree of predictive normalcy for at least another year.”

The FACT contains financial data for 218 hospitals and health systems that can be benchmarked against peers, medians and self-defined peer groups along with historical statistics and metrics going back to 2011. This report follows Fitch’s latest medians for U.S. NFP hospitals published earlier this week.

The FACT includes a dashboard feature to graphically plot annual issuer metrics and median performance, a peer analysis tool that allows users to review and compare metrics of two issuers, and a charting tool that generates a comparison of issuer metrics against rating category medians.

‘Not-for-Profit Hospitals and Healthcare Systems FACT’ is available at ‘www.fitchratings.com’.

Fitch Ratings-Austin-14 August 2024: Medians for U.S. not-for-profit children’s hospitals are still solid, although 2023 marked the lowest profitability level for the sector in a decade, according to Fitch Ratings in its latest annual medians report.

The operating environment for children’s hospitals continues to be challenging as a result of increased staffing costs and year-to-year volume fluctuations from respiratory virus cases. Despite this, the standalone children’s hospitals’ median rating remains strong at ‘AA-’. Even with a positive median operating margin, profitability is at the lowest level in 10 years with no easy to implement solutions available to generate a “v-shaped” recovery.

“Elevated labor expenses are an unavoidable reality for NFP children’s hospitals,” said Director Richard Park. “They must continue to seek creative solutions for this issue, as rate increases will not make up the gap on their own.”

In the long term, children’s hospitals will also face the effects of declining birth rates. Meanwhile, traditional adult acute care hospitals are looking to improve profitability by becoming full-service providers across all ages and care continuums. This includes the pursuit of growth in high acuity and margin service lines that are mainly provided at children’s hospitals. Hospitals are also considering whether to incorporate AI into the daily operations of health care, with many likely to start adopting the technology to reduce administrative burden.

“Healthcare still remains a service industry centered around person-to-person interactions. Finding a way to augment a human’s capabilities while improving the patient experience will be key to the industry’s adoption of technology going forward,” said Park.

Fitch’s ‘2024 Median Ratios for Not-for-Profit Children’s Hospitals’ is available at ‘www.fitchratings.com’.

Fitch Ratings’ 2024 children’s hospital medians (using 2023 full-year audited data) show the industry working through a challenging period as the past two years have produced declining profitability, with 2023 exhibiting the lowest profitability level in 10 years. This is in contrast to the adult not-for-profit hospitals and healthcare systems sector, which is beginning to show signs of recovery after 2022 full-year audited results showed what was likely the worst year the sector has ever experienced as a whole. Despite the declines, median operating margins for ‘AA’ category children’s and adult hospitals were both positive at 2.7% and 1.5%, respectively, in fiscal 2023. Fitch believes many highly rated organizations have relied upon robust balance sheets to navigate challenges and avoid layoffs/excessive cost-cutting measures to maintain patient safety/satisfaction and employee wellbeing.

Access Report

Wed 14 Aug, 2024

The recent United States Supreme Court decision in Loper Bright Enterprises v. Raimondo and Relentless Inc. v. Dept. of Commerce (the Loper decision) overturned a 40-year precedent commonly referred to as the Chevron Doctrine. While the magnitude of the ruling will take years to unfold, S&P Global Ratings believe the Loper decision will likely influence the regulatory and policy landscape for U.S. public finance issuers and has several potential credit implications.

Decision Shifts Interpretation Of Ambiguous Statutes To Courts From Federal Agencies

The now overturned 1984 Chevron Doctrine directed courts to defer to federal agency interpretation to address statutory ambiguity, effectively providing them with significant influence over regulation and policy. The Chevron Doctrine has underpinned thousands of regulations under the umbrella of numerous federal agencies. Overturning Chevron limits the deference to federal agencies and shifts responsibility to the judicial system. Prior cases that relied on Chevron are subject to stare decisis (the principle that courts should mostly adhere to their past cases) and are not automatically overruled; however, this doesn’t preclude relitigating past cases or using the Loper decision to overturn or challenge regulations and statutes, which we believe may occur.

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14 Aug, 2024

The Artificial Intelligence (AI) Exploratory Committee was formed in May 2023 and tasked with analyzing the landscape of generative AI as it applies to counties.

Use the links below to download the AI Exploratory Committee’s full report or jump to key sections of the report. In the navigation above, find an impact summary for your county role, as well as report highlights customized for you.

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National Association of Counties

The Inflation Reduction Act includes tax credits that reimburse governments for clean energy investments. New online resources make the program more understandable and accessible.

In Brief:

• The Inflation Reduction Act includes tax credits for tax-exempt entities that can repay costs for clean energy projects.
• The program, which has not attracted the same level of attention as credits for private investment, is open to an unlimited number of applicants.
• The process for obtaining these credits is unlike that of any previous program, and online resources have recently been published to make it easier to navigate.

In the two years since the Inflation Reduction Act (IRA) was signed into law, IRA tax credits for private-sector clean energy projects have been widely celebrated and estimates of the investment they have sparked range from $125 billion to $265 billion. Credits that repay energy investments by public agencies and other tax-exempt organizations have received much less attention, but a new online tool aims to redress the imbalance.

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governing.com

by Carl Smith

Aug. 16, 2024

Railways, roads, power lines, batteries—the heat of climate change is making them all falter.

A basic fact of thermodynamics is coming to haunt every foot of train track in the United States. Heat makes steel expand, moving its molecules farther apart, and as hot days become hotter and more frequent, rail lines are at risk of warping and buckling more often.

Any fix must deal with this fundamental truth of physics. Railroads can slow their trains down, which avoids adding more heat. Or they can leave gaps in a rail (or cut them as an emergency measure), which relieves pressure that causes track to bulge but means a potentially bumpier and slower ride. Painting tracks white would help deflect heat, but the paint would need to be reapplied frequently. Adapting to this reality will be expensive, and might ultimately just look as it does now: slow the trains, cut the track, issue a delay.

Our infrastructure is simply becoming too hot to function, or at least function well. High heat can also cause bridges to fail, for the same reason as with train tracks. Roads can buckle, thanks to the thermodynamics of concrete and asphalt. In Alaska, where permafrost is thawing into a substrate more akin to a waterbed, roads can resemble an undulating line of ribbon candy. Heat has two effects on power transmission, and “both of them are bad,” Bilal Ayyub, a civil-engineering professor at the University of Maryland, told me. One, heat reduces how much electricity power lines can deliver. Two, heat increases demand—everyone turns on their air conditioners in unison—further straining an already heat-strained grid, sometimes to its breaking point. (And those air conditioners need more power to run, because they’re also less efficient in high temperatures.) Phone and car batteries drain more easily when heat speeds up their internal chemical reactions.

According to the U.S. Census Bureau, this country currently builds more than $2 trillion worth of new construction a year. Each piece of it might have a life span of 50 to 100 years, Ayyub said. What we build now will face circumstances the world of modern infrastructure has never seen. To keep up, engineers need to start designing for it now.

One obvious way forward would be to incorporate climate projections into building codes. Each time an engineer designs a piece of infrastructure, it must meet certain local codes meant to guard against the daily pressures of gravity and the vagaries of regional weather—ranges determined, until now, by looking at historical records. These codes are based on standards written by organizations including the American Society of Civil Engineers (ASCE) through a painstaking consensus process; incorporating the risks of rising heat counts as cutting-edge in this slow-moving world.

Right now, ASCE is in the midst of a six-year push to have building codes take future climate change into account, using research from the National Oceanic and Atmospheric Administration. (Ayyub, who helped incorporate flood risk into New Orleans’s post-Katrina reconstruction plan, is part of that process.) But these codes are only recommendations; state and local governments decide whether to adopt them. And that choice can come down to political stances on climate change, in Ayyub’s experience.

But building codes represent the bare-minimum level of safety and stability that a designer must adhere to. Another way to keep up with unprecedented changes is to build beyond that, in a way that embraces uncertainty and factors in failure, according to Mikhail Chester, the director of the Metis Center for Infrastructure and Sustainable Engineering at Arizona State University. Rather than assuming that systems built to withstand historical conditions are fail-safe, engineers and planners should focus on making them safe to fail, finding opportunities to minimize human harm. Power failures may be inevitable during a heat wave, but creating ancillary systems—such as community cooling centers and shade structures—can save lives in that situation.

Chester told me he has no doubt that engineers could design infrastructure to stand up to rising temperatures. To him, “the question is, at what cost?” Trying to “harden, strengthen, and armor” every piece of existing infrastructure to withstand climate hazards, including excessive heat, is economically impractical—and likely impossible. “You can’t reengineer all of U.S. infrastructure as quickly as the climate is changing,” Chester said.

The key, instead, will be to do triage. Some places need more attention than others: Chester pointed out that a newer city like Phoenix, where he lives, is actually more closely designed to withstand current conditions than a place like New York City, where many designs are based on older extremes. And some systems demand precedence: Water infrastructure and transportation systems are critical to life, for instance, but power systems supply them both. So designing resilient power systems ought to come first. But “the solution for it is costly,” Ayyub said. It involves building more energy-storage capacity, updating a nation’s worth of transmission lines (not to mention major permitting reform), and probably having a metering system in place to modulate how much power each user can access. “But it does require the users to agree to that,” he added, and it may be a hard sell.

For now, the upward trajectory of heat is outpacing all construction ambitions, and forcing decisions about how best to balance affordability and risk. Energy is the biggest infrastructure challenge that both Ayyub and Chester foresee, but when it comes to things like train lines and other forms of built infrastructure, they’re both hopeful that humanity will design ways to work around the heat. Humans are good at building things when they need to. But it’s far easier for humans to fix their own machines than to fix large-scale biological systems; those are critical systems Ayyub is worried about more. Mass biodiversity loss concerns him first—that’s unrecoverable once it’s gone—along with food security and agriculture. Engineering can get us only so far.

The Atlantic

By Zoë Schlanger

August 14, 2024

The grid is overburdened, under-resourced — and vital to the energy transition. New federal funding aims to increase capacity and get more clean energy built.

The U.S. power grid is overburdened and under-resourced — and the Biden administration just announced a major investment aimed at helping solve those problems.

The Department of Energy has offered $2.2 billion to eight projects across 18 states that could expand and strengthen the grid. The projects range from deploying grid-enhancing technologies that boost the capacity of existing power lines to building brand-new high-voltage transmission cables that will enable wind farms in the Great Plains and off the coast of New England to plug into the grid.

Tuesday’s announcement represents another significant federal investment in the U.S. transmission grid, which isn’t growing fast enough to allow clean energy to come online at the pace needed to combat climate change. Energy experts warn that without a doubling or tripling of existing grid capacity, the country will fail to hit the Biden administration’s goal of halving carbon emissions by 2030.

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Route Fifty

By Jeff St. John,
Canary Media

August 14, 2024

To date, nearly half of the nation’s 3,000 airports have received federal funding to upgrade aging infrastructure and expand facilities amid record-breaking air travel.

Nearly 300 grants were awarded to airports across the country Tuesday to revamp runways, terminals, security checkpoints, parking garages and other airport infrastructure, according to the Biden administration.

The Federal Aviation Administration handed out more than $566 million to facilities in 47 states as part of a grant program to modernize airports that was included under the 2021 infrastructure law. This is the ninth funding announcement by the FAA this year. In total, $2.89 billion will be allocated in 2024—the third year in a five-year, $15 billion grant program.

Most notably, about half the nation’s 3,000 airports have received funding to date through the Airport Infrastructure Grants program, according to the administration. Some of those projects have even been completed, including a taxiway at San Diego International Airport in California.

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Route Fifty

By Elizabeth Daigneau,
Executive Editor, Route Fifty

August 13, 2024

Discretionary grants give the president’s administration—and members of Congress—an opportunity to shape transportation policy. But applying for and administering them can be a challenge for local governments.

One of the many changes that the 2021 federal infrastructure law made to transportation policy was giving local governments more opportunities to apply directly for federal grants, rather than depending on their state government.

But Congress is likely to scrutinize—and possibly change—those discretionary grant programs when they craft the next surface transportation bill, two transportation experts told a gathering at the National Conference of State Legislatures annual conference last week, in part to make the application process more user-friendly.

“We opened up grant opportunities more to local governments and to metropolitan planning organizations that have not always had the ability to directly apply for federal transportation dollars,” said Jordan Baugh, the senior policy advisor for the Democratic members of the U.S. Senate Committee on Environment and Public Works. “That’s created opportunities, but also a lot of challenges, particularly for smaller cities that don’t have a large transportation or public works department.”

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Route Fifty

By Daniel C. Vock,
Senior Reporter, Route Fifty

August 12, 2024

California is planning to sell $2.5 billion of tax-exempt general obligation bonds later this month, the state’s second largest offering this year.

Proceeds from the sale will be used to finance voter-approved projects, pay down outstanding commercial paper and refund outstanding general obligation bonds, according to ratings documents provided by Fitch Ratings, which scores the debt AA.

The bonds will price in a negotiated sale on Aug. 27. Bank of America Corp. and Barclays PLC. are joint senior managers.

New sales of tax-exempt bonds in California have been gobbled up by buyers looking to shield income from the state’s high taxes and to lock in yields before anticipated rate cuts by the Federal Reserve later this year. California, home to more billionaires than any other state and hundreds of thousands of millionaires, levies a rate of at least 13.3% on its highest earners.

The desire for tax-advantaged investments means California bond deals can sell at yields lower than AAA-rated benchmark muni securities. The Trustees of the California State University sold $671 million of tax-exempt bonds on Aug 5 with yields as much as 26 basis points below that benchmark, according to data compiled by Bloomberg.

California State Treasurer Fiona Ma is planning at least another six municipal bond offerings in 2024, including two in September intended to beef up services for veterans, according to a press release published by the treasurer’s office.

Bloomberg Markets

By Maxwell Adler

August 16, 2024

• Muni funds investing in lower-rated bonds have been in demand
• ETFs will be managed by trio who were previously at Invesco

Rockefeller Asset Management is the latest money manager to capitalize on the muni ETF boom.

The New York-based division of Rockefeller Capital Management is launching its first actively managed fixed income exchange-traded funds. The products, which will be managed by a trio of portfolio managers who joined earlier this year from Invesco Ltd., will focus on lower-rated bonds.

There are now more than 100 muni ETFs with a combined $131 billion as asset managers vie to capture money that’s been flowing into the low-cost and easy-to-trade products. Goldman Sachs Asset Management and PGIM have both launched new funds this year.

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Bloomberg Markets

By Amanda Albright

August 14, 2024

The Jack Bogle-founded fund giant is bolstering its fixed-income shelf with actively managed municipal bond strategies.

Vanguard is joining the growing circle of asset managers venturing into an appealing corner of the fixed-income ETF space.

On Friday, the mutual fund behemoth announced plans to expand its lineup of actively managed fixed income products by introducing two new municipal bond ETFs later this year.

The firm said it intends to launch the Vanguard Core Tax-Exempt Bond ETF and the Vanguard Short Duration Tax-Exempt Bond ETF, which will be both managed by its fixed income group.

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investmentnews.com

by Leo Almazora

August 16, 2024

Despite minimal growth in tax collections in fiscal 2024, most states ended the year near their revenue forecast based on newly released end-of-year revenue totals. Comparing actual collections to forecasts is a better indicator of state revenue performance than year-over-year growth figures which, in many states, have been considerably impacted by recently enacted tax cuts. Early indications are that the majority of states closed fiscal 2024 with revenues above original forecasts, with many also seeing revenues come in above revised forecasts. Most states that saw revenues come in lower than revised forecasts were below projections by less than one percent. Some states with revenues below forecast in fiscal 2024 noted spending was below forecast as well, resulting in an end-of-year budget surplus. While most states are reporting a fourth consecutive year of surpluses, their size in nearly all cases is smaller than the substantial surpluses experienced in fiscal 2021 and fiscal 2022. Similar to fiscal 2023, states are directing these smaller surpluses to a variety of purposes including further strengthening rainy day funds and other reserve funds, fulfilling previously identified spending priorities, and avoiding debt. For some states, this stronger-than-expected growth will trigger phased-in tax cuts or may be directed toward tax reduction proposals.

Based on NASBO’s Fall 2023 Fiscal Survey of States, enacted budgets for fiscal 2024 forecasted a 1.8 percent decline in general fund revenue compared to preliminary fiscal 2023 levels. This decline was from a high baseline after three consecutive years in which the vast majority of states recorded revenue surpluses and most states enacted tax reductions. Updated data from NASBO’s Spring 2024 Fiscal Survey of States reported fiscal 2024 general fund revenues were on track to increase 0.6 percent compared to actual fiscal 2023 collections; on a median basis, general fund revenues were estimated to decline 1.1 percent in fiscal 2024.

Newly released end-of-year revenue data reveal most states ended fiscal 2024 above their revenue forecasts, while year-over-year growth was more mixed, with some states seeing slow growth in tax collections compared to fiscal 2023, and other states recording modest declines. The reasons for the slow growth or modest declines in tax collections varied but included the impact of previously enacted tax cuts, slower growth in consumption, lower inflation, and higher tax refunds. On a positive note, several states highlighted in their revenue reports increased investment income resulting from higher interest rates.

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State and local governments are frequent targets of cyberattacks. In “City Hall Has Been Hacked! The Financial Costs of Lax Cybersecurity,” a paper presented at the 2024 Municipal Finance Conference at Brookings, four economists find that municipal borrowing costs rise after a publicly reported cyberattack.

Filippo Curti (Federal Reserve Bank of Richmond), Ivan Ivanov (Federal Reserve Bank of Chicago), Marco Macchiavelli (University of Massachusetts, Amherst), and Tom Zimmermann (University of Cologne) use data breach and ransomware data on over 1,000 cyberattacks against public entities between 2004 and 2018 from Advisen, a data provider for insurers. They matched government victims of cyberattacks with data from the Census of Governments and from the Mergent Municipal Securities Database and the Municipal Rulemaking Standards Board.

After a data breach, they find, the bond prices of the target issuer in the secondary market decline between 15 to 22 basis points and primary market yields rise by 10 to 13 basis points, which is 5% higher than average bond yields in their sample. Governments hit by data breaches are much more likely to negotiate prices of new bond offerings, but they find no evidence that data breaches affect the size of bond offerings.

Curti and co-authors show that cyberattacks lead to roughly $1.77 billion in mark-to-market losses to municipal bond investors on the $870 billion in outstanding bonds of issuers hit by data breaches between 2010 and 2019. This estimate, they say, is likely a lower bound, because many bonds of issuers affected by cyberattacks may be illiquid and not trade in the 60-day window studied.

The authors also examine the effect of state data breach notification laws, which require targets of cyberattacks to notify residents, and data security laws, which mandate measures to strengthen cybersecurity. The authors find that both types of laws temporarily increase government expenditures to comply with new rules, but do not change the likelihood of future data breaches.

Since the laws are proven to not be enough to prevent future cyberattacks, Ivanov proposed at the conference that alternatives should be considered. One option is to give “a safe harbor against data breach lawsuits if the government entity complies with industry-recognized cybersecurity programs.” Such an approach would incentivize upfront investment in cybersecurity, safeguarding personal and important information of the public, and potentially reduce the long-term financial losses from cyberattacks.

The Brookings Institution

by Tristan Loa and David Wessel

August 7, 2024

Rating And Outlook Overview

The number of rated children’s hospitals remains stable. Year over year, the number of children’s hospitals rated by S&P Global Ratings has remained steady at 22 providers. Rating activity remains limited, as mergers and acquisitions are rare, business positions remain healthy, and financial performance has historically been stable. Most of our rated children’s hospitals are considered stand-alone hospitals per our criteria, with the exception of Houston-based Texas Children’s Hospital and Children’s Hospital Colorado, which own multiple hospitals and are considered systems.

Ratings distribution is skewed toward the ‘AA’ category. Children’s hospital ratings remain skewed toward higher rating categories relative to the broader group of not-for-profit acute care providers, with 91% rated in the ‘AA’ or ‘A’ categories reflecting the cohort’s generally strong credit quality. The higher ratings are supported by the hospitals’ institutional strengths and positions in their respective markets, as often they are the only provider of tertiary and quaternary pediatric services. The hospitals’ generally healthy financial profiles, albeit with support from supplemental funds, and sound balance sheets also support our higher ratings and help offset higher Medicaid exposure.

Downgrades are concentrated in lower-rated organizations. We lowered the ratings on two children’s hospitals, both in the ‘BBB’ category, with one falling to speculative-grade. The organizations had experienced multiple years of operating losses, diminishing unrestricted reserves, and weaker debt-related metrics.

Outlooks remain predominantly stable. The outlooks for the vast majority of ratings in this group are stable, speaking to the generally higher ratings and overall credit strength of the segment. However, one issuer has a positive outlook and two have negative outlooks. Of the negative outlooks, one reflects the intense rating pressure on our only speculative-grade rated issuer; the other entity has a higher rating, but has a negative outlook that reflects weakening performance in an expanding system. Overall, children’s hospitals have been able to absorb industrywide expense pressures better than the sector at large; however, the spreads between children’s hospital and stand-alone medians did narrow in 2023.

Continue reading.

7 Aug, 2024 | 13:19

Rating And Outlook Overview

The number of rated entities remains stable, although downgrades have caused changes in distribution. The total number of speculative-grade ratings has remained stable year-over-year, but some shifts in distribution have occurred primarily due to downgrades, either within the category or from the investment-grade categories. For example, the number of ‘BB’ and ‘BB-‘ ratings has increased at the expense of low investment-grade and ‘BB+’ ratings. S&P Global Ratings believes negative shifts within the speculative-grade category could continue, given the very thin liquidity and continued operating losses for many speculative-grade rated issuers. Shifts at the lower end of the rating scale may be amplified by the very limited sample size and make trend analysis less meaningful. Although we took positive rating actions on a few speculative-grade providers, they were primarily the result of mergers with higher-rated organizations.

Covenant violations continue but there were no payment defaults during the last year. Due to their weaker debt service coverage and thin liquidity, speculative-grade issuers remain at a higher risk of breaching their financial covenants than investment-grade entities. Debt service coverage, in particular, is the most common covenant violation, followed by days’ cash on hand and debt to capitalization. Although these violations often constitute a technical event of default, none of them have resulted in acceleration of the debt, as management teams have been proactive in successfully negotiating waivers or forbearance agreements with bondholders. In many cases, these agreements were remedied before maturity. Similarly, there have been no payment defaults during the last year.

Favorable outlook changes reflect some mitigation efforts to offset operating pressures. Relative to 2023, when almost half of speculative-grade providers had a negative outlook due to persistent operating difficulties, most recent data indicates just a third of organizations carry a negative outlook as of June 2024. Although negative outlooks are still high for this subset, the favorable shift is encouraging. We believe this improvement reflects some alleviation in sector pressures of the past few years, particularly in relation to labor and lower agency staff usage. Stable outlooks now represent close to two-thirds of rated providers, and therefore, we do not expect any significant increase in upgrades.

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7 Aug, 2024 | 13:18

Rating And Outlook Overview

Small hospitals, defined as having $150 million or less of total operating revenue, are a subset of stand-alone hospitals. The limited number of small hospitals creates some difficulty in drawing conclusions from median trends, particularly as this cohort of providers has generally higher volatility than other larger and more diversified health care providers. There were 19 providers included in S&P Global Ratings’ small hospital median calculations, down from 26 two years ago. The decrease is due to some providers increasing total operating revenue beyond $150 million, as well as some acquisition activity.

The ratings distribution for small hospitals continues to skew toward speculative-grade. Ongoing high labor costs and inflationary pressures continued to affect small hospitals and have contributed to downgrades, especially when combined with reductions in liquidity and financial flexibility. A greater percentage of small hospitals are rated in lower rating categories compared with stand-alone hospitals, with no small hospitals garnering a rating above the ‘A’ category. This is consistent with historical rating distribution trends, given the inherent risks associated with small hospitals, including less operating diversity and flexibility, small medical staff sizes, and limited service area and economic growth characteristics, all lending to increased volatility.

More small hospitals carry a negative outlook. Industry performance pressure and generally weakened financial results have led to more small hospitals carrying negative outlooks this year (37%) than in the previous year (23%). Small hospitals have historically held an elevated proportion of nonstable outlooks compared with stand-alone hospitals due to the aforementioned inherent risks, which can lead to more rapid financial deterioration than larger providers and typically longer recovery periods.

The small hospitals we rate are diverse. Although the number of providers is limited, there are a variety of hospital types in this cohort, including specialty hospitals, tax-supported hospital districts, and critical access hospitals. The cohort is also geographically broad, representing 14 states, with many located in rural locations. This diversity within such a small sample size also might contribute to some median volatility year-to-year.

Continue reading.

7 Aug, 2024 | 13:16

Rating And Outlook Overview

We rate fewer rated stand-alone hospitals due to mergers and migration to systems. The number of stand-alone hospitals rated by S&P Global Ratings dropped to 228 from 243 year over year, 94% of which are reflected in the 2023 medians. This continues the diminishing trend of rated stand-alone hospitals (15 in the past year) mostly due to mergers and acquisitions as well as a few stand-alone hospitals migrating to systems, which overall increased by 11 this year.

There are fewer hospitals rated in the ‘AA’ category and more in the ‘A’ and ‘BBB’ categories. The overall rating distribution of stand-alone hospitals remains relatively stable with some minor variations. In addition to a couple of stand-alone hospitals in the ‘AA’ category migrating to systems, there was also some movement down the rating scale as a couple of stand-alone providers have migrated out of the ‘AA’ category, and the percent of ‘A’ ratings has risen. The ‘BBB’ and speculative-grade categories are relatively stable.

Stand-alone hospitals remain concentrated in the ‘A’ and ‘BBB’ categories. About 70% of stand-alone hospital ratings are concentrated in the ‘A’ and ‘BBB’ rating categories, with an even split between ‘AA’ and speculative-grade for the remaining ratings. The distribution trends lower compared with system ratings, given stand-alone hospitals are more prone to disruption with narrower primary service areas and more limited revenue bases and therefore, generally need to have stronger ratios relative to systems to achieve the same rating. Although the bar is higher, this also provides stand-alone hospitals with greater financial flexibility to absorb some financial stresses.

Slightly favorable shift in outlook distribution between 2023 and mid-2024. Given the larger sample size of stand-alone hospitals than for systems, small changes to the outlook distribution will be less pronounced in the percentages than they are for systems. The percent of stable outlooks increased from June 2023 to June of this year, although the percentages remain below historical levels. The percentage of negative outlooks remains slightly higher, accounting for almost one-quarter of rated providers, although slightly improved this year. Despite almost one-third of our outlooks being positive or negative, most ratings on stand-alone hospitals have a stable outlook.

Continue reading.

7 Aug, 2024 | 13:14

Rating And Outlook Overview

The number of rated health care systems slightly increased. The number of systems rated by S&P Global Ratings rose to 173, of which 161 (or 93%) are included in the 2023 medians. This increase, despite ongoing system consolidation, is mostly due to new issuers seeking ratings, as well as stand-alone hospitals transitioning to systems per our criteria, given revenue growth and added acute care facilities.

System rating distribution has shifted from the ‘AA’ category, despite the inherent strength of systems. Higher-rated systems are characterized by robust enterprise profiles, greater scale and diversity than stand-alone hospitals, and seasoned management teams. However, they also remain subject to persistent broad sector headwinds that continue to affect operating performance. The number of systems rated in the ‘AA’ category fell to 39% of total rated systems, from 44% in 2022, with concurrent increases in the ‘A’ and ‘BBB’ categories. Speculative-grade rated systems remain rare, encompassing only four organizations, and are therefore excluded from tables 2, 3A, 3B, and 3C.

Rating distribution for systems generally skews toward higher rating categories than those for stand-alone hospitals. About 87% of systems are rated in the ‘AA’ and ‘A’ categories, compared with just 56% of stand-alone hospitals despite several of their financial medians being more favorable than those of systems. The median system rating is ‘A+’ compared with the stand-alone median of ‘A-‘.

Negative outlooks remain elevated. The systems rating distribution in higher categories is accompanied by generally lower rating volatility, where nonstable outlooks account for 23% of the outlook distribution, generally consistent with 2022, but more favorable than outlook distribution for stand-alone hospitals at 27%. That said, the percentage of negative outlooks for systems in 2023 and year-to-date through June 2024, although unchanged, is about double 2022 levels, highlighting operational headwinds the sector faced. Positive outlooks have remained largely consistent in the past three years at less than 5%.

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7 Aug, 2024 | 13:12

Key Takeaways

• Operating performance remained weak, but virtually unchanged from fiscal 2022 medians. Margins and coverage ratios were consistent across fiscal 2023, with little movement up or down although with some underlying progress as indicated by adjusted operating margin improvement. That said, profitability measures remain well below the decade’s historical baseline.
• Balance-sheet metrics were mostly stable, with continued pressure on days’ cash on hand. Median absolute unrestricted reserves rose modestly, concurrent with a decline in median long-term debt and leverage. However, expense growth continued to pressure operating liquidity, with days’ cash on hand now below 200 for the first time in a decade.
• The growth rate of total operating expenses moderated. Following a dramatic 17% rise in fiscal 2022, median total operating expenses in fiscal 2023 reflected a manageable 5% uptick, well below the rate of increase for revenues with staffing adjustments and stabilizing labor costs.
• Leverage remained sound ahead of heavy borrowing observed in 2024. Debt measures were stable or improved in fiscal 2023, with sustained strong funding levels for defined-benefit pension plans. We anticipate some worsening in this area over the coming year as providers increase borrowing activity.

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7 Aug, 2024 | 13:08

Building infrastructure in the U.S. costs substantially more than in other countries. For example, on a per-mile basis, the U.S. spends three times as much as other upper- and middle-income countries on certain transportation infrastructure. In a paper presented at the 2024 Municipal Finance Conference at Brookings by Will Nober of Columbia University, Cailin Slattery of the University of California, Berkeley, and Zachary Liscow of Yale University surveyed infrastructure procurement practices and collected project-level data across the 50 states to help explain why U.S. costs are so high.

The authors identify two major factors. The first is the limited capacity of state departments of transportation (DOT). Survey respondents widely agreed that DOTs have become understaffed over time and that reliance on consultants drives up costs. A one standard deviation in increase in state capacity (measured by state DOT employment per capita) is correlated with 16% lower costs. One standard deviation in increased consultant use is associated with 20% ($70,000) higher costs per lane-mile of roadways on average.

The second factor is the limited competition in the market for government construction contracts. Most state DOTs report doing little bidder outreach, and there are fewer construction firms in most states than there were 10 years ago. A one standard deviation (12 percentage points) increase in outreach to bidders to increase the pool is correlated with 17.6% lower costs. This translates to a decrease of $65,000 per lane-mile and $1 million at the project level. Moreover, an additional bidder on a project was associated with 8.3% lower costs, approximately $460,000 for the average project. The authors also found that state DOTs that provide more details at the time of the bid-letting have lower costs, while states with more change orders, which are often the result of poor planning, have higher costs.

To learn more about the role of state capacity in driving infrastructure costs, Liscow, Nober, and Slattery collect data on individual DOT engineers in California. They find that a substantial amount of the variation in the cost of a resurfacing project can be explained by which engineer is assigned to it. Specifically, replacing a construction engineer at the 95th percentile of the cost distribution with a median engineer would reduce costs by 5.3% on average: $24,000 per mile; $220,000 per average project.

The Brookings Institution

by Comfort Oshagbemi and David Wessel

August 5, 2024

Florida, Louisiana and New Jersey lead the list of states with critical infrastructure in the path of rising seas, a new study says.

Flooding can disrupt communities not only by damaging homes and businesses, but also by knocking out facilities that provide essential services. When school buildings flood, students miss out on not only learning days but also access to subsidized meals. When hospitals get inundated, lifesaving treatments can get put on hold.

Storms like Hurricane Debby, which is set to saturate parts of Florida, Georgia and South Carolina with up to 30 inches of rainfall over this week, are becoming more frequent and severe in a warming world. But as sea levels rise, it doesn’t necessarily take a major storm to bring high water: Since 2000, chronic tidal flooding — also known as sunny day flooding — surged 400% and 1,100% in the US Southeast Atlantic and Gulf Coast regions, respectively.

According to a recent report from the Union of Concerned Scientists, there are about 900 “critical infrastructure” sites along the US coastlines at risk of high-tide flooding at least twice a year. That figure can jump up to 1,600 by midcentury, affecting some 3 million people, largely in disadvantaged communities.

Continue CityLab.

Bloomberg Markets

By Linda Poon

August 5, 2024

Thousands of school districts have tapped into resources committed by the private sector to shore up their cyberdefenses.

A year ago this week, First Lady Jill Biden entered the White House East Room, greeted by an audience of some 200 education technology stakeholders, to headline the launch of a Biden administration initiative to bolster school cybersecurity, following myriad incidents where hackers set their sights on school districts around the country. The digital intrusions have crippled schools’ tech infrastructure and led to compromises of sensitive student data, forcing administrators to direct funds away from vital services toward costly and prolonged IT overhauls.

For the initiative, the White House brought in private sector executives who, behind closed doors, worked out discussions with the Biden administration’s top cyber officials over the course of just a few weeks, agreeing to offer up free and subsidized cybersecurity resources for schools in need of added digital shielding.

Recent years have proven that cyber threats to schools could no longer be ignored. Schools are a key sub-sector housed under the umbrella of government facilities, one of 16 critical infrastructure sectors designated by U.S. cyber experts. In the 2022 to 2023 school year alone, officials made note of multiple cyberattacks that targeted American school districts, according to a senior administration official who spoke to reporters last year in the hours leading up to the White House event.

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Route Fifty

By David DiMolfetta,
Cybersecurity Reporter, Nextgov/FCW

August 7, 2024

• 15 schools have disclosed technical, payment defaults in 2024
• College impairment tally approaches 2023 total of 17: MMA

The challenging economics of higher education in the US are squeezing the finances of colleges and universities, driving more of them to struggle to pay their debt.

Fifteen institutions have disclosed new technical or payment defaults this year, according to data from Municipal Market Analytics. That’s already just shy of last year’s total of 17, the largest number of impairments — as such events are called — since at least 2009, coming in at more than twice the previous record.

The strains highlight the widening gap between the sector’s haves and have-nots, as stronger universities with large endowments and brand recognition thrive while more regional institutions contend with rising costs and a steep competition for students. Weaker schools recovering from the stress of the pandemic are also facing other pressures, such as student-aid-processing delays.

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Bloomberg Markets

By Nic Querolo

August 12, 2024

Several US states are tapping a federal carbon reduction program to fund highway projects, arguing that adding vehicle lanes can bring emissions down.

Every month, Dennis Grzenzski drives the stretch of Interstate 43 that runs north of Milwaukee to a board meeting for the Blue Heron Wildlife Sanctuary. Along the route, the urban landscape gives way to undeveloped farmland. Traffic is usually pretty light. But the view on his drive changed in February 2022, when construction crews began work to expand the roadway from four to six lanes.

“By no stretch of the imagination was that a place that really needed more lanes because of congestion,” said Grzenzski, an environmental attorney who has fought the state on highway expansions — though not this specific project — for close to 30 years.

The Wisconsin interstate expansion represents one example of concerns raised by transportation and environmental advocacy groups around how states are spending funds from a federal program designed to lower carbon emissions. In 2023, the Wisconsin Department of Transportation used $4.1 million of its annual $24 million allotment from the Infrastructure Investment and Jobs Act’s Carbon Reduction Program (CRP) to fund work in the I-43 project, including energy-efficient lighting and signal technology.

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Bloomberg Citylab

By Benton Graham
August 7, 2024

COMMENTARY | The rate at which a bridge or road deteriorates depends not only on the materials and construction methods used but also on the climate during the structure’s life span.

Summer 2024’s record heat is creating problems for transportation infrastructure, from roads to rails.

New York’s Third Avenue Bridge, which swings open for ship traffic on the Harlem River, was stuck for hours after its metal expanded in the heat and it couldn’t close. Roads have buckled on hot days in several states, including Washington and Wisconsin. Amtrak warned passengers to prepare for heat-related problems hours before a daylong outage between New York and New Jersey; the risks to power lines and rails during high temperatures are a growing source of delays for the train system.

It doesn’t help that the worsening heat is hitting a U.S. infrastructure system that’s already in trouble.

The American Society of Civil Engineers gave U.S. infrastructure an overall grade of C- in its latest national Infrastructure Report Card, released in 2021. While there has been some improvement – about 7.5% of U.S. bridges were in poor condition, compared with over 12% a decade earlier – many bridges are aging, making them difficult to maintain. Forty percent of the road system was considered in poor or mediocre condition, and maintenance costs have substantially increased.

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Route Fifty

By Suyun Paul Ham,
Associate Professor of Civil Engineering, University of Texas at Arlington,
The Conversation

August 6, 2024

On August 6, 2024, the U.S. Department of Energy (DOE) announced the first 8 selections for the 2nd round of the Grid Resilience and Innovation Partnership (“GRIP”) funding specifically for the “Grid Innovation Program”, one of three GRIP funding mechanisms. T

Per the DOE, through the second round of GRIP funding, the Grid Innovation Program will support 8 projects across 18 states, totaling approximately $2.2 billion in federal investment. Selections for the remaining 2 funding mechanisms should be announced later this year.

California Energy Commission

The California Harnessing Advanced Reliable Grid Enhancing Technologies for Transmission (CHARGE 2T) project is a public-private partnership that is intended to drive large-scale expansion to transmission capacity and improvements to interconnection process to increase and accelerate equitable access to renewable energy across California. CHARGE 2T is supposed to reconductor more than 100 miles of transmission lines with advanced conductor technologies and deploy dynamic line ratings (DLR) to quickly and significantly increase the state’s system capacity to integrate more renewable energy onto the grid. CHARGE 2T also supports transmission interconnection reform through process improvements, an interconnection portal, workforce investment, and educational resource development.

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Duane Morris LLP – Brad A. Molotsky

August 6 2024

Key Findings

• Thanks to elevated deficits and interest rates, fiscal restraint is back in Washington.
• While substantially reversing America’s fiscal situation requires structural reforms to entitlements and taxes broadly, reforming transportation funding would also help.
• The user-pays principle is a sound way to fund major infrastructure projects.
• Unfortunately, the US has moved away from the user-pays model, primarily due to the gas tax declining in real terms, but also due to excise taxes becoming weaker approximations of true user fees.
• By 2034, the gas tax and other car-related excise taxes are projected to raise less than half of the Highway Trust Fund’s outlays.
• The ideal solution would be to replace existing excise taxes with true user fees, but raising existing excise taxes would be a better solution than continuing a growing reliance on general revenue.
• Fully paying for federal highway spending with user fees could reduce the federal deficit by over $200 billion over the course of the next decade.

Continue reading.

Tax Foundation

By: Alex Muresianu, Adam Hoffer, Jacob Macumber-Rosin, Alex Durante

August 7, 2024

Corporate debt was hit by the recent panic, but true concerns are mostly limited to a few corners of the market

Even more so than stocks, bonds are often seen as an economic bellwether. If so, they are heading in a pretty positive direction.

The difference, or spread, between Treasury yields and the rate at which companies borrow has widened. Option-adjusted spreads on the investment-grade paper issued by blue-chip corporations closed at 1.11 percentage points Tuesday—an aftershock of the big stock-market selloff the day before. Spreads on debt issued by risky “high yield” issuers hit 3.81 percentage points. Both were the highest since last November. U.S. municipal bonds have been affected as well.

However, trading has normalized since. The spread on high-yield bonds closed at 3.4 percentage points Thursday. This still implies a rise in the default probability to 5.7% from 5.1% at the end of May, despite the fact that, as of the latest June data published last week by Fitch, actual U.S. leveraged-loan and junk-bond default rates had inched down to 4.06%. But it is a small increase, and it may soon fully come back down.

Continue reading.

The Wall Street Journal

By Jon Sindreu

Updated Aug. 9, 2024 5:29 pm ET

Underwriters are experiencing greater pressure in the competitive market as several firms bid on deals more frequently, and deals, on average, see more bids and narrower spreads.

“Competitive underwriting remains a tough business that’s getting tougher,” said Justin Marlowe, professor at the University of Chicago Harris School of Public Policy and director of the school’s Center for Municipal Finance. “You see some firms that have been around for a while who seem to have stepped up their participation in competitive sales, and then a few others either who weren’t involved or being actively bid but are now getting more involved in the business.”

Competitive issuance during the first half 2024 was $41.467 billion, up 18.7% from the same period of 2023, according to LSEG.

The top 10 competitive underwriters for the first half of the year saw some minor shuffling, with new entrants Truist and Raymond James bumping Citi and RBC Capital Markets. However, those just shy of the top 10 are getting more involved in bidding, according to LSEG Lipper.

Some major players in the negotiated space are absent from the top 10 competitive underwriters list, potentially due to this market being a higher-risk proposition, particularly when there’s volatility, market participants said.

Some firms, though, top the rankings year after year in both the negotiated and competitive markets.

BofA is one of the largest firms, in terms of capital and healthy balance sheets, said Matthew McQueen, head of municipal banking and markets at BofA.

The firm remained the top competitive underwriter during the first half of the year. It underwrote $8.587 billion in 46 deals versus $6.524 billion in 62 in 1H 2023.

Similarly, J.P. Morgan is still a top contender in competitive underwriting, moving up to second in the rankings in 1H 2024 from third in 1H 2023. The firm underwrote $6.897 billion in 70 issues, up from $3.183 billion in 43 issues, according to LSEG.

Both firms pride themselves on being a market leader and serving their large client bases.

“We have the commitment and the capital on balance sheet to continue to support our issuer clients and to distribute that to our investor clients,” McQueen said.

“We aim to be a top trading partner with all of our investor clients,” added Sean Saroya, managing director and head of public finance trading at J.P. Morgan. “Being consistently active across the breadth of the competitive space is an important way to achieve that goal.”

Given its stature, BofA is particularly drawn to large deals, while J.P. Morgan tries to bid on every transaction of sufficient size.

Meanwhile, others, like Baird, retain their status by bidding as a large syndicate, having several other firms with it on every deal, said Peter Anderson, a municipal bond underwriter and trader at Baird.

This works out for the firm as Baird remained in fifth during the first half of 2024, underwriting $2.9 billion in 226 deals versus $2.869 billion in 249 deals in the first half of 2023, according to LSEG.

“We take a group mentality toward everything and work as one in getting these deals,” he said.

The amount of bidders on any competitive deal can vary.

Some deals, such as larger transactions with more risk, may attract a smaller group of bidders, while others will see a wider range, Saroya said.

In any market, especially ones with low “entry barriers,” there will be ebbs and flows of market participants: sometimes heavier, sometimes lighter, Anderson added.

Currently, it’s one of the “heavier” periods as firms attempt to chase the same deals, he said.

Data shows the average bids per competitive sale is up noticeably over the past few quarters, Marlowe said, rising to 8.5 bids in Q1 2024 from 6.1 bids in Q1 2022.

“With the interest rate environment we’re in, with these rates here, with retail participation, that naturally brings in more dealers looking for product,” said Doug Vissicchio, managing director and head of municipal trading at UBS.

A big part of the reason for the increased bid frequency is new and returning entrants to the competitive market, propelled, in part, by Citi’s exit.

“It’s a $4 trillion market, and there is a need out there, so the market will absorb it,” McQueen said.

Many market participants worried about the impact of Citi’s departure on the muni market, including concerns over liquidity, but the bank’s exit created opportunities for firms like Truist to step in and gain a foothold, said Todd Bleakney, managing director and head of munis at Truist.

Truist was one of the new entrants into the top 10 competitive underwriters, ranking seventh. The firm underwrote $1.436 billion in 23 deals in 1H 2024 after not underwriting any deals in 1H 2023, according to LSEG.

The bank took its time building its muni team over the past several years. It started beefing up its muni presence with the hiring of Scott Frail, head of public finance origination and syndicate at Truist, in 2021, followed by Bleakney a year afterward.

Since then, the bank has added around 20 employees, including at least four from Citi in March.

Competitive underwriting is another “extension” of what Truist is doing and building, Bleakney said.

“We see this as an opportunity to take more [of a market] share, but we’re trying to be methodical and thoughtful and profitable as well,” he said.

Along with the new entrants, some longstanding firms stepped up their presence in the competitive market.

UBS, for instance, rose in the rankings to 12th in the first half of 2024, underwriting $834.5 million in 33 deals, up from 24th and underwrote $197.2 million in 10 deals in the same period of 2023.

When UBS exited the negotiated muni underwriting business, it “doubled down” on competitive underwriting, Vissicchio said.

“All of our customers depend on us for liquidity both on the bid side and on the offered side, and one of the best ways we can satisfy customer demand is staying in the [competitive] market,” he said. “We now have the luxury of being able to tailor our bids to what we think is best for our clients.”

This becomes more challenging as the average bid spread narrows. Bid spreads have steadily declined since the end of 2021, Marlowe said, noting that the average spreads across the past five quarters are the lowest in the past decade.

Multiple times throughout the week, UBS sees the top three or four cover bids all within a basis point of each other, said Vincent Pietanza, head of municipal competitive underwriting.

“A lot of times you need to bid through the market, not necessarily on the whole scale, but in spots,” Anderson said.

Many firms will get similar big presale orders from funds and “then it’s a race to who’s going to be the most aggressive and try to buy the deal,” leading to some frustration, he noted.

“It just goes to show you how tight the market bidding is right now and how hard it is to source products with a competitive space,” Pietanza said.

But even as firms compete against each other in an increasingly competitive marketplace, market participants say competitive underwriting is an important part of their business.

“Buying competitive deals allows us to expand our capabilities in ETFs and on the creation side,” Saroya said. “With increased inventory, we can more effectively engage in e-trading, portfolio trading, and swaps with clients. Sourcing risk for SMAs, funds and other investor clients is essential, making this integral to our business.”

By Jessica Lerner

BY SOURCEMEDIA | MUNICIPAL | 08/05/24 10:50 AM EDT

Actively managed ETFs continued to gain traction in July with $24 billion of net inflows. This represented 19% of the industry’s net inflows, which remains impressive given the 7% share of the assets. However, last month’s most popular ETF will surprise you.

Six of the ten most popular active ETFs in July were fixed income products. Taxable bond funds like the Fidelity Total Bond ETF (FBND) and the Janus Henderson AAA CLO ETF (JAAA) continued to gain traction. Yet, the Capital Group Municipal Income ETF (CGMU) gathered even more, adding $1.3 billion of new money more than doubling in size.

Capital Group’s ETF More Popular than iShares and Vanguard in July

The fund has $2.2 billion in assets, making CGMU the second largest actively managed municipal bond ETF. The JPMorgan Ultra-Short Municipal Income ETF (JMST) has $2.8 billion in assets. JMST is a multi-state fund with an average duration of less than one year.

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advisorperspectives.com

by Todd Rosenbluth of VettaFi, 8/12/24

Rate cut expectations and a bout of equity market turbulence have led muni bonds and related ETFs to perk up.

That’s good news for conservative income investors. But the asset class could be best approached with the benefit of active management. ETFs such as the Eaton Vance Intermediate Municipal Income ETF (EVIM) deliver on that front. The fund could be one of the municipal bond ETFs to consider over the remainder of this year and into 2025.

The reasoning for that assertion is simple. The current interest rate climate and related expectations for rate cuts could be indicators that active management has a window of opportunity to outshine passive muni strategies. Additionally, active managers can more swiftly seize upon credit and value opportunities than index-based muni bond rivals.

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etftrends.com

by Todd Shriber

August 12, 2024

• Benchmark AAA yields jumped as much as 13 basis points
• State and local government debt sold off across the curve

Municipal bonds slid on Wednesday after investors across fixed income markets dialed back a flight to quality bid.
The biggest rout came in the middle of the curve with yields on 15-year benchmark bonds surging 13 basis points, the most in almost a year, according to data compiled by Bloomberg.

The longest-dated securities saw yields jump 10 basis points, erasing gains during the flight-to-safety rally earlier this month.

The moves mark a week of unusually high volatility in the state and local government bond market as investors reassess the rally in safer assets fueled by concerns of a recession. The swings come in what was slated to be one of the busiest weeks of issuance for munis, and drove Chicago to delay its $643 million bond sale that was expected to price on Wednesday.

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Bloomberg Markets

By Nic Querolo

August 7, 2024

• Pruskowski’s strategy beats debt markets, many hedge peers
• Only about 25 US hedge funds focus on $4 trillion muni market

James Pruskowski learned the intricacies of the municipal bond market in his 30 years at BlackRock Inc., before exiting the world’s largest asset manager in 2023. He brought that expertise to another arcane part of Wall Street, the hedge fund industry, and produced market-beating results.

His muni hedge fund at 16Rock Asset Management has generated a more than 20% return in the past 12 months, according to Pruskowski, crushing the market’s benchmark by 16 percentage points and a broad hedge fund index by about 11 percentage points.

The $7 million 16Rock Municipal Opportunities Fund, which charges a 1% management fee and a 20% levy on profits generated beyond a certain threshold, plans to close on $100 million in investments by the end of the year, the 52-year-old money manager said.

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Bloomberg Markets

By Martin Z Braun

August 8, 2024

Despite unusual market volatility, munis can provide a boon for shrewd bargain-hunters.

Municipal-bond investors have endured a roller-coaster ride with the usually steady muni market experiencing significant gains and losses since early 2022. Yet, while such volatility has given some investors heartburn, it also has provided a boon for shrewd bargain-hunters.

Federal Reserve interest-rate hikes hit munis hard in 2022, and much of the sector recorded double-digit losses and historic outflows from mutual funds even as the credit quality of muni issuers remained strong. Results improved in 2023 but were uneven. After a promising start to the year, muni returns remained negative through the end of October 2023. An impressive rally in November and December thrust the market into positive territory for the year and started to woo back weary investors. In fact, gains in 2023′s last two months resulted in some of the best relative returns across the fixed-income landscape. On average, strategies in the muni-national long and high-yield muni Morningstar Categories earned 7.0% and 6.7%, respectively, over the 2023 calendar year. However, while strong, that still didn’t make up for the double-digit losses endured in 2022.

Many hoped 2024 would bring luster back to the sector, but it got off to a slow start. The muni market was mostly flat through the end of May with returns muted by an increase in the supply of investment-grade muni bonds offered and uncertainty around the Fed’s “higher for longer” message. While June hasn’t always been kind to muni investors as redemptions often increase, the sector rallied this year. Strong credit fundamentals and some of the highest yields in decades finally brought consistent inflows back to muni strategies and boosted total returns, particularly in high-yield muni bond funds.

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morningstar.com

by Elizabeth Foos
Aug 6, 2024

SIFMA Research tracks issuance, trading, and outstanding data for the U.S. municipal bond market. Issuance data is broken out by bond type, bid type, capital type, tax type, coupon type and callable status and includes average maturity. Trading volume data shows total and average daily volume and has customer bought/customer sold/dealer trade breakouts. Outstanding data includes holders’ statistics. Data is downloadable by monthly, quarterly and annual statistics including trend analysis.

YTD statistics include:

• Issuance (as of July) $280.8 billion, +33.0% Y/Y
• Trading (as of July) $12.9 billion ADV, +4.0% Y/Y
• Outstanding (as of 1Q24) $4.1 trillion, +1.0% Y/Y

View the SIFMA US Municipal Bonds Statistics.

August 2, 2024

Federal aid helped states and localities cope with the biggest costs of the pandemic. But good things don’t last forever, and this one didn’t.

Well, it sure seemed like a good idea at the time.

In 2020-2021, the federal government sent half a trillion dollars to state and local governments to help them survive COVID-19. Public health experts worried that the pandemic would be bigger than anything since the influenza outbreak of 1918, which struck one-fourth of the U.S. population and killed 675,000 people.

COVID-19, economists projected, would surely produce a big economic downturn. There was a sudden stall as things shut down early in 2020, but the economy began recovering almost immediately. State and local governments brought in more revenue than anyone expected. Many of them got hooked on the federal cash, and now that money is drying up, revenues have softened and lots of state and local governments are facing big deficits. The relief plan ended up blowing a hole in the federal budget, digging the country deeper into debt and luring many state governments into a fiscal hole.

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governing.com

by Donald F. Kettl

Aug. 1, 2024

Banks are key players in the municipal bond market, holding approximately 20% of outstanding municipal bonds. In a paper presented at the Municipal Finance Conference in July 2024, Gustavo S. Cortes of the University of Florida, Igor Cunha of the University of Kentucky, and Sharjil Haque of the Federal Reserve Board find that banks are more likely to hold bonds with issuers with which they have an established relationship. This study uses novel (and confidential) data on larger banks’ portfolios from the Federal Reserve, which collected the data for its stress testing exercise. This provides far more detail and specificity about holdings than data available to authors of previous studies.

Banks prefer larger, longer-maturity, and insured bonds as well as bonds with higher-credit ratings, but are less sensitive to these factors when picking bonds from an issuer with which the bank has other relationships.

These relationships benefit both banks and issuers, the authors conclude. Banks extract information from lending relationships to enhance investment decisions. They can more accurately price bonds at initial issue and find undervalued opportunities, resulting in better-performing bonds.

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The Brookings Institution

by Sarah Ahmad and David Wessel

July 30, 2024

Fitch Ratings-New York-01 August 2024: U.S. states’ financial resilience remains high despite a second consecutive year of weak overall tax collections in fiscal 2024, according to Fitch Ratings. Accumulated surpluses and record tax growth in 2021 and 2022 have allowed states to maintain rainy-day funds at historically high levels.

Overall, state tax revenue growth was roughly flat for the second consecutive year, driven by sluggish sales tax revenue growth, lingering effects of weak 2022 tax returns, and widespread income tax cuts, although actual experience varied by state.

For states reporting June data, median overall tax revenue growth for July 2023 to June 2024 (covering fiscal 2024 in 46 states) was 0.5%, with 16 states seeing yoy revenue declines, according to Fitch’s review of 38 states’ revenue collections. Monthly revenue reports vary in presentation by state. This data is timely and indicative but not necessarily definitive. Total state tax collections from July 2023 through May 2024 were below the highwater mark set in 2022 but were still well above pre-pandemic trends, based on Urban Institute data.

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Fitch Ratings-New York-31 July 2024: Fitch Ratings anticipates a modestly weaker U.S. credit environment in 2H24, according to the latest U.S. Credit Brief. Consumer spending growth has been holding up well and will likely be tempered as nominal wage and job growth slows. Housing demand is still solid but has recently softened with persistent high home prices, although affordability may improve with declining rates.

Fitch is forecasting two rate cuts in September and December. A soft landing is likely with moderating inflation and low unemployment, and we are projecting annual economic growth of 2.1%, down from 2.5% in 2023.

The vast majority of ratings across sectors in the U.S. have Stable Rating Outlooks. The percentage of ratings with Positive Outlooks exceeds those with Negative Outlooks, 7.2% vs. 5.1%, although the gap has narrowed with the increase in Negative Outlooks over the past four quarters, given cost and interest rate pressures on borrowers.

Delinquencies and defaults will continue to rise in 2H24 for rate sensitive borrowers, including CMBS, high-yield (HY)/ leveraged loan (LL), and subprime consumers. We are projecting higher CMBS delinquencies for all major CRE sectors in 2H24 due to increased maturity defaults from high rates. Structured finance downgrades are mostly tied to CMBS exposed to deteriorating office performance and lower valuations on specially serviced loans, primarily affecting ratings at ‘BBBsf’ and lower.

We expect HY default rates of 5.0%-5.5% in 2024 and have revised our 2024 U.S. LL default rates up to 5.0%-5.5% from 3.5%-4% as high interest rates are pressuring highly levered issuers’ liquidity positions and ability to service debt.

Our North American sector outlooks are split fairly evenly between neutral and deteriorating. We changed our sovereign regional outlook to neutral from deteriorating due to an improvement in our 2024 U.S. growth forecasts compared to our forecasts made at the start of the year and our expectations for modest improvement in the U.S. budget deficit in 2024.

S&P Global Ratings maintains public ratings on 211 U.S. public power (retail electric and gas) and distribution electric cooperative utilities and 55 wholesale utility projects (across 39 wholesale electric utilities). In early 2024, we revised the U.S. public power 2024 sector outlook to negative, reflecting our opinion that financial performance of, and ratings on, U.S. public power utilities could weaken in 2024, due to a confluence of inflation, reduced consumer wherewithal to pay utility bills, the sensitivity of rate-setting bodies to economic conditions, and a developing trend of weakening financial margins. (For more information, see “U.S. Public Power And Electric Cooperative Utilities 2024 Outlook: Mandates, Rising Costs, And Diminishing Affordability,” published Jan. 23, 2024, on RatingsDirect.) These credit challenges have led to rating downgrades exceeding upgrades by seven to four in the first half of the year, outpacing 2023. Putting the numbers into perspective, the downgrades represent just 3% of the rated universe, but the negative sector outlook reflects our view that these issuers are more susceptible to the above mentioned financial pressures. Apart from rating changes, we revised more outlooks to negative than to stable or positive. During the first half of 2024, 57 ratings were unchanged after review (21% of the total combined sectors).

The number of ratings on new issuances increased more than 40% the first half of 2024 compared with 2023 for U.S. public power retail, gas, and wholesale electric utilities.

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29 Jul, 2024

Muni bonds underperformed in the first half of 2024 due to robust economic conditions and increased supply, but strong credit fundamentals and potential rate cuts could improve performance later.

Through the first half of this year, municipal bonds fell short of projected performance expectations. The essential elements of a reliable source of income due to strong credit quality and benefits of interest income exempt from taxes remain foundational. Yet, the anticipated strong performance of the asset class so far has not materialized. So, we ask if our outlook has changed for the remainder of the year to provide some context for our outlook for the second half of 2024.

Expectations for the Second Half of 2024

The risks we discussed in our Muni Trends to Watch in 2024 focused on the U.S. economic environment, individual state laws and the municipal sector’s challenges. Appropriately, we felt that our domestic economy would fairly quickly feel the bite of higher rates and efforts of the Federal Reserve (“Fed”) to tighten monetary policy to temper inflation. History tells us not to ignore the risks of recession. The market’s consensus in the direction of Fed rate cuts in early 2024 would have put municipals on a path to strong positive performance results because muni rates would have dropped. As we now see, that call was premature. Robust economic performance and lingering inflation have pushed out the likelihood of rate cuts to the third or fourth quarters as is the timing for better muni market performance.

Supply of new-issue bonds is the other primary area of change. The increase in newly issued bonds originates from a significant increase in the re-financing of older, outstanding debt.* Since this component is now expected to add $30-50 billion to year-end totals, the immediate effect has been to keep rates high and within zones of comparative attractiveness. It would not be surprising to see additional supply later this year, primarily in re-financing, should the Fed cut rates and spur a potential muni rally. Increased supply would provide a greater variety of available bonds in the market and a moderate move to lower rates—a classic example of cause and effect.

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Van Eck

by James Colby, Senior Municipal Strategist

July 31, 2024

• Yields on 10-year benchmark bonds fell 9 basis points to 2.6%
• Issuers expected to sell over $15 billion of bonds next week

Municipal bonds extended their rally on Friday after a lackluster jobs number cemented expectations that the Federal Reserve will start cutting interest rates by the end of its next meeting in September.

Yields on 10-year benchmark securities fell 9 basis points to 2.6% on Friday, following yesterday’s move that marked the largest rally in weeks. Investors in search of safer assets fueled the rally, piling $1.1 billion into municipal bond funds during the week ended Wednesday, the second largest weekly inflow of the year, while the market’s biggest muni ETF saw its largest daily inflow in more than two years.

The moves cap an unusually busy week in the municipal bond market as investors sought to reposition portfolios out of fears that the US economy is at risk of moving toward a recession.

“What you’re seeing is a strong move to quality in anticipation of yields falling, and you will continue to see a rotation to high quality,” said Chip Hughey, managing director for fixed income at Truist Advisory Services. “This will probably improve muni to treasury ratios and create a bit more value on a relative basis.”

More certainty about the path of rate cuts should help stabilize the market, but tax-exempt munis are still “vulnerable” because of a heavy supply calendar, according to a Friday research note by Barclays Plc. Issuers are expected to sell more than $15 billion of bonds next week, what would be one of the heaviest weeks of the year.

Year to date, muni supply is up about 36% compared to the same period last year, according to data compiled by Bloomberg. Hughey said he expects clarity around the path of interest rates could compel some issuers to move forward with financing plans, driving continued strength in supply going forward.

BlackRock’s flagship muni ETF, the biggest in the market, saw its largest inflow since late April 2022, according to data compiled by Bloomberg. The iShares National Muni Bond ETF took in $418.5 million on Thursday.

Bloomberg Markets

By Nic Querolo

August 2, 2024

— With assistance from Martin Z Braun

Municipal bonds are staging a broad advance, pushing yields down the most in seven weeks as investors abandon stocks for fixed-income assets on concern the Federal Reserve is waiting too long to cut rates.

Yields on top-rated municipal benchmark bonds fell as much as seven basis points across the curve on Thursday, according to data compiled by Bloomberg. Thirty-year bond yields dropped seven basis points to 3.58% as of Thursday afternoon, heading for the biggest daily decline since May 3, while those on 10-year securities also posted a six basis point drop to 2.7%, the data show.

Fed Chair Jerome Powell indicated Wednesday that central bank officials are on track to reduce rates in September unless inflation progress stalls. The July employment report due Friday likely will fuel speculation on rate cuts.

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Bloomberg Markets

By Elizabeth Campbell and Nic Querolo

August 1, 2024

• TLT, AGG, BND funds are among those seeing big flows in July
• Fed’s Powell says interest-rate cut could come in September

Fixed-income ETFs took in a historic amount of cash last month as investors pile into the bond market, positioning for the start of a Federal Reserve rate-cutting cycle.

Bond funds saw inflows of roughly $39 billion in July, the most on record, according to data from Strategas. Investors are lavishing money across the fixed-income spectrum, from longer-duration government bonds and short-term obligations issued by Corporate America to muni ETFs.

The record spoils track a rally in Treasuries that has sent some yields tumbling to the lowest levels in months, with swaps traders now pricing in three quarter-point cuts in interest rates this year amid softening economic data. Fed Chair Jerome Powell said on Wednesday an interest-rate cut could come as soon as September.

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Bloomberg Markets

By Vildana Hajric

August 1, 2024

Fitch Ratings-New York/London-29 July 2024: US rate rises in 2023 have begun to show some effect on the labour market and demand, while politics remains an area of high uncertainty, and geopolitical risk is here to stay, Fitch Ratings says in a new report.

Signs of a slowdown in the US are evident in weak credit growth and slowing consumer spending. This should continue in 2H24 with headline real GDP growth materially decelerating though clearly remaining well above recession territory in our base-case forecasts.

Continued disinflation and the beginning of a global monetary policy pivot have reduced the probability of a major negative credit risk scenario stemming from continued monetary tightening. The ECB made its first rate cut in early June, following earlier moves by the Swiss National Bank and Bank of Canada, with the latter cutting for the second time in late July. While we now expect a slightly slower pace of rate cuts in 2024 from the Federal Reserve than our expectations at end-2023, the latest US inflation and labour market data support our view that two reductions are likely in 2H24.

Politics is an area of high uncertainty, as demonstrated in the string of elections in large economies in 2Q24 and early July, including France, the UK, India, Mexico and South Africa, as well as for the European Parliament. Incumbents lost ground or lost outright in all elections but Mexico. The forthcoming US election in November will be particularly relevant for global credit as it could mark a pivot point for policy in several important areas.

Wars in Ukraine and between Israel and Hamas have continued as have simmering tensions in other hotspots. The broader context of geo-strategic friction between major powers remains a key long-term theme. The greatest risk to credit would come from a direct conflict in one of these hotspots. However, broader geopolitical tensions are likely to continue to feed into such diverse areas as trade and investment policies, capital flows, supply chains and FDI.

‘Risk Headquarters – 3Q24’ can be accessed at fitchratings.com

For most states, 2025 represents a return to more typical economic conditions after an atypical period for their budgets.

State budgets are expected to shrink substantially in fiscal year 2025 as the post-pandemic era of surging revenue, record spending and historic tax cuts comes to a close. According to new data released by the National Association of State Budget Officers, total general fund spending is expected to decline to $1.22 trillion, a more than 6% drop from estimated levels in fiscal 2024, which ended for most states on June 30.

It’s a vastly different picture from recent years, two of which were the fastest-growing years for general fund spending since NASBO first launched its fiscal survey in 1979. The final tally for fiscal 2024, for example, is expected to total $1.3 trillion—a 13% increase from fiscal 2023, even after adjusting for inflation.

Although the decline in spending is comparable to the declines in 2009 and 2010, when the economic turmoil of the Great Recession drove state spending down by 5.8% and 6.6%, respectively, the situation now is driven by very different factors. For starters, California’s 2025 budget closes an eye-popping $46.8 billion budget deficit in large part by cutting or delaying spending. That one state has an outsize influence on the total 50-state picture. In fact, NASBO estimates that about half of states are still planning on spending increases in 2025.

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Route Fifty

By Liz Farmer

JULY 24, 2024

View the Current List.

25 Jul, 2024

NEW YORK (S&P Global Ratings) July 26, 2024–S&P Global Ratings today published “Methodology For Determining Ratings-Based Inputs.” This article presents the principles S&P Global Ratings applies when assessing the creditworthiness of assets or entities it doesn’t rate, where this information is required to inform its rating analysis. These principles, which are materiality-based, are reflected in our sector-specific criteria.

This methodology follows our request for comment (RFC), titled “Request For Comment: Methodology For Determining Ratings-Based Inputs,” published Jan. 17, 2024. For the changes between the RFC and the final criteria, as well as a summary of the comments received during the RFC process, see “RFC Process Summary: Methodology For Determining Ratings-Based Inputs.”

KEY CHANGES

This is a new article that formalizes and restates the key guiding materiality-based principles we consider when using rating inputs in our rating analyses. Those are used to perform our rating analysis in accordance with the application of many of our sector-specific criteria.

In addition, we updated our approach for incorporating other credit rating agencies’ (CRAs) ratings into our analysis. Under this approach, when we use other CRA ratings, we do so without adjusting them by considering the materiality of those inputs to our overall credit rating analysis. This is to ensure that the ultimate ratings we assign reflect our credit opinions and are consistent with our ratings definitions. In contrast, the previous approach generally involved adjusting other CRAs’ ratings, based in part on a statistical analysis, to account for differences with our own ratings.

This update has resulted in changes to certain sector-specific criteria, which we have republished. The prior versions have been superseded, except in jurisdictions that require local registration of the new articles, where they will be superseded–and the new articles become effective–only after the local registration process is completed. In addition, we have updated our guidance for rating CLOs and corporate CDOs.

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26-Jul-2024

(EDITOR’S NOTE: —On July 26, 2024, we released this criteria article following the publication of “Methodology For Determining Ratings-Based Inputs.” See the “Revisions And Updates” section for details.)

For information about the initial publication of this article as of July 26, 2024, including key changes made following the publication of “Methodology For Determining Ratings-Based Inputs” on July 26, 2024, the impact on ratings, and superseded criteria, see “Criteria Released To Clarify Method For Determining Ratings-Based Inputs.”

1. This criteria article describes S&P Global Ratings’ methodology and assumptions for rating U.S. public finance issues and issuers backed by long-term municipal pools.

2. This article is related to our criteria article “Principles Of Credit Ratings,” published Feb. 16, 2011.

3. Long-term municipal pool programs (hereafter referenced as municipal pool programs) vary in structure, funding, and purpose. Examples of municipal pool programs range from government-supported state revolving funds and bond bank programs to more localized private sector-related economic development programs and pool programs that enjoy only a tangential relationship with a quasigovernmental organization. Most programs operate only in a single state.

4. The criteria reference criteria for municipal and corporate collateralized debt obligations (CDOs), reflecting the similarities in structure and purpose. The use of the other criteria reflects a desire to further illustrate comparability across sectors. Accordingly, readers should also reference the following articles:

• “CDOs And Pooled TOBs Backed By U.S. Municipal Debt: Methodology And Assumptions” July 26, 2024 (the Muni CDO criteria)
• “Global Methodology And Assumptions For CLOs And Corporate CDOs,” published June 21, 2019 (the corporate CDO criteria)

5. While the criteria reference these similarities, they also recognize that the public purpose nature of municipal pool programs affect credit quality. Public-sector objectives of funding infrastructure improvements and recycling this money in a sustainable manner can result in different risk-taking behavior relative to the goals of maximizing yield return or profit. The methodology therefore uses a public finance enterprise framework to assess both enterprise and financial risk, consistent with other types of municipal enterprises.

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26-Jul-2024

This publication does not constitute a rating action.

S&P Global Ratings has performed annual reviews of the credit ratings of the issuers/issues listed below.

In an annual review, S&P Global Ratings reviews current credit ratings against the latest issuers/issues performance data as well as any recent market developments. Annual reviews may, depending on their outcome, result in a referral of a credit rating for a committee review, which may result in a credit rating action. The below list is not an indication of whether or not a credit rating action is likely in the near future.

The key elements underlying the credit rating can be found in the issuer’s latest related publication, which can be accessed by clicking on links below. Additionally, for each issuers/issues listed below, S&P Global Rating’s regulatory disclosures (PCRs) can be accessed on the relevant page on www.spglobal.com/ratings by clicking on Regulatory Disclosures underneath the current credit ratings.

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22-Jul-2024

Fitch Ratings-New York-30 July 2024: Fitch Ratings has published a new dataset covering issuers rated using our recently launched U.S. Local Government Rating Model.

The file provides the current Issuer Default Rating and Rating Outlook along with detailed model data supporting the rating. This information includes headroom, model data inputs, assessments, and metric outputs associated with key rating drivers. It also provides any Additional Analytical Factors incorporated into the rating that were not captured in the model’s Metric Profile.

Comprehensive overviews of the rated portfolio are available on the table tabs. Users can also easily focus in on a specific issuer by using the Ratings Analysis Snapshot option.

Fitch will update the file periodically with current data as more issuers are reviewed using the model. The file is available on Fitch’s websites or by clicking on this link: U.S. Local Government Data Comparator. Please bookmark this link for easy access to the most recent version.

The dataset should be read in conjunction with Fitch’s U.S. Public Finance Local Government Rating Criteria.

The program looks to improve data sharing infrastructure and processes for public health agencies to better detect and manage health threats.

Coping with future public health threats means more state and local agencies—many of which rely on aging infrastructure and still collect data by faxes and manual entry—must modernize their data systems, experts say.

To do that, a new $255 million federal program will support state, local and tribal governments’ data modernization projects by offering them technical assistance, policy and legal advice, and guidance documents, among other resources. Funded by the U.S. Centers for Disease Control and Prevention, the Data Modernization Implementation Center program will help develop robust and secure data exchanges among public health agencies, said Jennifer Layden, director of the CDC’s Office of Public Health Data, Surveillance and Technology.

“Public health has a responsibility to detect health threats or diseases that warrant immediate action … to identify outbreaks and then work to investigate and shut down that outbreak,” Layden said. And that, she continued, “relies on timely data.”

Continue reading.

Route Fifty

By Kaitlyn Levinson,
Assistant Editor, Route Fifty

JULY 23, 2024

The grants “put local governments in the driver’s seat to develop climate solutions,” a federal official said. Communities plan to use the money for electrification, bike-sharing and more.

Local, state and tribal governments are getting a total of $4.3 billion from the federal government for projects that reduce greenhouse gas emissions, the U.S. Environmental Protection Agency announced on July 22.

The Climate Pollution Reduction Grants program is funded by the Inflation Reduction Act. Monday’s announcement marks the second and final phase of the program. In the first phase, the EPA provided $250 million in noncompetitive grants to communities to develop plans to drive down greenhouse gas emissions.

The second phase, however, was competitive, with the EPA receiving almost 300 applications requesting a total of nearly $33 billion.

Continue reading.

Smart Cities Dive

Ysabelle Kempe

Published July 23, 2024

Regulators and academics have warned repeatedly that open-end bond mutual funds pose a significant risk to financial stability. If at a time of financial stress, lots of mutual fund shareholders pull their money out at the same time, the funds may be forced to sell bonds in their portfolios at fire sale prices. This can push down prices of other bonds, thus raising yields, and boost borrowing costs across the economy. In March 2020, for example, at the onset of the COVID-19 pandemic, investors took a record $45 billion from municipal bond funds, prompting the Federal Reserve to intervene to make loans backed by muni bonds and to offer to lend directly to state and local governments.

To reduce the risk of a repeat, the Securities and Exchange Commission has proposed, among other things, requiring open-end funds to keep at least 10% of their portfolio in highly liquid assets, such as short-term Treasury bills, so that they can satisfy a flood of shareholder redemptions without selling much less liquid municipal or corporate bonds. In a paper presented at the Municipal Finance Conference at Brookings in July 2024, economists Sergey Chernenko of Purdue University and Viet-Dung Doan of Hong Kong Baptist University find that—assuming the historical relationship between outflows from mutual funds and their sale of assets—such a requirement would have “a limited effect” on mutual funds sales of bonds from their portfolio when investors pull out large sums.

Chernenko and Doan construct a novel data set with daily trading, inflows and outflows, and cash buffers of municipal bond mutual funds. The funds did sell bonds from their portfolios when investors pulled money out. They estimate that $1 of outflows from a fund is associated with 24.2 cents of bond sales initially and another 26.9 cents worth of bonds in the following 15 trading days. The remaining outflows, they assume, are met by the funds’ cash reserves. Larger funds tend to sell less in response to outflows, as do funds holding longer maturity bonds.

The authors use pre-COVID data to estimate the behavior of the funds and then estimate how differently funds would have behaved between March 9 and April 30, 2020, if they had held 10% of their assets in a cash buffer. Specifically, a 10% liquid assets buffer would have reduced cumulative aggregate sales by municipal bond mutual funds in the early stages of the pandemic by only about 18%. “Requiring cash buffers on the order of 10% is unlikely to have a significant effect on flow-induced sales during periods of market stress,” they conclude.

Chernenko cautions, though, that funds might behave differently if all were required to have a 10% cash buffer. Absent such a policy, consider a fund that has a large cash buffer and knows that other funds do not. That fund might be reluctant to draw down the buffer instead of selling assets today to meet redemptions. It might worry that there will be outflows tomorrow and that, because other funds have little cash, they will have to be selling assets. If the fund draws down its cash and delays selling assets today and then faces outflows the day after tomorrow, it may have to sell assets at really low prices because of massive selling by other funds. However, if all funds were required to have a 10% cash buffer, then all of them might be comfortable in drawing down their cash buffers instead of selling assets, knowing that other funds won’t be forced to sell assets at fire sale prices.

Still, in responding to questions at the conference, Chernenko said regulators should consider ways other than requiring the 10% cash buffer to shield the financial system from the turmoil caused when shareholders pull lots of money out of the open-end funds.

by David Wessel

July 25, 2024

The Hutchins Center on Fiscal and Monetary Policy

• Investors are searching for overlooked muni securities
• Others are scouring the secondary market or sitting in cash

The $9 billion-a-week market for new sales of state and local government debt is now so crowded that investors are being forced to get creative in their hunt for value.

There’s been a record onslaught of issuance from municipal borrowers this year, with sales totaling $269 billion marking an increase of 38% from 2023’s volume. That supply — bolstered by a rush to issue before the November US presidential election — has been met with a surprising amount of enthusiasm in the $4 trillion muni market, frustrating long-time investors because it’s harder to get allocations of securities they want.

That tension is mirrored across fixed-income markets as global investors clamor for bonds. Credit spreads on both investment grade and junk-rated corporate bonds have tightened, with high-yield taxable debt trading at a spread roughly 100 basis points below the five-year average.

Continue reading.

Bloomberg Markets

By Erin Hudson and Amanda Albright

July 26, 2024

It’s On The House

It’s becoming increasingly common for issuers to waive some or all of an ETF’s expense ratio until the fund reaches a certain threshold of assets. US-listed spot crypto ETFs have supercharged the trend: the majority of the newly launched Ether ETFs have waived fees, following in the footsteps of the spot Bitcoin ETFs that debuted in January.

It’s not just crypto, though. Invesco’s just-launched Income Advantage Suite funds cost nothing between now and year-end, while the Roundhill Cannabis ETF (ticker WEED) dropped its expense ratio to zero from 40 basis points earlier this month for at least one year.

The logic is simple: issuers are hoping that by putting their funds on sale, investors will buy at a bargain — and then be charged full price once the waiver rolls off. But does that actually work?

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Bloomberg Markets

By Katie Greifeld

July 26, 2024

New York Life Investment Management said it acquired six municipal-bond funds from Aquila Investment Management LLC, a four-decade-old firm that carved out a focus on vehicles for investing in debt from specific states.

The funds, which had about $1.2 billion of assets, had delivered a lackluster run in recent years as US markets were battered by the Federal Reserve’s interest-rate increases.

MacKay Municipal Managers, part of New York Life Investments, will oversee the funds.

Continue reading.

Bloomberg Markets

By Amanda Albright and Sri Taylor

July 22, 2024

Goldman Sachs Group Inc., which manages $2.93 trillion in assets, is adding four actively managed municipal bond ETFs to its lineup as it aims to tap into rising demand for active bond funds while increasing options for tax conscious investors.

Continue reading.

Yahoo Finance

by DJ Shaw

Thu, Jul 25, 2024

• Goldman Sachs Asset Management launches four new funds
• Offerings include a product aimed at New York investors

Goldman Sachs Asset Management is launching four new municipal-bond exchange-traded funds, adding to the $129 billion corner of the state and local government debt market.

The firm, the investing arm within Goldman Sachs Group Inc., has created the actively-managed products which include a fund focused on ultra-short municipals and one that invests in tax-exempt debt sold by New York borrowers. More money managers have seized on demand for ETFs that are often lower-cost than mutual funds. The investment management business of Prudential Financial Inc. also introduced muni ETFs last month.

Inflows into muni ETFs in 2024 stand at roughly $5.4 billion, trailing last year’s pace when the funds collected more than $15 billion. However, demand has picked up in June and the products recorded an influx of over $2 billion, the biggest month so far this year, according to Bloomberg Intelligence data.

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Bloomberg Markets

By Amanda Albright and Erin Hudson

July 25, 2024

Two former executives from Preston Hollow Community Capital Inc. started a new firm, V2 Municipal Capital, that will source high-yield municipal bonds exclusively for alternative asset manager Fundamental Advisors.

Charlie Visconsi, who previously served as co-head of originations at Preston Hollow, and Ron Van Den Handel, a former managing director on the originations team, started V2MC this month, according to a statement Wednesday. It will target investment opportunities in health care, housing, education and infrastructure.

At Preston Hollow, a Dallas-based municipal lender, the two muni veterans sourced new deals for the firm. A representative for Preston Hollow didn’t immediately reply to a request for comment.

Continue reading.

Bloomberg Markets

By Amanda Albright

July 24, 2024

Higher interest rates and inflation remain headwinds for most U.S. public finance issuers from a debt issuance and operating and capital budget perspective. Credit conditions have been mostly stable, but credit pressure has accelerated for some sectors and the outlook distribution has weakened.

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Key Takeaways

• U.S. not-for-profit private colleges and universities faced ongoing demand pressure in fiscal 2023, with a median enrollment decline of 0.8%. However, those in the ‘AAA’ and ‘AA’ rating categories generated stable demand while enrollment decreases were concentrated in lower rating categories.
• Absent federal relief funding, enrollment decreases, increased tuition discounting, and inflation contributed to weaker operations in fiscal 2023, particularly for ‘BBB’ and speculative-grade institutions.
• While median cash and investments fell year over year, balance sheets remained stronger than they were before the pandemic.
• The median debt burden dropped slightly sectorwide but increased for speculative-grade issuers.

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July 18, 2024

Key Takeaways

• U.S. public higher education institutions continued a long trend of weakening demand metrics in fiscal 2023, with a median enrollment decrease of 0.7%. This trend was almost evenly spread across rating categories with the exception of a small increase in median enrollment at ‘AAA’ rated flagship institutions.
• Freshman application metrics were down similar to enrollment trends, but public colleges and universities had more success in maintaining retention and graduation rates.
• While demand pressures and the depletion of federal relief funds translated into tightening financial performance, improved state funding allowed most institutions to maintain net operating results close to pre-pandemic levels.
• Despite some volatility in investment markets, nearly all financial resource ratios modestly improved in fiscal 2023 across rating categories.

Continue reading.

18 Jul, 2024 | 19:18

• FEMA is stretched thin as number of big disasters pile up
• Massachusetts mayor warns others to ‘lower those expectations’

A once in 200-years storm dumped 11 inches of rain over four hours on the central Massachusetts town of Leominster in September, washing away culverts, creating a sinkhole that swallowed cars at a dealership and flooding the city council chambers with sewage.

Damages to public infrastructure in Leominster exceeded $24 million, but the federal government denied a request for reimbursement to fix everything from dams to sanitation mains, and rejected Governor Maura Healey’s bid for a major disaster declaration for impacted counties in the center of her state. And last month, Healey said the US Federal Emergency Management Agency turned down her appeal.

“The perception of most is FEMA is there when you get into large scale events — they are going to help you,” said Leominster Mayor Dean Mazzarella, who is now weighing how to pay for both a new elementary school that was planned before storms hit and the damage they caused. “Practice self reliance. If you are waiting for the federal government to help, lower those expectations.”

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Bloomberg CityLab

By Shruti Singh

July 12, 2024

The Biden administration announced $5 billion to build major bridge replacements, including several grants that were among the largest received by states in their history.

More than a dozen large bridge projects secured federal funding Wednesday, including long-planned connections in Portland, Oregon; Cape Cod, Massachusetts; Mobile, Alabama; Wilmington, North Carolina; and Harrisburg, Pennsylvania.

The Biden administration announced the $5 billion in grants funded under the 2021 infrastructure law, with Transportation Secretary Pete Buttigieg and other federal officials planning to visit the selected sites over the coming weeks.

“Today’s announcement means that millions of people will have a better and safer commute, and that every American will benefit in some way—whether they use these bridges or not—from the smoother supply chains hitting fewer bottlenecks at 13 of the most significant bridges in the country,” Buttigieg told reporters.

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Route Fifty

By Daniel C. Vock,

JULY 17, 2024

KEY POINTS

• The election outcome and future policy could impact the municipal bond market, experts say.
• A popular asset for higher earners, muni bonds generate interest that is federally tax-free and avoids state levies when investors live in the issuing state.
• However, there’s uncertainty around interest rates, income taxes and public financing.

With interest rate cuts from the Federal Reserve likely on the horizon, municipal bonds could soon see higher demand, experts say. But there are several factors to watch, including the election outcomes of the presidential and congressional races, and future policies

Continue reading.

cnbc.com

Kate Dore, CFP®

THU, JUL 18 2024

• Investors add about $900 million in latest week: LSEG Lipper
• First Eagle’s Miller, BlackRock see scope for continued inflow

Municipal bond funds are seeing the largest burst of demand in months as confidence builds that the Federal Reserve will start lowering interest rates as soon as September, bolstering the outlook for fixed-income more broadly.

Investors added about $900 million to funds focused on US state and city debt in the past week, the most since May, according to LSEG Lipper Global Fund Flows data. It was the third straight week of additions, and followed the muni market’s best month this year, which could help spur continued improvement in investor appetite, according to BlackRock’s municipal bond group.

Continue reading.

Bloomberg Markets

By Maggie Eastland

July 19, 2024

• Monthly visible supply for muni bonds stands at $16.1 billion
• Market benchmark has returned about 0.22% so far this year

Municipal bond sales are surging at the fastest clip in weeks as issuers focus on the prospect of lower borrowing costs amid growing expectations that the Federal Reserve will start cutting interest rates as soon as September.

US states and local governments are expected to sell $16.1 billion of debt over the next 30 days, a number that represents a fraction of what may actually come to market because deals are typically announced with less than a month’s notice. That figure, which sums the forward-looking calendar, shows the quickest pace of new offerings since early June and roughly 68% more than the 12-month average, according to data compiled by Bloomberg.

The supply uptick is a result of a slew of factors, including cities’ need to finance new infrastructure and a higher cost of construction for projects, said Matthew Caggiano, co-head of municipal bond strategy at DWS Investment Management. Issuers have also been rushing to refinance Build America Bonds with tax-exempt debt, which has boosted new deals.

Continue reading.

Bloomberg Markets

By Erin Hudson and Amanda Albright

July 16, 2024

Some muni market investors are paying far more than others for the same bond on the same day, even after a 2018 rule improved the situation somewhat.

That’s the upshot of two recent analyses of trading in municipal bonds, debt issued by state and local governments. Wealthy U.S. households like munis because their interest is tax-exempt. But unlike with stocks, there is no publicly searchable daily price information. Wall Street bond dealers broker the trades, deciding what prices they are willing to pay sellers and how much to accept from buyers.

In 2018, the SEC mandated that after an investor buys a bond, the dealer must provide a disclosure giving them an idea of what others had recently paid for it. Trading costs subsequently fell on frequently traded bonds, according to a paper presented Wednesday at the Brookings Institution by a University of Nebraska-Lincoln graduate student.

But a survey of trading data collected during two three-day periods of relative market calm this year found that for about 20% of the debt traded multiple times during those stretches, the highest price paid for a specific bond was at least 1% more than the lowest price. For almost 4% of the debt, the difference was greater than 3%.

That analysis, by fixed income research and data firm Solve, found dealers benefitting from the gaps. In one example, a dealer gave an investor $28,495 for some New York Metropolitan Transportation Authority bonds, then within a few minutes turned around and sold them to another dealer for $28,928, netting a profit of about $433. On another morning, three dealers traded bonds from a private college in Pennsylvania among themselves before an investor finally bought the bonds for $48,100 – or $918 more than the highest price any dealer had paid.

The Solve analysis echoes findings two years ago by a trio of professors who found dealers mark up prices when investors are less likely to notice.

The Wall Street Journal

By Heather Gillers

July 18, 2024

Fitch Ratings-New York-08 July 2024: The outcome of November’s U.S. elections could mark a significant pivot point for federal policy with implications for credit, Fitch Ratings says in a new report.

A status quo outcome where incumbent President Joe Biden returns to office with a split Congress would likely mean a broad continuation of major policies. A victory by presumptive Republican nominee and former President Donald Trump would likely mean changes to key policy areas, especially should the Republicans take control of the Senate while retaining or growing their majority in the House of Representatives.

In the event of a change in administration, we believe there are seven key policy themes that could have the biggest impact to credit. These are trade protectionism, persistent fiscal pressures, geopolitical positioning & foreign policy, a climate policy rollback, financial deregulation, social policy reform and restrictive immigration. Trade protectionism and fiscal pressures have been bipartisan trends, where we would expect a Trump administration to mark an amplification in policies. The other policy areas would likely experience sharper pivots.

There would likely be credit positives and negatives from a major policy shift. In the short term, there would not likely be broad-based direct ratings effects, barring the passage of certain policies that would require legislation and have a low probability of occurring. However, over the medium and longer terms, indirect feedthroughs could prove more meaningful to certain sectors.

The outcome of November’s 2024 U.S. elections could be profound for the trajectory of federal policy with implications for credit. Fitch Ratings believes a victory for incumbent President Joe Biden and a split Congress – a status quo outcome – would mean a continuation of key policies, including for the budget, foreign policy and trade, the regulatory environment, social policies and climate. By contrast, a victory by presumptive Republican nominee and former President Donald Trump would likely mean changes to key policy areas. This could include departures from long-held bipartisan consensus, such as in foreign policy, even under a divided government scenario. The probabilities of rapid and profound policy changes would rise significantly should Republicans also take control of the Senate while retaining or increasing their majority in the House of Representatives

ACCESS REPORT

Mon 08 Jul, 2024

• Technique made up 10% of June’s corporate-bond trading volume
• AllianceBernstein, Vanguard embrace it for liquidity benefits

The boom in portfolio trading is starting to creep into the market for state and local government debt.

The tactic, which allows investors to buy or sell bundles of bonds at once, has become popular in the US corporate bond market over the past six years. Now municipal bond managers are starting to catch on, too.

Portfolio trading holds the promise of injecting more liquidity into the buy-and-hold market, where debt sold by small towns and school districts may not trade for months or even years. That makes it difficult for investors to determine the value of a particular bond and has contributed to higher trading fees — a problem that may be eased if more rarely traded bonds are included in lots sold by portfolio trades.

Continue reading.

Bloomberg Markets

By Amanda Albright

July 11, 2024

HAMILTON, Bermuda, July 08, 2024–(BUSINESS WIRE)–Assured Guaranty Ltd. (NYSE: AGO) (together with its subsidiaries, Assured Guaranty) announced today that Assured Guaranty Municipal Corp. (AGM) will merge into Assured Guaranty Inc. (AG), which was named Assured Guaranty Corp. until May 24, 2024. The effective date of the merger is expected to be August 1, 2024.

“We see this merger as beneficial for all our stakeholders,” said Dominic Frederico, President and CEO. “It will result in more efficient utilization of the combined capital of the two companies, and it will simplify the administration and eliminate duplicative expenses of Assured Guaranty’s U.S. financial guaranty operations. Over its nearly 40 years in the financial guaranty business, Assured Guaranty has continually evolved, constantly looking for ways to better serve our customers and grow our business. This merger further positions us to achieve those goals.”

By aggregating AGM and AG into a single insurance company, the merger enlarges the pool of capital available to support each insurance policy and results in a further diversification of the insured portfolio’s credit profile. The merger is also expected to strengthen Assured Guaranty’s ability to continue successfully executing its strategies to achieve its business objectives. The new AG, compared with either AG or AGM before the merger, will have:

• a larger, more highly diversified insured portfolio
• a larger investment portfolio and a larger capital base, creating a more efficient capital structure, and
• greater claims-paying resources.

The merger combines two companies that have identical ratings from S&P Global Ratings, Kroll Bond Rating Agency and Moody’s Ratings and should have no impact on Assured Guaranty’s strong and stable financial strength ratings.

In recent years, AGM has served as Assured Guaranty’s flagship financial guaranty insurance company, offering guarantees on U.S. and non-U.S. public and infrastructure finance obligations, while AG has provided risk and capital management solutions for insurance, pension and banking institutions, offered guarantees on structured financings, and served as the acquirer or reinsurer of insured portfolios of non-affiliated financial guaranty insurers in runoff. Both companies’ insured portfolios contain public and infrastructure finance exposures and structured finance exposures.

“Assured Guaranty has been growing and broadening the financial guaranty products it provides and the markets it serves, extending a long tradition of innovation,” said Robert Bailenson, Chief Operating Officer. “This transaction will eliminate an unnecessary distinction between the companies and allow us to even more effectively lead the bond insurance industry.”

AG will continue to be domiciled in Maryland, and the Maryland Insurance Administration (MIA) will be its primary regulator, as it has been since December 31, 1987. Upon effectiveness of the merger, by operation of law, AGM-insured securities will become guaranteed obligations of AG, a larger combined company. AGM’s subsidiaries Assured Guaranty UK Limited and Assured Guaranty (Europe) SA will become subsidiaries of AG and will continue to operate as they did previously.

In connection with the merger of AGM into AG, the MIA approved a $300 million stock redemption (sometimes described as a “special dividend”) by the combined company, which is expected to be effectuated shortly following the merger.

Additional information on the merger can be found in a Presentation and a Q&A document on the Assured Guaranty website.

There’s great recognition—on both sides of the issue—that strict pro- and anti-environmental, social and governance investing strategies can lead to unintended costs and administrative challenges.

State policymakers across the political spectrum have increasingly created rules and mandates targeting environmental, social and governance investment strategies in recent years. In 2024 alone, more than two dozen ESG bills have been introduced—some favorable to the concept but most oppositional—and six so far are now law.

ESG investment strategies have traditionally focused on the long-term impacts of investing in industries that could be economically, environmentally, or politically undesirable—with the bottom-line goal of limiting financial exposure to potential risks. In contrast, some state policymaker efforts around ESG have conflated this traditional use with what is known as impact investing, a strategy that aims to achieve certain social or environmental outcomes.

This year, for example, Idaho lawmakers joined those in more than a dozen other states, including Texas and Florida, in prohibiting government entities from doing business with certain companies that use ESG considerations in their investing approach. On the other end of the spectrum, Oregon’s pension fund is planning to divest from coal after lawmakers enacted legislation as part of an effort to have a net-zero pension portfolio by 2050.

Continue reading.

Route Fifty

By Fatima Yousofi, Liz Farmer and Stephanie Connolly

JULY 10, 2024

More inflows into active bond ETFs during the month of June is following the overall trend of higher inflows since the start of the year. That said, it’s an ideal time to get core exposure with the added flexibility of active management with a pair of Vanguard ETFs.

“Investors are shovelling cash into exchange traded funds that invest in a handpicked array of bonds, with record inflows since January that are pushing the industry towards its first $1tn annual haul,” the Financial Times reported. “Actively managed fixed-income ETFs took in $7bn in June and have garnered $41bn over the first half of 2024, surpassing 2023’s record of $33bn for the entire year, according to data from State Street Global Advisors, the third-largest US ETF issuer.”

Yield is certainly a prime catalyst for the increased demand for bonds as investors are clamoring to lock in yields now before central banks start to cut interest rates. Additionally, active funds have been more competitive in terms of pricing compared to their passive counterparts.

Continue reading.

advisorperspectives.com

by Ben Hernandez of VettaFi, 7/14/24

• Pat Haskell needs to undo outflows in active muni mutual funds
• Ex-Morgan Stanley executive is known for market savvy, pranks

Not long after Pat Haskell took over Morgan Stanley’s municipal-bond department in 2013, he handed out rubber bracelets with the letters “EFD.” He wanted his team to bring their best every f—ing day.

And it worked — during his tenure, the business rose in client rankings and found new ways to deliver revenue.

Today, Haskell is trying to fire up another group, this time as BlackRock Inc.’s head of municipal bonds. A key challenge facing the 52-year-old executive is how to reverse severe outflows from actively managed mutual funds after bouts of underperformance.

Investors have pulled roughly $13.7 billion from those BlackRock muni funds on a net basis since 2020 and its market share has dropped, according to Morningstar Direct data. Although performance has improved in recent months, the outflows have continued.

Continue reading.

Bloomberg Markets

By Martin Z Braun

July 10, 2024

• Analysts see revenue pressure slowing recent flow of upgrades
• Health care, higher-education sectors will face most stress

Credit quality in the $4 trillion municipal bond market is showing early signs of pressure as federal pandemic aid winds down, spurring expectations that the rapid pace of rating upgrades over downgrades in recent years will ease.

Revenue growth is slowing, and in states such as California tax and fee collections are dropping. Rainy day funds are forecast to show declines after reaching record levels from strong economies and US stimulus money.

“Going into fiscal 2024, we were coming into all-time highs of reserve funds, and the economy had proven to be resilient,” Lisa Washburn, a managing director of Municipal Market Analytics, said in an interview. “If you look into fiscal 2025, you have draw down of reserves and softening of revenue growth.”

Continue reading.

Bloomberg Markets

By Shruti Singh

July 10, 2024

Eve Lando, Thornburg Investment Management portfolio manager, discusses the state of the municipal bond underwriting business. Speaking on “Bloomberg The Close,” Lando says she sees “insatiable interest in anything tax-exempt.”

Watch video.

Bloomberg Markets

July 11, 2024

• Yields dropped as much as 8 basis points on Thursday
• Strong performance may help boost flows into municipal funds

Short-dated municipal bonds posted their best day in five months after signs of slowing inflation fueled speculation the Federal Reserve will be able to cut rates as soon as September.

Shorter-dated securities extended a rally on Friday afternoon after state and local government bond yields dropped as much as 8 basis points on Thursday, further boosting prices. The biggest gains came at the front of the yield curve with top-rated benchmark bonds maturing in one and two years posting their best daily gains since early February.

“We’ve gone through several false starts in the first and second quarter, hence the market was going in a little cautious,” said James Pruskowski, chief investment officer at 16Rock Asset Management, referencing inflation data that had been stubborn until recently. “I think this seals the fate as the Fed is laying the groundwork for a pivot.”

Continue reading.

Bloomberg Markets

By Maggie Eastland and Danielle Moran

July 12, 2024

Municipal June update

• Municipal bonds posted their strongest June performance since 2019.
• The asset class outperformed amid improving seasonal supply-and-demand dynamics.
• Looking ahead, July has historically been the strongest performing month of the year.

Continue reading.

by Patrick Haskell, James Schwartz, Sean Carney of BlackRock, 7/11/24

Like chocolate and peanut butter, a dovish Fed and narrower credit spreads are two great tastes that go great together in high-quality municipal bonds, where investors in the highest tax brackets can earn impressive income without sweating credit risk.

Muni bonds aren’t for everyone. But for high-income investors, they provide sizable yields with lower risk than they could get elsewhere thanks to the magic of “tax equivalency.” Muni bonds usually have lower yields than Treasuries, but because they are generally free from federal taxes, the yield has to be adjusted for the amount saved on taxes. The actual tax-equivalent yield of a muni bond can depend on an investor’s tax bracket and state residence.

These days, the tax-equivalent yields for many muni bonds across the maturity spectrum are pushing 6%. That’s better than investors can do not only in equivalent Treasury bonds, but in corporates and money-market funds as well.

Continue reading.

Barron’s

By Al Root

July 12, 2024,

SIFMA Research tracks issuance, trading, and outstanding data for the U.S. municipal bond market. Issuance data is broken out by bond type, bid type, capital type, tax type, coupon type and callable status and includes average maturity. Trading volume data shows total and average daily volume and has customer bought/customer sold/dealer trade breakouts. Outstanding data includes holders’ statistics. Data is downloadable by monthly, quarterly and annual statistics including trend analysis.

YTD statistics include:

• Issuance (as of June) $241.5 billion, +31.9% Y/Y
• Trading (as of June) $13.0 billion ADV, +2.9% Y/Y
• Outstanding (as of 1Q24) $4.1 trillion, +1.0% Y/Y

Access the SIFMA report.

July 1, 2024

As of July 3, 47 states have enacted a full-year budget for fiscal 2025. State fiscal conditions are continuing to return to a more normal budget environment in which new money is limited and revenue collections more closely align with expectations. According to NASBO’s Spring 2024 Fiscal Survey of States, state general fund spending in fiscal 2025 is expected to slow following three consecutive years of robust increases, which were driven in part by sizable one-time expenditures of surplus funds. States are projecting modest revenue gains in fiscal 2025 following two consecutive years of essentially flat revenue growth, and tax collections for fiscal 2024 are performing close to states’ revenue forecasts. While expenditure and revenue growth is expected to slow, a majority of governors are recommending further increases to rainy day funds. As states begin fiscal 2025, overall fiscal conditions remain strong as states invest in priorities, experience stable revenue outlooks, and maintain rainy day funds at or near all-time highs.

Thirty-four states, the territories, and the District of Columbia are enacting a new budget for fiscal 2025 (Kentucky, Virginia, and Wyoming are enacting a biennial budget for both fiscal 2025 and fiscal 2026). Last year, 16 states enacted biennial budgets covering both fiscal 2024 and fiscal 2025; in seven of those states, the governor released a supplemental or revised budget recommendation for fiscal 2025. Forty-six states begin their fiscal year on July 1 (New York begins its fiscal year on April 1, Texas on September 1, and Alabama and Michigan on October 1). Puerto Rico begins its fiscal year on July 1, while the District of Columbia, Guam, and the U.S. Virgin Islands begin their fiscal year on October 1.

Below is additional information on states that have yet to enact a full-year budget for fiscal 2025. Additionally, Table 12 of NASBO’s Budget Processes in the States has information on procedures if no budget is enacted by the start of the fiscal year.

• Massachusetts – The legislature has yet to pass a budget for the full fiscal year; the governor signed a temporary budget for the month of July.
• Michigan – The legislature finalized the budget on June 27 and the governor is currently reviewing the budget bills. Michigan’s fiscal year does not begin until October 1.
• Pennsylvania – The legislature has yet to reach a budget agreement.

Please click here for links to proposed and enacted budgets, as well as prior budget summaries.

 

• Only 14% of muni turnover is handled electronically, bank says
• It’s about 60% for Treasuries, almost 40% for US IG bonds

The municipal-bond market has been one of the slowest areas of the fixed-income universe to shift to electronic trading. But as Bank of America Corp. sees it, there’s plenty of scope for that to change.

Electronic platforms have the potential to triple the share of turnover they handle in US state and city debt — from an estimated 14% now — reaping $1.6 billion in annual revenue, analysts at Bank of America said in a report this month that assessed the prospects of e-trading in various bond categories.

Bloomberg Markets

By Isabelle Lee

June 27, 2024

Presenting on the “AI and the Municipal Bond Market” panel for the Council of Development Finance Agencies/BNY Mellon webcast series, I was asked why the market’s adoption of technology is now coming at such a blistering speed. After all, for years if not decades, the market had been resistant to technology or any sort of change, enjoying its status as boring, stodgy, clubby, and dull. Now the pace of technological change is stunning—with no signs of abating. If anything, it’s increasing.

Certainly there are many reasons for this remarkable pivot. Technology across the board is better and faster. Advances in AI, faster chips, more code, better connectivity, data science breakthroughs, market professionals who grew up with laptops and cell phones—each building on the other. The market is experiencing a variant of Moore’s Law on steroids. To add fuel to the fire, there is FOMO: fear of missing out. If your competitor has bigger, faster, better technology than you do, you risk falling hopelessly behind.

All valid and reasonable explanations, but not really getting to the core of answering the question.

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Forbes

by Barnet Sherman, Contributor

July 2, 2024

Fitch Ratings-New York/Austin-01 July 2024: Fitch Ratings has published the following report: “U.S. Public Finance Prepaid Energy Transaction Rating Criteria.” This report updates and replaces the prior report published on June 13, 2023.

The primary revision to the criteria is a scope clarification to enable Fitch to assign and maintain ratings on underlying component obligations of prepaid energy transactions, including those related to the funding agreement. Fitch also clarified its definitions of payment force majeure, grace periods, and qualified investments.

The key criteria elements remain consistent with those of the prior report, and there is no impact on outstanding ratings. The previous version of the criteria has been retired.

Contact:

Dennis Pidherny
Managing Director
+1-212-908-0738
Fitch Ratings, Inc.
300 W. 57th Street
New York, NY 10019

Tim Morilla
Director
+1-512-813-5702

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

Additional information is available on www.fitchratings.com

After years of rapid growth, states are starting to see revenue declines. Tax cuts red states enacted could become more costly in future years, while some blue states are debating tax increases.

In Brief:

• Total state revenues are stagnating, with overall declines in sales tax collections.
• The factors that fueled growth in recent years, notably federal aid, are no longer boosting treasuries.
• Given healthy reserves, the picture is not dire but policymakers have entered an age of tough choices if not austerity.

California has been facing a massive budget shortfall — estimates vary, but in the $50 billion range — so it was not at all surprising that the spending package passed last month included serious cuts. The state will reduce its spending by about $16 billion, including an 8 percent reduction in funding for almost all departments.

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governing.com

July 5, 2024 • Alan Greenblatt

Key Takeaways

• U.S. charter schools’ median financial performance remained healthy in fiscal 2023, with stable-to-improving metrics across most measures relative to fiscal 2022.
• Median enrollment surged 7% to 1,175 from 1,098 in fiscal 2022, the largest annual growth rate our charter school universe has experienced in the past decade.
• California still leads the pack by number of rated schools, adding the most new ratings over the past year, followed by Florida.
• Elementary and Secondary School Emergency Relief (ESSER) funding, which is available to be spent through September 2024, continues to support solid financial performance, lease-adjusted MADS coverage, and liquidity levels.

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25 Jun, 2024

Fitch Ratings-New York/Chicago-02 July 2024: The uphill battle continues for U.S. private colleges and universities despite an uptick in net tuition revenue growth with medians likely under intensifying pressure in the coming months, according to Fitch Ratings in its latest annual medians report for the sector.

Private U.S. colleges saw a return to net tuition revenue growth in fiscal 2023. “Looking ahead, additional operating pressure is expected through with many institutions grappling with elevated costs and a fractured enrollment environment,” said Senior Director Emily Wadhwani. This will likely result in more pressure on medians with adjusted operating margins falling to their lowest point in over a decade despite relatively steady investment returns and endowment support. “Cash flows and coverage are likely to face continued pressure, particularly emerging from an admission cycle fraught with FAFSA issues this spring casting concerns over fall enrollment expectations,” Wadhwani continued.

Working in the sector’s favor to help balance out negative stresses are still-strong balance sheets. Colleges are playing defense in controlling expenses where possible, evaluating sales or monetization of non-core assets, weighing partnerships versus ownership, and deferring maintenance. As a result, Fitch-calculated available fund levels held steady in fiscal 2023 against expenses and adjusted debt.

Leverage and liquidity medians returned to slightly better than pre-pandemic levels, a favorable development which will in time be tempered by still-narrow operating margins and hampered operating flexibility. “Limited increases in tuition will be insufficient to mitigate still-elevated operating costs, which over time will further widen the credit gap between larger, more selective institutions versus their smaller, less selective and more tuition-dependent counterparts,” affirms Wadhwani.

Fitch’s Fiscal 2023 Median Ratios for U.S. Not-for-Profit Private Colleges and Universities report is available at www.fitchratings.com.

Contact:

Emily Wadhwani
Senior Director
+1-312-368-3347
Fitch Ratings, Inc.
One North Wacker Drive
Chicago, IL 60606

Unexpected costs and implementation challenges for the investment policies prompt a 2024 shift

State policymakers across the political spectrum have increasingly created rules and mandates targeting environmental, social, and governance (ESG) investment strategies in recent years. In 2024 alone, more than two dozen ESG bills have been introduced—some favorable to the concept but most oppositional—and six so far are now law.

ESG investment strategies have traditionally focused on the long-term impacts of investing in industries that could be economically, environmentally, or politically undesirable—with the bottom-line goal of limiting financial exposure to potential risks. In contrast, some state policymaker efforts around ESG have conflated this traditional use with what is known as impact investing, a strategy that aims to achieve certain social or environmental outcomes.

This year, for example, Idaho lawmakers joined those in more than a dozen other states, including Texas and Florida, in prohibiting government entities from doing business with certain companies that use ESG considerations in their investing approach. On the other end of the spectrum, Oregon’s pension fund is planning to divest from coal after lawmakers enacted legislation as part of an effort to have a net-zero pension portfolio by 2050.

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The Pew Charitable Trusts

By: Fatima Yousofi, Liz Farmer & Stephanie Connolly

June 27, 2024

Despite reserves bulging and revenue receding, state legislators and governors are reluctant to spend savings.

After years of strong revenue growth, states nationwide have greatly increased their savings—rainy day fund balances are at record levels relative to state spending in 22 states. But revenues are declining and legislators and governors in several states are asking whether this is the right time to withdraw money from their rainy day funds.

These funds are reserve accounts in which states save money in good years to help balance their budgets in bad ones. Budget experts, including credit rating agencies, recommend using the reserves to limit painful service cuts or tax increases when states face budget shortfalls caused by temporary events such as recessions or natural disasters. But rainy day funds are not well suited for helping states close shortfalls caused by structural imbalances in which ongoing spending chronically exceeds ongoing revenue.

Although this maxim is easy to understand in theory—use the rainy day fund for temporary shortfalls, not structural ones—applying it can be more difficult. It’s not always obvious where and when temporary problems end and structural problems begin. Furthermore, rainy day funds have grown so much that some policymakers have begun to wonder whether their savings are larger than necessary. Some states continue to increase savings by raising caps on reserve funds or appropriating dollars to emergency funds, but others have started to discuss spending down rainy day funds even in the absence of a shortfall.

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Route Fifty

By Josh Goodman, John Hamman and Sariah Toze

JUNE 26, 2024

Dan Close, Nuveen’s head of municipals, says borrowing costs, infrastructure demand and the US presidential election are driving mega-deals in the municipal bond market. Speaking on “Bloomberg The Close,” Close also comments on the anticipated demand for MTA muni bonds.

Watch video.

Bloomberg Television

Jun 26, 2024

Introduction: At a time when financing for hospitality development projects is challenging for developers, it can often mean that some projects won’t ever come to fruition. At the same time, municipalities would like to increase their hotel or resort offerings to attract travelers to their destinations while remaining fiscally responsible. When developers seek government assistance for development projects, state and local authorities must balance the needs of developers in the community with the financial realities of the project. Commissioning an economic impact study will provide important data for stakeholders to understand the economic benefits of a project and assess its desirability and its overall economic impact on the local or regional economy. The case study presented in this report shows the occupancy impact that Kalahari Resorts has caused in the markets where they have been developed in Ohio, Pennsylvania, and Texas over the past 20 years. The statistical data shows strong positive growth in market occupancy levels caused by the addition of these themed resorts with high room counts and multiple attractions. An economic impact study can similarly provide developers and government representatives with financial information to forecast the economic impact of a proposed development.

PURPOSE OF ECONOMIC IMPACT STUDY
An economic impact study estimates the total benefits of a project, including tax revenues, employment changes, additional spending impacts during the construction and operational phases, revenues from increased commercial activity and tourism, and other changes in the community. It will also measure the impact on other local businesses in the area that may benefit from a new hospitality property. The results of this study are often used to calculate financial incentives that municipalities are willing to offer a development project based on the projected impact on the local economy. In addition, the study can also be used to demonstrate benefits that may persuade communities to support a project.

Resources: H&LA utilizes the following resources when preparing economic impact studies:

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hospitality.net

By David J. Sangree
MAI, CPA, ISHC, is President of Hotel & Leisure Advisors

3 July 2024

Workforce shortages are affecting many areas of government, but public finance is particularly hard hit. Shortages of accountants are a severe problem, with too few candidates replacing aging employees.

In Brief:

• The public finance workforce is still below pre-pandemic numbers. A third of the existing workforce is eyeing retirement.
• Recruitment is a challenges, with college students deterred by barriers to entry including lengthy licensing requirements and subpar pay.
• Possible solutions include more financial aid and a streamlined hiring process.

By now, problems with workforce shortages are pretty familiar, but here’s a specialized area you might not have thought about: The nation is in the middle of a shortage of accountants that’s only going to get worse.

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governing.com

July 3, 2024 • Zina Hutton

• Municipalities sold $236 billion of bonds since January
• The deal growth has led some banks to upsize their forecasts

A surge in borrowing pushed municipal deal flow to the fastest start to the year on record after states and cities seized on more stable interest rates to flood the market.

Municipalities sold $236 billion of debt since January, the highest for the first half ever, according to data compiled by Bloomberg which dates back decades. The surge represents roughly 38% more than the same period last year.

Chris Brigati, director of strategic planning at SWBC, pointed to three drivers of supply in the first half: pent-up demand from lighter issuance last year, a bevy of infrastructure borrowing needs as stimulus funding wanes, and a rush by issuers to come to market before the US presidential election in November.

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Bloomberg Markets

By Maggie Eastland and Nic Querolo

July 1, 2024

• June gain of 1.5% for munis compares with 1.4% for Treasuries
• State, city debt pares 2024 loss amid strong seasonal period

The municipal-bond market is on track to slightly outpace Treasuries this month, benefiting from a broad fixed-income rally and a period that is typically strong for US state and city debt.

Munis are up 1.5% in June as of Thursday’s close, compared with 1.4% for US government debt, according to Bloomberg index data. Bonds have rallied this month as signs of cooling inflation supported bets that the Federal Reserve will lower interest rates this year. Both munis and Treasuries are still down a bit more than 0.4% in 2024.

For munis, it’s set to be the best June since 2016. This month is often the beginning of a mid-year stretch where demand outstrips supply as investors recycle cash from calls and redemptions back into munis while issuers tend to sell less debt.

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Bloomberg Markets

By Maggie Eastland and Maxwell Adler

June 28, 2024

A lot has changed in the world of munis over the past 40 years, but don’t take our word for it. Joining hosts Eric Kazatsky and Karen Altamirano on the June edition of Masters of the Muniverse is Joe Mysak from Bloomberg News, retiring this month after 40-plus years of covering public finance. In this month’s episode, we discuss Joe’s storied career at Bloomberg, how the muni market has changed and what to expect for the second half of the year. To help us bid him farewell, we are also joined by a few special guests.

Listen to audio.

Bloomberg Intelligence

Jun 28, 2024

June’s declining yields have pushed investment-grade munis into positive territory for the year, with the yield curve showing signs of normalization. Despite rich valuations relative to Treasuries, high-quality long-duration bonds remain attractive, especially for investors in high-tax states.

June gains brings muni returns into positive territory

On a year-to-date (YTD) basis, IG munis are now posting a gain of 0.1%, helped by declining yields in June. Over the past month the 2s10s on AAA muni curve has continued to steepen while the 10s30s flattened some more. The shape of the curve continues to normalize, although the 2s10s portion remains inverted. Despite softening yields, the long end still looks attractive to us given our lower rate outlook by year-end. Valuation continues to skew rich with the 10-year muni, as the Treasury ratio is now at 66%, compared to its three-year average of 72%. However, taxequivalent yields on high-quality bonds, particularly in high tax states such as New York and California, remain attractive from a long-term investment perspective.

Outlook

Lower inflation and favorable summer technicals, powered by heavy bond redemptions, should help near-term performance, albeit tempered by strong supply and still rich valuations relative to Treasuries. The municipal credit outlook remains stable given our expectation of a soft landing. A and BBB spreads remain tight relative to historical levels. We continue to favor long duration high-quality bonds.

As the Presidential election draws near and the politics of fiscal deficits and national debt assume more prominence, we expect more headlines about the federal tax exemption on municipal bonds being at risk of elimination. However, despite the heightened focus, we believe the municipal tax exemption will remain, albeit with some potential limited modifications. Finally, hurricane season is upon us. Given the rising frequency and cost of weather-related events, we encourage investors to consider physical climate risk factors when building a balanced and diversified municipal bond portfolio by state and sector, avoiding home state bias.

RECOMMENDATIONS AND PREFERENCES

• Take advantage ahead of the redemption season and increased supply: In the near term, we continue to see an opportunity to place assets into the muni market ahead of a heavy wave of seasonal bond redemptions expected this summer. Robust supply might temper performance but also helps investors with a wider choice of bonds in which to invest.
• Lock-in high taxable equivalent yields (TEYs):TEYs on longer-dated munis of around 7.5% for investors in top tax brackets in New York and California are particularly attractive.
• Curve positioning: We favor longer-dated high-quality bonds for a more durable source of income with capital gains potential. Investors could also consider some smaller allocations to the short end to create barbell portfolios and the intermediate portion of the curve to take advantage of recent steepening of the 2s10s.
• Credit quality and sectors: Given relatively tight spreads on lower-rated bonds we see better value in higher-quality issuers.

by UBS Editorial Team

02 Jul 2024

Main contributor: Sudip Mukherjee

Abstract

Both the increased transparency and the institutionalization of the municipal bond market have led to dramatic declines in the profits of underwriters, especially so for those whose underwriting activity is national in scope. Using comprehensive data on all trades, all bonds, and all underwriting spreads available between 2005 and 2023, we show that underwriters facing increasingly informed investors in the primary market are unable to capture high markups from investors but are also unable to raise costs to issuers. Using a structural model to examine trading, we document underwriters are half as likely over the time span of our sample to encounter an uninformed retail investor when selling an issue, and the markups they can charge these dwindling investors have fallen by a third. Increased transparency has not benefited issuers but has led to a decline in profitability for the largest municipal underwriters, several of whom have announced their departure from the market.

Read the Paper.

• New research shows underwriter profit drop from 2005 to 2023
• Underwriters less able to raise investor markups, issuer costs

Making money in the $4 trillion municipal bond market is harder than ever after a two-decade long drop in underwriting markups pinched bottom lines, contributing to pullback by major Wall Street firms such as Citigroup Inc. and UBS Group AG.

Profits for municipal underwriters fell by 30% to 50% from 2005 to 2023, according to a report to be presented next month at the Brookings Institution’s municipal finance conference.

Researchers analyzed more than 2 million state and local bonds and markups on 12.4 million new issue trades. They found a wider pool of institutional investors and improvements in disclosure have compressed underwriting spreads, or the profit banks make marketing bonds to buyers. They also found that the squeeze was more acute for national underwriters.

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Bloomberg Markets

By Shruti Singh and Skylar Woodhouse

June 21, 2024

Fitch Ratings-New York/Austin-18 June 2024: Cyber risk looms large for the water and sewer utility sector as a whole, but may not be as consequential for our rated portfolio, which is composed mostly of larger, highly-rated utilities that are well positioned with robust financial profiles and experienced management to address the risks and regulatory requirements, says Fitch Ratings. The median rating for our rated portfolio is ‘AA+’, with about 89% of the portfolio on Stable Rating Outlook and around 7% on Positive.

Water and sewer utilities are vulnerable to cyber breaches given their use of a number of complex and diverse operating and technology systems that make it challenging to guard against attacks. This risk is particularly acute for small systems with thin margins and limited staff. To date, however, none of the water and sewer systems rated by Fitch have been subject to negative rating action as a result of a cyber breach.

Fitch’s criteria consider event risks such as cyber-attacks as asymmetric additive risks, where the focus is on the robustness of governance systems and protocols to counteract or mitigate the threat, and the utility management’s reaction if an attack occurs.

Fitch may take negative rating action if a utility’s financial profile is deemed to be materially impaired in the aftermath of a breach. Expenses associated with a cyber breach, including remediation and enhanced security measures, along with increased cybersecurity insurance premiums, legal costs and staffing and regulatory compliance expenses, could add to a utility’s operating costs, erode liquidity and decrease funds available for debt service. Unexpected borrowing to bolster cybersecurity infrastructure, including updating compromised hardware and software systems, may further weaken leverage metrics.

A cyberattack that affects a utility’s ability to provide service and/or hinders customer billing could temporarily reduce revenue generation for the system. Depending on the extent of the disruption, Fitch’s assessment of the utility’s revenue defensibility could be lowered.

A cyber breach could compound expense pressures for water utilities already facing greater demands on their budgets from inflation, aging infrastructure and EPA mandates to replace lead service lines and remove/reduce per- and polyfluoroalkyl substances from drinking water. To address increased expenses, utilities often raise rates, which, if further increased to recover cyber costs, could erode rate affordability.

The level of cyber risk among water utilities varies significantly against a backdrop of little federal or state regulation relative to the public power sector. Water and wastewater utilities would be obligated to report cyber incidents and ransomware payments to the Cybersecurity and Infrastructure Security Agency according to proposed rules issued on April 4, 2024. Public comment for these rules ends on July 3. In addition, a bill introduced in the House in April would create a Water Risk and Resiliency Organization to develop and enforce cyber risk and resiliency requirements for water treatment and wastewater systems.

The trend towards smart infrastructure and the Internet of Things means that more water utility components are connected to the internet. This connectivity increases efficiency but also expands the attack surface. The use of homogenous operational technology (OT) across processes/systems also increases risk. Once hackers can exploit vulnerabilities in a certain system, they can often apply those techniques to other systems with the same OT.

Fitch Ratings-New York-17 June 2024: A firmer-than-expected macro environment is set to anchor positive performance for U.S. transportation segments headed into 2H24, Fitch Ratings says in a new report, although there are still pockets of underperformance.

‘Resilient activity performance is providing healthy tailwinds for airports, toll roads and ports,’ said Senior Director Seth Lehman. ‘Early indicators across all modes of transportation should keep fiscal positions stable through the end of 2024.’ That said, not all segments will see quite the same trajectory.

The broadest disparity seems to be emanating from U.S. airports. Passenger traffic overall is up over 6% year-over-year with travel demand looking robust headed into the summer. However, several west coast large market airports are still struggling to get back to pre-pandemic activity.

Overall port volumes have risen 14%. U.S. west coast ports are realizing sizable throughput increases while ports in the east and gulf coasts are seeing improved performance. Amid ports’ continued stable financial performance lie some risks that warrant caution, among them an elevated cost environment that could pressure operating, capital, and financing costs.

Toll roads appear to be on the most stable ground overall. Vehicle miles traveled increased by 1% year-over-year in January-April with low-single-digit traffic growth likely for the rest of the year. Toll roads in southern U.S. states continue to benefit from higher population growth than in the northeast.

‘North American Transportation Infrastructure Mid-Year Outlook 2024’ is available at www.fitchratings.com

Contact:

Seth Lehman
Senior Director
+1 212 908-0755
Fitch Ratings, Inc.
Hearst Tower 300 W. 57th Street New York, NY 10019

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

Additional information is available on www.fitchratings.com

Key Takeaways

• Our sector view for airports remains stable.
• Revenue growth remains balanced against increased operations and maintenance expenses, particularly labor and materials costs, as well as renewed capital spending for expanding capacity or modernizing facilities against a backdrop of higher financing costs.
• Our economic outlook projects a transition to slower growth in 2025 and beyond, which could translate into softening airline travel for business and leisure passengers but we expect would have a benign impact on airport credit.

Most U.S. Airports’ Credit Quality Comparable With Or Better Than Pre-Pandemic Level

Following a very turbulent period in aviation history during 2020-2021, U.S. air travel demand has fully recovered for most airport operators–and performance has even exceeded pre-pandemic levels for some–allowing management to return its focus to the future. This recovery and other factors have contributed to issuer upgrades for approximately 27% of S&P Global Ratings’ airport ratings. For 2024, inflation-related expense growth, a ramp-up in annual capital improvement spending, or weaker-than-forecast U.S. economic growth could lead to weaker financial results–including debt service coverage (DSC)–but likely not enough to affect airport credit quality. Any potential drag on air travel demand caused by inflation and economic weakness will be relatively benign and short-lived, in our view, as remaining federal operating assistance is exhausted and management teams navigate through any slowing demand with improved balance sheets, cost recovery arrangements, and activity-based revenue performance. Median DSC in 2023 and 2024 could dip below the 1.5x that we observed in 2022, with rising annual debt service.

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18 Jun, 2024

States are spending about $20 billion of the flexible funding from the American Rescue Plan Act on water infrastructure. Demand is expected to grow in coming years.

In Brief:

• States are spending $20 billion of the State and Local Fiscal Recovery Funds included in the American Rescue Plan Act on water infrastructure.
• Overall federal funding for clean drinking water systems has shrunk dramatically, from 63 percent of capital improvements in 1977 to 9 percent 40 years later.
• States in the West and the Southeast are spending the most ARPA money on water, anticipating population growth and climate change, while seeking to address inequities.

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governing.com

June 19, 2024 • Jared Brey

On June 24, 2024, a new DOJ rule will go into effect requiring state and local entities and their private contractors to comply with WCAG 2.1 AA digital accessibility standards for web content and mobile apps made available to the public.

The Americans with Disabilities Act (“ADA”) provides that no individual may be barred from accessing the services, programs, or activities of a public entity due to the individual’s disability. As local governments increasingly rely on Internet-based content and apps to disseminate information and provide services to the public, the Department of Justice (“DOJ”) published a new rule establishing specific requirements for state and local governments to make their web content and mobile apps accessible for individuals with disabilities. Despite previously issuing general guidance on digital accessibility, this rule will be the first binding regulation issued by the DOJ to address state and local government regarding website accessibility since the statute was passed in 1990.

The rule applies to any web content or mobile apps used by a public entity to provide services, programs, and activities. For the purposes of the new rule, “web content” refers to “any information and sensory experience” on the web communicated through a web browser, media player, plug-in, or other software that helps a user interact with online content. This includes text, images, sounds, videos, controls, animations, and conventional electronic documents, regardless of whether the content is viewed on a desktop computer, smartphone, or other medium. A “mobile app” is defined as software that is downloadable and designed to be used on mobile devices such as smartphones and tablets.

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Hogan Lovells – Mark Brennan, Katy Milner and Warren Alexander Kessler

June 18 2024

It’s been a historic few years for federal investment in American infrastructure and the built environment. The combined heft of the Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and the capital-eligible parts of the American Rescue Plan Act (ARPA) will commit well over a trillion dollars in federal government contributions to the physical reconstruction and modernization of America.

Yet, with all the big news out of federal Washington, it’s easy to lose sight of who does most of the investing in American infrastructure and other fixed assets owned by the public: states and localities. The IIJA, for example, is likely to average about $170 billion in spending per year across all its programs. This compares with $300 billion in new infrastructure spending financed by the $4 trillion municipal bond market in 2023 alone.

Since the bulk of the IIJA and IRA move through either established state formula programs or private industry, both laws also fail to reach every community or qualify many of their non-traditional infrastructure assets for investment, such as renovated schools and recreation facilities. Even after ARPA’s local investment programs—of which most of the dollars are now committed—the unmet needs are still substantial. Aging schools alone are estimated to need $85 billion of investment annually.

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The Brookings Institution

Michael Gaughan and Adie Tomer

June 20, 2024

It’s not just the decline in fuel tax revenues and its impact on highway construction and maintenance. Real estate will also be affected, and sales taxes are likely to take a hit. States need to begin developing strategies.

America’s transition to electric vehicles promises clear benefits for the environment and human health. And with an aggressive ramp-up of EV car and truck manufacturing and its associated domestic supply chain, the nation has the opportunity to remain economically competitive with China and the European Union.

This is great news, of course, but states must quickly develop new transportation funding strategies to make up for declining fuel tax revenue or we will face a significant national challenge.

Federal and state fuel taxes are the main source of highway and road funding, and the Congressional Budget Office projects that balances in both the highway and transit accounts of the federal Highway Trust Fund will be exhausted by 2028. The decline of fuel-tax revenues resulting from EVs never needing to visit a gas pump will further diminish state and local governments’ ability to maintain our deteriorating network of roads, highways and bridges. At the same time, governments will be faced with increased expenditures due to aging road infrastructure that is threatened by extreme weather events.

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GOVERNING.COM

June 20, 2024 • Jay Golden, Syracuse University

Thanks to the Fed’s tightening and subsequent pause, there are a lot of good places for investors to find income within the bond market these days. From junk to Treasury bonds, yields are on par with numbers not seen since the Great Recession. But very few places in the fixed income landscape can provide equity-like returns without the same level of risk.

One of them happens to be municipal bonds.

Ever since the Fed’s rate hikes, munis have provided very strong after-tax yields. And now those yields are almost equity-like in terms of returns. For investors, it’s just another reason to add municipal bonds to their fixed income sleeves.

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dividend.com

by Aaron Levitt

Jun 19, 2024

One of the most aggressive interest rate hiking cycles in U.S. history has a way of getting people’s attention.

From March 2022 to July 2023, the Federal Open Market Committee aggressively lifted the federal funds target rate by a whopping 5.25%. Combating inflation was and continues to be the focus. However, many conservative fixed-income investors instantly became unintended collateral damage.

Many broadly diversified index ETFs such the Vanguard Total Bond Market ETF (BND) fell by a staggering amount for conservative bond investors accustomed to an era of low volatility. In case you forgot, BND fell more than 16% and has yet to recapture its 2022 level.

What went wrong?

BND, like many plain vanilla index ETFs, is drenched with duration risk. And when interest rates are skyrocketing, these types of seemingly conservative bond ETFs are going to behave in a not so conservative manner by falling sharply, as history has proven.

As such, the ETF industry’s solution to the problem is something called “defined maturity” bond funds.

The benefit of this approach is that advisors can execute bond laddering in an ETF wrapper. Defined maturity bond ETFs hold a portfolio of bonds that all mature in the same year, which is known as the fund’s “target maturity year.”

One of the oldest iterations of this hyper-focused maturity bond ETF are the BulletShares lineup from Invesco. The company offers target maturity funds for corporate and municipal bonds covering 2024 to 2033. BlackRock also offers its version of defined maturity bond funds within its iShares lineup.

With under $35 billion in assets, defined maturity bond ETFs are still tiny compared to other ETF categories.

Unlike traditional bond funds that continuously buy and sell bonds to maintain a diversified portfolio indefinitely, single-year bond ETFs have a fixed termination date. The bonds held inside the ETF are held until they mature, according to a specific year. When the bonds finally hit maturity, the fund will liquidate and return the principal to the shareholders.

Defined maturity ETFs are arguably a better, easier way to manage interest rate risk because the impact of fluctuating rates has muted impact on bonds nearing redemption. This can help make an investor’s bond portfolio less volatile.

Diversification is another big advantage.

Laddering bonds from single corporations or municipalities might help to navigate rate risk, but it unfortunately concentrates a bond investor’s credit risk with single issuers. An unexpected credit event or default could quickly cause unwanted damage.

In contrast, a defined maturity bond ETF typically invests in a diversified basket of bonds, which might include corporate, municipal or government bonds, all with maturities aligning with the fund’s target year. This provides broader, diversified bond exposure in a single fund, while still maintaining a specific maturity date.

How might advisors deploy these types of ETFs?

One potential solution is they can be used as part of a bond laddering strategy. This is accomplished by investing in several different ETFs with staggered maturity dates to provide regular income over several years. Another solution is to use them for targeting specific financial goals that align with the fund’s maturity date, like a planned retirement or paying for college education.

In the end, single-year bond ETFs offer a unique combination of predictable maturities, regular income and a robust fixed income strategy less credit and interest rate risk.

FA-MAG.COM

JUNE 18, 2024 • RON DELEGGE

Ron DeLegge II is the founder of ETFguide.com and author of several books, including Habits of the Investing Greats and Portfolio Architecture: A Handbook for Investors.

As measured by the widely followed ICE AMT-Free US National Municipal Index, muni bonds are sporting modest losses over the past month and on a year-to-date basis.

However, it’s not all bad news when it comes to municipal debt. Yields remain elevated on asset classes typically not known for big yields though prized by risk-averse income investors. Economic conditions are supportive of this corner of the bond market and defaults are low.

Add to that, there signs active management could serve investors well in this fixed income segment. For example, the ALPS Intermediate Municipal Bond ETF (MNBD) traded slightly higher over the past month and has noticeably outpaced the ICE AMT-Free US National Municipal Index since the start of 2024. Those aren’t guarantees MNBD will outperform from here. But those encouraging traits could provide the foundation for leadership when munis rebound.

Mind MNBD for Muni Bonds Exposure
One potential advantage offered by active management when it comes to municipal debt is that active managers can more readily identify value in this bond segment. For advisors and investors considering MNBD, that’s a pertinent trait because some experts believe that following recent retrenchment in the broader muni bond arena, there is value to be had.

“The sell-off has started to restore value to the asset class, but there are several reasons why patience is still warranted. First, while much improved, valuations are still below their longer-term averages,” according to BlackRock research.

MNBD, which turned two years old in May, could benefit from other tailwinds. Those include expectations that muni supply will increase as Election Day approaches and the point that in preparation of volatility that could hit risk assets on the back of election results, some asset allocators may lean into more conservative asset classes.

“We think issuance will remain elevated ahead of the election and negate some of the tailwind typically provided by seasonal net negative supply during the summer,” added BlackRock. “Finally, we expect demand to remain subdued until the path of monetary policy becomes clearer and interest rates stabilize. Given this backdrop, we have started to selectively add duration, taking advantage of concessions in the new issue market.”

The asset manager also noted a preference for, among other traits, munis issued in states that are more reliant on consumption taxes. That’s applicable to MNBD because many of the bonds held by the ETF hail from states or cities in states with low or no income taxes.

ETFTRENDS.COM

by TODD SHRIBER

JUNE 18, 2024

NORWALK, Conn., June 13, 2024 (GLOBE NEWSWIRE) — CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for May 2024. The report, which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity over the next quarter, found a fourth-consecutive monthly increase in request volume for new municipal identifiers, while corporate volumes were steady overall.

North American corporate requests totaled 7,362 in May, which is down 3.2% on a monthly basis. On a year-over-year basis, North American corporate requests closed the month up 10.2%. The monthly volume decline was driven by a decrease in issuance volume for medium term notes. Other key asset classes, such as U.S. corporate equity (13.5%), U.S. corporate debt (17.8%) and Canadian corporate securities (17.9%) all saw monthly request volume increases.

The aggregate total of identifier requests for new municipal securities – including municipal bonds, long-term and short-term notes, and commercial paper – rose 51.5% versus April totals. On a year-over-year basis, overall municipal volumes are up 8.4%. Texas led state-level municipal request volume with a total of 143 new CUSIP requests in May, followed by New York (102) and California (90).

“New issuance activity in the municipals space has been consistently high for the past four months, but we saw a major surge in the May data,” said Gerard Faulkner, Director of Operations for CGS. “Similarly in the corporate asset classes, we see pockets of high volume in U.S. corporate debt and equity, Canadian corporates and certificates of deposit, all of which points to issuers finding opportunity to bring new securities to market in the current economic cycle.”

Requests for international equity CUSIPs rose 5.1% in May and international debt CUSIP requests rose 19.0%. On an annualized basis, international equity CUSIP requests are down 4.4% and international debt CUSIP requests are up 106.5%.

To view the full CUSIP Issuance Trends report for May, please click here.

CUSIP Global Services

Thu, Jun 13, 2024

• Refinancing tactic thrives after high rates, tax law shift
• Chicago, Wisconsin are users of common corporate strategy

When Harvard University offered to buy back more than $400 million of its debt in a tender offer in March, it signaled again just how much the strategy is gaining acceptance among municipal-bond-market borrowers looking for ways to reduce debt costs.

The school on March 22 invited holders of certain 2016 debt to redeem them as part of a bigger sale via the Massachusetts Development Finance Agency, some of which was used to pay for the buyback. Almost $335 million in debt was retired at above-market prices, according to a securities filing.

“Unique market conditions this spring created a window of opportunity to refinance Harvard’s existing debt through a tender offer,” Jason Newton, the school’s director of media relations, said in an email. “These cost savings directly benefit the University’s teaching and research mission.”

States, cities and other issuers offered to repurchase about $30 billion in muni bonds last year, and are on track for a similar amount in 2024, according to an assessment from Barclays PLC. While the bank estimates that less than half that was successfully repurchased, market participants expect such buybacks to rise amid higher interest rates and changes to tax law that eliminated other refinancing moves.

“Tenders are another tool in a debt manager’s toolbox,” said Aaron Heintz, capital finance director for the state of Wisconsin, which has offered tenders every year since 2022. “We have been able to generate significant debt service savings.”

In a tender, an issuer offers to purchase bonds at a specific price on a certain date. The price is usually above the current market value but still low enough that the issuer can realize savings in retiring the debt.

Companies often employ tenders to buy back high-cost debt or as a defense against a takeover by repurchasing shares. Their occasional use in the $4 trillion muni market increased when the 2017 Tax Cuts and Jobs Act pulled the tax breaks from bond sales used in another type of refinancing, known as an advanced refunding.

But the municipal tender offers really took off when the Federal Reserve started raising rates two years ago, erasing any advantage of using advanced refundings even for taxable bonds.

In 2023, state and local issuers marketed roughly three dozen tender offers, according to Globic Advisors, the agent for many of the deals. That was more than double the number from a year earlier, based on deals represented by Globic.

Muni investors this year already have received at least two dozen such buyback offers, Globic President Robert Stevens said. The Texas Transportation Commission was among those who extended them, while the city of Chicago had a tender in 2023.

Wisconsin Savings

Holders of Wisconsin bonds in the last three years tendered from 13% to a high of 84% of the debt in an individual offer. Among the debt the state sought to buy back was several taxable advance refunding bonds issued from 2020 through 2022, Heintz said.

“Who would have thought that you’d be able to generate savings on taxable bonds that have coupons less than 3%,” he said.

Investors and underwriters say they anticipate more muni tender offers, barring an unanticipated sharp decline in interest rates.

“Everyone is asking about tenders,” said Samantha Costanzo, senior managing director and head of public finance at Huntington National Bank.

“The volume increases for tax exempt tenders are largely being driven by an issuer’s desire for cost savings, combined with the markets becoming more comfortable with the process over the last few years,” said James D’Arcy, senior portfolio manager at Vanguard Group. “The decision to tender is primarily based upon how much of a premium relative to current market prices the issuer is willing to pay the investor, as well as the reinvestment opportunities in the market.”

Thornburg Investment Management, which holds about $6 billion in muni assets, has received about 20 tender offers since the beginning of 2023, said Eve Lando, a portfolio manager and managing director. Thornburg has sold back bonds at higher prices than those available in the secondary market, she said.

Credit concerns or the need to get out of an “illiquid name” could also drive future decisions, Lando said.

Bloomberg Markets

By Shruti Singh

June 13, 2024

This publication does not constitute a rating action.

S&P Global Ratings has performed annual reviews of the credit ratings of the issuers/issues listed below.

In an annual review, S&P Global Ratings reviews current credit ratings against the latest issuers/issues performance data as well as any recent market developments. Annual reviews may, depending on their outcome, result in a referral of a credit rating for a committee review, which may result in a credit rating action. The below list is not an indication of whether or not a credit rating action is likely in the near future.

The key elements underlying the credit rating can be found in the issuer’s latest related publication, which can be accessed by clicking on links below. Additionally, for each issuers/issues listed below, S&P Global Rating’s regulatory disclosures (PCRs) can be accessed on the relevant page on www.spglobal.com/ratings by clicking on Regulatory Disclosures underneath the current credit ratings.

Continue reading.

14-Jun-2024 | 07:00 EDT

View the Rating Changes.

6 Jun, 2024

An appellate court restored bondholders’ lien on electric-utility revenues

A federal appeals court said Puerto Rico bondholders have collateral rights over revenue generated by its bankrupt public power utility, a ruling that could delay and possibly upend a planned $10 billion debt restructuring.

The U.S. Court of Appeals for the First Circuit in Boston restored bondholders’ lien over past and future electricity revenues in Puerto Rico and reversed a lower-court ruling that had sharply limited their rights to repayment.

Wednesday’s decision marks a win for GoldenTree Asset Management and other bondholders seeking repayment from the Puerto Rico Electric Power Authority, the government-owned power utility. Prepa has been in bankruptcy since 2017, when the U.S. territory stopped paying its debts and triggered the largest-ever default by a U.S. municipality.

Officials have reached settlement deals in recent years with holders of most of Puerto Rico’s municipal bonds, leaving Prepa as the last public agency still under court protection. It proposed a restructuring plan last year to slash nearly $8.5 billion owed to its municipal bondholders—its largest single debt—by nearly $7 billion.

Prepa’s plan will be re-evaluated in response to Wednesday’s ruling, which found bondholders have a lien over the utility’s future net revenues—its surplus income left over after its operating costs.

The appeals court left it up to Judge Laura Taylor Swain, the lower-court judge who has overseen Puerto Rico’s bankruptcy process, to determine the “economic value” of the bondholders’ security interest.

The oversight board that supervises Puerto Rico’s finances said Wednesday that it was evaluating the ruling and that “Prepa does not generate any net revenues unless and until electricity rates are increased.” Under bankruptcy law, bondholders’ collateral must be valued when a restructuring plan is confirmed, “prior to any rate increase,” the oversight board said.

Bondholders have argued that Prepa is required to raise rates enough to pay their claims in full. Wednesday’s decision also said bondholders have a claim for the full face amount of their holdings, nearly $8.5 billion, rather than the reduced $2.4 billion that Judge Swain had estimated.

The restructuring plan, which would also cover Prepa’s bank loans and vendor debts, would pay GoldenTree as little as 3.5 cents on the dollar, court records show. Some other bondholders, including BlackRock Financial Management, had supported the restructuring in return for an exclusive right to buy new, discounted bonds from Prepa.

Prepa has tested the municipal bond market’s expectation of how its electric revenue bonds—a common type of tax-exempt debt secured by a pledge of special revenues—would fare in a bankruptcy.

GoldenTree and bond guarantor Assured Guaranty said in a joint statement Thursday that the ruling “restores the municipal market’s understanding of the proper functioning of special revenue bonds.” They said they hoped to reach a consensual resolution with the oversight board and elected officials in Puerto Rico.

The Wall Street Journal

By Andrew Scurria

Updated June 13, 2024

Write to Andrew Scurria at [email protected]

Fitch Ratings-New York-17 June 2024: A firmer-than-expected macro environment is set to anchor positive performance for U.S. transportation segments headed into 2H24, Fitch Ratings says in a new report, although there are still pockets of underperformance.

‘Resilient activity performance is providing healthy tailwinds for airports, toll roads and ports,’ said Senior Director Seth Lehman. ‘Early indicators across all modes of transportation should keep fiscal positions stable through the end of 2024.’ That said, not all segments will see quite the same trajectory.

The broadest disparity seems to be emanating from U.S. airports. Passenger traffic overall is up over 6% year-over-year with travel demand looking robust headed into the summer. However, several west coast large market airports are still struggling to get back to pre-pandemic activity.

Overall port volumes have risen 14%. U.S. west coast ports are realizing sizable throughput increases while ports in the east and gulf coasts are seeing improved performance. Amid ports’ continued stable financial performance lie some risks that warrant caution, among them an elevated cost environment that could pressure operating, capital, and financing costs.

Toll roads appear to be on the most stable ground overall. Vehicle miles traveled increased by 1% year-over-year in January-April with low-single-digit traffic growth likely for the rest of the year. Toll roads in southern U.S. states continue to benefit from higher population growth than in the northeast.

‘North American Transportation Infrastructure Mid-Year Outlook 2024’ is available at www.fitchratings.com.

Contact:

Seth Lehman
Senior Director
+1 212 908-0755
Fitch Ratings, Inc.
Hearst Tower 300 W. 57th Street New York, NY 10019

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

Additional information is available on www.fitchratings.com

View the S&P Ratings & Outlooks.

14 Jun, 2024

By applying this technology to coastal communities or community buildings, such as schools and stores, researchers can help residents and officials create a plan for hurricane season.

Researchers have implemented 3D visualization technology to identify the potential outcomes of hurricane flooding before it occurs.

Beginning annually on June 1, hurricane season poses a major threat to Texas coastal communities, causing both physical and financial damage to the areas they hit.

This damage can be staggering; when Hurricane Harvey hit in 2017, it cost Galveston $132.73 billion in damages.

Severe weather has been increasing over the last several years due to global climate change, according to the researchers. If severe storms and flooding continue to increase in the future, implementing 3D visualization based on real-time weather forecasts could result in improved safety and less damage-inflicted costs.

Continue reading.

Route Fifty

By Alyson Chapman,
Futurity

JUNE 17, 2024

Despite the size and frequency of major storms in recent years, the damage has had limited impact on U.S. local governments’ credit quality to date. However, with projections for another record-breaking Atlantic hurricane season in 2024, a dwindling federal Disaster Relief Fund (DRF), which is the Federal Emergency Management Agency’s (FEMA’s) primary funding source, could compound fiscal risks for the places most vulnerable to storms and push up their costs to rebuild.

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11 Jun, 2024

COMMENTARY | A county in Florida is leveraging federal funding to reduce carbon emissions, improve energy efficiency in public buildings and invest in renewable energy infrastructure.

Even before the start of what is expected to be a busier than normal Atlantic hurricane season, widespread rain and flooding have already begun to soak the South, putting millions at risk for flood damage and power outages among other threats. In fact, in the first five months of 2024, the U.S. has already been hit by disasters costing $7 billion, including storms, heavy snow and hotter than average temperatures.

Communities and their infrastructure find themselves at the mercy of more extreme weather events, and they must take some immediate steps to adapt to the changing climate and mitigate damage. Fortunately, many cities and localities are tackling the challenge head-on by implementing policies and programs that help their communities improve quality of life and build more resilient communities.

Sarasota County, Florida, for example, is working to strengthen its resilience to increased flooding.

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Route Fifty

By Hilari Varnadore,
U.S. Green Building Council

June 17, 2024

With billions in federal funds at stake, smaller cities are racing to compete for new clean energy and climate projects. That means filling out a lot of forms.

It’s a big windfall of federal investment. Together, bills like the Inflation Reduction Act, the Bipartisan Infrastructure Law, and the CHIPS Act present a substantial shift in how the US government funds local economic development, clean energy and environmental justice efforts, potentially giving cities and towns a huge boost.

That is, if the nation’s 90,000-plus municipalities and tribal governments can finish filling out all the paperwork.

The trillion-dollar trifecta of Biden administration legislation from 2022 underscores just how important grant writing has become. In many ways, the ability of cities to enact new policies and tap federal resources rests on the desks of the staffers or contract workers who research, write and submit applications for funding. Uncle Sam will cheerfully write a check for cities to install solar panels via Clean Electricity Investment and Production Tax Credits, for example, or provide tax credits for buying electric vehicles. But first, you have to ask.

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Bloomberg Markets

By Patrick Sisson

June 14, 2024