Bingham Township, Pennsylvania, is a quiet, rural place with few local businesses. “I always tell people that the cows outnumber the people over here,” said Cheryl Young, the township’s secretary. Most roads are dirt and gravel, she said, and many of the 600-some residents are Amish.

Congress in March authorized $19.5 billion in aid for cities and towns with fewer than 50,000 residents, including very small jurisdictions such as Bingham. Lawmakers wanted to help every town cover the cost of fighting a pandemic and recovering from last year’s recession.

But in some small, rural or conservative towns, local leaders are refusing the cash. They say they don’t need it, and in some cases, don’t feel comfortable accepting it.

Bingham’s leaders recently turned down about $69,000 in federal COVID-19 relief aid because they couldn’t think of a way to spend it, Young said.

“That’s the main reason why we opted not to do it,” Young said. “There’s no sense having [the money] sit here for two years, then turn around and send it back, because you can’t spend it.”

To be sure, such refusals are rare. Across 14 states where data is available, just 171 communities out of 7,975 that have fewer than 50,000 residents rejected the funds, according to the National League of Cities, a Washington, D.C.-based group that advocates for cities and towns.

The average community that rejected the money has 540 residents, according to the group.

Advocates for cities say towns that decline the funds are missing a big opportunity. “It’s unfortunate that anyone would turn down this money, because I think any community could benefit from it,” said Mike Gleeson, legislative manager for finance, administration and intergovernmental relations on the National League of Cities’ federal advocacy team.

Small towns can team up with their neighbors or with county and state leaders to use the funds, such advocates say. That could mean a regional effort to expand broadband, upgrade water infrastructure or study an area’s housing needs.

“I don’t think there’s any shortage of things to spend the money on, especially when we’re able to think beyond city hall and beyond village hall,” said Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League.

Fourteen Michigan villages and townships declined the funds, out of 1,692 eligible jurisdictions with fewer than 50,000 residents, according to the Michigan Treasury’s latest statistics.

Small towns that accept the funds may need help from states, municipal associations and local accountants to manage their grants. Places as small as Bingham don’t typically have staff used to following federal grant requirements.

Young said that she, three elected supervisors and two road maintenance workers—one of whom also serves on the board of supervisors—are about the extent of the local government. “That’s it,” she said. “You’re looking at us.”

Money for All Municipalities

Last year’s major federal aid package, known as the CARES Act, sent money directly to large cities and counties but not to small ones. States were supposed to transfer a portion of the federal dollars they received to jurisdictions with fewer than 500,000 residents.

That system left many localities behind, however. Almost 30% of towns nationwide didn’t get CARES Act money, according to the National League of Cities.

Congress tried a new approach with this year’s federal relief package, the American Rescue Plan Act. The law sent money to most incorporated cities, towns, townships, boroughs and districts.

“They made sure to include all the small guys,” said Emily S. Brock, director of the Government Finance Officers Association’s Federal Liaison Center. The association represents public finance officials.

U.S. Treasury Department and state officials had to figure out which governments could handle the money, however. Some local governments exist in name only or have limited tax and spending functions.

Brock said her organization advised the U.S. Treasury to avoid allocating funds to such figurehead governments. “There’s no elected officials, there’s no governing body—you cannot give them $100 million!” she said.

Eligible localities can use the latest round of federal COVID-19 relief for a broad range of things: to replace lost tax revenue; pay for pandemic response efforts; help households and businesses recover economically; give essential workers a raise; and invest in water, sewer and broadband infrastructure. The money can’t be used to shore up pension funds or pay for tax cuts.

Towns that accept the money get half of it this year and half next year. They have until 2026 to spend it and must regularly report their spending to the Treasury. Those that fail to spend the money according to the law and Treasury rules must return those dollars to the federal government.

States again have acted as a go-between. Local leaders have to apply to states to either accept or reject their federal allocation. When towns refuse the cash, or simply fail to apply for it, states must reallocate the money among other eligible localities with fewer than 50,000 people.

Some quirky jurisdictions that made the cut have turned their federal grants down, according to state records published online or provided to Stateline.

In Pennsylvania, for instance, the borough S.N.P.J. declined a $1,988 grant. S.N.P.J., or “Slovenska Narodna Podporna Jednota,” is a fraternal benefit association founded by Slovenian immigrants in 1904. The group runs a recreation center that’s incorporated as a borough. S.N.P.J. has just 18 residents, according to the U.S. Census Bureau.

‘It Was No Benefit to Us’

More established towns also have declined the funds. Town leaders who refused the latest federal grants say they lack infrastructure, struggling businesses, essential workers or public health efforts to spend the money on.

“The things that they allowed us to use the money on in that plan did not fall with anything we had in our town,” said Richard Ouellette, chair of the Dummer, New Hampshire, select board. “So really, it was no benefit to us whatsoever.”

Dummer is a rural town with about 300 residents, and it was eligible for about $29,000. “We really had no expenses for COVID,” Ouellette said. “We ended up buying maybe a case of masks for the town office, and that was pretty much it.”

There aren’t many businesses in town, Ouellette said, and residents get water from their wells rather than a municipal water system.

Iowa Park, Texas, received CARES Act money last year, said City Manager Jerry Flemming. That money—$350,020, according to records published online by the federal Pandemic Response Accountability Committee—covered all the town’s pandemic-related needs, he said.

The latest round of aid wasn’t as useful, Flemming said. “We just didn’t have any projects that met the criteria for it, so we didn’t apply for it.” Iowa Park sits near the Oklahoma border, and has about 6,500 residents.

Some local leaders refused the funds partly for ideological reasons. “The main reason we said ‘no’ as a board is because our country is going $29 trillion in debt, and we wanted to do our part to say: Hey, enough’s enough,” said Kevin Green, supervisor of Algoma Township in western Michigan. “We didn’t want to be part of that.”

Greene said the board had two other reasons for rejecting its $1.3 million allocation: Members couldn’t think of a way to use the funds to benefit all 12,055 residents, and they felt rushed.

The U.S. Treasury hasn’t yet released its final rules for spending the money, Green noted. But the Michigan Treasury wanted towns to accept or reject the funds by the end of July. “I think if they had given us a few more months, and we could have thought through it, maybe we could have accepted part of it,” he said.

Algoma did receive CARES Act funds last year, he said. The township used the funds to pay public safety workers overtime. He said local leaders would have liked to use the latest relief money to upgrade the township’s roads and parks, but such general infrastructure projects aren’t allowed under the law.

Following Federal Rules

Many small towns won’t be able to track their spending and report it to the U.S. Treasury without help.

Many leaders of such towns aren’t familiar with federal reporting and audit requirements, said Brock of the Government Finance Officers Association.

“In some cases, they may have to hire an auditor, or a consultant, to make sure they’re doing that right—an added expense on top of the money that they’ve just received,” she said.

About half the counties and more than 100 municipalities in Pennsylvania have hired Zelenkofske Axelrod LLC, an accounting firm, to help them manage the money, said Cory Johnson, a partner at the firm who works with public sector clients.

“There are small townships that have, at best, part-time people, and they’re not accountants,” he said. Some local leaders don’t have strong computer skills, he added. “That’s a big hesitation, in certain parts of the state.”

Assistance is available, though. Town leaders can use their American Rescue Plan Act grants to hire outside help. And they can turn to municipal leagues, professional associations and even public university extension agents, who have been fielding questions about compliance.

Advocates for cities say that once small towns get used to handling federal money, they’ll be well-positioned for any future grant opportunities. “If they can do it this time, it could potentially open up future federal grants,” said Gleeson of the National League of Cities.

Not all local leaders may see things that way. Green of Algoma said that dealing with the CARES Act requirements wasn’t easy, and township leaders weren’t eager to go through the process again this year. “Accounting-wise, it was a little rough,” he said.

The Pew Charitable Trusts

September 28, 2021

As Congress considered a massive COVID-19 relief package earlier this year, hundreds of mayors from across the U.S. pleaded for “immediate action” on billions of dollars targeted to shore up their finances and revive their communities.

Now that they’ve received it, local officials are taking their time before actually spending the windfall.

As of this summer, a majority of large cities and states hadn’t spent a penny from the American Rescue Plan championed by Democrats and President Joe Biden, according to an Associated Press review of the first financial reports due under the law. States had spent just 2.5% of their initial allotment while large cities spent 8.5%, according to the AP analysis.

Many state and local governments reported they were still working on plans for their share of the $350 billion, which can be spent on a wide array of programs.

Though Biden signed the law in March, the Treasury Department didn’t release the money and spending guidelines until May. By then, some state legislatures already had wrapped up their budget work for the next year, leaving governors with no authority to spend the new money. Some states waited several more months to ask the federal government for their share.

Cities sometimes delayed decisions while soliciting suggestions from the public. And some government officials — still trying to figure out how to spend previous rounds of federal pandemic aid — simply didn’t see an urgent need for the additional cash.

“It’s a lot of money that’s been put out there. I think it’s a good sign that it hasn’t been frivolously spent,” Louisville Mayor Greg Fischer said. He was president of the U.S. Conference of Mayors when more than 400 mayors signed a letter urging Congress to quickly pass Biden’s plan.

The law gives states until the end of 2024 to make spending commitments and the end of 2026 to spend the money. Any money not obligated or spent by those dates must be returned to the federal government.

The Biden administration said it isn’t concerned about the early pace of the initiative. The aid to governments is intended both “to address any crisis needs” and to provide “longer-term fire power to ensure a durable and equitable recovery,” said Gene Sperling, White House American Rescue Plan coordinator.

“The fact that you can spread your spending out is a feature, not a bug, of the program. It is by design,” Sperling told the AP.

The Treasury Department set an aggressive reporting schedule to try to prod local planning. It required states, counties and cities with estimated populations of at least 250,000 to file reports by Aug. 31 detailing their spending as of the previous month as well as future plans.

More than half the states and nearly two-thirds of the roughly 90 largest cities reported no initial spending. The governments reported future plans for about 40% of their total funds. The AP did not gather reports from counties because of the large number of them.

To promote transparency, the Treasury Department also required governments to post the reports on a “prominent public-facing website,” such as their home page or a general coronavirus response site. But the AP found that many governments ignored that directive, instead tucking the documents behind numerous navigational steps. Idaho and Nebraska had not posted their reports online when contacted by the AP. Neither had some cities.

Officials in Jersey City, New Jersey, required the AP to file a formal open-records request to get its report, though that shouldn’t have been necessary. City employees in Laredo, Texas, and Sacramento, California, also initially directed the AP to file open-records requests. Laredo later told the AP it had spent nothing. Sacramento relented and eventually provided a short report stating it had spent nothing but might put its entire $112 million allocation toward replacing lost revenue and providing government services.

Among states, the largest share of initial spending went toward shoring up unemployment insurance trust funds that were depleted during the pandemic. Arizona reported pouring nearly $759 million into its unemployment account, New Mexico nearly $657 million and Kentucky almost $506 million.

For large cities, the most common use of the money was to replenish their diminished revenue and fund government services. San Francisco reported using its entire initial allotment of $312 million for that purpose.

Those reporting no initial spending included Pittsburgh, whose mayor joined with several other Pennsylvania mayors in February on a column urging Congress to pass “crucial” aid for state and local governments.

“Congress must act, and they must act soon. Our communities cannot wait another day,” the Pennsylvania mayors wrote.

Pittsburgh ultimately ended up waiting to spend the money until the Treasury guidelines were released, community members had a chance to comment and the City Council could sign off on the spending plans. In the future, the city plans to use part of its federal windfall to buy 78 electric vehicles, build technology labs at recreation centers and launch a pilot project paying 100 low-income Black women $500 a month for two years to test the merits of a guaranteed income program.

The federal money also will help pay the salaries of more than 600 city employees

“Even though the money hadn’t technically been expended” by the Treasury Department’s reporting timeline, “the receipt of the money was enough for us to hold off on major layoffs,” said Dan Gilman, chief of staff to Pittsburgh Mayor William Peduto.

Some officials are intentionally taking their time.

Missouri Gov. Mike Parson, a Republican, opted not to call a special session to appropriate money from the latest federal pandemic relief act. So far, he’s publicly outlined just one proposal — $400 million for broadband.

Parson’s budget director said the administration will present more ideas to lawmakers when they convene for their regular session in January. Until then, the state should have enough money left from a previous federal relief law to cover the costs of fighting the virus, budget director Dan Haug said.

“We want to try to find things that are going to benefit Missouri not just next year or the year after, but 10 or 20 years down the road,” Haug said. “That takes some thought and some planning.”

Republican state Rep. Doug Richey, who leads a House panel on federal stimulus spending, said he’s not convinced Missouri needs to spend all of its American Rescue Plan funds.

“To the extent that we spend these dollars, we are participating in an ever-increasing federal debt or bad monetary policy,” Richey said.

Missouri was one several states that waited to request its initial allotment. Five other Republican-led states — Oklahoma, South Carolina, South Dakota, Tennessee and Texas — waited so long that they weren’t required to file reports by the Treasury’s Aug. 31 deadline.

Tennessee wanted to make sure small cities were prepared for a 30-day clock that starts ticking for them to seek funding once the dollars arrive at the state, said Lola Potter, a spokesperson for the state Department of Finance and Administration. A South Dakota official cited similar reasoning for the delay. Financial Systems Director Colin Keeler said it’s difficult for small towns to take the steps needed to apply.

“The state was in no rush at all,” he said. “The cities wanted to get theirs, but we needed to be prepared.”

ASSOCIATED PRESS

By DAVID A. LIEB

OCT 03, 2021

In this edition of Bloomberg Equality, Romaine Bostick, Caroline Hyde and Taylor Riggs spoke to Stanford Professor and Author of “The Bonds of Inequality: Debt and the Making of the American City.” which presents the postwar history of the San Francisco municipal bond market.

Watch video.

Bloomberg

October 1st, 2021

Joe Mysak, Editor of Bloomberg Brief: Municipal Market, discusses the latest news from the muni market. Hosted by Paul Sweeney and Kailey Leinz.

Play Episode

Bloomberg Radio

October 1, 2021

The share of large state and local government pension plans around the U.S. that maintained funding levels at or above a national average slid somewhat last year, according to a new report.

Last year, the average “funded ratio” for 169 plans was around 72%. This is a measure of how the plans’ assets stack up against benefits they will owe to retirees in the years ahead—the lower the percentage, the bigger the gap and the weaker a plan’s financial health.

Average funding levels for the plans have been in the low 70% range since 2012, compared with upwards of 100% in the early 2000s.

The new analysis found that, last year, the share meeting the 70% funded ratio threshold fell to about 56% from around 60% in 2019.

Overall, the data in the report, released by MissionSquare Research Institute, do not indicate that the Covid-19 pandemic delivered a severe blow last year to pension plans. The stock market generally performed well in 2020 despite the turmoil brought on by the virus.

Looking at 154 plans, the authors of the report found that, in about eight out of 10 cases, government employers made at least 90% of the contributions recommended—or “actuarially determined”—to keep the plans adequately funded. That’s roughly in line with 2019.

Pension plans depend on putting employer and employee contributions into the stock market and other investments and then using the investment returns to help cover benefit costs.

Recent years have seen a rise in the share of funding that plan managers are plowing into so-called alternative investments, a category that includes hedge funds, real estate, private equity and commodities. This trend kept up in 2020, with about 28% of investments for plans the researchers examined parked in alternatives, compared with 26% in 2015.

Meanwhile, the amount of money in equities was down slightly at 47%, compared to 50% in 2015. The share of fixed income investments grew by a percentage point over that time to 23%. In 2005, just 9% of investments were in alternatives and 61% in equities.

“Diversification can help protect against being over-invested in any given area, but some alternative investments may carry higher risks, and therefore may reflect a choice by fund managers to compensate for smaller contributions with a higher risk/higher reward investment policy,” the report authors note.

The paper relies on data from the Public Plans Database, a collaborative project involving MissionSquare, the National Association of State Retirement Administrators and the Center for Retirement Research at Boston College.

Route Fifty

By Bill Lucia

September 30, 2021

• Legal risk of Texas law prevents work with government: bank
• New GOP legislation targets companies for gun policies

The largest U.S. bank says it’s being shut out of underwriting municipal-bond deals in Texas after the state enacted a law banning government work with banks that limit business with the firearms industry.

Due to the legislation, JPMorgan Chase & Co. won’t bid on business with public entities in Texas, a key market where the bank underwrote $3.6 billion of municipal debt sales in 2020. Texas-based borrowers sold more than $58 billion of bonds in 2020, the most of any state after California, according to data compiled by Bloomberg. As part of bond offerings, borrowers often hire banks ahead of time and pay them a fee for underwriting the sales.

It’s one of the first signs of fallout from the Texas GOP’s effort to punish Wall Street banks for restrictive gun policies, with politicians in the gun-friendly state seeing it as a way of retaliating against them for weighing in on America’s fraught culture wars.

The law prohibits governmental entities from working with a business that “discriminates” against firearm and ammunition businesses or organizations, according to Republican Governor Greg Abbott, who has touted the legislation.

“While our business practices should permit us to certify, the legal risk associated with this ambiguous law prevents us from bidding on most business right now with Texas public entities,” Patricia Wexler, a spokesperson for the bank, said in an emailed statement.

The law was enacted as part of a flurry of GOP legislation, such as a law that restricts abortion rights and another that punished cities that defund their police departments. As part of Senate Bill 19, companies have to provide a written verification that they comply with the law, which applies to a contract that has a value of at least $100,000.

JPMorgan was ranked as the seventh-biggest underwriter of deals out of the state, which is one of the biggest markets for the muni-bond business thanks to its fast-growing population.

JPM Replaced

This legislation could be detrimental to municipal issuers in Texas, depending on ultimately how many banks are “captured” by the new law, said Martin Luby, a professor of public affairs at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. “There is a concern that the state and local governments wont have access to as many investors if the big banks aren’t participating in these transactions.”

Earlier this year, JPMorgan CEO Jamie Dimon told a Congressional committee that his bank won’t finance gun companies that make military-style weapons for consumers.

Still, the effect of the law is not entirely clear in Texas. Another bank that was targeted by the legislation, Citigroup Inc., said in June that it didn’t think it was affected by the law. In 2018, Citi said it would prohibit retailers that are customers of the bank from offering bump stocks or selling guns to people who haven’t passed a background check or are younger than 21. The bank was ranked as the biggest underwriter of Texas muni sales in 2020, when it was credited with underwriting $6.3 billion of long-term sales.

Mass Shootings

Bank of America also announced in 2018 it would stop making new loans to companies that make military-style rifles for civilian use. Its policy came after dozens of employees lost family members or suffered other trauma related to mass shootings in the past few years.

Bank of America was credited with underwriting $3.8 billion of municipal debt sales in Texas in 2020, making it the fifth-biggest underwriter there. A spokesperson for Citi didn’t provide an immediate comment on Thursday. Representatives for Bank of America and UBS did not respond to a request for comment.

It’s not the first time that municipalities or states have sought to punish Wall Street by cutting them off from new business. In 2018, Louisiana officials barred Bank of America and Citi from a bond sale, citing their restrictive gun policies.

And states like California in 2016 suspended Wells Fargo & Co. from bond work over the bank’s bogus accounts scandal.

Hospital Deal

The law is already crimping new business for JPMorgan.

This week, JPMorgan was replaced by UBS Group AG as the underwriter of a bond issue for Texas’s Decatur Hospital Authority, a local agency, according to a bond filing Thursday. The authority is an arm of a 7,000-person Texas city that operates Wise Health System. Decatur is the seat of Wise County and is about 65 miles (105 kilometers) northwest of Dallas. In July, the agency had disclosed that it was planning to have JPMorgan serve as senior managing underwriter on a financing that could include the sale of up to $150 million of bonds.

The authority cited “uncertainty related to the implementation of new legislation passed by the State of Texas,” though it didn’t specify which law.

Todd Scroggins, chief financial officer for Wise Health, didn’t respond to a request for comment, nor did a hospital spokesperson.

Bloomberg Markets

By Amanda Albright and Danielle Moran

September 30, 2021, 1:33 PM PDT Updated on September 30, 2021, 4:26 PM PDT

• JPMorgan, Citi pull back amid uncertainty cast by law
• Law blocks banks that ‘discriminate’ against gun industry

Wall Street’s three biggest municipal-bond underwriters have seen business grind to a halt in Texas after the state enacted a law that blocks governments from working with banks that have curtailed ties to the gun industry.

Since the Republican-backed law took effect on Sept. 1, neither Bank of America Corp., Citigroup Inc. or JPMorgan Chase & Co. has managed a single municipal-bond sale in the state, according to data compiled by Bloomberg. It was the first time that’s happened since at least late 2014.

JPMorgan said Thursday that it has decided that it can no longer bid for most municipal-debt business in Texas due to the law. On Friday, rival Citigroup said it has temporarily stopped underwriting deals there while it evaluates the law, though it expects to be able to resume work eventually.

Spokespeople for Bank of America declined to comment.

The Texas law marked the latest clash between Republican lawmakers and corporations that have been drawn into America’s fraught cultural wars, such as the efforts to enact more restrictive voting laws in the wake of Donald Trump’s defeat last year. Lawmakers in the gun-friendly state enacted the restriction to punish banks that curbed ties to firearm and ammunition makers in the wake of mass shootings like the one at a Parkland, Florida, high school in 2018 that left 17 dead.

The legislation, Senate Bill 19, requires that governments receive a written verification from companies that they do not have a practice, policy, guidance or directive that “discriminates against a firearm entity or firearm trade association.” They also have to verify that they will not do so during the term of the contract.

In 2018, Bank of America said it would stop making new loans to companies that make military-style rifles for civilian use. That same year, Citigroup said it would prohibit retailers that are customers of the bank from offering bump stocks or selling guns to people who haven’t passed a background check or are younger than 21. JPMorgan Chief Executive Officer Jamie Dimon told a Congressional committee this year that his bank won’t finance gun companies that make military-style weapons for consumers.

The Texas municipal-bond market isn’t a major profit center for the Wall Street goliaths, so the law doesn’t threaten a major hit to their bottom lines. But it does lock them out of a big corner of the state and local underwriting business because Texas’s swift growth has made it one of the biggest issuers of such securities.

The ambiguity around the law was what led JPMorgan to decide it can’t bid on most business with public entities in Texas, according to a company spokesperson.

“While our business practices should permit us to certify, the legal risk associated with this ambiguous law prevents us from bidding on most business right now with Texas public entities,” Patricia Wexler, a spokesperson for the bank, said in an emailed statement.

On Friday, Citigroup said in a statement that it believes it can comply with the law but has temporarily pulled back.

“While we are dedicated to staying involved in the Texas market and serving our public sector clients, we have elected not to engage in primary market underwriting temporarily as we work through the certification process,” the bank said in a statement to Bloomberg News.

The legislation has also sown some consternation among local officials concerned that limiting the number of banks at work could affect their ability to raise money or leave them paying higher costs.

Denise Tacke, the finance director for the city of Plano, Texas, said it’s unclear how big of an impediment the legislation will be until the city sells bonds again and sees how many underwriters participate and whether it has an impact on how the bonds price. She said it’s still unclear which financial institutions the city is barred from working with.

“We were concerned about the bill and we did let our legislators know that it might negatively impact us,” she said in an email.

Bloomberg Markets

By Amanda Albright and Danielle Moran

October 1, 2021, 11:10 AM PDT

— With assistance by Natalia Lenkiewicz

• Volume of new deals in September set to drop 30% from year ago
• Rising rates, uncertainty have pared back government sales

Wall Street’s municipal-bond underwriters may not get as big a year as they once expected.

Even before this week’s selloff drove 10-year benchmark yields to the highest since March, the volume of new state and local government bond sales was slowing from last year’s record-setting pace.

Such governments sold about $33 billion of debt in September, a 30% drop from a year earlier, according to data compiled by Bloomberg. That’s left issuance so far this year at $335 billion, up less than 3% from 2020, thanks to a surge in borrowing in the first half of 2021.

On top of that, next month’s issuance may trail the nearly $72 billion that flooded the market last October, when officials rushed to get ahead of any potential havoc following the presidential election.

The slowdown reflects the rise in interest rates, the economic uncertainty cast by the delta variant, and a decline in taxable bond sales for a key type of refinancing as Democrats in Congress push to restore governments’ ability to sell cheaper tax-exempt debt for that purpose instead. The odds of President Joe Biden enacting an infrastructure program has been another wild card.

“You have a lot of uncertainty in the market right now and when you have a lot of uncertainty, that gives the issuer community pause,” said Jeff Lipton, a managing director at Oppenheimer & Co.

Many municipal-bond strategists had high expectations for 2021, with those at Citigroup Inc., Morgan Stanley and Municipal Market Analytics late last year all forecasting that sales would hit $500 billion or more. Long-term municipal debt sales totaled about $455 billion last year, not including those with corporate-bond identifiers, according to data compiled by Bloomberg.

Yingchen Li, co-head of municipal-debt research at Bank of America Corp., attributed the recent slowdown to a drop in taxable debt issued for refinancings.

“Now, the question is: is it possible to catch up?” said Li. The bank has maintained its annual forecast even though issuance is behind schedule by an estimated $20 billion.

“It’s really whether we can make up $20 billion more in refundings,” he said. “If there’s a lot more new money than we thought, then that’s another way to catch up. The fourth quarter is normally very big.”

Analysts at Citigroup led by Vikram Rai have already rolled back their forecast, predicting $515 billion of long-term sales this year, down from the $550 billion projection made at the end of 2020. Rai stands by that call, saying that the fall season typically brings stronger sales.

“It’s definitely do-able,” he said in an interview.

Tom Kozlik, head of municipal strategy and credit at Hilltop Securities in Dallas, has been estimating that states and local governments will sell around $460 billion. He said the pace of sales next month will be a big factor in whether his target proves correct, given that it’s a crucial month before the winter holidays.

JPMorgan Chase & Co.’s Peter DeGroot, head of municipal research and strategy for the bank, cut his forecast in the middle of the year because of the dip in taxable debt sales. He now predicts about $465 billion by the end of the year, including those sold into the corporate-bond market.

Yet even if 2021 sales fall short of last year’s record, issuance could be the second-busiest year since at least 2013, according to data compiled by Bloomberg.

“At the onset of the year we expected another year of record supply,” DeGroot said in an interview. “That record supply was largely beholden to an increase in taxable issuance.”

“We do expect issuance to be somewhat lower but still relatively high,” he said.

Bloomberg Markets

By Danielle Moran and Shruti Singh

September 28, 2021, 11:08 AM PDT

• Issuance for tollways, bridges and tunnels highest since 2017
• Tollways benefit from rebound of economy, travelers: Vanguard

Americans eager to get out of the house are jumping in their cars for trips near and far, spurring a faster-than-expected rebound in traffic and investor demand for bonds funding municipal toll roads, bridges and tunnels.

Many non-profit toll operators are seeing traffic at around 90% to 100% of 2019 activity, after a shallower drop and stronger rebound than anticipated, said S&P Global Ratings Analyst Scott Shad. While volume overall won’t hit 2019 rates this year, it will probably recover to pre-pandemic levels in 2022 and grow 5% in 2023 given a pickup in the economy and pent-up consumer demand, Shad said.

Such metrics are drawing the attention of investors who are trying to find higher yields in muni bonds at a time when returns are low, and when record federal aid has given a boost to nearly all issuers. Debt issuance for state and local tollways, bridges and tunnels has reached about $9.77 billion, the highest for the year-to-date period since 2017, according to data compiled by Bloomberg.

The combination of aid and market technicals has made it “really hard to distinguish the good from the bad,” said Mathew Kiselak, head of long term municipal portfolio management for Vanguard, which holds $222 billion in muni assets. Toll roads stand out as attractive investments, he said.

“It’s really looking at sub-sectors that benefit from an improving economy,” Kiselak said in an interview. “We love toll roads.”

A North Texas Tollway System bond that matures in 2048, among the debt held in funds that Kiselak manages, has seen a 55 basis point premium to benchmark securities in January fall to a discount of 36 basis points earlier this month. The spread above the benchmark for debt issued by the Pennsylvania Turnpike Commission that matures in 2027, another Vanguard holding, has shrunk to 23 basis points this month from 49 basis points in May.

Part of the sector’s strength stems from Americans choosing to hit the road rather than flying, Kiselak said. The total number of vehicle miles traveled in the U.S. is close to pre-pandemic levels based on a weekly U.S. Department of Transportation report that compares current interstate highway traffic to the same week in 2019.

Separating the mileage data between commercial and passenger shows that truck volume helped kick off the rebound in mid-2020 when shoppers jumped online for purchases and the delivery sector surged. Passenger traffic began to gain more in the new year and is now close to pre-pandemic levels, according to the government data.

Weekly vehicle miles traveled are recovering faster than expected

Better still, often issuers can increase tolls with inflation, giving investors some benefit from recent rising price levels. Increases to toll rates and other “prudent” management steps have kept credit stable and meant no downgrades in 2020 or 2021 across 55 toll road operators rated by S&P. Debt coverage “remained strong despite declines in operating revenues” in 2020, according to S&P.

This sector has “proven its worth,” Ed Paulinski, a portfolio manager and head of muni separately managed accounts at Goldman Sachs Asset Management, said in an interview.

“A lot of the transportation-related sectors actually survived the downturn pretty well and toll roads was certainly one them,” Paulinski said. “The revenue has been in line or in some cases better than pre-Covid. I think that in combination with spreads is hard to find.”

Bloomberg Markets

By Shruti Singh and Skylar Woodhouse

September 27, 2021, 10:45 AM PDT

— With assistance by Natalia Lenkiewicz

Since 2018, wildfires have become increasingly common and are a credit risk for municipalities in high fire-risk areas across several western states such as California, Washington, Oregon, and Colorado. The ongoing drought, particularly in California, is a likely contributor to the reoccurrence of wildfires in areas with historically low rainfall. With the effects of climate change likely to stay, we believe wildfires will remain a common occurrence for the foreseeable future.

However, despite the number of wildfires in the western states, S&P Global Ratings has not taken any negative rating actions to date. Although some wildfires are close to municipalities that we rate, most of these municipalities’ boundaries and property values have not been materially damaged. We closely monitor wildfire risk across the western states.

Continue reading.

28 Sep, 2021

Summary

• As a working professional, the municipal bond market has been a preferred asset class of mine for a long time. I find the tax-exempt income preferable to alternative, taxable investment grade options.
• With a new administration in the White House that is calling for higher tax rates on corporations and the wealthy, the outlook for munis should be very bullish.
• However, there are caveats to this view. While absolute rates may go up, many Democrats are advocating for a repeal of the SALT deduction cap.
• A repeal of SALT deduction limits could actually drive down effective tax rates, even if absolute rates go up. This will limit the desirability of munis.
• Further, other provisions, like advance refundings, could see substantial changes.

Continue reading.

Seeking Alpha

Oct. 04, 2021

Fitch Ratings-New York-29 September 2021: A US federal government shutdown as a result of the failure to pass legislation to extend government funding would unlikely affect most US public finance credits in the near term, Fitch Ratings says. However, a prolonged shutdown without a clear path or timeline for resolution could lead to disruption in federal payments to public and private entities and limited economic effects in areas with larger concentrations of federal employment. Moreover, political deadlock complicates policymaking, which may have longer-term implications for entities relying on federal funding. Government funding expires at midnight on October 1.

It is unclear what agencies and services would be affected in a shutdown, as President Joseph Biden has discretion about what would be considered essential functions of the government and would, therefore, continue through any shutdown. This shutdown may have more extensive reach than prior ones, as Congress has not yet passed any funding bills that would maintain ongoing operations for certain agencies.

Payments to states and local governments under the American Rescue Plan Act should not be affected, as remaining allocations are not due until 2022. Medicaid, which is the largest federal government transfer to states, and Medicare are expected to continue as both are considered mandatory spending programs. It is unclear if the funding and operations of public health agencies, such as the Centers for Disease Control and Prevention and US Food and Drug Administration, would be disrupted.

Most federal employees, including Defense and the US Postal Service, which together make up almost half of the total of employees, would not see changes to their employment or pay status. Other employees could be furloughed or required to work without pay. Localities with the highest proportion of federal employment are unlikely to see long-lasting effects on economically-sensitive tax revenues as the Government Employment Fair Treatment Act (GEFTA) of 2019 ensures payment of federal salaries deferred during a shutdown. The District of Columbia’s operations are protected by the fiscal 2021 D.C. Appropriations bill, which excepts the district government from a shutdown in fiscal 2022.

Universities and non-profit entities may experience temporary pressures if federal research grants are not processed and disbursed. A short-term shutdown would have little effect but those that rely most heavily on federal grants or contracts would suffer in a longer shutdown. Student financial aid will likely be unaffected, as most disbursements for fall have occurred already.

Federal Housing Administration (FHA) loan applications may be stalled for new single-family FHA mortgages and multifamily properties with FHA risk share loans. This will delay the addition of new mortgage assets to Housing Finance Agency (HFA) programs, which could potentially cause a turnaround in the aggregate increases in total assets that HFAs experienced over the last five fiscal years.

Infrastructure projects backed by federal dollars may be affected in a prolonged shutdown. Federal highway transportation funding to states and local governments through the Highway Trust Fund is authorized outside of the annual budget process through multi-year legislation. The current authorization expires on October 1 as well, with reauthorization included in the Infrastructure and Investment Act (HR 3684) scheduled for a final House vote on Thursday. The Senate already cleared HR 3684 and the President plans to sign it if passed by the House.

Extending federal government funding seems to have support across the aisle, which may ease passage of a bill this week. These discussions are related to, but separate from, the deadlock over the debt limit. The Senate recently voted against a measure that combined the two issues, with all Republicans voting against it. The debt limit could be suspended or raised by other means before the limit is reached, estimated to be mid-October.

Contacts:

Amy Laskey
Managing Director, US Public Finance
+1 212 908-0568
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019

Sarah Repucci
Senior Director, Fitch Wire
Credit Research & Risk Analytics
+1 212 908-0726

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Fixed income investors should consider the risks of traditional market cap-weighted bond indexing and look to alternative exchange traded fund methodologies to help diversify their risks and maintain income.

In the recent webcast, The Quest for Income: Smarter Approaches to Meet Client Income and Stability Needs, Katherine Nuss, vice president and fixed income client portfolio manager at Columbia Threadneedle Investments, touched upon the current economic environment, with labor markets progressing but still below their peak and core inflation decelerating. The Federal Reserve is still waiting on the labor markets to make a full rebound and insists that inflation remains transitory.

Nuss argued that investors should consider the value in diversification rather than further upside potential, especially with the markets more at risk of rising interest rates. However, credit valuations leave little room for error with tight spreads reflecting high valuations in the credit markets already.

Marc Zeitoun, head of strategic beta and private client advisory at Columbia Threadneedle Investments, argued that there may be room for fixed income investors to find value, but people will have to go beyond their comfort zones or away from traditional bond benchmarks like the Bloomberg U.S. Aggregate Bond Index.

“Bloomberg U.S. Aggregate Bond Index investors are taking more risk to generate less income than ever before,” Zeitoun said.

Zeitoun warned that investors need more credit exposure or even 80% in high yield in today’s low-rate environment to generate a 4% yield, but this would expose them to risks that many may not be comfortable with. Income is a driver of total return, and its contribution is magnified in short duration. On the other hand, Zeitoun argued that investors need to consider a diversified, flexible portfolio that can better balance today’s market risks.

For example, Jay McAndrew, vice president and national sales manager at Columbia Threadneedle Investments, highlighted the Columbia Diversified Fixed Income Allocation ETF (NYSEArca: DIAL), the Columbia Short Duration Bond ETF (SBND) and the Columbia Multi-Sector Municipal Income ETF (MUST).

McAndrew underscored the improving income and diversification through a broader opportunity set. For example, high yield and emerging market debt produce the most yield relative to duration. They also exhibit low correlation with the Bloomberg 1-5 Government/Credit Index.

DIAL provides convenient access to six sectors attractively priced and managed by senior fixed income portfolio managers. For instance, the ETF focuses on BBB- and BB-rated sovereign EM bonds that have provided income at a reasonable volatility. McAndrew noted that DIAL’s indexing methodology provides a more differentiated country and currency exposure, investing in higher-yielding countries and a modestly shorter duration.

DIAL helps investors focus on areas that have been largely ignored by traditional bond benchmarks. The typical short-term bond fund lacks meaningful exposure to higher income-producing sectors, according to McAndrew. Meanwhile, with short-term rates so low, fees can even negate the impact on effective yield.

Additionally, SBND, which tracks the Beta Advantage® Short Term Bond Index, provides convenient, diversified access to four sectors, managed by senior fixed income portfolio managers at a competitive price. The thoughtfully constructed, diversified portfolio can mitigate duration risk while capturing higher current income opportunities. In order to maximize the potential for risk-adjusted returns and income, the underlying Beta Advantage Multi-Sector Municipal Bond Index is designed to exploit inefficiencies inherent in traditional passive approaches.

Lastly, MUST broadens the opportunity set by providing thoughtful access to municipal sectors at an attractive price and is designed by senior municipal fixed income portfolio managers.

ETF TRENDS

by MAX CHEN

SEPTEMBER 30, 2021

View the Current List.

22 Sep, 2021

View the NASBA list of State Recovery Plans.

On Wednesday, September 15, 2021, the House Committee on Ways and Means advanced the infrastructure bill (also called the Build Back Better Act). Of particular interest to the public finance market are Subtitles F and G, which are Infrastructure Financing and Community Development, and Green Energy, respectively. The legislation includes dozens of development finance provisions related to bonds, tax credits, and housing. The link to Subtitles F and G can be found here.

Notably, the infrastructure bill includes the restoration of Advance Refunding Bonds, a Bond Category for Electric Vehicle Charging Stations, creation of new Qualified Infrastructure Bonds, a permanent extension to the New Markets Tax Credits, and an increase in the threshold for bank qualified bonds.

We will continue to provide updates on the status of the infrastructure bill and legislative next steps. At this point, it is important to caution that it is anticipated the bill will go through additional revisions. Committee Chair Richard Neal is a recognized friend of the muni market and the bill’s finance provisions may well face headwinds from other sectors.

New Measures

The following are notable measures included in the Ways and Means Committee’s portion of the infrastructure bill:

Infrastructure Financing:

• Credit to issuer for a new category of qualified infrastructure bonds (modeled on the success of Build America Bonds)
• Advance refunding bonds
• Permanent modification of small issuer exception to tax-exempt interest expense allocation rules for financial institutions
• Modifications to qualified small issue Industrial Development Bonds
• Certain water and sewage facility bonds exempt from volume cap on private activity bonds
• Exempt facility bonds for zero-emission vehicle infrastructure

Other Provisions Related to Infrastructure Financing:

• Creates a 30% credit for government-owned broadband
• Permanently extends the New Markets Tax Credit (NMTC)
• Temporarily increases the historic rehabilitation tax credit (HTC) to 30%
• Permanently increases the HTC percentage to 30% for certain smaller projects
• Creates a 30% credit for qualified wildfire mitigation expenditures

Housing Provisions:

• Increases in-state low-income housing tax credit (LIHTC) allocations.
• Temporarily reduces the LIHTC 50% requirement to 25%
• Basis boost for LIHTC buildings designated to serve extremely low-income households
• Basis boost for inclusion of rural areas as difficult development areas
• Increase in credit for bond-financed projects designated by housing credit agency
• Establishes a new federal neighborhood homes credit

Green Energy Provisions:

• Extension of credit for electricity produced from certain renewable resources
• Extension and modification of energy credit
• Increase in energy credit for solar facilities placed in service in connection with low-income communities
• Elective Payment for energy property and electricity produced from certain renewable resources
• Investment credit for electric transmission property
• Zero emissions facility credit
• Extension of credit for carbon oxide sequestration
• Green energy publicly traded partnerships
• Zero-emission nuclear power production credit
• Extension of excise tax credits relating to alternative fuels
• Extension of second generation biofuel incentives

Steps to Passage

The House Budget Committee and House Rules Committee will consider the bill before it is voted on by the full House, though the timeline for additional House and Senate action is unclear after a number of moderate House and Senate Democrats expressed concerns over the overall price tag and individual components of the bill.

September 23, 2021

© 2021 Foley & Lardner LLP

• Year-over-year bond sales fell 34% to $12.6 billion in 2021
• Federal aid diminished some facilities’ need to borrow

U.S. hospitals are pulling back on issuing municipal debt in the midst of the ongoing Covid-19 pandemic, following a wave of federal aid that softened borrowing needs and uncertainty that has clouded capital spending plans.

Muni-bond sales by U.S. hospitals have fallen about 34% to $12.6 billion this year compared to the same period in 2020. The borrowings are on pace to be the lowest since 2014, according to data compiled by Bloomberg.

The slowdown in such debt sales may reflect a slump in planned capital expenditures given the uncertainty surrounding the pandemic, said Ryan Ciavarelli, senior research analyst for Belle Haven Investments. “You don’t see a lot of hospitals issuing new money debt to build a new hospital unless they had those plans in the works,” he said.

Taxable health-care issuance, on the other hand, is roughly on track for an average year, likely because many hospital systems are refinancing tax-exempt debt with longer calls and terming out lines of credit tapped during the early stages of the pandemic, Ciavarelli said.

Another factor driving the decline may be the presidential election in 2020, which spurred borrowers to move deals forward that year to avoid potential market disruption in the aftermath of the vote, said Steve Sohn, senior vice president at health-care consultancy Kaufman Hall & Associates LLC.

Hospitals generally performed better in 2020 than many investors expected after elective surgeries, which had been deferred during the peak of the virus, recovered and an influx of federal aid strengthened balance sheets. Many systems are now better equipped to handle Covid-19 case surges while still continuing to provide elective procedures, a major driver of revenue.

The Bloomberg Hospital index has returned 2.72% year to date, the strongest performance among municipal revenue bond sectors tracked by Bloomberg. The high-yield hospital bond index returned 6.67% over the same period.

Under the CARES Act passed in March 2020, the U.S. Department of Health and Human Services received $175 billion to distribute to hospitals and health-care providers. The American Rescue Plan Act also secured additional aid for providers.

“The need to come to market isn’t quite so great with the federal stimulus money being allocated,” said Kim Olsan, senior vice president for municipal trading at FHN Financial. “As states have found with G.O. debt, airports, transit systems, a lot of that federal money is taking the place of traditional financing needs.”

Still, the outlook for the sector is complex. Covid-19 cases and hospitalizations spiked in recent weeks as delta spread, reaching a seven-day moving average of nearly 160,000 cases earlier this month. Kaufman Hall projects hospitals nationwide will lose an estimated $54 billion in net income over the course of 2021, even considering federal relief from the CARES Act. More than a third of U.S. hospitals will maintain negative operating margin through year end, according to a September report from Kaufman Hall.

Like other businesses and governments, staffing is also a concern that is prompting some hospitals to look into closing service lines, cross-training nurses and offering signing bonuses to new hires, which could compress margins.

“Pretty much every single major health care system is having challenges with labor, especially on the nursing side,” Kaufman Hall’s Sohn said.

Bloomberg Markets

By Nic Querolo and Sri Taylor

September 23, 2021, 11:41 AM MDT

— With assistance by Danielle Moran

• Asking issuers about social policies ahead of bond offerings
• ‘They are mammoth institutions that can impact pricing levels’

Some of Wall Street’s biggest buyers of America’s state and local government bonds are starting to ask questions about racial equity.

Five investment giants — BlackRock Inc., Goldman Sachs Asset Management, Lord, Abbett & Co., Morgan Stanley Investment Management and Vanguard Group Inc. — are working with two minority-owned underwriters, Loop Capital Markets and Siebert Williams Shank & Co., to develop and distribute a questionnaire that governments will be asked to fill out before new bond deals are arranged. It will ask about policing policies, efforts to combat race-based inequality, social services and the demographic breakdown of the government’s workforce, among other things.

“The pandemic has brought up the broad range of inequity in our society and it’s important to understand how everyone is working on that,” said Daniel Solender, head of municipal bonds at Lord, Abbett, which manages about $36 billion of the securities.

“We want to engage: we can ask questions, we can compare different issuers for what they’re doing,” Solender said. “It’s important for us to know what we’re investing in.”

The push reflects the growing influence of the socially responsible investment business, with Wall Street funds eager to cater to investors seeking to use their funds to combat global warming or promote societal change.

The industry has been making inroads into the $4 trillion municipal securities market, a slow moving haven of buy-and-hold investors seeking tax-free income.

But the market has broad reach that’s drawn attention from activists, since it finances everything from hospitals and water systems to sports stadiums and legal settlements for victims of police brutality. And governments themselves have started courting the do-good investors: they sold a record $10 billion of so-called social debt so far this year, and they frequently put green-bond labels on debt issues that finance public transportation, energy efficient buildings and other projects with environmental benefits.

The questionnaire project, called the Municipal Issuer Racial Equity & Inclusion Engagement Framework, marks a step to provide more information to investors interested in how cities are working to address the nation’s legacy of racial inequality. It was organized in part by the non-profit JUST Capital.

The protests that gripped the U.S. in the summer of 2020 underscored the need for investors to know what cities are doing to promote racial equity, said Alexa Gordon, head of municipal ESG at Goldman Sachs Asset Management. She said that eventually the responses may help investors decide what to buy.

“There may be a time where we look to invest in certain issuers because they are willing to engage with us,” she said.

The firms aren’t bound to use the information in their investment decisions, nor will the underwriters require governments to participate. Yet backers said the involvement of such massive investment companies gives the project significant heft and lets governments know that social concerns are beginning to matter to buyers of their bonds.

“These are among the largest municipal bond holders; they are mammoth institutions that can impact pricing levels on municipal bonds and their position is that we need this information,” said Suzanne Shank, chief executive officer of underwriter Siebert Williams Shank. “Issuers want to access the best rates at the best time in the market. If investors are demanding this, we want to make our issuer clients aware that this is something that will be increasingly scrutinized.”

Peter Hayes, who oversees about $183 billion as the head of state and local government debt investing at BlackRock, called the survey a first step.

“This will continue to evolve,” he said, noting that the use of the data to determine which bonds to invest in is “a bit down the road.”

Bloomberg Markets

By Danielle Moran

September 24, 2021, 6:00 AM MDT

We are seeking member input for the NFMA Green Bond Survey. Your input matters!

Please complete this Green Bond survey to assist the NFMA Green Bond Committee determine what disclosures investors seek from issuers of Green Bonds.

The survey will take approximately 10 minutes to complete and it is anonymous.

Key Takeaways

• We expect U.S. not-for-profit toll road ratings will remain stable, given a rebound in traffic in 2021 to near pre-pandemic levels supported by positive commercial vehicle traffic trends, following temporarily weakened activity at the onset of the COVID-19 pandemic.
• Prudent management actions, including reducing operating and maintenance (O&M) expenses, increasing toll rates, restructuring debt, and deferring capital projects, have largely mitigated the effect of revenue loss on financial metrics.
• Resilient commercial vehicle traffic spurred by increased consumer spending somewhat offset more severe declines in passenger vehicle traffic and supported overall operating revenue performance, especially for mature, statewide systems.
• Fiscal 2020 financial metrics, including debt service coverage (DSC), debt to EBIDA, and liquidity and financial flexibility, weakened but remained comparable with historical levels despite lower median revenues of about 10% in 2020 due to pandemic-induced activity declines and toll transaction declines of about 15%, resulting in median DSC of 1.7x in 2020 compared with 1.9x in 2019.

Continue reading.

22 Sep, 2021

The Washington Suburban Sanitary District will use bond proceeds to improve the water system throughout the service area. The projects were necessitated by aging infrastructure, a consent decree, and the desire to improve water sustainability and reduce pollution.

Read the S&P Green Transaction Evaluation.

Fitch Ratings-New York-22 September 2021: Jobs continue to rise in major metropolitan statistical areas throughout the U.S., but Fitch Ratings’ latest U.S. Metro Labor Markets Tracker shows the rate of growth is slowing due to the Delta variant.

The median jobs recovery rate for U.S. metros rose to 68% in July with 49 of 53 major metros seeing employment growth, a significant increase from June. Much of the growth came from metros in the South. Nationally, however, employment growth slowed in August largely due to the impact of the Delta variant on pandemic-sensitive sectors such as leisure and hospitality.

“Recent federal vaccination mandates for employees of firms with 100 or more employees will likely lead to an uptick in vaccination rates but may also result in a more challenging job-seeking environment for those who decline vaccination,” said Senior Director Olu Sonola. “L&H, education and health services and local government jobs still account for 71% of total job losses in major metros, which are still well below pre-pandemic levels despite some recent growth.”

The employment recovery rate for major Southern metros rose to 78% in July from 74% in June. The region still has weak pockets including Memphis, Oklahoma City, San Antonio, and Virginia Beach. Three major metros (Richmond, New Orleans, and Orlando) remain particularly challenged by the current economic environment, with employment recovery rates below 50%. The struggles of New Orleans and Orlando largely reflect the cities’ heavy exposure to tourism activities.

‘U.S. Metro Labor Markets Tracker’ is available at ‘www.fitchratings.com’.

Contact:

Olu Sonola
Senior Director
+1 212 908 0583
Fitch Ratings, Inc.
300 W 57th St.
New York, NY 10019

Nicholas Rizzo
Analyst
+1 212 908 0596

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com

• Online job postings up 84% from 2016 to 2020 in public finance
• Smaller workforce to manage record billions in federal aid

Record amounts of federal aid set to flow through state and local coffers will add to the workload of public accountants and investment officers, pressure that could build further as a potential surge of retirements exacerbates a worker shortage.

The demand for public finance employees based on online job postings surged 84% between 2016 and 2020, even after a slight year-over-year dip last year due to the pandemic, according to a study released Tuesday by the National Association of State Treasurers Foundation.

Over 2019 and 2020, public sector employers across all levels of government posted more than 112,000 jobs online including chief financial officer, accountant, financial analyst, auditor, debt manager and budget specialist, according to the report.

Additionally, the sector that employs more than 850,000 state, county and city government workers may be on the verge of a so-called “silver tsunami,” according to the association. The public finance workforce, 31% of which is over the age of 55, and 60% is over the age of 45, “is on the brink of a wave of retirements,” the report said.

“We are entering a potentially tumultuous era of employment and staffing in the public finance sector,” Indiana Treasurer Kelly Mitchell and Connecticut Treasurer Shawn Wooden said in the opening remarks in the report.

Facing Pressure

The industry is facing “unpredicted rates of retirement,” fewer applicants and competition from the private sector, according to the report. Those challenges come at a time when federal investments in local economic recoveries and infrastructure are increasing public spending as well as the need for employees with skills to manage those resources. The latest stimulus package, the American Rescue Plan Act, is sending $350 billion to state and local governments over the next few years.

The finance segment of the state and local workforce is one of several in the government sector facing pressures around the country. U.S. state and local government job openings jumped to 936,000 in July, the highest since at least 2000, according to the U.S. Labor Department this month.

U.S. state and local job openings hit a record in July

The foundation undertook the study in collaboration with Emsi Burning Glass to understand the skills needed along with short- and long-term staffing and skills challenges. Demand numbers are reported as a two-year snapshot between Jan. 1, 2019 and Dec. 31, 2020 “to smooth out” some effects of the pandemic. Emsi Burning Glass also analyzed growth rates between 2016 and 2020.

Public sector agencies may need to expand capacity, staffing, and hiring given the level of anticipated retirements “may further exacerbate skills and worker shortages,” according to the report. The sector, however, has several points working its favor for recruiting and retaining employees.

Important Work

Low barriers to entry, an already diverse workforce and entry-level pay that on average is higher than the private sector can help, according to Joel Simon, vice president for workforce strategies at Emsi Burning Glass. Women making up about 52% of the public finance workforce and the sector mostly mirrors the racial and ethnic profile of the broader U.S. workforce.

“It’s a bigger, wider door,” Simon said.

The importance of the work is also key, said Mitchell, Indiana’s Treasurer. The office serves as the chief investment officer for the state and manages nearly $10 billion. Done properly, public finance posts such as treasurer offices can save money for taxpayers by lowering borrowing costs with higher credit ratings and increasing funds with higher returns on investments, she said.

“I try to draw that line financially between what we do and the impact on individuals own wallet,” Mitchell said in an interview.

Bloomberg Politics

By Shruti Singh

September 20, 2021, 10:01 PM MDT Updated on September 21, 2021, 11:16 AM MDT

Second Consecutive Monthly Decline in Muni Volume

NEW YORK, Sept. 20, 2021 /PRNewswire/ — CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for August 2021. 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 monthly decrease in request volume for new corporate and municipal identifiers.

CUSIP identifier requests for the broad category of U.S. and Canadian corporate equity and debt fell 15.4% versus July totals. The decrease was driven largely by a decline in requests for domestic corporate equity and Canadian corporate identifiers. On a year-over-year basis, corporate CUSIP request volume rose 0.1%.

Monthly municipal volume decreased in August, the second consecutive monthly decline in muni CUSIP request volume following seven straight months of increases. The aggregate total of all municipal securities – including municipal bonds, long-term and short-term notes, and commercial paper – fell 1.7% versus July totals. On an annualized basis, municipal CUSIP identifier request volumes were up 2.4% through August. Texas led state-level municipal request volume with a total of 221 new CUSIP requests in August, followed by New York with 123 and California with 81.

“It is noteworthy that we’re seeing a second month in a row of declining CUSIP request volume, but it is also important to recognize that August is a historically slower month for issuers,” said Gerard Faulkner, Director of Operations for CGS. “We will continue to monitor request volumes closely to get a clearer read on expected issuance activity as we head into the fourth quarter.”

Requests for international equity and debt CUSIPs both declined in August. International equity CUSIP requests were down 8.7% versus July. International debt CUSIPs were down 0.3% on a monthly basis.

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

• Activists single out Alabama in letter to Biden administration
• Alabama to hold special session on correctional facilities

Activists and investors are asking President Joe Biden’s administration to ban the use of federal stimulus funds to build prisons in Alabama and elsewhere.

Dozens of signatories, including the American Sustainable Business Council and Justice Capital, sent a letter to Treasury Secretary Janet Yellen and other administration officials asking them to “explicitly prohibit any state, including Alabama, from using CARES Act, American Rescue Plan (ARP), infrastructure funds or any other federal dollars for prison construction projects.”

The push comes after Alabama Governor Kay Ivey, a Republican, this week called a special session of the state legislature to address “longstanding” issues with correctional facilities. As part of the plan to modernize the state prison system, lawmakers could consider a bill to sell as much as $785 million of bonds and tap as much as $400 million in federal aid from the Biden administration’s American Rescue Plan, according to the governor’s office.

State lawmakers are considering those funding options after a controversial debt financing didn’t move forward in the municipal bond market. In that proposal, the state would have contracted with prison company CoreCivic Inc. to build and own the facilities while leasing them to the state’s corrections department. The state terminated its 30-year lease with CoreCivic in August.

The activists say the federal aid should be allocated to those who have been disproportionately impacted by the pandemic, like Black, Brown and indigenous communities.

“If permitted to use federal dollars, the State will squander a once-in-a-generation opportunity to invest in our communities for productive infrastructure like K-12 and early childhood education, access to high quality and affordable healthcare, clean water and sanitation,” the group wrote in the letter dated Sept. 23. “Aid should be allocated to explicitly center and uplift widespread economic prosperity.”

Bloomberg Markets

By Danielle Moran and Amanda Albright

September 24, 2021, 8:22 AM MDT

• Ivey calls legislature back into special session next week
• Lawmakers to mull plan to use American Rescue aid for prisons

Alabama may seek to use debt and federal aid to fix longstanding issues with its prisons after a controversial financing plan fell apart earlier this year.

Governor Kay Ivey, a Republican, announced on Thursday that the legislature would meet in a special session on Sept. 27 to address the state’s “longstanding” issues with correctional facilities, according to a statement from her office. Alabama and its corrections department were sued by the U.S. Department of Justice in December 2020 for failing to protect male prisoners from violence and unsanitary conditions.

As part of plans to modernize correctional facilities, lawmakers could consider legislation authorizing the sale of up to $785 million in bonds for prison projects, according to the governor’s proclamation. It could also consider a bill that would authorize using up to $400 million in federal aid from the Biden administration’s American Rescue Plan and up to $154 million from the state general fund.

Earlier this year, the state abandoned its plan for prison company CoreCivic Inc. to build and own new prisons after a controversial debt financing didn’t move forward in the municipal-bond market. The state’s corrections department terminated its 30-year lease with CoreCivic in August.

“I am pleased and extremely hopeful that we are finally positioned to address our state’s prison infrastructure challenges,” Ivey said in a statement. “I appreciate the hard work of the legislative leadership and the many members who have worked diligently with my team to put us in position for a bipartisan proposal.”

In July, the state asked the Treasury Department whether Covid-19 relief aid can be used to fund correctional system projects. Alabama is eligible to receive $2.12 billion from the American Rescue Plan’s aid package for states.

Bloomberg Markets

By Amanda Albright and Danielle Moran

September 23, 2021, 2:03 PM MDT

Two decades ago, most American cities were making adequate contributions to their municipal pension funds—the national funded ratio-average for cities across the nation was more than 100 percent. But that percentage dropped when the dot-com bubble popped, and in 2007, the Great Recession pushed it down further.

It’s hovered in the low 70s since 2012.

At the pandemic’s onset last year, there was concern that suddenly tightened budgets would drive municipalities further into the hole, exacerbating an already serious fiscal problem. That hasn’t been the case so far, according to an analysis of public retirement plans released this month by MissionSquare Research Institute.

Most pension plans continued making all or most of their annual contributions throughout 2020.

“Despite the early economic disruption of the COVID-19 pandemic, the average funded ratio among state and local pension plans has held steady at 72 percent for plans included in the Public Plans Database,” according to a statement from the research institute released along with the report, “Public Plans Database—Snapshot as of September 2021.”

The Public Plans Database, described in the statement as “a comprehensive database of public sector retirement plans,” was developed and is maintained by the MissionSquare Research Institute in collaboration with the Center of Retirement Research at Boston College, the Government Finance Officers Association and the National Association of Retirement Administrators.

According to the statement, the database “contains detailed information on the 210 largest state and local (defined benefit) pension plans in the U.S., representing 95 percent of all state and local pension assets and participants. The PPD was expanded in 2020 to include data from public sector DC retirement plans. For this report, 2020 data were available for most but not all of the 210 total plans, depending on when a plan’s fiscal year closed.”

Through the first quarter of this year, defined benefit plans accumulated $5 trillion in assets and defined contribution plans contributed $531 billion.

“The Public Plans Database continues to be an excellent resource for understanding the public sector retirement plan landscape,” said Joshua Franzel, Ph.D., managing director at the research institute. “As we continue to expand the PPD to include more defined contribution plans, it will provide stakeholders with an even more comprehensive view of public retirement plans.”

Just as the average ratio for funded pension plans held steady, the share of cities and states with around or above 100 percent funding also remained high, “although decreasing from 85 percent of all plans in 2019 to 83 percent in 2020,” the statement says. And the percentage of plans paying less than 70 percent “decreased from 9 percent of all plans in 2019 to 6 percent in 2020.”

Of the 16 pension plans with a funded ratio below half, 13 contributed at least 70 percent last year and three contributed between 60 and 70 percent.

When economic downturns happen and revenue dries up, reducing pension contributions can be a tempting temporary solution for city leaders, the report notes. But “doing so has the potential to adversely affect long-term funded ratios as it reduces the principal available for investment.”

Driven by a changing economic landscape, cities and states have begun to shift away from exclusively employer-paid pension plans. The number of plans that include a payroll contribution has more than doubled since 2001. Even so, defined benefit pension plans (when an employer promises a specified payment plan, lump-sum or a combination of the two) are still the most common form of state and local retirement plans—offered to 86 percent of public state and local employees.

Defined contribution plans (those in which an employee contributes money and their employer typically makes a matching contribution) account for 37 percent of all plans.

americancityandcounty.com

Written by Andy Castillo

27th September 2021

Key Takeaways

• The average U.S. state funded ratio decreased for fiscal 2020 to 68.9% from 70.9% primarily due to market returns during the pandemic-induced recession; however, we expect funded levels will improve for many plans in fiscal 2021 given generally strong market returns to date.
• Fourteen U.S. states met our minimum funding progress metric for pensions, indicating they made meaningful contributions toward full funding.
• States continue to reduce market risk exposure in their target portfolios, leading to lower discount rates and higher reported liabilities.
• State retirement plans benefited indirectly from historic levels of federal aid during the pandemic, but large unfunded liabilities persist.
• Retiree health care plans remain substantially underfunded because most states direct limited resources to other priorities.

Continue reading.

Key Takeaways

• Housing finance agency (HFA) multifamily programs maintain strong asset-to-liability parity.
• Multifamily program delinquencies and loans in forbearance have returned to near-pre-pandemic levels after slight increases in mid-2020.
• Extraordinary federal support during the pandemic bridges the gap while renters get back on their feet.
• Preparedness is everything: HFAs have shown nimbleness and resilience in adapting to a changing environment.

Continue reading.

23 Sep, 2021

Key Takeaways

• U.S. state housing finance agency (HFA) issuer credit ratings generally remained strong from 2020 through the first nine months of 2021.
• Of the 23 state HFAs we rate, all but one are rated ‘AA-‘ or higher.
• Ratios in fiscal 2020 showed mixed performance, with equity and assets at record highs and profitability and asset quality declining.
• The COVID-19 pandemic brought a combination of pressure and relief to HFAs; healthy balance sheets and robust liquidity mitigated its impact.
• Sizable funding from federal stimulus programs is expected to slowly but surely aid in the return to pre-pandemic trends.

Continue reading.

23 Sep, 2021

Key Takeaways

• Rated U.S. HFA single-family programs have withstood pandemic-related impacts, with median parity remaining relatively stable at 121%.
• Median whole loan delinquencies reached just above 6% by the end of 2020, their highest level since 2013, but have since come down in 2021.
• Most single-family whole loan programs carry insurance or guarantees from the federal government or investment-grade-rated insurance providers.
• Single-family bond issuance was 6% lower in 2020 than in 2019, but is on pace to exceed 2020 totals as of July 2021.

Continue reading.

23 Sep, 2021

RJ Gallo, Senior Fixed Income Portfolio Manager & Head of the Municipal Bond Group at Federated Hermes, discusses the Federal Reserve taper timeline, and the municipal bond space. Hosted by Paul Sweeney and Matt Miller.

Play Episode

Bloomberg Radio

September 20, 2021

• Bank strategists see pressure for muni returns, citing rates
• October supply uptick may also pressure performance, they say

Pressure is building for the municipal-bond market after a selloff in U.S. Treasuries this week, according to Barclays Plc.

Rates market volatility is one of the challenges facing state and local debt performance in the near-term, according to a Sept. 24 note by strategists Mikhail Foux, Clare Pickering and Mayur Patel. Municipal bonds have posted losses this week but outperformed U.S. Treasuries, which sold off after the Federal Reserve announced it could begin scaling back asset purchases in November.

The bonds were able to “hold their ground relatively well” amid the bond market selloff, the Barclays strategists said. Benchmark AAA yields have climbed as much as five basis points higher since the start of the week.

“However, if rates remain under pressure, at some point tax-exempts will have to follow,” they said.

The Barclays strategists also pointed to more supply as a challenge facing the market, given that the volume of bond sales tend to pick up in October, which can weigh on performance. But any selloff over the next four to six weeks could be a buying opportunity, they added.

“In general, we are not overly concerned, as we see this as a temporary dislocation,” they said.

Bloomberg Markets

By Amanda Albright

September 24, 2021, 10:40 AM MDT

Eric Kazatsky, Senior Municipal Strategist for Bloomberg Intelligence, discusses muni market news. Hosted by Paul Sweeney and Matt Miller.

Play Episode

Bloomberg Radio

September 24, 2021

Key Takeaways

• U.S. public finance issuers are showing an increasing interest in blockchain and cryptocurrency (crypto) as a new investment tool to enhance portfolio diversification, earn higher returns, and provide more efficient operations to control costs.
• Analogous to a retail consumer using a debit card for ease of electronic transfer, this technology and related innovations could aid some U.S. government entities but also introduces cybersecurity risks.
• A portfolio that includes cryptocurrency contains liquidity risk due to the high volatility of cash-out value and could affect creditworthiness because of reduced budgetary stability.
• ESG considerations include the environmental impact of high energy costs associated with blockchain operations, regulation, potential government interference, the escalated impact of possible cyber attacks, transparency, and whether companies involved in blockchain and crypto are promoting social welfare or merely seeking pecuniary benefit.

Continue reading. (Registration required.)

• 74 issuers have sold in 2021, unprecedented year-to-date tally
• Governments see chance to borrow cheaply, invest in stocks

Unprecedented number of muni issuers selling pension debt

A record number of U.S. state and local issuers are selling debt to pay for retirement benefits, tapping borrowing costs near historic lows as they eye surging returns in investments such as stocks.

Seventy-four issuers have sold debt to finance pension costs in 2021, the highest number year-to-date in records starting in 1999, data compiled by Bloomberg show. The combined amount of more than $10.3 billion, encompassing all bonds where at least a portion of the proceeds goes toward pension funding, is the highest since the all-time peak in 2003, which included a $10 billion Illinois sale.

The offerings have come from states and an array of other borrowers, including cities, townships, fire and school districts, a community college and a university. Growing unfunded liabilities, which add budget stress each year, are a key driver, and with some Wall Street banks anticipating higher long-term rates, the timing appears right. For UBS Group AG’s Tom McLoughlin, it adds up to a third major wave of such sales, after one following the 2008 financial crisis and another in 2003.

“The low rates in the market, if they persist, you could expect this wave to be larger,” said McLoughlin, head of fixed income, Americas.

Municipalities nationwide are grappling with a pension shortfall that amounted to around $4.5 trillion as of 2018, according to the Federal Reserve’s latest analysis. Years of underfunding and aggressive assumptions for returns at times were big contributors. The pain is only increasing now as the slow recovery in state and local employment from the pandemic has left fewer workers contributing to retirement systems, McLoughlin said.

The gamble for issuers is that they’ll be able to earn more investing the proceeds of the bond sales than they need to repay the debt. It’s been an appealing option in 2021, with major stock indexes marching to a series of record highs, even as valuation questions are mounting.

‘Pros and Cons’

In June, when the border town of Douglas, Arizona, sold almost $39 million in pension-obligation securities, it looked “at the pros and cons extensively, and felt this was the best way” to avoid a crisis down the road, said its mayor, Donald Huish.

The community had expected its annual fire and police pension payments to jump to $4.4 million in 2038, from $2.4 million in fiscal 2022, Huish said. Douglas sold the debt with an average rate of about 2.9% and projects a 7.3% annual return.

Many issuers are drawn by the arbitrage opportunity and the bonds “probably look pretty attractive” said Lisa Washburn, a managing director at research firm Municipal Market Analytics. The risks they carry, however, mean they’re “not a sure thing.”

The Government Finance Officers Association has advised against using them and analysts warn that they take a “soft” liability such as an annual contribution that some governments reduce in times of financial challenges and turn it into a hard liability, like fixed debt service.

A spokesperson for Stifel, which has managed the most such deals in 2021 — 27 of the 74 sold — said the firm didn’t have a comment.

Timing Challenge

The catch with pension bonds is two-fold. First, they don’t offer a permanent fix to the fiscal strains that pushed municipalities to sell them, says Michael Rinaldi, a Fitch Ratings analyst. The second is the issue of market timing.

Timing worked against Stockton, California, which sold pension debt in 2007 and filed for bankruptcy in 2012. The 2008 crisis drove investment returns below assumptions and the bursting of the housing bubble slashed revenue collections.

One reason for confidence now is that Treasury yields remain low by historical standards, with 30-year rates hovering below 2%. The yield will probably be closer to 2.6% a year from now, according to the median forecast in a Bloomberg survey.

In August, Kansas sold about $500 million of pension bonds, its first such issuance since 2015, “to take advantage of the attractive interest rates in the bond market right now,” Adam Proffitt, the state’s budget director, said in an email. Proceeds will go into the public pension system to pay down a portion of its unfunded actuarial liability and accelerate payments, he said.

Dozens of smaller governments have jumped in as well.

Localities are addressing “unsustainable” costs and unfunded liabilities that are threatening the ability to serve residents, said Kevin Phelps, city manager for Glendale, Arizona, which issued about $253 million in pension bonds in June. The city pays around $50,000 a year per firefighter and per police officer into the retirement system, close to the median household income in the community, he said.

The sale of almost $54 million in pension debt in recent days by Naugatuck, Connecticut, will go toward financing unfunded retirement obligations for borough employees and firefighters. The borough ended its defined-benefit pension plan in 2012 and shifted to a 401(k) plan for new employees to ease pressure on its budget long-term.

“We can definitely see the end,” said Mayor Pete Hess.

Bloomberg Markets

By Shruti Singh

September 9, 2021, 11:00 AM MDT

— With assistance by Natalia Lenkiewicz, and Francis Yatzun

The prospect of higher taxes has fueled interest in muni cipal bonds since state elections in Georgia assured Democrats of a slim majority in Congress at the beginning of the year.

That’s because municipal bonds allow investors to earn tax-free income. But the benefits of owning the highest quality of these tax-free securities relative to Treasuries or investment-grade corporate bonds have diminished as the rush to munis has pushed prices higher, and yields lower.

The yield-to-worst (the potential lowest yield for a security) of the S&P Municipal Bond Index was only 1.03% on Monday, slightly above a low of 0.92% hit on July 27 this year. By comparison, the U.S. 10-year Treasury closed Monday at a yield of 1.36%

But high prices, and low yields, haven’t quashed investor interest in munis. Estimated net cash flows into municipal bond mutual funds and exchange-traded funds reached US$79.25 billion through the end of August this year compared with US$15.73 billion in the same period a year ago, according to Refinitiv Lipper data. Those are the largest inflow totals for municipal bonds on record, according to the firm, a unit of the London Stock Exchange Group.

“There’s only been one or two weeks over the last 60 that we haven’t had positive cash flows into municipal bond funds,” says John Flahive, head of fixed income investments at BNY Mellon Wealth Management.

Penta recently spoke with Flahive about how wealthy investors should approach the municipal bond market amid low interest rates throughout the world of fixed income.

A Rapidly Declining Ratio

Before the pandemic, the yield on 10-year triple-A-rated municipal bonds was about 85% to 90% of the 10-year Treasury yield. For investors in a 40% tax bracket, the taxable-equivalent yield on those municipal securities would be 0.30-0.50 of a percentage point higher (depending on the yield of the security at the time), Flahive says.

But prices of municipal bonds tanked, and yields rose, in the first few months of 2020 as investors feared pandemic-related lockdowns would cause state and local governments to run into financial difficulties. That would mean they could have trouble making bond payments to investors.

As a result, yields on muni bonds rose to nearly four times comparable Treasuries by the end of March 2020, according to research from Brookings.

But interventions by the Federal Reserve during the height of the crisis quickly stemmed fears. By the time the pandemic-related eligibility of municipal securities for the Fed’s Commercial Paper Funding Facility and for the Money Market Mutual Fund Liquidity Facility expired on March 31, muni rates had fallen to about 50% of comparable Treasuries, Brookings researchers wrote in an Aug. 31 post.

As Flahive noted in a mid-year report on the bond markets, the yield on 30-year triple-A rated municipal bonds rose just 0.07 percentage point in the first half of this year compared with a 0.47 percentage point gain in 30-year Treasury yields.

The relative after-tax advantage of munis, as a result, was historically low on all maturities as of the first half. Today, the tax-equivalent yield differential between munis and Treasuries is so slim that in some cases it doesn’t exist at all, Flahive says.

Total returns for munis have also been modest. The US$14 billion Vanguard Tax-Exempt Bond fund, a national intermediate municipal bond fund, returned 1.32% through Monday, Sept. 13, compared to 4.98% in 2020 and 7.45% in 2019, according to Morningstar.

The credit outlook for municipal securities, meanwhile, “is as favorable as we can recall” as a result of federal fiscal stimulus during the pandemic, Flahive said in the mid-year report. While that stimulus swelled general fund balances, he cautioned that spending budgets by these municipalities will expand, “which could make it more difficult to manage during an economic downturn.”

Still Worth Owning

For wealthy investors, the tax advantages of municipal bonds mean the securities are worth buying compared with taxable securities of similar credit quality and with durations of more than five years.

More important for investors, however, is to have a diversified fixed-income portfolio. According to Flahive, investors should even consider giving up some after-tax yield to include taxable bonds among their holdings.

“There’s nothing wrong with taking on some corporates, and for those who can take on some risk, there’s nothing wrong [with having] exposure to high-yield, floating-rate high-yield, and maybe even emerging market debt,” he says.

Sticking With Bonds

Even with rates low across the board, BNY Mellon says investors, generally, should own bonds—albeit a judicious amount. While a generic, moderate-risk portfolio might typically call for 60% in stocks and 40% in bonds (taxable and tax-free), for instance, the wealth manager’s high-level recommendation is now for something less than 30% in fixed income, Flahive says.

Of that approximate 30% allocation, most should be in “core” securities, such as intermediate municipal bonds. Generally, this allocation should include about 80% in state-issued municipal securities (for those who live in states with good bond ratings, such as New York or California), and about 20% in national bonds. The portfolio should be diversified between revenue bonds (used to fund specific projects) and general obligation bonds.

Another 6% or so of the total fixed-income allocation could then be in riskier, higher-yielding securities, including opportunistic municipal bond strategies, he says.

“You are probably better off following a diversified fixed-income approach even though you might be taking more volatility asset class by asset class, [because] at least it’s not just one asset class,” Flahive says.

Barron’s

By Abby Schultz

Updated Sept. 14, 2021

We understand how challenging (and frustrating) it can be to try and measure the true impact of ESG factors, as the landscape constantly evolves without any clear standards to measure ESG-related risks and opportunities. Leaning on our best-in-class analytics and research and our on-the-ground subject experts, Fitch has developed a robust and comprehensive ESG data and analysis solution that will set a new standard in the market.

Today we introduce Sustainable Fitch: the transparent, independent source of ESG information for benchmarking, reporting, and communicating the true impact of companies worldwide, born out of a trusted credit ratings provider.

Sustainable Fitch brings our existing ESG capabilities together in one place, and adds over the coming months the first global ESG Ratings solution for all asset classes at an entity and instrument level. It is designed and built on fundamentals entirely and exclusively to help the ESG focused financial community make better-informed decisions. Leveraging over 100 years of experience, Fitch is committed to providing transparent, objective, and substantive data and analysis that enables confidence in decision-making with unprecedented coverage.

The Sustainable Fitch ESG suite provides a much-anticipated single source for the ESG financial community with tools, data, research, insights, and training under one holistic, modular, user-friendly ESG investing umbrella including:

Learn more about Sustainable Fitch, its ESG Suite, and its new ESG Ratings by clicking the link below, and contact us via the website or by replying to this email.

DISCOVER SUSTAINABLE FITCH

Fears are receding of immediate state and city budget crises, due to the double impact of federal spending and restored economic and revenue growth. But low interest rates and pent-up public spending needs are leading to a great deal of new state and local borrowing. Are states and cities taking on too much debt?

In 2020, falling revenues due to the Covid-19 recession led to significant new muni borrowing. In fact, 2020 saw municipal bond sales set a new record of $451.2 billion, up 11% over 2019.

2021 has seen continued issues from states and cities, “5% above the 5-year average” in June according to Blackrock. But muni supply is being swamped by demand, with large inflows of purchasing funds and less supply due to investors buying and holding munis.

Continue reading.

Forbes

by Richard McGahey

Sep 8, 2021

Table of Contents

S&P Global Ratings affirmed 17 ratings without revising the outlooks and took 12 rating actions in the U.S. not-for-profit health care sector in August 2021. There were 11 new sales in August including ratings initially assigned to AtlantiCare Health System, N.J. and St. Lukes Hospital of Duluth, Minn. We also assigned an issuer credit rating to Antelope Valley Hospital, Calif. The 12 rating and outlook actions were comprised of the following:

• Three stand-alone hospital downgrades all into speculative grade;
• Two upgrades, including one stand-alone hospital and one health system;
• Five favorable outlook revisions (four to stable from negative and one to positive from stable); and
• Two unfavorable outlook revisions (to negative from stable).

The table below summarizes S&P Global Ratings’ monthly bond rating actions for U.S. not-for-profit health care providers in August. We based the credit rating affirmations and rating actions on several factors within enterprise and financial profiles, including business position, utilization, financial performance, debt levels, bond-issuance activity, physician relationships, and the external regulatory and reimbursement environment. This also incorporates our stable sector view and our assessment of COVID-19, economic developments, and market volatility.

Continue reading.

13 Sep, 2021

Fitch Ratings-New York-13 September 2021: Fitch Ratings has released its 2021 Median Ratios for Not-for-Profit Life Plan Communities (LPCs). The data presented in this report are limited solely to audited fiscal 2019 results.

“The sector remained resilient during the coronavirus pandemic, which is reflected in the sector’s 2020 financial results,” said Margaret Johnson, Director. “Most of Fitch’s rated communities availed themselves of various forms of emergency stimulus funding to alleviate the operational pressure of the pandemic, which included increased expenses, lower revenues as a result of a decline in post-acute rehabilitation volumes and pressured cash flows from curtailed turnover due to severe limitations imposed on move-ins to communities during the pandemic.”

As of Aug. 4, 2021, Fitch maintained public ratings on 161 LPC providers, of which 151 are included in the medians report. The median rating is ‘BBB’ and the number of ratings in the ‘BBB’ rating category remains the most numerous at 77 (or about 51%) versus 34 (or 22%) in the ‘A’ rating category. Within Fitch’s median portfolio, Type A contract providers remain the plurality with 57 (about 38% of the portfolio), followed by Type C contract providers and Type B contract providers.

Contact:

Margaret Johnson, CFA
Director
+1 212 908 0545
Fitch Ratings, Inc.
300 W. 57th Street
New York, NY 10019

Richard Park
Director
+1 512 813 5704

Gary Sokolow
Director
+1 212 908 9186

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com

Pullman & Comley’s Public Finance tax attorneys are pleased to bring you the latest development on the budget reconciliation front as it relates to municipal bonding. Last Thursday, September 9, 2021, the House Ways and Means Committee kicked off a multiday markup of key elements of $3.5 trillion social spending package. In the evening on Friday, September 10, the House Ways and Means Committee released the remaining tax subtitles for consideration in their portion of the reconciliation package. The proposed legislation, which the Committee will mark up this week, includes the following municipal bond priorities (among others):

• Restoration of Advance Refundings,
• Reinstatement of a Direct Subsidy Bond Program Similar to Build America Bonds, and
• Expansion of Bank Qualified Provisions of the Code.

The Committee’s section-by-section summary is below. There are still no firm details on the Senate’s tax provisions or on the anticipated schedule for consideration.

Section-By-Section Details for Select Sections of Subtitle F – Infrastructure
Financing and Community Development

Sec. 135101. Credit to issuer for certain infrastructure bonds.

Based on the successful Build America Bonds program enacted in the 2009 American Recovery and Reinvestment Act, issuers of qualified infrastructure bonds would receive a tax credit equal to an applicable percentage of the interest, providing direct financing support for infrastructure investments made by state and local governments. The applicable percentage of the credit for interest paid with respect to qualified bonds is determined in the year the bond is issued as follows:

2022 through 2024 – 35%
2025 – 32%
2026 – 30%
2027 and thereafter – 28%

State and local governments may claim this credit for bonds whose interest would otherwise be eligible for tax-exempt status in the Internal Revenue Code, and the entirety of whose net proceeds are used for capital expenditures or the operation and maintenance of capital expenditures.

This provision requires that 100% of the proceeds of a bond issued under this provision meet the requirements in the Davis-Bacon Act. Payments under this section are grossed up in the event of sequestration. This provision applies to qualified infrastructure bonds issued after December 31, 2021.

Sec. 135102. Advance refunding bonds.

Advance refunding refers to a state or local government holding the proceeds of a refunding issue for longer than 90 days before using such proceeds to pay off a refunded issue, allowing state and municipal governments to take advantage of lower interest rates to refinance long-term debt obligations. Prior to repeal in the 2017 Tax Cuts and Jobs Act, interest on advance refunding bonds was exempt from tax. This provision would once again allow interest on advance refunding bonds issued by state and local governments to be exempt from tax. This provision applies to advance refunding bonds issued more than 30 days after date of enactment of this Act.

Sec. 135103. Permanent modification of small issuer exception to tax-exempt interest expense allocation rules for financial institutions.

As a general rule, no deductions are allowed for expenses that are allocable to tax-exempt income, including tax-exempt interest received by holders of certain municipal bonds. The same general rule applies to financial institutions to disallow a deduction for interest expense that is allocable to tax-exempt interest income. However, present law provides an exception for interest expense allocable to certain tax-exempt obligations issued by qualified small issuers, which are defined (in part) as issuers that are not reasonably expected to issue more than $10 million in tax-exempt obligations during a calendar year. This provision revises the definition of qualified small issuers by increasing the $10 million limit to $30 million (indexed annually for inflation). In addition, this provision treats qualified 501(c)(3) bonds as tax-exempt obligations for purposes of the small issuer exception, and makes permanent certain rules related to qualified financings.

Sec. 135104. Modifications to qualified small issue bonds.

This provision expands the definition of eligible manufacturing facilities eligible for financing through qualified small issue bonds to include facilities used for the creation or production of intangible property, and facilities functionally related and subordinate (or directly related and ancillary) to facilities used for the manufacturing, creation, or productions of tangible or intangible property. This provision also raises the aggregate cap for prior issues from $10 million to $30 million, indexed annually for inflation.

Please contact Michael J. Andreana, Sandra D. Dawson or Glenn G. Rybacki with any questions.

by Michael J. Andreana, Sandra D. Dawson and Glenn G. Rybacki

09.14.2021

Pullman & Comley, LLC

• White House warns of possible recession, slump in federal aid
• Treasury has warned “extraordinary measures” run out in Oct.

President Joe Biden’s administration is warning state and local governments that the risk of a default on U.S. debt could trigger a recession and curb the flow of federal aid, as it urges Congress to raise or suspend the federal borrowing ceiling and avoid a crisis.

“Hitting the debt ceiling could cause a recession. Economic growth would falter, unemployment would rise, and the labor market could lose millions of jobs,” the White House said in a letter to state and local governments, released Friday.

The White House said disaster relief payments, Medicaid and the children’s health insurance program, as well as funding for education, infrastructure and child nutrition could be disrupted.

“If the U.S. defaults on its obligations, the ripple effects will hurt cities and states across the country,” the letter said.

The letter comes after Senate Minority Leader Mitch McConnell this week rejected an appeal by Treasury Secretary Janet Yellen for Republicans to join with Democrats in raising the federal debt ceiling, leaving the two sides at odds with potentially just weeks to go until the limit is breached.

The debt limit snapped back into place at the beginning of August, but Treasury has been using so-called extraordinary measures since then to avoid a default. Yellen has warned that those measures will run out some time in October.

“If the U.S. defaults on its debt – cities and states could experience a double-whammy: falling revenues and no federal aid as long as Congress refuses to raise or suspend the debt limit,” the White House warned, adding that a debt limit crisis could also raise the cost of borrowing for states and municipalities.

It warned that the S&P 500 could plunge in the event of a prolonged standoff, “and the value of state pension fund assets would fall as a result, hampering states’ ability to pay their pension obligations.”

The administration has been urging Congress to simply raise or suspend the limit, as has been done regularly in the past, though Republicans have seized on the issue as a way to combat Biden’s domestic fiscal agenda, which includes tax increases for corporations and a series of proposed spending measures that the GOP opposes.

National Economic Council Director Brian Deese said Friday that the administration ultimately expects Congress to avoid a debt limit crisis.

“We have seen this done in a bipartisan way consistently and the best way to do this is without a lot of drama, without a lot of self-inflicted harm to the economy and to our country, and that’s what we’re going to do,” Deese told MSNBC. “Now, there’s a lot of posturing on this issue, but we’re confident at the end of the day we’ll get this done.”

The U.S. Conference of Mayors on Friday urged Congress to act on a bipartisan basis.

“Both parties in Washington have added to our debt, and both parties have an obligation to make sure the United States can continue to pay its bills,” Dayton, Ohio Mayor Nan Whaley, the group’s president, said in a statement. “This is one of the most basic responsibilities of Congress, and there is no good reason for lawmakers to create a crisis that undermines the full faith and credit of the United States.”

Bloomberg Politics

By Josh Wingrove

September 17, 2021

Despite predictions that COVID-19 would crush state tax revenues, most of them didn’t need megabillions in pandemic aid to balance their budgets. But for the most part they seem to be spending the money wisely.

It’s time for macroeconomists and public finance pundits to eat crow. Early last year, almost all of us — myself included — predicted that states would encounter major revenue shortfalls as the nation locked down to fight the coronavirus. In retrospect, that proved to be a false alarm, at least for all but a third of the states. So the megabillions of federal dollars allocated to them by the 2020 CARES Act and the 2021 American Rescue Plan are largely going someplace other than budget balancing. Has a half-century of empirical public finance wisdom gone out the window?

As for my own humble pie, hopefully I can pass up the largest slice: While I was among the pundits predicting significant tax revenue shortfalls, I did make the case in this space in April 2020 that the size of federal relief packages being proposed at the time by congressional liberals and advocates of state and local government were double or even quadruple the realistic magnitude of what the pandemic could inflict. Beginning with the data point that total state and local sales and income taxes garner about $1 trillion annually, my bar-napkin estimate of the likely revenue shortfall was a range of 10 to 25 percent of that number, so perhaps $100 billion to $250 billion. At the time, governors were pleading for $500 billion, and I explained how that was probably going to be far more than was actually needed.

Although the 2020 CARES Act focused mostly on direct aid to individuals and small businesses, it did include about $150 billion for states and localities. With Democrats relentlessly pushing for more, the bigger funding package came later in this year’s pandemic relief legislation: the American Rescue Plan, which earmarked another $350 billion for intergovernmental aid — a number that will be debated for many years to come.

Continue reading.

governing.com

September 14, 2021 • Girard Miller

• House panel approves increase to the corporate tax rate
• Banks wading back after Trump tax cuts set off a pullback

The Democrats’ push to raise the corporate income tax will likely drive banks and insurers to step up their purchases of municipal bonds, a haven for tax-averse investors.

House Democrats are looking to increase the top corporate rate to 26.5% from 21% to help finance President Joe Biden’s $3.5 trillion economic plan.

That could spark demand for state and local government debt from financial firms seeking to ease their tax burden. Banks, property and casualty insurers and life insurance providers are active investors in the $4 trillion municipal-bond market, collectively holding a combined $1 trillion of the securities as of March 31, according to Federal Reserve data.

“With the increase in the tax rate you would see more demand for tax exempts from banks and property and casualty insurance, especially because they’re quite sensitive to tax-rate changes and often times they make decisions between municipal bonds and corporate bonds,” said Karel Citroen, head of municipal research at Conning, which oversees $9 billion of state and local debt, mostly for insurance clients.

The tax increase would partially roll back the deep cuts in the 2017 law enacted under former President Donald Trump, which reduced the corporate rate from 35%. That caused banks to slash their holdings of municipal bonds by lessening the need for the tax shelter.

Such holdings by financial institutions and insurers are down from $1.1 trillion at the end of 2017, the Fed’s data show.

The latest tax-law changes could also affect demand from the wealthiest investors. The steps approved by the House Ways and Means Committee would raise the highest tax rate and impose a 3% surtax on incomes over $5 million.

The impacts appears largely priced into the market, given that yields have been largely unchanged since the measures were rolled out. Investors have widely anticipated such tax hikes under Biden, contributing to a large influx into tax-exempt bond funds.

“If the tax changes are implemented in the current form, we will likely see demand for the product remaining quite strong,” Barclays strategists wrote in a report Wednesday. “Higher individual tax rates, and a 3% surcharge for adjusted gross income above $5 million, should increase appetite even further, given that individual investors in top tax brackets own the bulk of tax-exempt bonds.”

Bloomberg Markets

By Michelle Kaske

September 16, 2021

• U.S. commercial casinos earned record $4.8 billion in July
• More relief for municipalities that collect gaming taxes

In a boon for U.S. states that tax gambling revenue, the nation’s commercial casinos are earning record sums as Americans hungry for leisure and entertainment storm back to play blackjack, work the slots and bet on sports.

July was a historic month for commercial casinos, which earned $4.83 billion after paying out winnings, according to the latest data from the American Gaming Association.

It was also the fifth consecutive month of double-digit revenue growth over the same period in 2019, and the year’s total, $29.6 billion, almost matches the entire intake for 2020. The peak year was 2019, at $43.6 billion, and 2021 looks like it may give it a run for the money.

This is more good fiscal news for states and localities, already awash in cash as the result of stronger-than-forecast tax revenue as the economy rebounds from the pandemic, as well as $350 billion in federal aid. The robust financial backdrop has been one of the pillars supporting municipal debt this year as it’s outperformed the broader U.S. fixed-income market.

“For those states that collect gaming taxes, we have seen steady collections from online gaming activity as well as a recovery in in-person gaming receipts, primarily due to a surge in domestic leisure travel and limited alternative entertainment options that conform to social-distancing practices,” Ladunni Okolo and Sussan Corson of S&P Global Ratings said in an email Tuesday.

The totals from the AGA represent gambling in the 25 states with commercial casinos, and don’t include revenue from Native American tribal operations. July marked the first full month since the onset of the pandemic in which casinos in all 25 of those states could open at full capacity, the association said.

Turnaround 2021

It promises to be a big turnaround year from the perspective of the tax collectors. In 2020, commercial gaming and sports-betting operations paid $6.7 billion in taxes, down from $10.2 billion in 2019, according to AGA data.

Massachusetts gambling operations have reaped the biggest increase in revenue this year: The $560 million they’ve taken in amount to a 79.2% increase over the same period in 2019. Nevada casinos brought in the most, at $7.4 billion, which is a 6% increase over the January-July period in 2019.

Las Vegas has seen visitors increase steadily this year, according to data through July, which was just as the delta variant of the coronavirus was causing cases to soar again.

For municipalities, gambling tax revenue is only part of the story, said Douglas Goldmacher, a senior analyst at Moody’s Investors Service.

“Although the overall impact is undeniably positive, the specific impact on a given state or local government is more variable as it depends on the tax structure of the jurisdiction,” he said via email Tuesday.

“For some, there is a direct link between higher revenues and higher taxes, but for others, the effects may be more indirect and may depend less on total revenues and more on the number of jobs or ancillary economic impacts,” he said.

Bloomberg Markets

By Joseph Mysak Jr

September 15, 2021, 9:06 AM MDT

— With assistance by Alexandre Tanzi, and Danielle Moran

• Refinancing, infrastructure subsidies would unleash new issues
• At the same time, tax-law changes could affect demand

A flurry of legislative activity in Congress is promising to shake up the $4 trillion municipal-bond market by unleashing a potential surge of new debt sales and altering tax rates in ways that could affect demand from investors.

The proposals are among those included in legislation released by Democrats in the U.S. House of Representatives who are moving to implement President Joe Biden’s tax-and-spending agenda.

The steps, if enacted, would upend the calculations used in the tax-exempt bond market, where valuations have surged and investors have flooded in over speculation that Biden will raise taxes on the highest earners. Yet the varying elements make it difficult to gauge exactly how it will affect prices, particularly since some elements would likely increase demand as well as supply.

One set of proposals would almost certainly set off a large increase in new bond issuance by subsidizing governments that sell taxable debt for infrastructure projects and restoring the tax-breaks for a refinancing tactic that was effectively ended by Donald Trump in 2017. That could be offset at least in part by moves to raise corporate tax rates and apply a surcharge on individual incomes over $5 million, providing a potential increase to demand.

“It’s a little hard to predict how that all comes out in the wash at this point,” said James Iselin, head of the municipal fixed-income group at Neuberger Berman Group.

The legislative push could inject more volatility into the state and local government bond market, where yields have been little changed since April.

JPMorgan Chase & Co. estimated that the move to allow governments to again sell tax-exempt bonds for so-called advance refundings could fuel over $100 billion of debt sales in 2022 alone. At the same time, lawmakers are seeking to revive the Obama-era Build America Bonds program, which covered part of the interest bills on taxable municipal bonds to spur infrastructure projects. About $186 billion of such debt was sold in 2009 and 2010.

The House Ways and Means Committee’s proposal to raise the top corporate tax rate from 21% to 26.5%, however, could affect demand from buyers such as banks that pared their municipal-bond holdings after taxes were cut under Trump. Even so, some lawmakers are pushing to eliminate the $10,000 cap on state and local tax deductions that was widely seen as increasing demand for tax-free bonds from wealthy Americans, particularly in states like New York that were heavily affected by the limit.

Overall, though, money managers said the provisions could ease the shortage of new bonds that resulted from a steady influx of cash this year. Municipal debt sales have increased just 3.5% this year, according to data compiled by Bloomberg.

“Most market participants feel there’s just not enough tax-exempt bonds relative to that demand,” Iselin said. “It could wake the market up from this more doldrum-like state. Everybody would be happy for that.”

A surge in debt sales would in theory weigh on performance given that the market tends to be heavily driven by supply and demand dynamics. But any selloff as a result of the expectations for higher supply would be “healthy,” said Jeff Timlin, a managing partner at Sage Advisory Services, and so far prices have barely budged.

Municipal bonds have posted small gains this year, bucking the losses seen in other parts of the fixed-income markets. And the yields on 10-year tax-exempt bonds have averaged about 66% of those on Treasuries this year, down from 106% in the second half of 2020, indicating valuations have risen.

Any pullback could “help the muni market reprice to levels or valuations that are more sustainable in the long run,” Timlin said.

Bloomberg Markets

By Amanda Albright

September 14, 2021, 11:07 AM MDT

• Atlanta’s airport, one of world’s busiest, to sell muni bonds
• Bond sale unlikely to face penalty despite rising Covid cases

When the Hartsfield-Jackson Atlanta International Airport offers nearly $342 million of municipal debt Tuesday, bond investors may wish they could go back in time.

When the airport, one of the busiest in the world, sold bonds during the depths of the pandemic in September 2020, it paid 49 basis points above AAA rated securities on debt due in 2030. Since then, the additional yield that investors could get on airport bonds has dwindled, lowering the yield penalty on those Atlanta bonds to 19 basis points in secondary market trading on Sept. 8.

Betting on bonds that will benefit from the pandemic recovery is a trade that’s losing its shine in the municipal market. The additional yield that investors received on airport debt has dwindled after the market’s steep selloff in spring 2020 as buyers became more confident in airports’ ability to weather the pandemic.

“If I had a time machine I’d like to go back to May 2020 and buy a bunch of these,” said Paul Toft, senior portfolio manager for municipal investments at Key Private Bank.

Toft said he’ll likely sit out this week’s sale because airport bonds have become “overvalued” over the last six to 12 months.

Why It’s Noteworthy

Municipal-bond investors have been showing confidence in airports, citing their ample supply of liquidity going into the pandemic. Cash on hand for airports rated by Moody’s Investors Service totaled 652 days in fiscal 2019, a record.

Atlanta’s Department of Aviation, which operates the city-owned airport, had 1,026 days of cash on hand as of June 30, 2021. The federal government has provided several rounds of aid to airports through stimulus legislation, and Atlanta’s has received nearly $800 million in relief.

Jason Appleson, a portfolio manager at PT Asset Management, said the airport benefits from its large size and being the largest hub for Delta Air Lines Inc. “They’re well positioned to sustain a temporary loss of passengers from Covid,” he said.

He said credit spreads in the bond market haven’t reacted much to the spike in Covid-19 cases. U.S. carriers have warned that the rise in Covid-19 infections is delaying their recovery after a strong travel season this summer.

Greg Richardson, chief financial officer of the airport, said in an emailed statement that the airport is seeing signs of “traffic recovery.” Enplanements in June 2021 totaled about 75% of June 2019 levels, according to bond offering documents. He said the airport has about $600 million of unused pandemic relief aid which it can use to address future challenges.

Market’s View

The Atlanta airport debt is rated Aa3 by Moody’s, which said the airport is in a “solid position.” Loop Capital Markets is serving as the senior manager on the sale.

Richardson said the airport is expecting very strong interest from investors and he hopes to achieve savings of more than $90 million from the refinancing.

“The market for airport debt remains strong as investors understand the essential role ATL and other airports serve in the national and global transportation network,” he said.

Toft said expects the Atlanta airport deal to price around 20 basis points higher than five-year AAA debt issued by Georgia, which he uses as a proxy for where top-rated municipal credits are trading. He said higher quality debt may make more sense given there is “downside” potential for airports with credit spreads at tight levels.

Appleson said he would consider buying the debt if there was a price “concession” but said he has not been actively buying airport bonds.

“Spreads are so tight in the sector that you’re not getting paid to take airport bond risk,” he said.

Bloomberg Markets

By Amanda Albright

September 13, 2021, 11:04 AM MDT

• Ways and Means Committee on Tuesday will discuss bill markup
• New BABs would lead to jump in issuance in the muni market

Build America Bonds are back.

So is the ability to refinance debt that comes due years later on a tax-exempt basis. There’s also an increase, to $30 million from $10 million, in the amount of bonds that can be sold by small issuers and for which banks can deduct their cost of carry. And Native American tribes will find it easier to borrow in the municipal market, while companies will get a new tax credit for wages paid in U.S. possessions.

These are among the proposals affecting the municipal bond market in the text of a bill released late Friday by the House Ways and Means Committee, which on Tuesday will resume discussion of the Build Back Better Act, its portion of President Joe Biden’s $3.5 trillion economic agenda.

The return of so-called tax-exempt advance refunding bonds is something municipal market participants have been advocating for since they were prohibited under President Donald Trump’s tax overhaul in 2017. The wish for a return of Build America Bonds, a type of subsidized taxable bond, goes back even further, to the end of 2010, when the program expired.

“It’s safe to say there’s a lot of very happy issuers out there,” Emily Swenson Brock, director of the Government Finance Officers Association’s Federal Liaison Center, said in an email on Sept. 11. The group, which represents state and local governments in the U.S. and Canada, has been lobbying for both provisions.

Brock cautioned that the House had a big list to tackle before its self-imposed Sept. 27 deadline, and that Speaker Nancy Pelosi had “to get the caucus in lock-step for reconciliation, which will require some give and take.”

Issuers sold $187 billion in Build America Bonds, created by the American Recovery and Reinvestment Act of 2009, before the program expired at the end of 2010. BABs provided issuers with a direct-payment 35% subsidy on the interest they paid to investors, making the taxable borrowing even cheaper than tax-exempt. The subsidy was later lowered as a result of budget sequestration.

“Short opinion is that Christmas came early!” Dave Erdman, Wisconsin’s capital finance director, said in an email. “Yes ‘some assembly required’ and some details need to be worked out, but very happy with the work completed by the Ways and Means Committee!”

New BABs will offer a direct-payment subsidy of 35% from 2022 to 2024 and decrease to 28% by 2027 and after that. Brock of the GFOA said Monday that the committee clarified that the bill would offer direct-pay bonds to the issuer, rather than a credit allowed to the buyer. The committee plans to clarify this in the markup this week, according to Brock.

Burned Last Time

“There will be many issuers out there who felt burned by sequestration-related subsidy cuts last time and may not even consider this taxable financing option without overwhelmingly attractive subsidy rates,” said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities in Dallas, Texas.

Advance refundings once counted for anywhere between 25% and 30% of municipal bond sales every year. In recent years, issuers have turned to doing them with taxable munis because interest rates had become so compressed.

“The muni-friendly provisions in the Ways and Means reconciliation draft is nothing short of a love letter to MuniLand,” said Eric Kazatsky of Bloomberg Intelligence in an email. “While we don’t know what will make the final cut, it is safe to say that public finance bankers should have their hands full going forward.”

The Joint Committee on Taxation on Sept. 11 released a report on the budgetary effects of each of the proposals being considered by Ways and Means. New BABs would cost the government $22.5 billion between fiscal 2022 and 2031, while allowing tax-exempt advance refundings would cost $14.9 billion. Expanding bank-qualified issuance would cost $3.97 billion.

Bloomberg Politics

By Joseph Mysak Jr

September 13, 2021, 12:00 AM MDT Updated on September 13, 2021, 11:44 AM MDT

— With assistance by Erik Wasson

• Governments expected to sell $15.9 billion of bonds in 30-days
• Supply, demand imbalance has frustrated investors for months

The pace of new municipal-bond sales is poised to surge, snapping back from the late-summer lull and promising to ease a supply dearth that’s left money-managers competing to get in on debt offerings.

State and local governments are expected to sell $15.9 billion of bonds over the next 30 days, the fastest pace since June. The actual amount issued will be much higher because many offerings are scheduled with less than a month’s notice.

Continue reading.

Bloomberg Markets

By Danielle Moran

September 10, 2021, 9:13 AM MDT

Eric Kazatsky, Senior Municipal Strategist for Bloomberg Intelligence, discusses muni market news. Hosted by Paul Sweeney and Matt Miller.

Play Episode

Bloomberg Radio

September 10, 2021 — 11:00 AM MDT

• Market stagnates with light trading and predictable patterns
• Barclays cites ‘Let’s Get it Started,’ sees more volatility

Volatility in the state and local debt market has dwindled

Municipal-bond investors and traders are looking for something, anything, to get the market out of its doldrums.

Trading has slowed. Debt sales are up, but only by a paltry 4%. The amount of cash pouring into municipal investment funds has become predictable. State and local debt even defied the selloff in bonds globally on Tuesday, with yields barely budging.

The conditions have meant there hasn’t been much volatility that investors often pounce on for buying and selling opportunities. A gauge measuring that volatility in the market over a 30 day period has fallen to the lowest since January.

“Absolute muni yields are too low to sell and too low to buy,” said John Ford, co-head of municipal trading at broker-dealer firm Wall Street Access, who described the market as being stuck in a period of “inertia.”

“Nobody wants to enter the market at these levels,” he said.

Barclays Plc municipal strategists say they think the next few months could get more eventful, publishing a note on Friday with a title that referenced “Let’s Get It Started,” a song by the Black Eyed Peas, a pop-rap group. The note detailed the potential factors that could drive more activity in the market, including federal infrastructure legislation.

Dave Isaak, owner of Isaak Bond Investments, said he thinks buyers are worried about the risk of inflation, and that may be causing buyers to struggle to commit to a big position making a call on the direction of interest rates.

“There’s a level of hesitation,” he said. “Because the risk of inflation being more than transitory is out there.”

The muni-bond market is also watching for any related change in policy from the Federal Reserve. If the Fed sought to taper its bond purchases, it could cause Treasury yields to increase, which could drive up yields on muni bonds, Ford said.

Still, Ford said he thinks any taper-related selloff would likely be muted compared to what happened during the taper tantrum in 2013, given the Fed has refined its messaging strategy and would telegraph a change in policy well in advance.

That would likely limit any increase in muni yields and would mean the securities could have a “lid” on them for a while longer, he said. “I think munis are overpriced here and I hope that a new buying opportunity emerges.”

Bloomberg Markets

By Amanda Albright

September 7, 2021, 11:00 AM MDT

WASHINGTON – The U.S. Department of Housing and Urban Development today issued the HOME-ARP Implementing CPD Notice, Requirements for the Use of Funds in the HOME-American Rescue Plan Program (“the Notice”). The new HOME-ARP notice is a critical step taken by HUD to expeditiously allow communities to begin accessing funds from the nearly $5 billion funds allocated from the American Rescue Plan to help communities across the country create affordable housing and services for people experiencing or at risk of experiencing homelessness.

“With rates of COVID-19 transmission still high, there is no time to wait to assist the more than half a million Americans on any given night who are enduring this pandemic in crowded shelters or on the streets,” said Secretary Marcia L. Fudge. “Today’s release of guidance opens up access to the critically needed American Rescue Plan funds that will help communities provide the safety and security of a stable home to more Americans.”

In April, HUD announced the American Rescue Plan funding allocations and broad contours of how the funds can be used. Today, this notice sets forth specific program requirements that participating jurisdictions or grantees must meet to begin planning for their use of their HOME-ARP funds in earnest. Under the regular HOME program, grantees must wait until their allocation plans are completed and approved by HUD in order to access funds. Given HOME-ARP’s focus on addressing the urgent needs of people experiencing and at-risk of homelessness, HUD is providing grantees with five percent of their HOME-ARP grant upfront to support eligible program planning activities related to the development of their HOME-ARP Allocation Plans. Participating jurisdictions will be provided access to the balance of its HOME-ARP grant, including the remaining 10 percent of its administrative and planning set-aside, after HUD reviews and accepts its HOME-ARP Allocation Plan.

The $4.925 billion in HOME-ARP funding will play a critical role in developing housing to address homelessness and homelessness risk among extremely low-income households. The funding also gives participating jurisdictions flexibility to best meet the needs of people experiencing or at – risk of experiencing homelessness, including through the development of affordable housing and permanent supportive housing, the provision of tenant-based rental assistance, the delivery of supportive services, and acquisition and development of non-congregate shelter units.

September 15, 2021

Municipal bond ETFs are getting into something that stock fund managers have been doing for a while now—sustainable investing.

On Friday, asset manager VanEck launched the first municipal bond exchange-traded fund explicitly focused on the type of investment that goes by many names—sustainable, values-aligned, but most commonly ESG, which stands for environmental, social, and corporate governance.

The VanEck HIP Sustainable Muni ETF (ticker: SMI) will hold investment-grade state and local government debt that promotes positive social, environmental and economic outcomes, according to the company.

Continue reading.

Barron’s

By Evie Liu

Sept. 10, 2021

Yields are low across the fixed income universe this year, and municipal bonds aren’t exempt from that trend.

That may sound like an invitation to embrace high-yield municipal bonds and exchange traded funds like the VanEck Vectors High Yield Muni ETF (HYD). After all, the $4 billion HYD sports a 30-day SEC yield of 2.20%. That’s a lot better than the 0.75% on the widely followed S&P National AMT-Free Municipal Bond Index.

Of course, the trade-off for more yield on any bond usually is elevated default risk, among other concerns. Fortunately, muni defaults remain rare and that’s a plus for investors considering HYD.

“While they may have become more common over the last 10 years, municipal defaults and bankruptcies still remain rare overall,” says Michael Cohick, VanEck senior ETF product manager. “(Indeed, during the period of significant market stress during 2020 resulting from Covid, there were only two municipal defaults and neither were virus related.) Second, muni bonds continue to be highly rated compared to corporates. While there were municipal ratings downgrades during the year, global corporates’ ratings’ downgrades were more frequent.”

Municpal bonds, high-yield and otherwise, are seen as long-term investments, ideal for conservative investors and retirees. On that note, a recent study by Moody’s Investors Service notes the long-term default for munis is rather low.

“The five-year all-rated cumulative default rate (CDR) of municipal bonds throughout the study period (1970-2020) was unchanged at 0.08% and still remains very low,” adds Cohick. “Likewise when compared to the five-year CDR of 6.89% for global corporates over the same time period. Of the two muni defaults in 2020, one was rated and the other was “’by a Moody’s rated entity albeit on an unrated instrument.’”

Low default rates are particularly relevant in the case of HYD, not just because the fund holds high-yield debt, but also because of some of its state exposures. For example, Illinois, one of the more financially challenged states, accounts for 11.7% of the ETF’s roster. California, a state with ballooning public pension obligations, is the fund’s largest allocation at 13.7%. Those are points to consider, but history is on HYD’s side.

“If one looks at long-term municipal bond obligations, across all sectors, between 1970 and 2020, according to the Moody’s report, there were only 114 distinct Moody’s-rated defaults, representing a little over $72 billion, out of a universe of more than 50,000 different state and local governments and other issuing authorities,” according to Cohick.

ETF TRENDS

by TOM LYDON

SEPTEMBER 7, 2021

Though the ETF wrapper’s genesis was in benchmark-tracking, with the launch of the SPDR S&P 500 ETF Trust (SPY) in 1993, active ETFs have begun to gain ground since their debut in 2008. Fixed income ETFs have been particularly well-suited for active management, especially in the current low rate environment.

With the return of near-zero interest rates in the wake of the pandemic, active fixed income managers can adjust interest rate sensitivity based on their prediction of the next Federal Reserve action.

Active managers can also conduct analysis on various credits, picking and choosing which might be best-positioned to make good on their debts.

Continue reading.

etf.com

by Jessica Ferringer

September 08, 2021

ATLANTA & NEW YORK, September 07, 2021–(BUSINESS WIRE)–Intercontinental Exchange, Inc. (NYSE: ICE), a leading global provider of data, technology and market infrastructure, and ADP (NASDAQ: ADP), a leading global technology company providing human capital management (HCM) solutions, today announced the launch of a new data service that helps investors better understand and assess the economic stability and creditworthiness of fixed income issuers in the U.S. municipal bond market.

The new service links aggregated and anonymized human resources and compensation data from ADP directly to more than one million municipal bonds covered by ICE’s reference data service. This can allow municipal bond investors, and other market participants, to assess a wide range of dynamics that could impact a municipal issuer and supplement their fundamental research.

“This data is incredibly powerful and can be used by market participants to drill into the financial stability of a municipal issuer,” said Lynn Martin, President of Fixed Income & Data Services at ICE. “ADP’s human capital data is impressive in its timeliness and breadth of coverage, and by linking it to our municipal fixed income data, we’re able to give investors and market participants convenient access to a broad set of alternative datasets to better understand the implications and risks of their investments.”

“Our work with ICE highlights that ADP’s anonymized and aggregated data can help investors discover and better understand the U.S. municipal bond environment,” said Jack Berkowitz, Chief Data Officer at ADP. “ADP serves more than 900,000 clients worldwide, including approximately 75% of the Fortune 500. Our depth of information and data makes us a powerful input for real-time socioeconomic analysis.”

Users will have access to granular aggregated and anonymized human capital data, including average gross pay, total projected income, average commute distance, details into specific job sectors and more than 50 other distinct fields. It can also be used to see trends over time, including migration, which is particularly relevant in understanding how a municipality or region’s population changed over periods of time. ICE’s data will be consistently updated with ADP’s anonymized and aggregated data , making it a compelling complement to sources of public information.

For more information about ICE’s reference data service, please visit: https://www.theice.com/about/fixed-income-data.

Municipal bond ETFs are getting into something that stock fund managers have been doing for a while now—sustainable investing.

On Friday, asset manager VanEck launched the first municipal bond exchange-traded fund explicitly focused on the type of investment that goes by many names—sustainable, values-aligned, but most commonly ESG, which stands for environmental, social, and corporate governance.

The VanEck HIP Sustainable Muni ETF (ticker: SMI) will hold investment-grade state and local government debt that promotes positive social, environmental and economic outcomes, according to the company.

Continue reading.

Barron’s

By Evie Liu

Sept. 10, 2021

Green bonds are a growing part of the fixed income landscape, and there’s an appetite for those issues. The success of the VanEck Vectors Green Bond ETF (NYSEArca: GRNB) confirms as much.

In traditional form, green bonds are debt used by companies and governments to fund environmentally friendly projects. With governments prioritizing climate awareness and sustainability, there are myriad avenues for increasing green debt issuance, including in the municipal bond market. The new VanEck HIP Sustainable Muni ETF (SMI) taps into that theme.

SMI, which debuted last week, is an actively managed ETF. Active management could serve investors in the green municipal bond space, a corner of the bond market that’s still in its infancy.

Continue reading.

ETF TRENDS

by TOM LYDON

SEPTEMBER 16, 2021

• Actively managed fund enters growing area of fixed income
• ETF to deploy four different criteria to evaluate securities

VanEck is breaking new ground in the nearly $80 billion municipal exchange-traded fund business with a product focused on sustainable investing.

The asset manager on Friday introduced an actively managed fund, the VanEck HIP Sustainable Muni ETF, which will focus on investments in projects that advance sustainability or those with “positive social, environmental and economic outcomes,” according to a statement by the company. It will trade under the ticker SMI.

The fund will seize on growing demand for investments — in both stocks and bonds — that have a positive social or environmental impact. At the same time, municipal ETFs have lured a record amount of cash this year as investors seek out the tax-free securities to shield income from potentially higher levies under the Biden administration.

The fund, which will be managed by Jim Colby and Stephanie Wang, will add to VanEck’s existing muni ETF lineup, which has over $7 billion under management. The company is partnering with research firm HIP Investor on the new product.

“Clients all across the board in every channel have been indicating interest in ESG broadly, but specifically an option they can use in an ETF format in this asset class,” Michael Cohick, senior ETF product manager at VanEck, said in an interview.

The fund enters a burgeoning corner of the fixed-income ETF industry focused on investments with a positive environmental or social impact. Janus Henderson Group on Thursday announced two sustainable ETFs dedicated to fixed income, buying corporate credit and other bonds. U.S. fixed-income ETFs that follow certain ESG criteria have amassed about $4.7 billion, according to Bloomberg Intelligence.

VanEck is using four different screening processes from HIP, which evaluates securities for their environmental and social impact, to determine whether debt is eligible for the fund. The filters take into account resilience to climate threats and proximity to opportunity zones that are typically home to lower-income and racially diverse populations, for example.

The fund, HIP Investor’s first co-branded ETF, uses a broad index with about 60,000 securities in it. After applying the four screens in early August, there were around 23,000 securities remaining, Cohick said. He noted the firm is seeking to construct a “highly sustainable” portfolio that maintains the yield and duration characteristics of the benchmark.

Initial holdings include debt of the state of Minnesota, which will likely become a “climate crisis destination” amid global warming, said R. Paul Herman, chief executive officer of HIP Investor. Another is a California school district that uses solar energy, which helps reduce energy costs and train students about taking climate action, he said.

Transparency Push

The new ETF’s data-driven approach to bond picking will help make clear why securities are in the fund, Herman said.

“It can bring new transparency and accountability to the muni market,” he said.

Cohick said he expects the fund will gain traction with a variety of investors. The muni ETF industry is dominated by passively run products that follow an index, but more companies have launched actively run funds focused on state and local debt. This week, Pacific Investment Management Co. also introduced an actively managed muni ETF.

In its research, VanEck found that its new ETF strategy outperformed the two largest, passively run muni ETFs, Cohick said.

“We thought an active approach made sense for this fund, the novelness of it,” he said.

Bloomberg Markets

By Amanda Albright

September 10, 2021, 7:30 AM MDT

New Cellenus ESG for Muni’s dataset features ESG topics across all 1.5 million active CUSIP’s to reduce investment risk

IRVINE, Calif., Sept. 14, 2021 /PRNewswire/ — Bitvore, the leading provider of AI-driven intelligence for third-party risk management, today announced availability of a new Cellenus Environmental, Social and Governance (ESG) dataset targeting the municipal bond market.

ESG refers to the three central factors in measuring the sustainability and societal impact of municipal bond debt issuances. These criteria help to better determine the future financial performance of issuers in terms of return and risk. Bitvore’s continuously updated ESG topics are derived from over 60K quality unstructured data sources (including news, press releases, EMMA filings and more), and identify what nearly 50k issuers are doing regarding ESG transparency.

“We’re excited to announce our new Bitvore Cellenus ESG Dataset for the municipal bond market,” said Elizabeth Pritchard, CEO, Bitvore. “It is fast becoming a requirement for investors to evaluate the financials of a muni offering together with the sustainability impact. Our new ESG insights will allow municipal bond analysts to get the full picture of the value of a bond.”

The Cellenus Muni ESG dataset is derived from more than 60K unique unstructured data sources, including both publicly available and licensed subscription sources. Using machine learning models and NLP, Bitvore derives 34 unique ESG Muni topics, allowing customers to quickly identify specific ESG topics of interest such as GHG emissions, Diversity & Inclusion, Climate Change, Cybersecurity and more. In addition to the continuously updated ESG topics, Bitvore allows existing customers to effortlessly request ESG topics be included into daily surveillance alerts. Bitvore’s surveillance alerts assist in mapping out any potential ESG risk that may be found in a portfolio of municipal bonds or across a sector.

Bitvore’s Cellenus platform provides continuous, AI-powered analysis of unstructured data sources, linking the right obligor to specific ESG events or topics and providing early warning of any potential ESG violations. It also offers the capability to monitor specific topics across the entirety of the municipal bond market. For example, monitoring the expanding drought across the western United States or monitoring which municipalities are meeting goals around recycling or net-zero emissions. The Cellenus Muni ESG dataset may also aid in complying with future regulatory requirements by surfacing relevant ESG related topics and mapping the content back to a relevant obligor for transparency purposes.

Bitvore Cellenus datasets are accessible via API, file downloads and full research applications.

For more information about Bitvore Cellenus, please visit https://bitvore.com/cellenus-intro/

The beginning of the COVID-19 pandemic strained many sectors of the economy, including the municipal bond market, prompting an unprecedented intervention by the Federal Reserve. This post summarizes the latest research on the effectiveness of the Fed’s response to COVID-related distress in the muni market, which finances more than 50,000 local and state governments and other entities.

HOW DID COVID-19 AFFECT THE MUNI BOND MARKET?

Prior to the pandemic, the muni market was ebullient. According to Morningstar, between the beginning of 2019 and February 2020, investors put $105 billion into muni mutual funds and exchange-traded funds, the largest annual influx in the muni sector in 25 years.

COVID-19 hit nearly every sector of the financial market. In the muni market, investors apparently feared that state and local government revenues would fall and spending would increase, hurting governments’ ability to service their debt.

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The Brookings Institution

Sophia Campbell and David Wessel

August 31, 2021

• Average muni offering was $34 million from Jan. through July
• 15 deals of $1 billion or more is fraction of corporate tally

U.S. states and localities have sold 15 bond deals of at least $1 billion this year, on pace to surpass the total of 18 offered in 2020 and potentially even challenge the record 26 issued in 2018, data compiled by Bloomberg show.

And yet, it’s still a far cry from the hundreds of megadeals sold in the world of U.S. corporate bonds this year. Muni investors may be looking to the corporate-debt space with envy, amid a dearth of trading activity in the state and local-government market.

The conditions are right: The amount that municipalities are paying to borrow is at rock-bottom generational lows. Their credit has never been better because it has been rendered almost irrelevant by free money from the federal government aimed at bolstering the economic rebound from the pandemic. And investor demand is seemingly insatiable.

Two primary forces are holding them back from issuing larger sums, analysts say. The first is, they don’t need to, in part as many states and cities are refilling their coffers more quickly than they’d anticipated.

“Tax revenues have surged with the economy re-opening this year and when combined with the stimulus funds from the American Families Plan and more coming from the Infrastructure Investment and Jobs Act, they’re simply flush with cash,” said Matt Buscone, co-head of portfolio management at Breckinridge Capital, in an email last week.

Some municipalities may use part of the federal money for deferred maintenance; others will tap it for debt reduction and fund more of their capital budgets on a pay-as-you-go basis, Buscone added.

Size Mismatch

A second key reason why states and localities aren’t bringing more extra-large deals is that size matters.

It’s “primarily attributable to the size of corporations versus municipalities,” said Cooper Howard, director of fixed-income strategy at the Schwab Center for Financial Research. “There are many more bonds in the muni index, but they are much smaller on average than the corporate market.”

To illustrate, he said there are a bit fewer than 7,000 bonds in the Bloomberg Corporate Bond Index, compared to more than 55,000 in the Bloomberg Municipal Bond Index. The size of the average bond in the muni index is a little over $30 million, compared with around $1 billion for the corporate index, according to Howard.

The average size of new muni deals was $34 million from January to July, according to the Municipal Securities Rulemaking Board. More than half were for $10 million or less.

So for every Texas Municipal Gas Acquisition & Supply Corp III (which sold $1.06 billion in bonds in January) or California State University ($1.66 billion in July), there are hundreds of issuers more like Cimarron, Kansas (population around 2200; borrowed $975,000 in February), and Pomeroy, Iowa (population roughly 660, borrowed $995,000 in March).

But a more fundamental reason may be at work, which is that most of the nation’s 90,126 units of government — the tally in the Census of Governments 2017 data — don’t seem to like debt.

That may explain why they pay some of it off every year and why 31% of it will mature or be called by the end of 2026, according to a study by Municipal Market Analytics.

Bloomberg Markets

By Joseph Mysak Jr

August 31, 2021

— With assistance by Danielle Moran

Summary

• While they may have become more common over the last 10 years, municipal defaults and bankruptcies still remain rare overall.
• The five-year all-rated cumulative default rate of municipal bonds throughout the study period (1970-2020) was unchanged at 0.08% and still remains very low.
• Municipal credits remain strong.

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Seeking Alpha

Sep. 03, 2021

The Disclosure Committee is pleased to release the final version of the Recommended Best Practices in Disclosure for Toll Road Bonds, dated August 2021.

To view this paper and other work products of the Disclosure Committee and the Industry Practices Committee, go to Best Practices in Disclosure and Position Statements under Resources.

Municipalities have assumed about $10 billion in debt this year to shore up retirement obligations

Many U.S. towns and cities are years behind on their pension obligations. Now some are effectively planning to borrow money and put it into stocks and other investments in a bid to catch up.

State and local governments have borrowed about $10 billion for pension funding this year through the end of August, more than in any of the previous 15 full calendar years, according to an analysis of Bloomberg data by Municipal Market Analytics. The number of individual municipalities borrowing for pensions soared to 72 from a 15-year average of 25.

Among those considering what is known as pension obligation borrowing is Norwich, a city in southeastern Connecticut with a population of 40,000. Its yearly payment toward its old pension debts has climbed to $11 million in 2022—four times the annual retirement contribution for current workers and 8% of the city’s budget. The city will vote in November on whether to sell $145 million in 25-year bonds to cover the pensions of retired police officers, firefighters, city workers and school employees.

Norwich’s rating from Moody’s Investors Service is in line with the median for U.S. cities, and officials expect to pay about 3% in interest. Norwich’s pension consultant, Milliman, projects investment returns of 6.25%.

Comptroller Josh Pothier said that spread helped him overcome his initial hesitation. “It’s pretty scary; it’s kind of like buying on margin,” he said he thought to himself. “But we’ve had a long run of interest rates being extraordinarily low,” he added.

Milliman forecasts that Norwich would save $43 million in today’s dollars over the next 30 years.

Over the past few decades, state and local governments across the country have fallen hundreds of billions of dollars behind on savings needed to pay public employees’ future promised pension benefits. Officials have been trying to catch up by cutting expenses from annual budgets and making aggressive investment bets.

With big pension payments looming and Covid-19-era federal stimulus pushing municipal borrowing costs to record lows, local officials are taking a gamble: that their retirement plans can earn more in investment income on bond money than they pay in interest.

Here is how a pension obligation bond works: A city or county issues a bond for all or a portion of its missed pension payments and dumps the proceeds into its pension coffers to be invested. If the returns on pension investments are higher than the bond rate, the additional investment income will translate into lower pension contributions for the city or county over time. (The $10 billion in pension borrowing captured by the Municipal Market Analytics analysis also included some money used directly for pension benefits, rather than being invested, and at least one borrower directed some bond proceeds to other uses.)

Pension obligation bonds can backfire. If investments don’t perform as expected and returns fall below the bond interest rate, the city can end up paying even more than if it hadn’t borrowed.

Norwich is one of many smaller municipalities venturing into pension borrowing. This summer local governments issued 24 pension obligation bonds with an average size of $112 million, according to data from ICE Data Services. That compares with 11 deals with an average size of $284 million during the same period last year.

The Government Finance Officers Association, a trade group, in February reaffirmed its recommendation against the practice. “Absolutely nothing has changed,” said Emily Brock, director of the group’s federal liaison center. “It’s still not a good choice.”

In 2009, Boston College’s Center for Retirement Research examined pension obligation bonds issued since 1986 and found that most of the borrowers had lost money because their pension-fund investments returned less than the amount of interest they were paying. A 2014 update found those losses had reversed and returns were exceeding borrowing costs by 1.5 percentage points.

By swapping out their pension liability for bond debt, local pension borrowers give up the budgetary flexibility to skip a retirement payment in an acute crisis. Pension obligation bonds have contributed to the chapter 9 bankruptcies of Detroit, Stockton, Calif., and San Bernardino, Calif. Chicago three years ago considered, and then scrapped, plans for a big pension borrowing deal.

Other local officials are starting to educate themselves about the deals. More than 200 people attended the webinar “How to Explain Pension Obligation Bonds to Your Governing Board,” hosted by the law firm Orrick, Herrington & Sutcliffe last month.

For investors, the bonds can be more of a mixed bag. A pension obligation bond approved by Houston voters in 2017 earned praise from analysts because the city paired it with benefit cuts.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said that though he occasionally purchases the securities, the decision to issue them raises red flags. “I have a lot more questions about how an entity is governed if they’re using this tactic,” Mr. Cure said.

The Wall Street Journal

By Heather Gillers

Sept. 4, 2021

Wildfires are raging across the western United States, destroying homes, commercial buildings and entire towns. The biggest is the Dixie Fire, which has spread across more than 700,000 acres in Northern California and turned more than 1,200 buildings to ash.

“My defiantly quirky, beautiful adopted hometown turned into a ghost town last night,” reporter Meg Upton wrote on Aug. 5 in the Plumas News. In an unstoppable march of heat and flame, the Dixie Fire erased the bulk of Upton’s hometown of Greenville from existence.

As with many of the more than 150 wildfires burning today, the Dixie Fire was fueled by dry timber and high temperatures amid a changing climate.

A nation away, experts at Atlanta-based Intercontinental Exchange, known as ICE, and climate and ESG data provider risQ, headquartered in Boston, work to help identify and quantify the risk associated with such potentially disastrous events. Their efforts power a young service called ICE Climate Risk, developed for those who invest in the trillions of dollars in bonds that municipalities have sold to pay for hospitals, power plants, schools and other critical infrastructure.

ICE Climate Risk sits at the cutting edge of modern ESG tools, with the most advanced growing remarkably sophisticated in recent years as those who invest in a variety of asset classes pay rapt attention to environmental, social and governance issues.

“ESG is definitely evolving,” says Mark Heckert, who oversees ICE’s fixed income and data services products.

ICE Climate Risk works by dividing the nation’s 48 contiguous states into 100-square-meter cells and analyzing each for its risk from different climate events. Comprising more than 1.3 billion cells in total, the data set quantifies risk for events including flooding, hurricane, heat stress, drought and, of course, wildfire.

Climate risk can be particularly important to investors in municipal bonds, as these securities are tied to the locations of the projects they fund. For example, a bond sold to pay for a new library in an area with a high risk of flooding may warrant a different price than a similar bond in a location with little threat from the climate.

“We can tell you for every patch of dirt in the U.S., what debt is sitting on it,” says risQ CEO Evan Kodra.

Indeed, ICE Climate Risk had identified Plumas County, where Upton’s hometown of Greenville is located, as falling in the 98th percentile of wildfire risk across the United States and the 86th percentile in the fire-prone state of California. Of course, the database could not predict when the Dixie Fire would occur. It can and did, however, quantify the likelihood of such an event.

“It was way at the top end of the percentile in that risk,” says ICE’s Spencer Gallagher, who helped develop ICE Climate Risk together with Kodra.

ESG investing has been around for some time, with the United Nations launching its Principles for Responsible Investment in April 2006 at the New York Stock Exchange, which is owned by ICE. Yet, demand for high-tech ESG tools like ICE Climate Risk has grown most rapidly in recent years as investors have demonstrated a keen interest in projects and organizations whose values and approaches align in these areas.

In addition to climate risk, ICE is involved in many other areas of ESG investing. “ICE was an early investor in this space and has been helping develop these markets for many years,” says Brookly McLaughlin, who oversees ICE’s sustainability efforts.

In some ways, the company’s offerings represent a microcosm of the modern ESG universe.

For equity investors, ICE’s ESG Reference Data tracks about 500 ESG metrics across publicly traded companies including carbon emissions, renewable energy, diversity and inclusion, and board profile. The NYSE leverages this data as it works with its 2,400 listed companies to help them adopt best practices in ESG standards and disclosure.

The NYSE Arca exchange lists more than $23 billion of ESG-focused ETFs. ICE also lists numerous climate-related futures contracts in Europe and North America, allowing companies and other organizations to offset their carbon footprints.

In early August, ICE, together with risQ, announced that municipal bond investors can now receive data to help evaluate the potential social impact of an investment, an area of fast-growing interest. Similar to ICE Climate Risk, they can use this information to analyze poverty, employment, racial diversity and other factors in the geographies where the bonds’ underlying projects live.

Growth in the importance of ESG investing doesn’t seem likely to disappear anytime soon. Earlier this month, the U.N.’s Intergovernmental Panel on Climate Change published a report that received wide media coverage, finding that temperatures will continue to rise globally “until at least the mid-century.” This almost certainly will make the ability to identify the risk of climate events like the Dixie Fire even more critical in the years ahead.

“When we first started, a lot of the market originally was skeptical that a lot of this stuff was ever going to matter,” Kodra recalls. “That clearly changed.”

By NYSE

August 31, 2021

By Farrell Kramer, Head of NYSE Communications, New York Stock Exchange

In a normal public finance transaction to raise capital, local governments often have to pledge some form of revenue stream that’s both reliable and enough to meet the debt service for the capital raised.

For most municipal debt issuances, these revenue streams are often limited to sales tax, property tax, some form of utility user tax, or a combination of all three. However, with the constantly evolving capital markets and its investor base, issuers are demanding more creative ways to pledge alternative revenue sources to take the pressure off their other revenue streams.

In this article, we will take a closer look at the world of Low Carbon Fuel Standard Credits (LCFS) and how some transportation agencies are pledging them as a revenue source to issue green debt for their respective capital needs.

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municipalbonds.com

by Jayden Sangha

Sep 01, 2021

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) $309.1 billion, +2.5% Y/Y
• Trading (as of August) $8.8 billion ADV, -33.0% Y/Y
• Outstanding (as of 1Q21) $4.0 trillion, +2.7% Y/Y

Download.

September 2, 2021

View the list.

2 Sep, 2021

Rating Activity

S&P Global Ratings took the following rating actions in U.S. public finance in July 2021:

25 downgrades
58 upgrades
372 outlook revisions to stable
15 outlook revisions to positive
13 outlook revisions to negative

These data were prepared by individuals on behalf of the USPF group of S&P Global Ratings and are current as of Sept. 1, 2021. For the most up to date, accurate, and complete information on any credit ratings referenced here, visit www.spratings.com. For these purposes we represent as one rating action a change in the rating of linked ratings. For example, we reflect as one rating action a change in the rating on a general obligation (GO) issuer and its related appropriation issues if the rating change on the GO led to rating changes for linked appropriation issues. In certain other publications, linked ratings actions may be represented or counted as separate rating actions.

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3 Sep, 2021

Larger investors are starting to buy up the debt behind loans to homeowners who want to reduce their dependence on vulnerable electric grids

Investment firms are buying record amounts of so-called solar bonds, debt issued to help U.S. individuals finance the purchase of rooftop solar panels to power their homes.

Sales of solar bonds hit around $2 billion in the first six months of the year, roughly double levels during the same period in 2020 and 2019, according to deal tracker Finsight.com. The bonds, which are backed by bundles of loans made to homeowners for panel purchases, are being issued by a handful of financing companies that specialize in residential solar panels, including GoodLeap LLC, Sunnova Energy Corp. and Solar Mosaic Inc.

By tapping bond markets, the companies are connecting fund managers looking for eco-friendly investments with homeowners who want to get cheaper—and potentially more reliable—electricity while cutting their carbon footprints.

“It came down to cost and the environment,” said Josh Rudin, a 34-year-old real-estate attorney who took out a 10-year loan from Solar Mosaic to install solar panels on the house his family bought in Woodbury, N.Y., this year. “We just started a week ago, and even with the bad weather, the system is producing 82% of our electricity.”

The solar panels cut the cost of his electricity purchases from the grid by 95% and qualify him for about $15,000 in federal and state tax credits. Even after accounting for loan payments, his monthly power expenditure will fall, saving him about $8,500 over the life of the loan, according to EmPower Solar, the company that sold him the equipment. Payments on the loan will remain fixed, and when the panels produce more electricity than he uses, Mr. Rudin can sell the excess to his local power grid, he said.

Demand for the loans is accelerating this year amid more violent and unpredictable weather patterns, said Tanguy Serra, president of GoodLeap LLC, the largest issuer of solar bonds. “The wildfires in California, the Texas winter, the outages in Louisiana, they’re all large-scale advertising for the product,” he said.

Hurricane Ida cut power to roughly one million customers in New Orleans and Mississippi and 200,000 people in New York, New Jersey and Pennsylvania this past week.

Bond investors like debt backed by solar loans because the borrowers must own their homes and have good mortgage track records to qualify, said Katrina Niehaus, head of corporate structured finance at Goldman Sachs Group Inc., which arranges solar bonds. Buying the securities also helps asset managers meet environmental, social and governance, or ESG, investing targets required by their clients.

Growing appetite for the bonds is lowering borrowing costs for companies like GoodLeap. Investors bought the bulk of the firm’s most recently issued bonds at a yield of 1.94%, compared with 2.77% on a deal done in July 2020, according to Finsight.com.

Solar energy systems can cost $30,000 or more, and until recently, most homeowners had two choices when purchasing them: pay cash or sign a lease. Over the past five years, solar financing companies scaled up operations by borrowing money from banks and credit unions, then lending it out to customers of panel vendors like EmPower.

The companies use algorithms to rapidly assess and approve borrowers, collect fees on the loans and then sell them to fund managers. Loans accounted for 63% of solar financing in 2020, up from 21% in 2015, Mosaic Chief Executive Billy Parrish said.

Initially, finance companies sold much of their loans and bonds to hedge-fund managers. Alternative fund manager CarVal Investors LP has purchased more than $500 million worth of loans from GoodLeap and Blackstone Group Inc. bought large quantities from the company when bond markets seized up in the summer of 2020, people familiar with the matter said.

The solar bond market is still small, but it is now starting to attract larger traditional investors, said Rob Camacho, co-head of structured credit at Blackstone. “This market is going to grow a lot, so you have money managers willing to spend time on it,” he said.

BlackRock Inc., the largest fund management company in the world, has begun buying solar bonds, a person familiar with the matter said.

As the market expands, so could the risk in the loans backing solar bonds. The average FICO score of solar loan borrowers is roughly 745, but “there’s definitely the possibility that the industry will expand to borrowers that are in the lower credit spectrum,” said Melvin Zhou, an analyst at Kroll Bond Rating Agency LLC.

Increased government support is playing a part in the industry’s growth, said Bryan White, a solar analyst at market research firm Wood Mackenzie. The 26% federal investment tax credit on residential solar panels is slated to expire fully in 2024, but the Biden administration and Democrats in Congress are working on extending that by as much as eight years through the current budget reconciliation process, he said.

“It’s a great day for solar today,” Mr. Rudin said on Thursday as blue skies replaced Ida’s torrential downpour. “I’m exporting five kilowatts to the grid and it’s only 9 a.m.”

The Wall Street Journal

By Matt Wirz

Sept. 4, 2021

Repeated shocks from hurricanes, fires and floods are pushing some rural communities, already struggling economically, to the brink of financial collapse.

FAIR BLUFF, N.C. — It’s been almost five years since Hurricane Matthew flooded this small town on the coastal plain of North Carolina. But somehow, the damage keeps getting worse.

The storm submerged Main Street in four feet of water, destroyed the town hall, the police and fire departments, and flooded almost a quarter of its homes. After two weeks underwater, the roads buckled. The school and grocery store shut, then didn’t reopen. When Hurricane Florence submerged the same ground two years later, in 2018, there was little left to destroy.

What started as a physical crisis has become an existential one. The town’s only factory, which made vinyl products, closed a few months after Matthew. The population of around 1,000 fell by about half. The federal government tried to help, buying the homes of people who wanted to leave, but those buyouts meant even less property tax, tightening the fiscal noose.

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The New York Times

By Christopher Flavelle

Sept. 2, 2021

Today, the National Telecommunications and Information Administration (NTIA) released the Interactive Federal Funding Guide as an enhancement to BroadbandUSA’s “one-stop” federal funding site. The Guide provides an interactive, step-by-step approach for users to filter through more than 90 broadband related programs compiled from 12 federal agencies and the Federal Communications Commission. These programs were included in the BroadbandUSA FY21 website update, which was recently updated with EDA’s American Rescue Plan Programs. It highlights general information about each program, including program descriptions, important dates, contact information, and links to program websites. Developed in response to feedback from users of the federal funding site, the Interactive Guide can be used offline and across multiple platforms, including tablets and mobile devices, providing an option for users with limited access to the internet or digital devices.

Feedback on the site overall and this Interactive Guide is welcomed; please contact BroadbandUSA@ntia.doc.gov to provide input.

Fitch Ratings-New York-30 August 2021: Multifamily mortgage delinquency levels have remained low throughout the pandemic, up only slightly from pre-pandemic levels for both Fitch-rated affordable housing and market-rate housing loans in commercial mortgage backed securities (CMBS), Fitch Ratings says. The end of federal unemployment aid that provides support to individuals may lead to increased rent delinquencies, negatively affecting multifamily loan performance. Both affordable housing transactions and CMBS have robust overcollateralization to protect against multifamily loan performance deterioration.

Occupancy levels may see some volatility with the end of the Centers for Disease Control and Prevention’s (CDC) eviction moratorium, which applied to those counties experiencing substantial and high community transmission virus levels, covering over 90% of the country. The Supreme Court of the United States ruled on August 26 that the CDC did not have the authority to impose the moratorium. Only a fraction of federal aid for rental assistance has been dispersed, and it is unclear how quickly remaining funds will be made available.

The impending expiration of federal supplemental unemployment benefits in September presents a significant income cliff for millions of unemployed and increased coronavirus cases are expected to drag on jobs recovery for lower wage earners. Lower wage sectors saw the biggest hit to employment during the pandemic and employment has not rebounded for these sectors to the same extent as other wage brackets.

We would expect delinquencies and evictions to be higher for lower-income individuals, although some affordable housing properties lack the ability to evict tenants. For the week ending August 2, 70% of renters who were delinquent on rent payments have an annual household income of less than $35,000, according to the US Census Bureau. This is a material jump up from a range of 60% to 63% during the 1H21. The National Multifamily Housing Council Rent Payment Tracker indicates that 94.9% of apartment renters made a full or partial rent payment in July, down 0.7% from June and 0.8% yoy.

Fitch-rated affordable housing programs maintained sufficient cushion along with liquidity and reserves sized to cover short-term cash flow disruptions without eroding the overcollateralization sufficient to cover debt service payments and provide cushion for higher ratings. Fitch’s stress scenario models a hit of 10%-50% to NOI for rated affordable housing pools. This assumes 30% of each unsubsidized property may experience non-payment or payment lag in addition to a 10%-20% increase in operating expenses, due to coronavirus containment efforts during a six-month period, resulting in a total discount to the debt service coverage ratio (DSCR) of 40%-50%. We assume full, on-time rental payments for government subsidized properties and an increase in operating expenses of 10%-20%, resulting in a 10%-20% discount to the DSCR.

Multifamily mortgages securitized in Fitch-rated conduit CMBS and Freddie Mac transactions are typically 10-year loans backed by properties with historically strong performance. CMBS multifamily delinquencies remained low, ticking up slightly to 0.49% in July 2021, compared with 0.41% prior to the pandemic. Master servicers for CMBS transactions are obligated to advance against missed principal, interest, taxes and insurance, thus providing liquidity if there are payment shortfalls.

Multifamily cash flow performance throughout the pandemic significantly outperformed our expectations and we have removed additional coronavirus stresses for CMBS multifamily loans. The expiration of the eviction moratorium is not expected to cause disruptions to landlords of properties securitized in CMBS, as multifamily property-level NOI for conduit and Freddie Mac loans in our rated portfolio saw an overall positive NOI growth rate of 1.4% in 2020. Some of the Negative Outlooks previously assigned were revised to Stable based on performance stabilization.

Contacts:

Mikiyon Alexander
Senior Director, US Public Finance
+1 646 582-4796
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019

Melissa Che
Senior Director, US Structure Finance CMBS
+1 212 612-7862

Eric Rothfeld
Managing Director, US Structured Finance CMBS
+1 212 908-0761

Sarah Repucci
Senior Director, Fitch Wire
Credit Research & Risk Analytics
+1 212 908-0726

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Fitch Ratings-New York/Austin-31 August 2021: Fiscal 2020 was a very challenging operational year for children’s hospitals, but the medians confirmed that the sector’s specialized service mix and high acuity of care translated into favorable profitability compared to adult hospitals. That being said, Fitch Ratings’ analysis shows that stimulus relief provided significant support as the 2021 median operating margin and operating EBITDA of 3.8% and 9.8% would have decreased significantly to negative 0.8% and 7.1% without the support of CARES Act funding.

Management teams did not halt their focus on strategic efforts as many children’s hospitals took advantage of low interest rates to fund upcoming projects using tax-exempt and taxable debt issuances, resulting in increased liquidity and leverage. “Capital spending was lower in the past fiscal year, but this is expected to be a temporary reaction to conserve liquidity given the unknown risks of the pandemic during the March/April 2020 timeframe,” said Fitch Director Richard Park. 2021 median cash-to-adjusted debt decreased to 229.6% from 240.9% in the prior year. Yet days cash on hand improved to 396.1 days, compared with 350.4 in the prior year.

The 2021 medians largely reflect the reduction in patient care revenues with children’s hospitals being forced to temporarily cease elective procedures and caretakers deferring care even though COVID-19 has not had the same physical effect on children as it has had on adults. Fitch believes the coronavirus pandemic remains a significant operating risk as the Delta variant appears to be more easily spread than other coronavirus variants to the pediatric population and children under the age of 12 are still not eligible for vaccination.

Fitch’s ‘2021 Median Ratios for Not-for-Profit Children’s Hospitals’ is available at www.fitchratings.com.

Contact:

Richard Park
Director
+1-512-813-5704
Fitch Ratings, Inc.
2600 Via Fortuna, Suite 330
Austin, TX 78746

Olga Beck
Senior Director
+1-212-908-0772

Kevin Holloran
Senior Director, Head of U.S. NFP Hospitals & Health Systems
+1-512-813-5700

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com

Fitch Ratings-New York/London/Moscow-01 September 2021: Fitch Ratings has updated the Public Sector, Revenue-Supported Entities Rating Criteria report (the Revenue Master Criteria) as part of the routine criteria review process. Revisions to the criteria are mostly editorial in nature and there is no impact on existing ratings.

This update describes in criteria the effect on ratings of a distressed debt exchange event and adds consideration of management’s ability to protect cyber and other infrastructure adequately as an asymmetric risk factor. Other minor and editorial revisions to the report include clarifying the application of these criteria to government-owned financial institutions and updating various references consistent with changes in other criteria and definitions.

This new criteria report replaces the criteria report of the same name dated Feb. 23, 2021.

Contact:

Tipper Austin
Director
+1 212 908 9199
Fitch Ratings, Inc.
300 W. 57th Street
New York, NY 10019

Vladimir Redkin
Senior Director
+7 495 956 2405

Kevin Wu
Director
+852 2263 9609

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com
Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com

Additional information is available on www.fitchratings.com

Fitch Ratings-New York-01 September 2021: Fitch Ratings has published an updated criteria report titled ‘U.S. Military Housing Rating Criteria.’ The report replaces the existing criteria dated July 2, 2020.

Primary revisions to the criteria include the publication of category-specific assessments for each key rating driver (revenue defensibility, operating risk and financial profile). The key rating drivers were updated in line with the master revenue criteria, ‘Public Sector, Revenue-Supported Entities Rating Criteria.’

The revised criteria report also describes the explicit forward-looking approach for military housing surveillance reviews, which, similar to the initial rating assignment, considers revenue and expenses stresses, and the potential impact on a project’s debt service coverage ratio (DSCR). The magnitude of the revenue and expense stresses are evaluated in the context of the revenue defensibility and operating risk assessments. The financial profile DSCR ranges in the criteria were also updated, as supported by fourteen-years of financial performance of this ratio for all Fitch-rated military housing projects.

Additionally, the updated criteria references Fitch’s ‘Completion Risk Rating Criteria’ for the analysis of construction risk (if present).

No changes to the ratings of existing transactions are anticipated as a result of the application of the criteria.

The criteria report is available at ‘www.fitchratings.com/criteria/us-public-finance.’

Contact:

Mikiyon Alexander
Senior Director
+1-646-582-4796
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Kasia Reed
Director
+1-646-582-4864

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com

Virginia’s ‘Smart Scale’ program offers an example of how a more-calibrated approach can work—and generate controversy

Included in the bipartisan infrastructure bill now before the U.S. House of Representatives are a pair of provisions that could spur states to rethink how they allocate scarce transportation dollars.

One new program would offer $2 million grants to help planners set up a formal and more open process to determine which projects should get funding. The other gives officials access to new data sources to help set those priorities.

The grants, pushed by Sens. Tom Carper (D., Del.) and Tammy Duckworth (D., Ill.), were modeled on a Virginia program that shows how such a system could work—and how it can generate controversy.

In 2014, Virginia lawmakers on a bipartisan basis changed the way the state’s transportation department allocates funds to road, transit and pedestrian projects.

Before, transportation officials would release a list of their top projects and then work their way down as money became available. But they didn’t discuss in detail what criteria they used to devise their ranking.

The ranking was closely watched by local officials and residents, anxious to get money for projects such as widening a traffic-choked highway or calming a dangerous intersection.

Many states use a similar process. In some cases the legislature, rather than the department of transportation, determines the list of projects to fund.

Under Virginia’s new system, dubbed “Smart Scale,” officials score projects based on six criteria. They examine a project’s effect on congestion, safety and environmental quality. They also look at how it fits into regional land-use plans and whether it would contribute to local economic development efforts.

Finally, they assess how a project, such as a widened road, would make the region more accessible, defined as whether people would be able to more easily move around their neighborhoods, even if they don’t use the road in question.

“It ties the benefits to people rather than to how well an individual road is performing,” said Chris McCahill, director of the State Smart Transportation Initiative, a research group at the University of Wisconsin that helped Virginia set up its program.

Academics have focused on such accessibility measures for decades. But only in the past few years have planners begun to incorporate them into transportation decisions, in part because they can get much more detailed data now than in the past, said Andrew Owen, a research fellow at the Center for Transportation Studies at the University of Minnesota.

For instance, planners can now map out how long it takes for people on every block to get to destinations such as jobs, grocery stores, schools or doctors’ offices and estimate how those travel times would change under different scenarios.

Focusing on those details could change how planners invest their money, said Mr. Owen.

“One of things that we might see is more attention being paid to projects that are smaller-scale but that have an outsized impact on people’s ability to get to destinations,” he said.

A provision in the infrastructure bill would make that data more widely available.

Virginia officials publish a project’s scores on all the criteria, and weigh the results against the costs. They then recommend the top projects for funding from the state’s transportation board. The board can adopt or reject the agency’s recommendations.

“In the past there was a sense the process was opaque,” said Nick Donohue, Virginia’s deputy transportation secretary. “Now we have a much more transparent and accountable process. I would like to think that we’re picking much more effective projects.”

But Virginia’s effort has its critics. For instance, a $115.5 million request to widen the northbound lanes of Interstate 95 over the Rappahannock River didn’t score high enough to receive money through the program, even though widening the southbound lanes was approved under the program. That upset local officials who say that stretch of highway is among the state’s most congested.

Matthew Kelly, a city council member in nearby Fredericksburg, said that although he agrees with the principle behind Virginia’s Smart Scale program, he has problems with its execution.

“It’s the metrics that they use to determine what gets funded that creates a problem,” he said. “Everybody would agree we are the most screwed-up section of 95 in the freaking world.”

The project eventually received funding through other sources.

Dave LaRock, a Republican who represents Loudoun County in the Virginia House of Delegates, said the department of transportation’s criteria put too little emphasis on reducing congestion, which he called “the most fundamental need for roads.”

Mr. LaRock has introduced legislation to overhaul Smart Scale, so far without success.

Other states, such as North Carolina and Utah, have similar processes in place. In Utah, planners evaluate how projects will affect safety, economic growth, air quality, the possibility of walking or biking and whether the project would fit into the existing community, said Carlos Braceras, executive director of the Utah Department of Transportation.

“When I started here in 1986 the attitude was we’re the experts, get out of the way,” Mr. Braceras said. “The focus on transparency, on being clear how and why decisions are made, I don’t think was as big a focus.”

Asking transportation officials to publicly spell out their priorities is a significant shift, said Mr. McCahill. “You’ve got to change the way you’ve been doing things and commit to some level of staffing to get it right,” he said. “The pilot program in the bill would enable a lot more folks to take that step.”

Mr. Braceras said the grants included in the infrastructure bill could help states overcome the fear of trying something new.

“There’s so much risk,” he said. “If it’s done in partnership with the federal government and it’s done with a pilot [program], it gives you a lot of cover.”

The Wall Street Journal

By David Harrison

Sept. 4, 2021

As Biden’s tax hikes loom, cities and states see a tax-exempt boom.

The biggest winners of the 2020 election have turned out to be state and local governments, especially those run by Democrats. Democrats in Congress have showered them with federal largesse, and President Biden is now reducing their borrowing costs by driving a stampede of investors into tax-exempt municipal bonds.

Demand for muni debt has surged this year even from last year’s high levels as well-to-do Americans seek protection from the expected income and capital gains tax increases. Investors have plowed a record $69 billion into muni-bond mutual and exchange traded funds during the first seven months of this year, driving yields to historic lows.

The yield on the S&P Municipal Bond Index this summer fell below 1% for the first time and is now about half of what it was two years ago. BlackRock’s California and New York Muni Bond ETFs (which include bonds from municipalities and local public agencies) are yielding 0.83% and 0.86%, respectively, versus 1.29% on the 10-year Treasury.

Try to wrap your head around this: The U.S. government has been issuing hundreds of billions of dollars in debt to help states and localities that are rolling in record tax revenue and can borrow at negative real rates. Now Congress plans to borrow even more for public works that many states could finance more cheaply. Only in Washington does this make any sense.

Munis have become more attractive because their interest is exempt from federal income tax, unlike Treasurys and corporate bonds. Most states also exempt debt issued by their localities from income taxes. This makes muni ETF and mutual funds especially popular among wealthy Americans in states with high tax rates like California and New York.

Now Mr. Biden wants to raise the top income tax rate to 39.6% from 37%. After adding the 3.8% investment tax, couples making more than $509,000 would pay 43.4% on interest income and dividends. High earners currently pay 23.8% on long-term capital gains, but Democrats also want to tax their capital gains as ordinary income.

The tax bill for wealthy Americans in many states could soon exceed 50% on stock sales, dividends and interest income. Tax-exempt munis are a port in this tax storm. Despite the paltry yields on munis, Americans may still net more than they would buying corporate bonds or Treasurys.

The gusher of cash from Congress to the states has also reduced muni-bond risk. Illinois recently received its first credit rating upgrade in more than 20 years, though the state’s spendthrift policies and public-union stranglehold on Springfield haven’t changed. The difference is the federal bailout cash.

The biggest, if unseen, cost of this investment in munis is misallocation of capital. Muni bonds do finance some needed public works improvements. But today’s extraordinary rush to munis means that many investors are looking for tax avoidance rather than investing for higher returns in new ventures or productive private enterprises.

All of this finances bigger government, not the wealth creation that is essential to long-term growth and higher living standards.

The Wall Street Journal

By The Editorial Board

Sept. 2, 2021 6:48 pm ET

KEY POINTS

• California, Texas and New York will likely cash in big on the trillion-dollar infrastructure package if the bill makes its way to President Joe Biden’s desk.
• But far less populous states — such as Montana and Alaska — will get the most money per capita.
• The Senate overwhelmingly approved the $1 trillion infrastructure bill earlier this month. The House aims to pass the bill by October.

Continue reading.

cnbc.com

by Thomas Franck & Nate Rattner

AUG 31 2021

When the Covid-19 recession hit hard in spring 2020, people feared that state budgets would collapse, driving cities and states to bankruptcy and crippling public services. Although we still must keep investing in public goods, the feared budget disaster didn’t happen. Why? Prompt government action, including unprecedented steps by the Federal Reserve and massive federal spending.

Remember the headlines? In May 2020, the New York Times NYT -1.3% saw state services decline “as virus ravages budgets.” The US Conference of Mayors put a “Fiscal Pain Tracker” on the internet, detailing the cuts being made across America’s cities, big and small. In August, National Public Radio said “States Are Broke And Many Are Eyeing Massive Cuts.”

I was among those fearing deep harm from the Covid-19 recession. In May 2020, I endorsed a $1 trillion spending package for states and cities, arguing that “collapsing” tax revenues were undercutting public sector jobs and threatening the macroeconomy.

Continue reading.

Forbes

by Richard McGahey

Sep 1, 2021

• Combined payrolls fell in August for first time since February
• Employment levels still below pre-pandemic levels despite aid

State and local governments shed employees in August, underscoring the impact of the latest surge in U.S. coronavirus infections and the cautious approach municipalities have been taking with their windfall from federal aid.

August payrolls for nonfarm state and local government employees fell by about 11,000, according to Bureau of Labor Statistics data released Friday. The decline followed steady gains for most of 2021 and represents the first drop since February.

The losses took place against a backdrop of a weak overall hiring across the economy in August, which produced the smallest job gains in seven months.

The lethargic rebound at the state and local level — in particular in education, where pandemic-related staffing fluctuations are roiling hiring — is significant, though: The state and local areas combined account for about 12% of total employment.

“The pandemic is weighing on the labor market again,” said Teryn Zmuda, chief economist at the National Association of Counties. “Overall the jobs report did not perform as we hoped for or expected.”

Municipalities received $350 billion from the federal government to ease the blow of the pandemic and to stave off the sort of cuts that hampered growth in the years after the 2008 financial crisis.

Education Losses

Still, the 466,000 jobs gained in the sector since January 2021 leaves states and localities 780,000 positions short of their January 2020 levels, according to the BLS data. Of note, around half of that deficit is from education jobs.

The gap should continue to close as the governments build and implement programs to spend the unprecedented federal aid distributed as part of the American Rescue Plan. States have spent or appropriated at least $81 billion of the $200 billion they received, according to data compiled by Bloomberg. The measured approach is evident at the local level as well, Zmuda said.

The fact that state and local job losses have been concentrated in education is a promising sign for recovery, said Mikhail Foux, head of municipal strategy at Barclays Plc. He sees next month showing a bigger rebound as schools reopen and resume in-person activity.

“We expect September job numbers to be substantially stronger,” he said.

Bloomberg Economics

By Fola Akinnibi

September 3, 2021

— With assistance by Amanda Albright, and Olivia Rockeman

Joe Mysak, Editor of Bloomberg Brief: Municipal Market, discusses the latest news from the muni market. Hosted by Paul Sweeney and Matt Miller. (Taylor Riggs fills in for Paul Sweeney)

Play Episode

Bloomberg Radio

September 3, 2021

• Fund manager plan to close to new money may signal overheating
• Citi sees high-yield muni spreads widening, valuations falling

The riskiest part of the $4 trillion municipal bond market may see demand fade as the largest fund devoted to buying that debt closes its doors to new investors, according to Citigroup Inc. strategists.

Nuveen’s plan to limit new money in its high-yield muni fund signals to investors that the market for riskier tax-free bonds may be overheating, strategists led by Vikram Rai wrote this week, in a report that doesn’t mention the asset manager by name.

In addition to the signaling effect, Nuveen’s fund accounts for almost a fifth of the assets under management by high-yield muni asset managers, according to Citigroup. Even if existing holders keep adding money, and new investors hand their dollars over to other firms, the fund is big enough to have an impact on the overall market as its demand slows.

“You can expect spreads to cheapen because one, people will buy less and secondly the largest mission fund manager will also buy less,” Rai said in an interview.

The strategists estimate that the Nuveen fund’s demand for new securities will drop by about 50%. But it’s unusual for muni funds to close their doors to new investors, so it’s hard to know what the net decline will be for demand overall in the market as at least some investors pour money into other funds, they wrote.

In addition to high-yield municipal bonds getting weaker relative to Treasuries, valuations will likely fall overall, Rai wrote. Any declines would come after the securities lost 0.2% in August on a total return basis, the first monthly decline since February, according to a Bloomberg index. The debt has still gained 7.2% this year.

Nuveen said last month that its High Yield Municipal Bond Fund, run by John Miller, plans to close to new investors at the end of September. It has returned around 15% over the past year, better than all but 2% of its peers, according to data compiled by Bloomberg.

Junk and unrated munis can fund a range of issuers, including airline-linked projects and convention centers. Investors have poured nearly $18 billion into funds buying these securities this year, as an improving economy and federal bailouts for state and local governments have made many fund buyers more willing to take risk.

Meanwhile, there are only so many opportunities to buy high-yield muni bonds now, Citigroup strategists wrote, noting “demand far exceeds supply.” Buying investment-grade securities would depress returns for these funds.

Nuveen’s move came after Invesco in May said it was closing its high-yield muni fund to new investors.

Bloomberg Markets

By Skylar Woodhouse

September 1, 2021, 11:48 AM MDT

— With assistance by Romy Varghese

• Bloomberg benchmark shows tax-free debt down 0.37% in August
• Market still up for the year, beating Treasuries, corporates

State and local government debt is poised for the first monthly drop since February, stepping back from a rally that made it one of the best performing corners of the bond market.

The securities have posted a loss of 0.37% since the start of August, according to Bloomberg’s benchmark index, as yields rose on speculation about when the Federal Reserve will start tightening monetary policy.

The decline is a shift after five straight months of gains that have allowed tax-exempt bonds to eke out a positive return so far this year, in contrast the overall losses for both Treasuries and investment-grade corporate debt.

“The market just can’t keep rallying,” said Vikram Rai, head of municipal strategy for Citigroup Inc. He said the returns are not “deeply negative,” so the dip isn’t likely to shake up investor sentiment or cheapen heady valuations that have frustrated investors for much of the year. “August is just a minor correction.”

The advance this year came as investors plowed record amounts of cash into mutual funds, fueling high demand for the bonds. That helped hold down yields and earlier this year pushed a key measure of valuations to an all-time high. That influx has continued to hold up despite the price retreat.

James Iselin, a portfolio manager at Neuberger Berman Group, said that tax-exempt bonds have been extremely expensive relative to Treasuries and it’s natural to see “a modest pullback” as trading slows at the end of the summer.

“Things can’t go up forever,” he said.

“A lot of people in the market aren’t upset to see a little backup in yields off these levels,” he added. “The market got a little bit tired and, with Treasuries stopping the huge rally that they had and going the other way, it makes sense that munis came a little off their highs.”

Bloomberg Markets

By Danielle Moran and Skylar Woodhouse

August 31, 2021, 11:33 AM MDT

The two active bond insurers combined for a total of $18.75 billion of insured par in the first half of 2021 in 1,164 deals, up from the $14.04 billion in 985 transactions in the first half of last year.

They are on pace for the most insured par since 2008 and best market share since 2009.

Assured Guaranty Municipal Corp. and Build America Mutual insured 8.4% of the market, measured by par, according to Refinitiv data, the highest since it was 8.64% at the end of 2009. Pre-pandemic, the wrap rate was roughly 6%.

The first-half insured par is up 31% year-over-year compared to the overall market volume growth of 15%. The number of insured transactions is up 88%, while the total transaction count in the muni market increased by 19%.

Insurance usage was up 77.5% in the first quarter to $8.71 billion from $4.91 billion in the same time the year before, while the second quarter was up 9.9% to $10.04 billion from $9.14 billion.

Assured Guaranty (AGO) accounted for a total of $10.74 billion in 543 deals in the first half of 2021, compared to $7.84 billion in 476 deals a year prior. Those figures include Assured’s subsidiary, Municipal Assurance Corp, according to Refinitiv data.

“Assured Guaranty’s U.S. municipal bond insurance production was outstanding during the first half of 2021, guaranteeing 58% of new issue insured par sold,” said Robert Tucker, senior managing director and head of investor relations and communications at Assured. “The $11.1 billion (inclusive of a corporate-CUSIP transactions) Assured Guaranty (AGO) guaranteed in the primary market was 34% higher than the amount of new-issue insured par sold that it guaranteed in the first half of 2020 and, looking back to a comparable period just before the pandemic, 73% more than the amount of new-issue insured par sold that it guaranteed in the first half of 2019.”

Tucker added that the results were achieved in a market where municipal interest rates hovered near historic lows and credit spreads tightened.

“Year over year, the financial guaranty industry’s total first half insured par was up 34%, more than double the 15% rate of increase for total par issued in the U.S. municipal bond market,” Tucker said.

Build America Mutual was credited by Refinitiv with $7.54 billion in 584 deals or 41.2% of the two-insurer market share in the first half of 2021, up from its first half 2020 total of $6.09 billion in 504 transactions.

“Insured bond volume is growing significantly faster than the market overall, and that is likely to be a lasting change: 48 underwriters priced transactions with BAM insurance in the first half, and we find that dealers who have had positive experiences selling BAM-insured bonds are more likely to utilize us again in the future,” according to Scott Richbourg, head of public finance at BAM.

Assured Guaranty (AGO) reports continued heightened demand for its financial guaranty insurance on larger transactions, where high demand typically signals interest from institutional investors.

In the first half of 2021, Assured Guaranty (AGO) selectively insured 21 transactions of $100 million or more in insured par, Tucker said.

“Assured Guaranty also continued to add value on double-A credits, insuring $2.3 billion of par on 56 transactions in this category during the first half of 2021,” he said. “Overall par volume of municipal bonds issued has been strong year-to-date as monetary and fiscal policy drive economic recovery. Additionally, to the extent high-net-worth individual investors anticipate higher tax rates, the demand for tax-exempt income tends to increase.”

Tucker noted that taxable issues made up a quarter of the par amount issued in the U.S. municipal bond market year-to-date and that Assured Guaranty (AGO) believes these issues are attractive to taxable buyers because of the currently high relative value of taxable municipals versus corporate bonds.

“Some buyers of taxable municipal bonds, including international buyers, may prefer insured bonds because they are less familiar with U.S. municipal credit and benefit from the underwriting experience of the financial guarantor,” he said. “Bond insurance penetration of first-half taxable new issue par sold reached 10%, and Assured Guaranty (AGO) insured $3.9 billion of taxable new-issue par sold, which was about two-thirds of the taxable new-issue insured par sold.”

BAM’s Richbourg said the insurer is seeing increased utilization on sales with underlying ratings in the double-A category, which allows the mutual insurer to achieve substantial growth without changing its credit appetite.

Both of the major insurers bring AA financial strength ratings from S&P Global Ratings to the paper they wrap.

“We anticipate that new-money volume will be stronger in the second half and into 2022 as issuers gear up their capital plans post-COVID, and our guaranty will be a helpful tool for them,” he said.

Grant Dewey, head of capital markets at BAM, noted the ?uneven? economic recovery from the COVID-19 pandemic.

“Even though municipal bond yields began and ended the first half at about the same level, there were some significant swings in the interim,” he said. “We saw weakness in the first quarter based on inflation concerns, which then reversed when the Delta variant began to spread more widely in Q2.”

He added that institutional investors, in particular, recognize that insured bonds can be more stable during those periods of volatility.

“So their appetite for a BAM wrap has remained elevated as compared to similar pre-COVID market conditions,” he said. “We’re also continuing to see strong interest on taxable transactions from buyers who are relatively new to the municipal market, and value BAM’s deep knowledge of the sector and the liquidity of BAM-insured bonds.”

By Aaron Weitzman

BY SOURCEMEDIA | 08/23/21

The severe drought covering the Western U.S. threatens the economic health of municipalities and may force them to pay more for bonds that fund local projects.

The extreme drought that has gripped much of the western United States has shriveled crops, stoked wildfires, and drained reservoirs across several states. According the U.S. Drought Monitor, more than 60 million people are currently living under drought conditions in the region. For some cities, lack of water could be a fiscal as well as an environmental disaster: Prolonged droughts are threatening the creditworthiness of local governments, utilities and irrigation districts.

According to a new report from S&P Global Ratings analysts Jane Ridley, Chloe Weil and Nora Wittstruck, drought-struck municipalities may generate less income from their water systems because there’s less to sell or they may have higher costs to provide adequate supplies. While cities and utilities can manage a year of dry weather, the drought conditions west of the Rocky Mountains have persisted since May 2020, with no end in sight. These conditions could slow overall local economic growth and dent property values, creating “revenue implications that can lead to rating changes.”

Lower credit ratings would force local governments and utilities to pay higher interest rates on bonds they issue to fund general operations and special projects. “Cities finance their infrastructure projects with debt, so this could have a significant impact on their ability to do so,” said Danielle Spiegel-Feld, executive director of the Guarini Center at New York University’s law school, which focuses on sustainable energy and environmental practices.

Cities may also need to restrict water use for residents and farmers, as well as limit commercial and residential development in areas where the water supply may be insufficient to sustain additional growth, S&P said.

“In some ways, cities are between a rock and a hard place in terms of financing their debt,” Spiegel-Feld said. They need to limit development in areas prone to flooding, for example, but also need the property tax revenue from building on valuable land.

But lower ratings shouldn’t be a near-term problem for cities, said Bloomberg Intelligence analyst Eric Kazatsky. “Credit spreads in munis are at all-time lows, across the curve and credit spectrum,” he said.

Higher borrowing costs from extreme dry weather would add to expenses governments are already shouldering to shore up infrastructure, deal with damage from other extreme climate events such as floods and wildfires, and supply adequate power.

California’s hydroelectric production in the first four months of this year is 29% of that generated in the same period two years ago; the hydroelectric facility on Lake Oroville, for example, was forced to shut down for the first time when water levels dropped too low at the beginning of August. In Nevada, Lake Mead’s capacity is at 35%, the lowest since the area that sends water and power throughout the Southwest was created. Both situations could force local utilities to turn to more expensive — and less climate-friendly — options, such as natural gas powered plants, S&P said.

The water problem is part of a bigger puzzle for cities to solve on the overall environmental, social and governance front, with the S&P analysts writing that water considerations “will be part of issuers’ ESG planning as they address what could become the ‘new normal’ across the West.”

Bloomberg CityLab

By Lauren Coleman-Lochner

August 23, 2021

Property dedication requirements and eminent domain usually don’t mix well:they make for an odd and confusing set of valuation rules. For example, if an agency seeks to condemn property to build a road through an undeveloped area, but that road would be required in order to develop the properties, how should it be valued? Under one set of eminent domain rules (the Porterville doctrine), the property subject to dedication has little value since it would have to be given up as part of any future development. Under another set of eminent domain rules (the “project influence rule”), the road project should be disregarded as part of the valuation. These rules create an inherent tension for valuation purposes that courts have struggled to resolve. A recent Court of Appeal decision, City of Escondido v. Pacific Harmony Grove Dev., 2021 Cal. App. LEXIS 706 (Aug. 26, 2021), provides some guidance on what valuation methodology should apply.

Background

In Pacific Harmony, the city filed an eminent domain action to acquire a strip of land for a road extension. The road extension had long been on the city’s circulation element of its general plan, and a city ordinance required any owner developing property to dedicate public improvements to conform to the general plan. The city had also previously entered into a development agreement with a nearby hospital pursuant to which the city agreed to extend the road with contributions from the hospital and surrounding developers. With the anticipated road extension coming to fruition, the surrounding properties were up-zoned for industrial use (as opposed to low-density residential).

In the condemnation action, the city argued that the strip of land had nominal value ($50,000) since it would have been required to be dedicated as part of any future development. The city provided extensive testimony as to why the road dedication was roughly proportional to the impacts of any development (including increased daily trips from a new industrial development, the costs for the owner to build its own access road, etc.). The owner claimed the road was not necessary, as it could utilize an existing road which had sufficient capacity, and therefore the strip of land should be valued based on its industrial highest and best use, resulting in compensation of nearly $1 million. The owner also argued that the city was liable for precondemnation damages since it waited more than 10 years to condemn after entering into the development agreement which committed to build the road.

The trial court concluded that the strip of land should be valued at its unimproved value since it would have been required to be dedicated as part of any future development, and such a dedication requirement was constitutional (it was roughly proportional and rationally related to any future development impacts). The court also concluded that the “project-effect rule” did not apply, since the dedication was not put in place to impact the value of the property, but instead to mitigate the traffic burdens created by a future development. Finally, the court held that the owner was not entitled to precondemnation damages as there was no unreasonable delay in pursuing the condemnation or the road extension project. The owners appealed.

Court of Appeal Decision

The Court of Appeal walked through the two competing arguments on valuation: how to take into account the dedication requirements while also disregarding project influence.

Dedication Doctrine

With respect to the dedication issue, the Court explained that pursuant to the Porterville decision, “when a city would lawfully have conditioned development of property upon the owner’s dedication of a portion of the property” to mitigate the impacts of the development, “the fair market value of that portion in a subsequent condemnation action is its value in its undeveloped, agricultural state,” rather than in its highest and best developed state.” The rationale for this rule is that because the owner could not develop the portion of land subject to dedication, no willing buyer would purchase that portion for more than its undeveloped value, and therefore that is what the acquiring agency should pay. In order for this valuation approach to apply, the dedication requirement must be constitutional (roughly proportional and rationally related to the impacts from the proposed development), and it must be reasonably probable that the condemning agency would actually impose the dedication requirement as a condition of development.

Project Influence Rule

With respect to the project influence rule, the Court explained that the rule prohibits the fair market value of condemned property from being influenced by the project for which the property is being condemned. For example, if the government is condemning property to build a sewage plant, the government does not get a discount because its project renders surrounding properties less valuable. So if municipal zoning actions were enacted to suppress property values before an intended taking, the zoning law must be disregarded when valuing the condemned property.

These two concepts present an inherent conflict: the dedication approach allows a city’s dedication requirements to depress the value of condemned property, while the project influence rule prohibits it. In order to address this conflict, courts look at a “date of probable inclusion” to determine which rule applies. If the dedication requirement arose before the date of probable inclusion, the dedication approach applies, but if it arose after, the project influence rule applies. The date of probable inclusion is determined when a public agency is engaging in a public project for which it intends to acquire property, and it must be probable that the property at issue would be included in that project. Where a general plan and circulation element require a strip of land be dedicated for a roadway if the larger parcel is ever developed, the designation itself does not make it probable that the agency would condemn the strip (and hence does not trigger the date of probable inclusion).

Here, the Court concluded that the dedication requirement was constitutional, as the city did “its constitutionally required homework” to ensure that its dedication requirement was proportional to the impacts caused by developing the property. The Court also agreed that the project influence rule did not apply because the dedication requirement arose as part of the general plan and circulation element, which were in place long before the “date of probable inclusion”. The Court held it would result in a windfall to compensate the property owner for an industrial use of the strip of land when the owner would have been required to dedicate that land in order to achieve an industrial development.

With respect to the precondemnation damages claim, the Court explained that the owner is required to demonstrate that the public agency acted improperly by either unreasonably delaying an eminent domain action following an announcement of an intent to condemn or by other unreasonable conduct, and the actions must have resulted in a diminution in value. There must also be some formal announcement or other official act or expression of intent to acquire the property in question (i.e., the agency’s activities must go beyond the planning stage to reach the acquiring stage).

Here, the city’s entering into a development agreement with the hospital committing to build the road 10 years before filing the condemnation was not unreasonable; the city still had to go through general planning and environmental approvals, and regardless, the owner did not suffer any damages as a result.

Take-Aways

Dedication requirements will continue to create complex, fact-specific inquiries to determine the appropriate valuation methodology. Government agencies will likely continue to require owners to dedicate property for public improvements as part of future developments, and may resort to condemnation when necessary to complete those improvements. Property owners should be informed regarding the conditions or exactions placed on their property, and understand the constitutional factors and valuation methodologies that come into play.

Nossaman LLP – Bradford B. Kuhn

California Eminent Domain Report

August 27 2021

• Massachusetts’ documents show how little banks’ will charge
• But there may be a hidden downside for states and cities

Every once in a while, a state or local government’s request for underwriting services will have a question that illuminates what’s going on in the municipal-bond market at large.

Massachusetts’ request from May 2020 is one of them. It asked for something rather mundane — their underwriting takedown for every $1,000 of bonds sold. That’s effectively what the banks’ main fee would be upfront, a key measure of the total cost of floating a bond issue.

Underwriting fees have declined steeply since the 1980s, when negotiated fees were more than $20 per $1,000 of bonds, and had more or less continued on the downward drift in recent years. This year, they’re around $5.15 overall, according to data compiled by Bloomberg.

But for a big-name client like Massachusetts, underwriters, it seems, are willing to work for much less. Sue Perez, the state’s Deputy Treasurer for Debt Management, said the takedowns on its bond deals has been in the $2 to $3 range since at least 2014.

Sixteen banks applied to underwrite all three transactions mentioned in the RFP. None wanted more than $3, according to copies of the responses received through a public records request. Bank of America Corp., the market’s underwriting behemoth, was willing to work for just 50 cents, as was Morgan Stanley, on one-year maturities. Both won top slots.

I was shocked because I hadn’t realized takedowns had shrunk to so little. But David Erdman, Wisconsin’s capital finance director, assured me in an email that this collapse had come in the past two or three years, and that “starting 3-4 years ago firms have stopped even asking for a management fee,” formerly levied for running a syndicate.

This takedown death-ride has come as a result of both issuers and their advisers pressing for it, but also banks on their own just offering it, said Erdman. There’s often been a shortage of bonds to go around, and banks have been eager to land inventory for their clients.

All told, this seems like a great thing. That means it costs municipalities less to gain access to the bond market, right?

And this is true, but there are two elements to “how much you pay.” The first is one-time professional fees, like those for underwriters, that are transparent. The second is how the actual bonds are priced, which has a much more long-term and costly impact, and is more murky.

Lee McElhannon, director of bond finance for the Georgia State Financing and Investment Commission, said the more those transparent fees are cut the more important it is to see whether the banks are underpricing the bonds.

That would make it a lot less work to sell them and maybe even deliver a quick gain to early investors. But all that would come at the government’s expense, which perhaps could have paid a lower interest rate for many years to come.

This seems especially important for smaller issuers who may not have the knowledge or ability to evaluate how their bonds are priced, or who may not even care. You would do well to remember that most of the municipal market’s issuers — beyond states, major authorities, some large cities and counties — are small and relatively unsophisticated.

“Your financial adviser better be very good at pressing them on preliminary and final scales, and even then you might see some interesting secondary market trades for a week or so after pricing,” McElhannon said in an email. “Underwriters are pricing bonds so they move the bonds and don’t take on any (significant) risk.”

That may not be the case for big, sophisticated issuers like Massachusetts, who comprise a very small portion of the market. Yet other public officials chasing after those rock-bottom fees may do well to remember that sometimes, well, you get what you pay for.

Bloomberg Markets

By Joseph Mysak Jr

August 24, 2021

View the current list. (Registration required.)

27 Aug, 2021

Fitch Ratings-New York-25 August 2021: Fitch Ratings has resolved the ratings of all Life Plan Communities (LPCs) placed Under Criteria Observation (UCO) in March, following the release of its revised LPC rating criteria.

Of the 22 ratings placed UCO, four were downgraded: one driven solely by criteria factors, one driven solely by credit reasons (a large additional borrowing), and two driven by a combination of criteria and credit factors. The remaining 18 were affirmed.

Updated review status of UCO names is available in the special report linked above.

Contact:

Margaret Johnson, CFA
Director — Sector Lead, Senior Living
+1 212 908 0545
Fitch Ratings, Inc.
300 W. 57th Street
New York, NY 10019

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com

HIGHLIGHTS

A regional investment bank is looking into upgrading its credit and climate workflow processes. By working with S&P Global Market Intelligence, the bank was able to automate its credit and climate data collection process, acquire a transparent approach to understanding creditworthiness of financial advisory clients, and help the firm win the underwriting of new deals.

This regional investment bank advises over 100 municipal clients and underwrites dozens of deals annually. The financial advisory team supports their clients with the issuance of new debt and navigating the credit rating process. Separately, the underwriting team facilitates the purchase and resale of new municipal securities, where having a deep understanding of credit and climate risks is essential in structuring a deal. Also, the company was aggressively looking to add more clients. Given the importance of these functions to these departments, the company was interested in upgrading its credit and climate workflow processes. By working with S&P Global Market Intelligence (Market Intelligence), the company achieved these goals of automating its credit and climate data collection process and providing a simple to use, completely transparent approach to understanding creditworthiness of financial advisory clients and helping the firm compete, win and promote the underwriting of new deals.

Pain Points
The Public Finance financial advisory and underwriting teams had been struggling with their internally developed solution, which was not adequate for the company’s needs. Specifically:

• Lacked an understanding of client climate risk: The company did not have the data or process to assess the impact of climate or physical risk for its clients or new deals they were taking to market.
• Internal credit models were misaligned with Rating Agency criteria: Since the company’s credit models were not annually recalibrated and updated, they were not reflective of the current methodology including environmental and social factors. Consequently, they were generating credit results that had material credit scores different than the public ratings. So, when scenario analyses were conducted (e.g. new debt) the results were inconsistent.
• Needed innovative approaches to win new business: The business was increasingly competitive, and they needed to identify ways to differentiate themselves from competitors.
• Cumbersome surveillance process: The process the company used to conduct annual reviews of their customers was manual and time consuming.
• Insufficient data coverage: The company was spending more time trying to obtain the necessary data than it was conducting the analysis.
• Gaps or lack of expertise for certain public finance segments: The company had difficulty entering new Public Finance segments because they lacked the expertise or did not have the appropriate segment specific credit models (e.g. higher education, healthcare, housing, general obligation, transportation, water & sewer).

The company’s Public Finance team adopted the Market Intelligence’s Public Finance Automated Scoring Tool (PFAST) solution to address these challenges.

The Solution
Market Intelligence recommended PFAST, an Excel-based suite of Market Intelligence Credit Assessment Scorecards that is both an automated credit scoring and data solution enabling users to:

Assign credit scores to the vast majority of the company’s municipal customers
PFAST offers broad Public Finance sector coverage, including:

• General Obligation issuers or states, cities, counties, and school districts
• Water and Sewer utilities
• Not-for Profit Health Care including health care systems and hospitals
• Not-for-Profit Higher Education including private and public/state institutions
• Transportation including airports, mass transit, toll roads, bridges, and tunnels
• Housing including single- and multi- family agencies

Understand your client’s climate risks
Understanding your client’s susceptibility to 18 different natural hazards and potential economic loss from those natural disasters will help you better and more proactively manage your clients. PFAST also includes a quantitatively based summary environmental/social score for every municipal entity where data is available.

Win new business by differentiating yourself from your competitors by providing credit and climate insights
PFAST will provide easy to identify credit and climate finding that will highlight your command of new and existing clients. Leverage our unrivaled ability to create local, regional, and national benchmarks for prospective clients given our vast database of both rated and unrated issuers.

Automate the spreading for all S&P rated General Obligation, Water & Sewer, Healthcare, Higher Education and Airport Obligors
Market Intelligence has collected more than three years of financial and economic data for all rated general obligation issuers, water & sewer, healthcare, higher education, and airports. The data and credit scoring are fully automated by simply using an identifier (CUSIP or S&P Capital IQ ID).

Monitor your customer credit quality in minutes
By simply inputting an identifier a user can generate overall credit risk scores for your complete public finance customer portfolio.

Conduct scenario analysis
Additional functionality for conducting “what-if” scenario analysis for your municipal portfolio.

Key Benefits

The PFAST solution provides an automated credit scoring tool for all US cities, counties, and school districts and water and sewer utilities. A similar approach is also available for the major rated revenue bond segments. Key benefits include:

• Broad scope of application with sector-specific credit scorecards and data for General Obligation and Revenue Bonds including Water and Sewer, Not-For-Profit Healthcare, Not-For-Profit Higher Education, Transportation and Housing.
• Climate Risk data and scores that identifies the susceptibility and potential economic from 18 different natural hazards fully mapped to every U.S. county.
• Methodology transparency of the Scorecard including all risk factors, weights, benchmarks, and scoring algorithms.
• Training and ongoing analytical assistance to help groups understand the range of available capabilities and continue to get the most out of the solutions.
• Quickly get up to speed in public finance credit analysis with our easy to use Scorecard User Guides and 24/7/365 support from our global customer support team.
• Validation support through annual technical documentation that explains Scorecard methodology and testing.
• Extensive coverage and continually growing database of municipal entities financials and economic data.

Click here to learn more about the Public Finance Automated Scoring Tool (PFAST), mentioned in this case study.

Fitch Ratings-New York-23 August 2021: A stronger economy and Federal Aid have helped U.S. states weather the disruption caused by the coronavirus pandemic with a smoother budget season firmly in place for 2022, according to Fitch Ratings in its latest annual report for U.S. state budgets.

Fiscal 2022 budgets have been enacted so 47 states so far with North Carolina, Oregon and Michigan (whose fiscal year begins on October 1) as the only outliers so far. This represents a return to more normal budgeting and is in stark contrast to the upheaval the pandemic induced last year that led to a steep drop in state tax revenue.

Many states are still determining how to allocate funds received under the American Rescue Plan Act, and renewed concerns about the trajectory of the pandemic pose a downside risk. That said, ‘Strong fiscal 2021 revenue performance led many states to make upward revisions to their forecasts for fiscal 2022, bringing many close to pre-pandemic revenue estimates,’ said Senior Director Karen Krop.

Going into this latest fiscal year, a primary focus for states will be rebuilding their budget resilience through adding to reserves and paying down liabilities. Whereas only a few states drew on their rainy day funds to close out fiscal 2020 and several budgeted reserve draws in fiscal 2021, states are now drawing down reserves less than budgeted and are adding to reserves in fiscal 2022.

‘With additional available revenues, many states are addressing issues such as displaced workers and employment issues, mental and other health programming, and education spending,’ said Krop. ‘Health care is also still a key driver with many states using additional available tax revenues to support various programs, though several states are still struggling with whether or not to expand Medicaid under the Affordable Care Act ten years after its passage.’

‘U.S. State Budgets Bounce Back in 2022’ is available at www.fitchratings.com.

Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
Hearst Tower 300 W. 57th Street
New York, NY 10019

Eric Kim
Senior Director, Head of U.S. State Government Ratings
+1-212-908-0241

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com

Grassroots groups are imploring federal officials to make sure local governments get relief to those most in need, rather than banks.

Dozens of community organizations from across the U.S. want Treasury Secretary Janet Yellen to issue rules that direct the latest round of relief funds into communities hardest hit by the pandemic and away from state and local debt repayments and police budgets.

Fifty-seven national and local groups are sending Yellen and President Joe Biden a letter Tuesday to maintain the current ban on states and cities using American Rescue Plan Act funds to repay debt. They also are asking that the aid not boost police budgets. Paying back loans and increasing funding for cops would come at the expense of community needs such a rental assistance, mental health programs, child care, homeless services and violence prevention, according to interviews with the organizations and local elected officials.

The groups are making a public push in response to efforts and comments submitted by state and local officials to the Treasury since May that seek to change or ease interim rules on the use of the funds. The rescue plan enacted in March is sending $350 billion in aid to state and local governments, which are now debating how to appropriate the unprecedented amounts.

“Congress passed the federal relief to go directly into communities,” Bahar Tolou, a campaign director in Los Angeles for the Action Center on Race and the Economy, said in an interview. “The relief money is in real danger of being diverted.”

ACRE, one of the lead organizations sending the letter to Yellen, is among groups from New York, Philadelphia, Detroit, Milwaukee, Chicago and Sacramento that advocate for workers, minority communities and lower income neighborhoods. They are trying to shine a light on the needs of communities after the pandemic exacerbated long-standing income gaps. Now is not the time to send money to Wall Street banks, expand police budgets or give corporations tax cuts, according to the letter.

“Every year, public dollars are already siphoned off by banks through high cost municipal debt and for corporate tax benefits, draining hundreds of billions from neighborhood services, enabling the conditions for over-policing, and exacerbating racial and economic inequality in communities,” according to the letter. “These are the very conditions that made Black and brown communities so vulnerable in the pandemic.”

Ongoing Argument

The debate over how to best use the unprecedented infusion of federal aid is playing out across the country. Philadelphia is among the cities that have asked the Treasury to reconsider and allow debt service to be paid with the money.

The city wants to “generate the highest impact for our residents,” Ashley Del Bianco, Philadelphia’s chief grants officer, said in an emailed statement. “Using a portion of our ARP allocation for debt service would allow us to provide services that are key to the economic recovery of our region.” Debt service funds projects that “directly benefit residents,” she said.

Philadelphia Councilwoman Kendra Brooks is among those who want the city to instead use the aid to address the “root causes of poverty.” For example, officials should use the funds to boost support for a mobile crisis program run by social workers rather than police, she said.

“ARPA is so unprecedented. It can have long lasting impacts,” Amanda Kass, associate director of the Government Finance Research Center at the University of Illinois in Chicago, said in an interview. “It’s great to see this kind of debate taking place.”

In Chicago, where the budget process is just getting started, officials are planning to use the funds to provide fiscal relief and still abide by the rules. Before the Treasury’s interim guidance banned using the funds for debt repayment, Chicago Mayor Lori Lightfoot’s administration had floated the idea of using ARP funds to repay a $465 million loan the city took in 2020 from JPMorgan Chase & Co. Since then, the city has said that eligible reimbursements under the Treasury’s interim rules will open up money in its main operating fund to pay back the debt and cancel another refinancing it had planned for this year.

Alderman Daniel La Spata argues that using $782 million of ARP funds to pay for expenses in Chicago’s corporate fund, which pays for services including policing, as the Lightfoot administration has proposed, and then using the money that’s freed up to pay the loan immediately, ignores the dire situation facing some residents.

“It’s within the letter of what Treasury guidance says but not the spirit,” said La Spata who wants to divvy up the city’s $1.9 billion in ARP funds for needs including mental health, child care and homeless services. “There are so many urgent needs.”

The department is “carefully reviewing” all input as it finalizes the rule, a Treasury official said Tuesday. In Sacramento, community organizer Christina Livingston said she’s worried the Treasury will relax the rules, as the city asked last month. Livingston is executive director of the Alliance of Californians For Community Empowerment, which advocates for low-income workers and people of color.

“Debt service should be included as an eligible expenditure, especially as a ‘negative economic impact’ of Covid-19,” Leyne Milstein, Sacramento’s assistant city manager, wrote in a comment on the Treasury’s website in July. “Debt secured prior to the pandemic, whose primary source of repayment is a specific source impacted by the pandemic, is especially challenged as many of these revenue sources declined precipitously and have yet to fully recover.”

Aug. 31 is the deadline for when states and larger municipalities must report to Treasury how much of the ARP allocation they’ve spent so far. In the meantime, the collective of grassroots groups is trying to sway the Biden administration’s stance on the rules.

“We don’t want this money spent on banks nor on police,” said Emma Tai, executive director of United Working Families in Chicago, among the community groups that signed the letter. “At this time, it’s so evident human need is so great.”

Bloomberg CityLab

By Shruti Singh

August 24, 2021

For the Philadelphia teacher Freda Anderson, setting up her classroom involves clearing plaster, dust and paint chips from tables, chairs and desks. Somewhere, a leak has allowed water to seep through the walls. Years of deferred maintenance have caused dust and paint chips to scatter across the room. This debris is not just a brazen reminder of state abandonment of public education — it is an active vector of harm. A report released this spring revealed an asbestos epidemic creeping through Philadelphia schools.

During the 2019 school year, 11 schools closed because of toxic physical conditions; a veteran teacher is suffering from mesothelioma, a lethal disease caused by asbestos. Ms. Anderson used to believe the best way to fix schools would be to hire more teachers, counselors and mental health providers, “but, honestly, now the first thing I would do is start reallocating money to fix the buildings,” she told me. “They’re just really dangerous.”

The question of how to finance Philadelphia schools’ $4.5 billion of unmet infrastructure needs — as well as hiring more teachers, counselors and nurses — has been a vexing issue for the community. Despite high levels of affluence in the city, inequitable distribution of state aid and regressive taxation, including hundreds of millions of dollars in local corporate tax breaks, have exacerbated budget shortfalls.

Continue reading.

The New York Times

By Eleni Schirmer

Aug. 27, 2021

In Southern California Alliance of Publicly Owned Treatment Works v. U.S. Environmental Protection Agency, — F.4th —, No. 19-15535, 2021 WL 3412744 (9th Cir. Aug. 5, 2021), the Ninth Circuit held that the Environmental Protection Agency’s (EPA) nonbinding guidance recommending a new statistical method for assessing water toxicity under the Clean Water Act (CWA) was not a reviewable final action under the Administrative Procedures Act (APA). Instead, challenges to the guidance must be made in the context of individual permit decisions.

Under EPA’s National Pollutant Discharge Elimination System (NPDES) program, the CWA permitting scheme, some permit holders must pass a whole effluent toxicity (WET) test which measures the “aggregate effect of a discharge on aquatic organisms.” Id. EPA previously recommended several statistical methods to satisfy the WET test requirements and in June 2010, recommended an additional method called the Test of Significant Toxicity (TST) in a separate nonbinding guidance document (2010 Guidance). Id. at *2. The plaintiffs, municipal wastewater trade associations, alleged that EPA violated the APA by issuing the 2010 Guidance and the TST without following notice-and-comment procedures. Id.

The Ninth Circuit affirmed the district court’s dismissal of the plaintiffs’ challenge on the alternative ground that the 2010 guidance was not a reviewable final agency action. Under the APA, plaintiffs are only allowed to challenge final agency action and an agency’s action is final only if it imposes legal consequences. Id. at *1.

The Ninth Circuit determined that the 2010 guidance does not impose any legal consequences on its own because it merely recommended the TST as another WET testing methodology from which permitting authorities may choose. Id. at *4. In fact, the court found that the 2010 guidance will not have legal consequences at all unless the TST is incorporated into an entity’s individual NPDES permit. The court explained that “an agency action is not final when subsequent agency decision making is necessary to create any practical consequences.” Id. The court, therefore, held that the 2010 guidance was not reviewable under the APA.

Plaintiffs argued that if they are not permitted to challenge the 2010 guidance in the district court, they will have no forum to do so. The Ninth Circuit disagreed and advised plaintiffs and other would-be challengers that the appropriate forum to challenge the TST and 2010 guidance is in the context of individual NPDES permit decisions. Id. at *5.

Taft Stettinius & Hollister LLP – Kristine Gordon

August 27 2021

It wasn’t just businesses that shuttered their doors when the pandemic struck last spring. With everyone suddenly telecommuting, municipal governments from Massachusetts to New Mexico were unexpectedly thrust into an entirely digitized world.

For many cities and counties accustomed to working in-person within closed or analog systems, adapting to the change was undoubtedly a challenge. Especially when it comes to budgeting, being able to adapt to the pandemic’s rapidly changing conditions has been a vital skill for municipal leaders over the last year, according to Charlie Francis, senior policy analyst at Questica, a California-based government administration software company.

“The ones that could respond and react most efficiently and strategically where the ones that had already made the transition from excel-based budgeting to cloud-based budgeting,” said Francis, who has spent 45 years working in government finance, including half as finance director at Sausalito, Calif.; Tracy, Calif.; and Indian Wells, Calif. Last year, he returned to Sausalito after the municipality’s finance director unexpectedly resigned in the middle of budget season.

Those municipalities still working with analog systems suddenly had to confront the question, “How do you collaborate when everyone is working from home?” he said. In this, cloud-based budgeting programs, which allow administrators to access data remotely and work together collaboratively, provide an answer for municipalities of all sizes.

According to Francis, digital budgeting systems have a number of benefits: First, data is accessible from anywhere. With built-in archives, there’s more time for municipal leaders to analyze historical and present-day data (a feature that was especially important last year, with town meetings held via video conference apps). It’s also easier to collaborate remotely when everything is digitized. And because digital data is accessible from anywhere and by everyone—citizens, too—trust in government is enhanced through transparency.

“One of the integral parts of going through a crisis like the pandemic is that you want to be able to communicate easily and accurately,” Francis said, noting that trade organizations like the Government Finance Officers Association can help municipal leaders set up digital cloud-based budgeting infrastructure (OpenGov, ClearGov and Questica are three companies that make cloud-based budgeting software).

Beyond digital collaboration, Francis said governments that early-on in the pandemic preplanned and developed scenarios for budgeting were better able to adapt. Based on those scenarios, they were able to leverage data in real time as challenges unfolded, adjusting quickly to meet community needs—a process Francis calls “continuous budgeting. In other words, as new data was coming in, they were recalibrating their figures,” he said.

Within the government finance community, this is “an emerging practice,” Francis said. “We went from line item budgeting … to priority-based budgeting. Continues budgeting is going to be the next wave.”

But it’s only made possible through technology advancements such as cloud-based budgeting. In an analog system, administrators have to crunch numbers derived from separate data sheets to estimate a specific performance results. Digital systems allow this data to be viewed in real time.

For example, in order to find out how much it costs to vaccinate one person, a financial officer working in an analog system might have to, by hand, combine the number of people vaccinated with the total amount spent on vaccinations, Francis said. “Modern systems can bring all of that into one place with a dashboard: ‘Here’s the number of people vaccinated; here’s the cost for each person to be vaccinated.’”

Another beneficial aspect of cloud-based budgeting is social features, which are increasingly being integrated.

“Governing and budgeting used to be (completed by) department heads … getting together and saying, ‘here’s what we think the services are that citizens need,’” he said. These days, “Citizens are finally telling us what services they need and how they would like them delivered. It’s more interactive, it’s more productive.”

As an example, he pointed to the civil unrest that erupted last year.

“We saw it going on during COVID—here’s how we would like to see police services delivered,” Francis continued. Instead of governments telling citizens how they were going to be managed, many communities across the United States called on their leaders to integrate different policing practices based on their personal experiences.

In looking to the future, Francis said he expects these governing tech-trends to continue long after the pandemic subsides and life returns to a semblance of what it used to be. The ongoing pandemic accelerated a shift toward the digital realm that had already started. A next step beyond continuous budgeting is budgeting based on “geo-predictive analytics”—a process through which municipal leaders allot funds based on predictive data. Francis said it’s already happening in some regions.

“The new generation of finance leadership has been born into an entirely digitized working (environment),” he said. “They’re used to using rules and algorithms.”

American City & County

Written by Andy Castillo

20th August 2021

• Market’s trading volume tumbles 34% this year to 22-year low
• Bonds have grown scarce with cash flowing steadily in

The loneliest place on Wall Street may be the muni-bond trading desk.

Even with the volume of new state and local government debt sales on pace to surpass last year’s record, trading activity has dried up considerably. The par amount of bonds traded has tumbled by 34% so far this year to $1.43 trillion, a 22-year low, according to data compiled by Bloomberg.

On average, about $8.9 billion of municipal bonds are changing hands each day, the least since 2001.

The dearth of activity is likely a side effect of the massive influx of cash into the $4 trillion municipal securities market, with mutual funds receiving an average of about $2 billion each week since the start of the year, according to Investment Company Institute figures.

As a result, money managers have faced brisk competition to get in on new bond deals and yields have held near the lowest in decades. And it seems those who own the securities are, on the whole, not eager to sell.

“Overall a lot more investors, whether they are participating in new issues or not, they are just holding on to their paper,” Jonathan Law, a portfolio manager at Advisors Asset Management, said in an interview Wednesday.

It doesn’t look like the gulf between supply and demand will narrow much soon. Over the next month, there’s about $10.6 billion of new municipal debt sales scheduled so far, according to data compiled by Bloomberg. That’s about $14.3 billion less than the amount of cash bondholders will receive from debt that’s being paid off, which they typically seek to reinvest.

Bloomberg Markets

By Shruti Singh and Skylar Woodhouse

August 25, 2021

— With assistance by Natalia Lenkiewicz

Fixed income investors can’t get enough of municipal bonds, putting exchange traded funds (ETFs) like the Vanguard Tax-Exempt Bond ETF (VTEB) in focus.

Even in the current challenging rate environment, investors aren’t thinking twice about picking up municipal bond exposure.

“The yield on the S&P Municipal Bond Index this summer fell below 1% for the first time since it was created in 1998,” a Wall Street Journal report said. “The index tracks returns on a selection of core municipal bonds from across the market and assumes any interest thrown off is reinvested. The yield in question—known as yield to worst—is the lowest rate the investor can expect to earn short of a default.”

“Still, investors can’t get enough of the bonds,” the article said, noting the high interest in munis. “Prices have surged even though outstanding muni debt has swelled by more than $100 billion in the year ended March 31, according to Federal Reserve data. Cities and states could probably sell an additional $89 billion in bonds without meaningfully driving down prices, according to an analysis of lending capacity by Municipal Market Analytics.”

Per the fund description, 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. This index includes municipal bonds from issuers that are primarily state or local governments, or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).

What’s Driving Demand for Munis?

One of the factors driving the strong demand for municipal bonds is their inherent tax advantages. That’s especially the case given the current U.S. presidential administration’s proclivity for raising taxes.

As such, getting tax-free income is a prime option to lower investors’ tax burdens. The other reason driving demand for munis is the relative stability of local government debt.

Local governments have been able to successfully stave off the effects of the pandemic, making municipal bonds a prime option for investors looking for a stable debt market.

“Meanwhile, many states, cities and counties have weathered the Covid-19 pandemic far better than expected, assuaging investor concerns that pandemic-related budget pressures could drive down the value of some local-government debt,” the Wall Street Journal article said. “Moody’s Investors Service raised its outlook on state and local governments to “stable” from “negative” in March, citing better-than-expected revenues and federal stimulus.”

ETF TRENDS

BEN HERNANDEZ

AUGUST 26, 2021

Prices surge, hurting yields for new investors, as Biden comments ignite tax-increase fears and local governments weather Covid-19

Everyone wants state and local-government bonds. That’s a good thing if you already own muni debt, and a bad thing if you’re trying to get your hands on some.

The yield on the S&P Municipal Bond Index this summer fell below 1% for the first time since it was created in 1998. The index tracks returns on a selection of core municipal bonds from across the market and assumes any interest thrown off is reinvested. The yield in question—known as yield to worst—is the lowest rate the investor can expect to earn short of a default.

Still, investors can’t get enough of the bonds. Prices have surged even though outstanding muni debt has swelled by more than $100 billion in the year ended March 31, according to Federal Reserve data. Cities and states could probably sell an additional $89 billion in bonds without meaningfully driving down prices, according to an analysis of lending capacity by Municipal Market Analytics. Bond yields rise as prices fall.

“If you’re sitting on bonds that were issued three to five years ago I would ride it out,” said Greg Zandlo, president of Minneapolis-based North East Asset Management. “It’s absolute gold.”

There are several factors driving the surging demand in munis.

Among them are concerns that President Biden and the Democratic-controlled Congress will raise taxes. Mr. Biden spoke about the possibility on the campaign trail; his comments have since made muni bonds and the tax-free income they provide more precious to many investors.

Meanwhile, many states, cities and counties have weathered the Covid-19 pandemic far better than expected, assuaging investor concerns that pandemic-related budget pressures could drive down the value of some local-government debt. Moody’s Investors Service raised its outlook on state and local governments to “stable” from “negative” in March, citing better-than-expected revenues and federal stimulus.

The surge in muni prices comes at the same time demand is high across markets, driving up prices for homes, equities and a range of other assets.

The nearly unending demand is crushing returns for prospective investors who want to earn tax-free interest. Still, bondholders who got into the market years ago are sitting on hefty returns.

Minnesota local-government bonds that Mr. Zandlo bought for clients about a decade ago yielded more than 3% annually until they were paid off recently, he said. Bonds he bought in the past few years are now trading at 10% to 15% more than the price he paid.

An investor who bought the bonds reflected in the S&P Municipal Bond Index 10 years ago and reinvested the interest he earned would have seen his investment grow 50%, said Brian Luke, head of fixed-income at S&P Dow Jones Indices.

The stampede into munis has pushed yields even below previous lows in February 2020, when investors spooked by early reports about Covid-19 viewed munis as a haven and rushed in.

Though prices plummeted briefly the following month amid a multimarket liquidity crisis, the pandemic hasn’t interrupted a decadelong slide in government borrowing costs. The median amount of annual interest state governments are paying as a percentage of their total outstanding debt fell to 3.4% in 2020 from 4.2% in 2010, according to preliminary data from Merritt Research Services.

Public officials have taken advantage, issuing $186.5 billion in new debt this year through Aug. 18, a 35% increase from last year and the highest since at least 2007, according to data from Refinitiv.

When the Chicago suburb of Lincolnwood, Ill., sold $9 million in bonds this month to pay for road and water-system improvements, officials expected to pay as much as 3%, said Finance Director Denise Joseph. Four bidders competed for the debt, she said, and the village ultimately agreed to yields ranging from 0.2% to 2.16% for bonds with maturities ranging from one to 20 years, sale documents show.

“It was a nice surprise,” Ms. Joseph said.

Much of the competition for munis is coming from asset managers charged with deploying an unceasing stream of investor cash. From the start of the year through the end of July, investors poured a total of $69 billion into municipal-bond mutual and exchange-traded funds, the most of any year since record-keeping began in 1992, according to data from Refinitiv Lipper.

In a recent New York City bond sale, institutional investors put in orders for about 70% more bonds than were available to them, allowing the city to slightly shave down interest costs, according to the city comptroller’s office.

“Every time a new deal comes to market, there’s this food fight from the institutional investors to grab as many bonds as they can get,” said Eric Friedland, director of municipal-bond research at asset manager Lord Abbett & Co.

The Wall Street Journal

By Heather Gillers

Aug. 24, 2021

• Muni-bond ETFs have pulled in $14.5 billion year-to-date
• Investors have become more comfortable with muni ETFs

Municipal-bond exchange-traded funds are attracting a record-breaking amount of cash in 2021 as investors get more comfortable with the investment tool and buyers flock to state and local debt.

The funds have pulled in $14.5 billion year-to-date, more than last year’s total of $14.4 billion, according to data compiled by Bloomberg. That’s the highest annual total on record since 2007.

Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research, said the funds are benefiting from increasing investor familiarity with bond ETFs. “This is a continuation of the adoption of ETFs as more investors are getting comfortable using fixed-income ETFs,” he said.

The influx into the funds also comes as investors continue to flock to the market for state and local debt, which pays interest that’s tax free and offers a shelter for wealthy Americans worried about higher taxes.

Mutual funds focused on municipal securities have seen inflows for 25 straight weeks, with investors adding about $1.87 billion to municipal-bond mutual funds during the week ended Wednesday, according to Refinitiv Lipper US Fund Flows data.

Within muni ETFs, the biggest, passively-run products continue to dominate inflows. The Vanguard Tax-Exempt Bond ETF, a $13.9 billion fund that trades off the ticker VTEB, has seen $3.5 billion of inflows this year, already an annual record for the fund and more than any other muni ETF tracked by Bloomberg. It’s also the cheapest muni ETF, with an expense ratio of just 0.06%.

Rosenbluth said buyers have continued to look to “extremely cheap” funds like VTEB that offer broad exposure to the municipal market. But he noted that the space is diversifying, with other funds starting to gain more sizable inflows.

For example, the nearly $2.1 billion JPMorgan Ultra-Short Municipal Income ETF, which is actively run and launched in 2018, has seen $941 million of inflows this year, the fourth-most of any muni ETF tracked by Bloomberg. And 40 of the 67 muni ETFs tracked by Bloomberg have more than $100 million in assets, Bloomberg data show.

“I’m particularly encouraged to see the breadth of ETF products that are gaining meaningful traction,” Rosenbluth said.

Bloomberg Markets

By Amanda Albright

August 27, 2021, 9:38 AM PDT

• Bloomberg Barclays high-yield index is down 0.09% this month
• Despite slowing inflows, Parametric not expecting outflows yet

The riskiest debt in the $4 trillion municipal-bond market is headed for its first monthly drop since February as the resurgence in Covid-19 cases in the U.S. increases uncertainty around the nation’s economic recovery.

The Bloomberg Barclays High Yield Index, which includes debt from convention centers and airline-backed projects, is down 0.09% this month. Investor appetite for the riskiest state and local debt is showing signs of slowing as inflows into high-yield muni mutual funds have fallen in five of the past six weeks, according to Refinitiv Lipper US Fund Flows data. High-yield muni mutual funds saw a $389 million inflow for the week through Aug. 18, the lowest in seven weeks.

“What caused the weakness is simply the Treasury yields rose a little bit and you have more uncertainty about the virus,” Kathleen McNamara, senior municipal investment strategist at UBS Global Wealth Management, said in an interview. “Those two things weighed on the market. It was due to take a little bit of a breather.”

High-yield munis have delivered outsized returns all year as the market rallied while yields on top-rated state and local debt stayed near record lows. Junk muni bonds surged as the U.S. economy reopened earlier this year and more Americans boarded planes, conventions restarted and office workers returned to high-rises thanks to the vaccine roll out. Now the resurgence of Covid-19 amid a slowdown in vaccinations and the emergence of the delta variant, is raising questions about the return to normal.

Last week, Nuveen said it plans to shut its high-yield municipal bond fund, the biggest focused on state and local government junk bonds, to new investors after the end of next month. The move follows a similar step by rival Invesco Ltd., which closed its $11 billion high-yield muni fund to new investors.

After five straight months of high-yield muni index returns topping 1%, “it’s not surprising to see some fatigue in August,” said Gabe Diederich, a portfolio manager for Robert W. Baird, which has $9.6 billion in muni assets.

“The tailwind of improved fundamentals, cash inflows, reopening and potential tax hikes set up lower quality municipals for a strong performance run,” Diederich said. “In recent trading sessions, it does seem as though the market is looking for additional clues on economic openness as well as monetary and fiscal policy.”

Some high-yield bonds are seeing spreads widen from just two months ago. For example, the spread on 30-year bonds issued in March 2020 by Illinois’s Metropolitan Pier & Exposition Authority for the expansion of McCormick Place, the largest convention center in North America, was 55 basis points over benchmark on Aug. 16, compared to 46 basis points in June.

The decline in high-yield munis could be temporary, according to Nisha Patel, a portfolio manager at Parametric Portfolio Associates LLC. They are still the best performing class within fixed income. There’s the prospect for higher tax rates, which bodes well, and lots of cash waiting to be invested as supply of new debt has lagged demand, she said.

“Outside of economic data deterioration, I don’t see how we see massive outflows as of now,” Patel said.

“Investors are just taking some pause here,” Patel said. “Munis are having a hard time continuing to grind lower in spreads” because investors are starting to question if the income they are getting is worth the higher risk, she said.

Bloomberg Markets

By Shruti Singh

August 23, 2021

— With assistance by Martin Z Braun

Explore the companies and municipalities accessing capital markets to drive economic growth in this state-by-state database.

View the SIFMA database.

In the latest edition, we talk with Shamiah Kerney, director of Baltimore’s new Office of Recovery Programs. Also, updates from St. Louis, Hoboken, N.J., and Memphis.

Continue reading.

ROUTE FIFTY

by BILL LUCIA

AUGUST 17, 2021

At least 10 states haven’t spent any of the aid from the American Rescue Plan legislation as officials grapple with how to use the unprecedented federal relief that Congress approved almost six months ago.

Tens of billions of dollars that U.S. states got as a lifeline from the Biden administration is sitting idle in local coffers already flush with cash.

Michigan has budgeted just 7% of its $6.5 billion allocation and hadn’t spent any as of last week. South Dakota officials haven’t even gotten around to asking for their $974 million allotted under the White House’s American Rescue Plan legislation. In West Virginia, a state website says detailed plans for its $1.35 billion are “COMING SOON.”

Officials nationwide are grappling with how to spend an unprecedented infusion at a time when their coffers have been replenished by a rebounding economy that in many cases is generating billions more in tax revenue than budgeted for.

Continue reading.

Bloomberg CityLab

By Amanda Albright and Danielle Moran

August 17, 2021, 6:54 AM MDT

Key Takeaways

• Water supply challenges could create credit pressure for municipal utilities, irrigation districts, and local governments resulting from either a materially unfavorable shift in cost or if the service area economy stagnates due to insufficient supply.
• Managing water demand, procuring drought-resistant supply, and maintaining storage will be critical to managing fluctuations in hydrology. Issuers with prudent rate structures and strong balance sheets will be best positioned to absorb disruptions in operations or revenue collections from hydrological variability.
• Drought-related credit pressures for local governments include potential limits on economic growth, heat waves that require assistance for residents, and climate change-induced hydrological volatility that weakens levees and leads to flash flooding and mudslides.
• Extreme hydrological variability has been a pervasive challenge across the West. As droughts become more prolonged or expansive, there could be credit pressure. We expect well-defined climate adaption policies, credible long-range resource plans, and achievable supply and demand management strategies will support stable credit quality. Many of these plans will be part of issuers’ ESG planning as they address what could become the “new normal” across the West.

Continue reading. (Registration required.)

18 Aug, 2021

Key Takeaways

• Although COVID-19 had a significant effect on major U.S. cities, strong management conditions and considerable federal support prevented credit deterioration.
• The sudden stop recession was shorter, and the economic rebound stronger, than anticipated, leading to more robust revenue for local governments than originally expected.
• Unprecedented federal relief was a lifeline and abated liquidity pressure.
• Current challenges for big cities include the delta variant, changing work/school patterns, and an uptick in violent crime.

Continue reading. (Registration required.)

19 Aug, 2021

Bus, subway and local rail systems nearly shut down when the pandemic first struck. Now they’re trying to find a new way forward.

Congress pulled public transit agencies from the brink of financial collapse during the darkest days of the pandemic, and it is getting closer to helping them upgrade their physical assets too. But that doesn’t mean the agencies running buses and trains are in the clear yet.

The actual impact could vary greatly from one agency to the next, but overall, the industry is still worried about whether ridership will return to pre-pandemic levels.

Recent estimates show that ridership levels are now about 58 percent of what they were before the pandemic. Many agencies hope to see that number climb as offices reopen after Labor Day. If not, agencies may have to change the services they offer, make spending cuts or find new sources of funding to make up the difference.

Continue reading.

ROUTE FIFTY

by DANIEL C. VOCK

AUGUST 21, 2021

Key Takeaways

• The implementation of S&P Global Ratings’ updated not-for-profit transportation infrastructure enterprise (TIE) criteria resulted in 22 rating actions (15 upgrades and seven downgrades) where the TIE criteria were the primary criteria applied; and four priority-lien rating upgrades where the updated TIE criteria were used to determine the obligor’s creditworthiness for 32 priority-lien ratings of 21 different mass transit obligors that issued sales tax-backed obligations.
• For operating revenue-backed ratings on TIEs, positive rating changes were due to the added financial stability and flexibility from receiving significant tax revenues (like property or sales taxes) that do not fluctuate with transportation activity levels; for sales tax-backed ratings on TIEs where our priority-lien tax revenue debt criteria are applied, positive rating changes were generally due to an improvement in the linked obligor’s creditworthiness, which incorporates pledged tax revenues that were generally resilient, as further evidenced during the COVID-19 pandemic; and for property tax-backed ratings on TIEs, negative rating changes were largely attributed to our incorporation of operating risk exposure for debt issued by TIE entities as well as weakened market positions for those issuers sensitive to changes in transit ridership or air travel volumes.
• Twenty-nine TIE entities benefiting from tax support received one to three notches of rating uplift; 14 received one notch of uplift, 13 receiving two notches of uplift, and two received three notches of uplift. Key considerations behind the amount of uplift were the significance of the tax revenue relative to total revenues, the type of tax (for example, sales versus property taxes), tax base characteristics as measured by diversity and stability, and a demonstrated willingness and ability to increase the tax levy.

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17 Aug, 2021

Read the S&P list of ratings.

In this installment of Bonding Time featuring Tom Kozlik of HilltopSecurities, we discuss the ongoing infrastructure deliberations in Congress and likely next steps for the bipartisan bill as well as the budget reconciliation package that will potentially provide an additional $3.5 trillion in infrastructure spending.

We also take a look at the debt ceiling and the recent extraordinary measures implemented by Secretary Yellen halting the sale of SLGS and the potential credit ramifications of default.

Click here for audio.

Bond Dealers of America

rcrodriguez

August 18, 2021

Today, the House returns from August recess for a week-long session to debate budget reconciliation instructions and voting rights legislation. At this time, House leadership remains steadfast in their position that the Chamber will not debate the Senate bipartisan infrastructure package until the budget reconciliation package, which will serve as a vehicle for additional infrastructure spending potentially including key muni priorities, becomes law– likely a months-long process.

In response to Leadership’s position, a group of 9 rank-and-file Democrats demanded the House pass the bipartisan infrastructure package prior to advancing the budget reconciliation outline. This weekend, the group remained staunch in their legislative opposition penning an op-ed laying out their position.

At this time, House Leadership does not have the votes to pass the budget reconciliation instructions, setting up a likely legislative showdown in the next 48 hours. While it is too early to predict outcomes for this week’s process, the MBFA and BDA believe both the bipartisan infrastructure package and a narrowed budget reconciliation package focused on the Biden Build Back Better infrastructure agenda will become law by year-end regardless of procedural hiccups.

Muni Priorities Update

The BDA and MBFA continue to press for the inclusion of key muni priorities in the budget reconciliation package. The MBFA recently met with Senior Staff in Rep. Terri Sewell’s (D-AL) office to discuss the Congresswoman’s muni package, the LIFT Act, and possible inclusion in the draft budget bill. The MBFA plans to continue meeting with key offices leading up to the introduction of legislative text promoting all muni priorities including:

• The reinstatement of tax-exempt advance refundings,
• Raise the BQ debt limit, and
• Creation of a new direct-pay bond exempt from sequestration.

The MBFA and BDA will continue to provide updates as they become available.

Bond Dealers of America

August 23, 2021

Under America’s constitutional system, states and cities are responsible for maintaining public infrastructure such as streets, schools, parks, and water and sewer facilities. Yet even as Congress moves ahead with the $1 trillion Infrastructure Investment and Jobs Act, and even as calls increase for more federal assistance to ease burdens on local taxpayers, it’s clear that the legislative branch largely fails to understand how states and municipalities manage their budgets.

This lack of understanding—or willful ignorance—is a critical shortcoming that should be addressed promptly, given the enormous amount the federal government already spends to subsidize state and local governments. In 2019, such subsidies accounted for 22% of those governments’ operating expenditures of $3.5 trillion, according to U.S Census data. Federal tax deductions on interest on most municipal bonds, the financing vehicles that cities and towns use to build roads, bridges, and schools, will cost $334 billion in forgone federal revenue from 2021 to 2030, U.S. Treasury projections show. Federal aid and tax breaks also help support the jobs of 19 million schoolteachers, police officers, firefighters, public health workers, and other state and local employees whose roles have been so critical during the COVID-19 crisis.

If the infrastructure bill and a proposed $3.5 trillion budget resolution become law, federal assistance to states and municipalities will swell even further, with Congress on the hook for much of the cost of everything from roads and bridges to broadband Internet installations, in the process helping states and localities avoid taking on massive amounts of new debt beyond the $4 trillion they have already borrowed.

Continue reading.

Yahoo Finance

by William Glasgall & Richard Ravitch

August 19, 2021,

BlackRock Municipal Bonds Group Head Peter Hayes joins Yahoo Finance to explain the municipal bonds outlook.

Video Transcript:

EMILY MCCORMICK: Welcome back to “Yahoo Finance Live.” US Treasury Secretary Janet Yellen doubled down on her support for President Joe Biden’s infrastructure investment plans in an op-ed published to Yahoo Finance earlier today. The plans include the $1 trillion infrastructure bill passed by the Senate last week, and the $3.5 trillion budget plan to expand the social safety net, which the Senate also approved the blueprint for last week. Here to discuss infrastructure, the outlook for the Fed, the markets and more is Peter Hayes, BlackRock’s Municipal Bonds Group Head.

And Peter, I want to start off with that op-ed and those remarks from Janet Yellen. She highlighted several points to make the case for the spending now. And from your vantage point, how could investors be thinking about municipal bonds, specifically as a way to trade this increased government spending?

PETER HAYES: I think in general, first of all, thanks for having me, great to be back. I’ll say that in general, there’s been an awful lot of stimulus since the start of the pandemic on the part of both the Fed and Congress. And this is just another element. So I think it probably gives a tailwind to assets in general. But certainly adds a big balance to the municipal bond market. When you think about the spending that’s occurred at the state and local level, it’s been really beneficial on top of actually surprisingly strong tax revenues that have occurred.

Remember, most states and cities were really talking about large budget deficits, and actually what we’ve seen, is large budget surpluses. I think I saw today where the state of New York, their July revenue collections are up 21% from a year ago. New York City, 14%. Many states have not even touched these billions of dollars that they’ve received from the federal government. So all of this investment, all of this infrastructure spending will continue to be a ballast I think to the economic environment and the municipal market going forward over even, probably the next two years.

ADAM SHAPIRO: Peter, it’s always good to see you. When we talk about going forward, I realize that you and the team, the bonds group deal in much larger numbers, but I’m going to ask a question from the kind of perspective of a lot of people who might be 45 years and older looking at the future. If they had say $500,000 saved up for retirement, how do you advise them?

Because it used to be a chunk of that you might want to put into municipal bonds. And you noted in the note that 27% of the supply was taxable issuance, because we’re seeing the refinancing of what had been tax exempt muni bonds by cities and municipalities into taxable. What would you say to that potential woman or man regarding the future for them?

PETER HAYES: I’d say a lot of it is around, how much do you want to protect from taxes? And that’s one of the reasons we’ve seen such strong inflows into the asset class this year. We’ve seen $62 billion in mutual fund inflow. So that’s about the strongest that I can remember going back into the ’90s. And I think a lot of that is because the fear of taxes going up. Now it’s likely that the marginal tax rate for individuals, perhaps it goes back to 39.6%. So the benefit there is somewhat incremental. I think the bigger fear is corporate taxes. But clearly, for that individual looking to shelter income and not pay taxes on that income, municipal bonds will continue to provide, I think will provide that benefit.

The other element that sometimes is forgotten, is you look, if you think interest rates are going to rise, municipal bonds tend to do better. Well, look at this year. Year to date, the municipal index is up 1.6%. Most fixed income asset classes are actually negative. We’ll use the Barclays ag. That’s down negative 70 basis points. So a fair amount of outperformance. But it provides you some insulation if you really believe interest rates are going to rise.

And the other one is, it’s a great hedge against equity risk. It’s always done very well when you see volatility in the equity markets. Municipal bonds tend to be a safe haven for that. So it’s really got kind of a three-pronged benefit to that investor, and that’s what I would tell them. Adam.

ADAM SHAPIRO: In fact, the S&P municipal bond index, to reiterate what you said, has you said in the note, year to date, total return of about 1.9%, almost 2%. The other thing that’s great about your note, is how everything is connected. You talk about climate change impacting revenue to utilities, especially the water utilities. Out West, which are now going to have to restrict demand, and you ended that part of the note by saying, we anticipate water usage limitations will become stricter and more widespread through year end. What kind of pressure does that put on the utilities to make good on their notes? I don’t think anyone’s going to default, but does it put pressure on them?

PETER HAYES: Well, I’ll start with your comment. No one’s going to default. I think that’s very important. Sometimes they see these headlines and they think that means that an issuer is not going to repay their debt. That’s never happened. California in particular has had a long history of drought. And even, and you look in some other areas of the US where droughts have been an issue over the years, water utility systems have always been very resourceful. They could cut water usage, they could raise rates. There’s a lot of ways that they can actually utilize to repay their debt.

And the other one is just general utilities. So you talk about A, water restrictions. We saw I think in the Southwest yesterday for the first time they’re going to cut the water usage in the Southwest to the Colorado River. And then the other is just general utilities. We saw today where I think PG&E is going to basically cut power to a certain part of their population in Northern California. That can impact revenues in the utility sector.

But again, they have a lot of tools at their disposal that they can ultimately use to help repay the debt. So it’s not a default issue. Sometimes it’s a rating issue, but it hasn’t even really been that. Sometimes they go on negative watch, but again, investors shouldn’t be necessarily very concerned about that on a going forward basis.

ADAM SHAPIRO: Peter, just quickly on interest rates. What are you expecting from the Fed meeting minutes tomorrow and Jackson Hole next week? When do you expect that tapering announcement and the actual start of tapering?

PETER HAYES: That’s the $64,000 question that the bond market I think would love to know. I think our feeling generally is that interest rates have to rise. When you look at the, something you asked at the outset about the economic stimulus that’s occurred, when you look at some of the supply chain disruptions and you look at the impact it’s had on inflation, the notion that it’s transitory is probably under, I think probably overvalued to some degree. This is here to stay for a while. So interest rates have to rise. It’s a matter of when, and that goes to your question.

I think Jackson Hole is going to be somewhat of a non-event. I think the market may be expecting more out of Jackson Hole. Probably not likely to see anything there. I think it’s more likely to occur in the coming months after that when we get by this Delta variant. The Fed wants to see what the impact will be on the economy. And then I think if we can get through that, if there’s some clarity around the booster, and is a 2022 to restart to the economy, then you have to think more seriously about the Fed tapering, beginning to raise short-term interest rates, all of which are more likely to occur in 2022.

ADAM SHAPIRO: Peter Hayes, BlackRock Municipal Bonds Group Head, thank you so much.

August 17, 2021

Joe Mysak, Editor of Bloomberg Brief: Municipal Market, discusses the latest news from the muni market. Hosted by Paul Sweeney and Matt Miller. (Taylor Riggs fills in for Paul Sweeney)

Play Episode

Bloomberg Markets

August 20, 2021

• S&P warns of slow recovery, trouble reaching pre-Covid levels
• Texas borrowers have convention center deals on calendar

The Delta strain is dealing a setback to the convention industry’s fragile recovery.

Some big gatherings are being shut down as the number of coronavirus cases surges again, dealing a fresh hit to a business that was already struggling to revive from the era of social distancing and working from home. The New York International Automobile Show was canceled this month for the second year in a row because of concerns over the pandemic. In Florida, the epicenter of the U.S. outbreak, the North American Association of Food Equipment Manufacturers and the Global Surgical Conference called off their events, with organizers of the later, citing the “dramatic surge” in the state’s cases.

“It is very hard to pull a group of people and make sure that they are all comfortable in meeting together,” S&P Global Ratings credit analyst Safina Ali said in an interview. “To an extent, they might not even get back to pre-Covid” levels, she said, referring to convention centers.

Bond-financed convention centers have seen their businesses dry up since the pandemic struck the U.S. in early 2020. The Center for Exhibition and Industry Research reported that the industry has shriveled to $24 billion, down $77 billion from 2019.

“There is not going to be a light switch and everybody is able to go back and go to events,” said Brad Mayne, president and chief executive officer of the International Association of Venue Managers.

Still there isn’t much distress right now for convention center debt, said Eric Kazatsky, senior U.S. municipals strategist at Bloomberg Intelligence. Many of these had pretty solid cash on hand going into the pandemic and decent credit quality.

“They had some cash to burn,” Kazatsky said. “Things aren’t at a total zero. They’ve just declined. There are still conventions being held.”

Plus the muni market is searching for supply amid ongoing investor demand, and there is appetite for new projects, he said.

About $1.5 billion of municipal bonds for convention centers have been sold so far this year, down from $2.4 billion in the same period in 2020, according to data compiled by Bloomberg. There are some upcoming municipal bond deals that may offer a look at how investors view the risk.

The city of Abilene, Texas, through the Abilene Convention Center Hotel Development Corp., is looking to finance the construction for a full-service, upscale 200-room hotel and conference center 150 miles (241 kilometers) west of the Dallas-Fort Worth area. S&P considers the $19.5 million first-lien bonds BBB-, one step above junk. Additionally, the corporation is also selling $24.7 million of second-lien bonds for the project.

Also in Texas, the Baytown Municipal Development District outside of Houston plans to sell about $61 million in bonds to finance the development of the Baytown Convention Center Hotel with about 208 rooms, according to bond documents.

Yet such deals may belie the risks posed the industry’s slowdown. Earlier this week, S&P said it expects Overland Park Development Corp. in Overland Park, Kansas to draw on $530,000 debt service reserves to cover a portion of its Sept. 1 interest payment.

“If revenue fails to meaningfully improve over the remainder of 2021, particularly given the additional uncertainty imposed by the Delta variant, credit quality could deteriorate,” S&P said in the report on Tuesday on the Overland debt.

Cooper Howard, director of fixed-income strategy at the Schwab Center for Financial Research, said the impact of the pandemic on convention centers is about “looking at the liquidity and health of the region that they are located in. “Right now the delta variant doesn’t appear to be posing a major risk to this sector, longer term it is something that yes, we will be watching,” Howard said.

Bloomberg Business

By Skylar Woodhouse

August 19, 2021, 12:30 PM MDT

— With assistance by Natalia Lenkiewicz

Municipal bond yields aren’t exactly thrilling these days, but the asset class remains an important income-generator and risk-reducer for investors in retirement.

While yields are broadly low today in the municipal bond space, there are some positive points for retirement investors to consider, and the asset class is proving sturdy even as the delta variant of the coronavirus vexes investors.

“Municipals maintained their seasonal trend and posted strong performance throughout the month of July. The market benefited from a favorable supply-demand backdrop and rallying interest rates due to excess liquidity, short covering, and Delta variant fears,” according to BlackRock research.

More recently, longer duration munis and those with lower credit ratings delivered upside for investors as muni market participants sought to embrace credit and duration risk. A recent decline in supply could be another factor supporting municipal bonds.

“Supply moderated from the robust levels experienced in June and trended more in line with historical expectations. Issuance of $35 billion was down -26% month-over-month but just 5% above the 5-year average, bringing the year-to-date total to $255 billion,” notes BlackRock.

While yields are low within the broader municipal bond universe, investors are still displaying enthusiasm for this form of debt, with flows to related funds, including exchange traded funds, poised to hit records this year.

“Demand remained firm with the asset class garnering continued inflows. While fund flows slowed slightly into month end amid lower absolute yields, 2021 remains on pace to eclipse 2019 as the best fund flow year on record,” continues BlackRock.

The asset manager recommends underweighting munis tied to “speculative projects with weak sponsorship, unproven technology, or unsound feasibility studies,” as well as senior and assisted living facilities in markets that already have plenty of those establishments. However, BlackRock is bullish on munis issued by states in strong fiscal positions as well as munis issued by cities and school boards with robust property tax bases. The fund issuer also likes some high-yield munis.

ETF Trends

AUG 16, 2021

• One-third of outstanding debt will be paid off by end of 2026
• Investors already face ‘a very challenging muni environment’

Municipal-fund managers awash with cash are struggling to find bonds to buy, a situation that may persist for the next few years if new issues continue to fall short of the demand.

About 21% of outstanding tax-exempt debt will mature or be called by the end of 2024, according to data compiled by Bloomberg. That rises to 31% by the end of 2026. The figures are higher than those seen historically and exacerbate the challenge bondholders have in reinvesting their payments, said Matt Fabian, partner at Municipal Market Analytics. Meanwhile, new dollars continue to flow apace into mutual funds.

So far this year, issuers have sold $289 billion in long-term municipal debt, higher than the $267 billion over the same period last year, according to data compiled by Bloomberg. While the federal infrastructure bill in the works may drive more sales of new debt, it’s unclear if it will be “enough to offset the giant sucking sound of the pending maturity schedule,” Fabian said.

“We need to see a material increase in new money projects, if only for the market to stand still,” he said.

The dynamic underscores the strength of the municipal-bond market, which is notching positive returns even as several other corners of the fixed-income universe are down for the year. Investors are shifting into the tax haven as President Joe Biden’s administration pushes to raise income taxes on the highest earners. Meanwhile, Biden’s stimulus packages easing the impact of the coronavirus pandemic have boosted the credit quality of local government borrowers such as cities and transit systems.

Investors have plowed a record amount into municipal-bond funds for the first seven months of the year, totaling more than $69 billion, according to Refinitiv Lipper US Fund Flows data. The wall of cash has led Nuveen to turn new investors away from its high-yield municipal bond fund, the market’s biggest.

The demand from mutual funds and those seeking to redeploy their principal payments will likely keep spreads at tight spreads, Fabian said.

“This is a context in which spreads are not going to widen absent some kind of surprise,” he said. “We need some big city to file for bankruptcy, or some kind of major reversal of revenue trends.”

Meanwhile, portfolio managers are left scrambling to get a piece of new deals, which receive so many orders that underwriters are able to lower yields that the buyers feel compelled to accept.

“What starts off looking attractive, by the time it comes to you, it’s okay,” said Sweta Singh, portfolio manager at City Different Holdings LP. “It is a very challenging muni environment, for sure.”

Bloomberg Markets

By Romy Varghese

August 20, 2021, 10:00 AM MDT

— With assistance by Natalia Lenkiewicz

• Sales with later delivery head for record as rate risk rises
• Ban on tax-exempt advance refundings lifts popularity of tool

State and local governments barred from a key refinancing tactic are turning more than ever to a funding tool that helps them avoid the risk of rising interest rates.

Sales of municipal bonds that won’t be delivered to investors until months after they price have reached about $10.5 billion in 2021, up 174% from the same period a year ago and on pace for a record, according to data compiled by Bloomberg. California issued the largest ever so-called delayed-delivery bond four months ago, while deals by issuers from across the country are set to price in the weeks ahead.

The structure allows state and local governments to lock in interest rates in anticipation of refinancing higher costing debt that’s not yet eligible to be called back. It’s an attractive tool for governments that believe rates are going to rise, said Vikram Rai, head of municipal strategy for Citigroup Inc. The structure has grown in popularity since a clause included as part of former President Donald Trump’s 2017 tax cuts banned the sale of tax-exempt bonds to refinance debt ahead of the call date.

“It’s a rate call,” Rai said in an interview. “Rates are low and I find it difficult to believe that they will go lower.”

California sold nearly $1.1 billion in April to be delivered next month, and the state plans to sell $372 million of the same structure in October. The Phoenix Children’s Hospital is selling $150.4 million through the Arizona Industrial Development Authority that will be delivered in November. And Connecticut’s Health and Educational Facilities Authority sold $206 million Wednesday that will be delivered no earlier than April.

The rising volume of forward sales comes as demand outpaces the supply of new bonds in the $4 trillion muni market, leaving yield-hungry investors willing to take on more risk to boost returns.

Rising inflation, the potential for Treasury yields to climb higher and the possibility the Federal Reserve starts tightening monetary policy could all shift future pricing for state and local governments. Ten-year top rated municipal benchmark bonds currently yield about 0.9%, according to Bloomberg BVAL pricing.

“What’s in it for us is we get the advantage of low rates,” Tim Schaefer, the deputy treasurer of public finance for the state of California, said in an interview. The state began issuing large chunks of bonds for forward delivery last October, and while it doesn’t make interest-rate predictions, it wants to benefit from the low-yield environment, he said. “All of our risk of rate fluctuation beyond the date we sign the contract is thus eliminated. We have certainty.”

Forward-delivery bonds offer extra yield to investors to compensate for the risks associated with waiting months to get your bonds. Rai, the Citigroup analyst, estimates the premium is about 3 to 4 basis points per month, meaning the further out the settlement date, the higher cost of selling the debt.

“This structure is seen as a win-win for issuers which can lower their cost of capital while investors will usually get some modest additional spread on forward delivery deals,” said Erin Ortiz, managing director for municipal credit at Janney Montgomery Scott. “In fact, investors appear as being comfortable with forward delivery deals settling much longer out, even some over one year, as opposed to three or even six months.”

Illinois’s Metropolitan Pier and Exposition Authority sold about $811 million forward delivery bonds in July to take advantage of “favorable” interest rates, said Jason Bormann, chief financial officer of the agency. A bond that matures in 2052 priced at a yield of 97 basis points over the Bloomberg BVAL benchmark, according to data compiled by Bloomberg. It generated $140 million of present value savings, the authority said. The bonds won’t be delivered to investors until March.

“I don’t see the demand changing on the issuer side unless the advance refund rules change,” Bormann said.

Bloomberg Markets

By Shruti Singh and Danielle Moran

August 18, 2021, 11:56 AM MDT Updated on August 18, 2021, 1:04 PM MDT

— With assistance by Skylar Woodhouse

Long-term fundamentals could support municipal bond exchange traded funds as investment demand could fall short of new muni issuances.

About 21% of outstanding tax-exempt debt will mature or be called by the end of 2024, Bloomberg reports. The amount rises to 31% by the end of 2026.

Matt Fabian, partner at Municipal Market Analytics, warned that the amount of money maturing or set to be called is higher than that which is experienced historically, and could prove challenging for those trying to reinvest their payments, especially as new dollars continue to flow into the space with an aging population.

Meanwhile, on the supply side, issuers have sold $289 billion in long-term municipal debt so far in 2021, which was slightly higher than the $267 billion over the same period last year. Additionally, while the federal infrastructure bill could stimulate greater sales of new debt, it’s unclear if it will be “enough to offset the giant sucking sound of the pending maturity schedule,” Fabian told Bloomberg.

“We need to see a material increase in new money projects, if only for the market to stand still,” Fabian said.

The difference between supply and demand in the muni market has helped this pocket of the fixed income space turn a positive return in 2021, even as other areas of the debt markets are down for the year. Additionally, investors have been targeting the tax-exempt debt as President Joe Biden’s administration seeks to hike income tax rates on high earners and stimulus packages have helped ease the negative impact from the coronavirus pandemic on local government borrowers.

Investors have so far funneled a record $69 billion into municipal bond funds for the first seven months of the year, according to Refinitiv Lipper US Fund Flows data.

Looking ahead, Fabian warned that the demand for muni funds and those trying to redeploy principal payments will keep spreads tight.

“This is a context in which spreads are not going to widen absent some kind of surprise,” he added. “We need some big city to file for bankruptcy, or some kind of major reversal of revenue trends.”

ETF investors who are interested in the munis space can also consider targeted ETF strategies, such as the popular iShares National Muni Bond ETF (NYSEArca: MUB), Vanguard Tax-Exempt Bond ETF (NYSEArca: VTEB), and SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (NYSEArca: TFI).

ETF TRENDS

AUG 23, 2021

The federal government heaped billions of dollars on states to help them tidy up their balance sheets in the wake of the coronavirus pandemic.

However, municipal default rates ticked higher in 2020 and to this point this year. Yet that’s not damping the case for high-yield municipal bonds and the VanEck Vectors High Yield Muni ETF (HYD), one of the dominant exchange traded funds providing exposure to junk-rated munis.

The $4 billion HYD follows the Bloomberg Barclays Municipal Custom High Yield Composite Index and turns 13 years old next February. As of Aug. 12, it yields 2.17% on a 30-day SEC basis. These days, that’s elevated in the municipal bond universe, but it’s not cause for alarm. As Tamara Lowin, VanEck senior municipal research analyst, points out, investors should dig into where exactly the muni defaults are coming from.

“While default rates increased in several sectors, the healthcare sector is responsible for most of the spike, doubling its five-year average,” she said in a recent note. “The healthcare sector is known as one of the riskiest sectors historically, mainly due to the senior-living sub-category, which includes nursing homes, assisting living facilities, and continuing care retirement communities. This category was directly impacted by the pandemic and hit harder than any other municipal sector. The nation saw occupancy levels fall, broken supply-chains, and a loss of employees, which devastated them financially.”

HYD has a 19% weight to healthcare munis – its largest segment allocation. That exposure isn’t hindering the ETF this year. Year-to-date, HYD is higher by 3.35% while the widely followed S&P National AMT-Free Municipal Bond Index is flat on the year.

That’s a sign that the concentration of muni defaults in one corner of the market isn’t denting the thesis for this asset class in general.

“The concentration of defaults in one sector affirms our belief in the strength of high yield municipal bonds overall,” adds Lowin. “The shock to the system did not result in widespread staggering defaults, but instead targeted borrowers most vulnerable to a sudden health-event shift. It is no surprise that the sector most directly impacted by the Coronavirus continues to struggle through instability. However, the size and brevity of the disruption in the remaining sectors speaks to the continued strength of high yield municipal bonds.”

Of HYD’s top four state exposures – California, Illinois, New York, and New Jersey – only Illinois appears somewhat financially strained at the moment. California, the ETF’s largest state exposure, is doing well when it comes to tax collection and is running a massive budget surplus.

ETF TRENDS

TOM LYDON AUGUST 16, 2021

• Investors have flocked to muni junk bond funds for high yields
• Nuveen fund has gained over 14% in the past year, data shows

Nuveen said it plans to shut its high-yield municipal bond fund to new investors after the end of next month.

The fund is the biggest focused on state and local government junk bonds, a corner of the market that’s received a massive influx of cash at a time when the pace of new debt sales has struggled to keep up.

High-yield municipal funds have drawn in new cash week after week this year as the market rallied, delivering out-sized returns at a time when yields on the safest state and local government bonds are holding not far from record lows.

Investors have added nearly $17 billion of new money to such funds since the start of the year, according to Refinitiv Lipper US Fund Flows data.

That influx has created challenges for fund managers forced to compete against each other to get in on new bond offerings. At the same time, surging economic growth and the massive federal rescue package has left local government credit ratings broadly on the rise.

Nuveen’s High Yield Municipal Bond Fund, run by John Miller, is not only the market’s behemoth, with more than $24 billion of assets, but one that has also consistently outperformed its rivals. It has returned more than 14% over the past year, better than all but 2% of its peers, according to data compiled by Bloomberg.

The fund is closely watched by municipal-bond investors, given its track record and size. A spokesperson said Miller was unavailable to comment.

Nuveen is also closing its California high-yield muni fund to new investors after Sept. 30, the company said in a statement and filings with the Securities and Exchange Commission. Those with stakes by then will still be allowed to keep investing.

The step follows a similar move by rival Invesco Ltd., which closed its $11 billion high-yield muni fund to new investors.

“Nuveen investment and product teams will closely monitor market conditions and other fund-specific factors and will actively look to reopen the funds when it is deemed to be in the best interest of shareholders,” Nuveen said in a statement to Bloomberg News.

Bloomberg Markets

By Danielle Moran

August 19, 2021, 2:45 PM MDT Updated on August 19, 2021, 3:40 PM MDT

— With assistance by Romy Varghese

Wealthy investors are shoveling more money into municipal-bond exchange-traded funds as they seek shelter from expected higher tax rates.

Municipal-bond ETFs have already experienced $13.8 billion in net inflows this year. The current trajectory is set to outpace the $14.5 billion gathered by muni-bond ETFs for all of 2020.

The U.S. Senate recently approved a $1 trillion infrastructure spending package. That’s on top of the $1.9 trillion Covid-19 relief bill passed earlier this year, plus $2.2 trillion more spending via the CARES Act in 2020. The surge in government spending has alarmed many affluent households and financial advisors who are bracing for higher income tax rates.

Income generated from municipal bonds is exempt from federal taxes and from state income taxes, so long as the bonds purchased are from a taxpayer’s home state. In certain cases, income from in-state municipal bonds could be subject to state taxes.

There are 65 U.S.-listed municipal-bond ETFs with $78.5 billion in combined assets, according to ETFAction.com. The Denver-based firm is seeing a big pickup in demand for muni-bond ETFs.

ETFs that own higher yielding, lower credit quality municipal bonds have been among the biggest beneficiaries of surging investor demand. Over $1.25 billion has already flooded into high-yield muni-bond ETFs this year, which is more than 10 times greater than the $111 million of assets gathered in 2020.

The $3.9 billion VanEck Vectors High Yield Muni ETF (HYD) is among the funds within the high-yield category that’s seen an uptick in asset flows. HYD carries a 30-day SEC yield of 2.18% which equates to a 3.46% taxable equivalent yield for investors in the highest 37% tax bracket. The fund distributes income payments monthly and charges 0.35% annually.

Muni-bond ETFs that are exempt from the federal alternative minimum tax, or AMT, have become another popular target for investors.

With $8.7 billion in combined assets, ETFs tied to municipal bonds with AMT-free income represents the largest segment within the overall municipal-bond ETF category. Within this group, the Invesco National AMT-Free Municipal Bond ETF (PZA) owns at least 80% of its assets in muni bonds that are exempt from the AMT.

The AMT disallows certain deductions that are permitted in the ordinary income-tax code. After calculating taxes under both ordinary income and AMT rates, taxpayers must pay whichever rate is higher. The 2017 tax law change under the Tax Cuts and Jobs Act increased the phase-out thresholds, meaning fewer tax filers are subject to AMT.

FINANCIAL ADVISOR

AUGUST 17, 2021 • RON DELEGGE

Municipal bond ladders are a common strategy to mitigate interest rate risk. If interest rates rise, you can reinvest bonds coming due in higher-yielding bonds. If interest rates fall, you always have a good number of bonds locked in at higher rates. The problem is that the current environment introduces a lot of uncertainties.

Let’s look at why muni bond investors face a challenging reinvestment environment and alternative strategies to consider.

Demand Outstrips Supply

The municipal bond market has become a fixed-income safe-haven. After a tumultuous winter, the federal government’s stimulus spending has padded state and local budgets. Meanwhile, the swift economic recovery alleviated many concerns of future budget shortfalls. These trends have eliminated the need for new muni bond issues to raise capital.

Continue reading.

dividend.com

by Justin Kuepper

Aug 18, 2021

NEW YORK, Aug. 13, 2021 /PRNewswire/ — CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for July 2021. 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 significant monthly decrease in request volume for new municipal identifiers and a slight increase in request volume for new corporate identifiers.

CUSIP identifier requests for the broad category of U.S. and Canadian corporate equity and debt edged higher in July versus June totals. The monthly increase was driven largely by medium-term note and Canadian corporate issuance. On a year-over-year basis, corporate CUSIP request volume was down 1.3%.

Monthly municipal volume decreased in July, the first monthly decline in muni CUSIP request volume since January of this year. The aggregate total of all municipal securities – including municipal bonds, long-term and short-term notes, and commercial paper – fell 18.7% versus June totals. On an annualized basis, municipal CUSIP identifier request volumes were up 4.2% through July. New York led state-level municipal request volume with a total of 196 new CUSIP requests in July, followed by Texas with 195 and California with 93.

“Municipalities have been busy with new debt issuance this year, and while the volume of new requests has slowed this month, it’s important to note that seasonality could be playing a role in the trend. June is peak short-term notes season, so it stands to reason that we’d see a tough comparison in July,” said Gerard Faulkner, Director of Operations for CGS. “With interest rates still holding at historic lows and state governments very much in need of cash flow, we expect issuance volume to stay healthy for the near term.”

Requests for international equity and debt CUSIPs both declined in July. International equity CUSIP requests were down 4.6% versus June. International debt CUSIPs were down 24% on a monthly basis.

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

• So-called competitive deals are up 32% to highest since 2016
• Competitive sales were down a year ago following market crash

In a stark contrast to a year ago when states and local governments hit by the pandemic had to woo skittish investors, more issuers are selling municipal bonds through competitive auctions that put the risk on underwriters.

The amount of long-term bonds sold through competitive deals has risen to $64.6 billion so far this year, a 32% increase from the same period of 2020 and the highest for the year-to-date period since 2016, according to data compiled by Bloomberg. Meanwhile, the volume of long-term bonds sold through a negotiated offering — still the bulk of the market — has gained 2.7% to about $211.8 billion, the data show.

In a competitively priced deal, underwriters bid for and buy the bonds and then have to sell them no matter the market conditions. In negotiated offerings, banks are hired in advance to set the interest rates and line up buyers for the securities.

Right now, investor demand for tax-exempt debt is so great that the extra legwork by underwriters and marketing time needed with negotiated deals to attract buyers isn’t as necessary, according to Vikram Rai, a municipal analyst for Citigroup Inc. Munis have proven to be an oasis in the fixed-income universe in 2021, outperforming Treasuries.

“Negotiated deals are more popular when the market has a slightly weaker tone,” Rao said. “When demand is strong we see competitive deals increase.”

The rise in competitive deals is a big shift from a year ago, when negotiated sales spiked as the market coped with the impact of business shutdowns at the start of the pandemic and spooked investors pulled record amounts of cash from mutual funds. Last year through mid-August, competitive deals were down about 18% from the same stretch of 2019, while negotiated deals jumped 35%.

The supply of muni bonds expected to be issued in the next 30 days is short of the amount available for reinvestment by $14.9 billion, up 10% from a year ago, according to data compiled by Bloomberg. Mutual funds for tax-exempt bonds have seen inflows of almost $60 billion this year as investors look for income amid historically low interest rates, and there have been no meaningful outflows for almost 66 weeks.

Right now, the market is leaning more toward competitive deals than last year because “issuers, and their financial advisors, see the uneven landscape between supply and demand,” said Bloomberg Intelligence analyst Eric Kazatsky. “To help drive the best deal for their clients, advisors help navigate them towards the competitive market, where they can save on costs of issuance and have many firms bid on their debt.”

Also boosting the rise in competitive sales, recent rate volatility has eroded some of the benefits of refunding offerings, which are largely priced through negotiated sales, according to Kimberly Olsan, senior vice president of municipal bond trading for FHN Financial. Refunding deals are down while new money sales, which are usually sold via a competitive auction are up, she said.

Still, the surge in competitive deals may be a “temporary phenomenon,” according to Citi’s Rai. “If there is any letup in demand, the needle will turn toward negotiated deals,” he said.

Bloomberg Markets

By Shruti Sing

August 13, 2021

— With assistance by Danielle Moran

Fitch Ratings-Austin-11 August 2021: Fitch Ratings has published an update to its “State Revolving Fund and Municipal Finance Pool Program Criteria.” This report replaces the previous report of the same title last published on March 3, 2021.

The fundamentals of these criteria remain unchanged. However, on Aug. 9, 2021, Fitch published an exposure draft for its “CLOs and Corporate CDOs Rating Criteria (CDO Criteria)” that proposes a calibration update to its Portfolio Credit Model, including probability of default assumptions, confidence intervals, and correlation.

Given the relationship of these criteria to the CDO criteria, for new ratings, Fitch will utilize a modified version of its Portfolio Stress Model incorporating similar changes as those proposed in the CDO criteria exposure draft. With respect to the surveillance of existing ratings, Fitch will utilize the existing version of the Portfolio Stress Model without modification. Following the consultation period and publication of the new CDO Criteria, this SRF criteria and the Portfolio Stress Model will be updated accordingly.

Fitch does not expect any ratings changes as a result of these updates.

Contacts:

Major Parkhurst
Director
+1-512-215-3724
Fitch Ratings, Inc.
111 Congress Ave. Suite 2010
Austin, TX 78701

Julie Garcia Seebach
Director
+1-512-215-3743

Tim Morilla
Director
+1-512-813-5702

Doug Scott
Managing Director
+1-512-215-3725

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com

Fitch Ratings-New York-12 August 2021: US Public Finance (USPF) ratings are subjected to the same macroeconomic and structural factors that underlie the Negative Outlook on the United States’ Long-Term Foreign Currency Issuer Default Rating (IDR) of ‘AAA’ says Fitch Ratings. Most USPF ratings are not explicitly tied to the US sovereign rating, except when bond repayment depends on federal agencies or instruments. However, federal policy actions have direct and indirect ramifications for the operating environment of states, local governments, and revenue-supported entities, which over time could influence the risk profile of the sector.

The Negative Outlook on the US sovereign rating reflects ongoing risks from fiscal deficits and real interest rates to its public finances and debt trajectory. A further meaningful increase in debt could lead to a downgrade. Deterioration in governance represents a further risk, reflecting in part a lack of bipartisanship and difficulty in formulating policy and passing laws in Congress.

Although there are numerous policy and funding links between USPF issuers and the federal government, USPF issuers benefit from the significant autonomy inherent in the US federal structure. Legal and fiscal powers enshrined in the US Constitution devolve broad powers to states, most notably fiscal powers. Government frameworks below the state level follow similar patterns, with substantial fiscal powers delegated to local governments to deliver general services and to public and not-for-profit entities to fund public services through their own revenue powers.

Future actions by the US government to rein in the nation’s very high debt burden by curtailing spending could directly affect USPF credits that rely on federal funding for certain programs, particularly Medicaid, housing subsidies and grants, higher education grants and student loans, and the Highway Trust Fund. USPF ratings assume sufficient flexibility to respond to reduced federal funding, although service mandates or decisions to backfill lost federal funds with own-source resources could affect operating performance over time.

Local governments bear the added risk of absorbing both federal spending cuts and state tightening that could follow a round of federal spending cuts but their typically broad budgetary tools and high reserves help offset this constraint. Lower infrastructure investment could also affect credits longer term if states, local governments and revenue-supported entities must ultimately bear the full burden for expansion or restoration of infrastructure.

Beyond funding effects, a weakening of the US government’s credit quality could have wider reverberations on USPF finances. Higher interest rates would make debt issuance costlier for USPF issuers. Weaker public finances could diminish the reach and effectiveness of countercyclical actions, leaving USPF issuers vulnerable to deeper downturns and slower recoveries.

A limited number of ratings with direct links to, or dependence on, the US sovereign credit retain the Negative Outlook on their ‘AAA’ rating, unless there are mitigants that reduce US sovereign exposure. These ratings with US rating links are municipal housing bonds currently rated ‘AAA’ and secured entirely, or predominately, by Fannie Mae and Freddie Mac mortgage-backed securities and pre-refunded municipal bonds where escrowed funds deposited with a trustee to advance refund the bonds are invested in US government obligations. Ratings on the latter bonds depend on the rating assigned to those securities, which are generally US treasuries or other bonds directly guaranteed by a US federal agency.

The Muni Landscape

Municipal securities, or “muni bonds”, issued by states, cities, counties and other governmental entities in order to fund infrastructure, schools and other projects represent an extensive marketplace. As of the first quarter of 2021, there was $4 trillion in outstanding issuance, accounting for over 50,000 issuers.

Muni bonds come in two varieties: general obligation and revenue bonds. General obligation bonds are used to finance public projects that aren’t linked to a particular revenue stream. Revenue bonds, by contrast, are bonds whose interest and principal are backed by the revenues of a specific project that the bonds are funding, such as toll roads and universities.

Often, revenue bonds are issued through a conduit, which is usually a government agency or government-sanctioned entity that issues debt to raise funds for large-scale projects, such as hospitals and airports, on behalf of a borrower. Conduits typically are not responsible for the payment of principle or interest for the issue(s) in question, as this falls to the borrower. In addition, conduits are often not located in the same geographic area as the projects they are funding.

The Rise of ESG Concerns are Impacting Munis Too

Environmental, social and governance (ESG) factors are taking center stage and playing an increasingly important role in the evaluation of risks associated with investments. In March of this year, for example, the European Union’s Sustainable Finance Disclosure Regulation (“SFDR”) came into force requiring certain asset managers and financial advisers to make ESG disclosures to potential and current investors. This new regulation also impacts large U.S. firms that market funds in Europe.

To fully understand potential ESG risks, it is imperative to know where assets are located. This applies to muni bonds, as well, but there are three major challenges here:

1. Conduit issues are assigned to the state where the conduit issuer resides, not where the actual projects are located.
2. Revenue bond issues often represent projects that are located across numerous cities, counties and even states, but are assigned to a single state at issuance.
3. Many revenue bond issuers (e.g., hospital obligated groups, gas districts and water districts) cover multiple locations, and it is important to map these multiple entities to the issuer in question in order to effectively assess ESG risks.

To address these challenges, CUSIP Global Services (CGS) partnered with ISS ESG[2] to create a location mapping solution.

Shining a Light on Municipalities to Assess Potential Risks

CUSIPs are nine-character alphanumeric security identifiers that capture the unique attributes of issuers and their financial instruments throughout the U.S. and Canada. In the muni bond market, a CUSIP is used by investors to uniquely identify and track municipal securities and link them with the underlying issuing entity. This represents approximately 1.5 million CUSIPs today.

Working with ISS ESG, CGS has created a mapping file that links the first six characters of the unique CUSIP identifier for each municipal issue with the geographic identifier (GEOID) hierarchy for the issuer, including state, county, city and school district. The GEOID is a unique geographic identifier assigned by the U.S. Census Bureau to administrative/legal and statistical geographic areas.

ISS ESG has also developed its Muni QualityScore based on socioeconomic, environmental, health and crime data, which can be accessed through a separate mapping and is updated quarterly. The GEOID-level detail enables muni bond identifiers to be paired with these ESG scores, giving market participants insight into the level of exposure their municipal securities have to certain ESG attributes.

This new capability addresses a longstanding challenge in the U.S. muni bond market, where interested parties could not easily make the link between underlying issuer and related census, socioeconomic, climate change and crime data. Through this partnership, CGS and ISS ESG are able to deliver more transparency into the muni bond market, facilitating links to data that can be used to inform risk models and values-based investment strategies.

Click here for more information on the CGS/ISS ESG solution.

• Alpha Ledger’s blockchain-based platform offers loan auctions
• Firm aims to move into business of public muni debt in 2022

After breaking new ground in exchange-traded funds for Pimco more than a decade ago, Manish Dutta and Tammie Arnold have set their sights on one of the more opaque corners of municipal finance.

Their company, Alpha Ledger Technologies, is seeking to modernize the market for direct lending to municipalities through a platform based on blockchain, the technology used for verifying and recording transactions that’s at the heart of Bitcoin.

The firm’s system lets cities and localities auction their loans, allowing a wide group of investors — such as regional banks — to bid, potentially reducing borrowing costs on these relatively small, private financings. The other benefit is that the system provides an online account of the bids and the deal — a novelty for localities used to maintaining paper records.

It amounts to a shift from the “old-school” process of underwriting, where the decision to pick a bank and the terms of a loan can be private, said Dutta, Alpha Ledger’s chief executive officer. Fifty banks have used the platform, including community, regional and national banks, he said.

“On our platform, it’s an open, direct, transparent market,” he said.

In July, the Poulsbo, Washington-based company, which was founded in 2019, made further inroads when California’s Coachella Valley Unified School District borrowed through its platform. It was one of five loan transactions Alpha Ledger has completed this year, after two in 2020.

Banks held about $197 billion of direct loans to municipalities as of the second quarter, according to research firm Municipal Market Analytics. Alpha Ledger wants to move into the public-debt arena — which accounts for the brunt of municipal borrowing — some time in 2022.

The muni market, with annual bond and note issuance of about $400 billion, has proved to be tough to disrupt. In one example, Neighborly, a venture that tried to sell muni bonds in smaller pieces than the typical $5,000, abandoned that effort in 2019.

Dutta, who worked on technology development at Pacific Investment Management Co., co-founded the company with Christopher Wade and brought on former colleagues like Arnold and Don Suskind, who worked on ETF products at Pimco.

‘Nothing But Competition’
Traditionally with municipal loans, borrowers hire advisers who seek bids from banks. Municipalities can also approach banks directly. With direct loans, officials have found they can borrow at rates comparable to those on bonds without the fees or disclosure requirements associated with public-debt offerings.

Alan Crain, chief financial officer of Kitsap Bank in Port Orchard, Washington, said his bank joined the platform even though he knew it was “nothing but competition” in the lending market.

“My recognition was that if we don’t work with them to do this, someone else will,” he said. “I’d rather work with them and understand how to pivot our business, rather than be left out in the cold.”

Kitsap manages a portfolio of about $280 million of municipal debt including the loans, and has participated in four transactions on the platform. Crain said that he’s seen the bidding process deliver lower rates for borrowers as well as more flexible terms for them, and said it helps improve transparency around pricing.

“When banks compete, you win” as a borrower, he said.

ETFs to Blockchain

Arnold and Dutta met in 2008, when Arnold was tasked with starting Pimco’s actively managed bond ETF products, an effort that she said stretched existing technology around compliance, trading and disclosure.

For example, the money manager had to address issues with pricing of ETFs, which updates instantly because the funds trade on an exchange, while mutual funds can sort out net asset values overnight if needed, she said.

Arnold’s request for more help with technology led to her connection with Dutta. Both spent roughly two decades at Pimco. She says ETFs were instructive in how to make small transactions financially viable, given that they had to be available for investors at a much lower cost than mutual funds, for example.

That’s now relevant to Alpha Ledger’s strategy of focusing on municipal loans, which tend to be smaller. The average size of loans the company has worked on is about $3 million.

“This is an exercise in small transaction size access and economics,” said Arnold, the company’s head of business strategy.

Alpha Ledger charges what it calls a technology fee, that is fixed regardless of loan size and which the company declined to share. The company is working with municipal advisers and bond counsel as it seeks new business, Dutta said.

‘Digitizing Everything’

David Ulbricht, director of advisory services for SDAO Advisory Services, which advises Oregon-based issuers, said he researched blockchain for two years after first meeting with the company in 2019. He wanted to make sure it would be a good product for his clients, which include special districts, cities, school districts and counties.

“It’s basically digitizing everything,” he said. “You realize, OK, this is kind of where things are going.”

The platform helps banks hear about transactions — and as a result, the terms of the financings under the platform are “very, very” competitive and can cut out costs like bank counsel fees, something that ultimately benefits borrowers, Ulbricht said.

The platform also offers a debt-management tool, which appealed to Oregon’s Port of Astoria, which operates an airport in Warrenton, Oregon. It obtained a $1.3 million loan through the platform in April, and plans to put its $14 million loan portfolio on the platform, said Melanie Howard, the port’s accounting and business services manager.

The port typically monitored its loans on a spreadsheet, while the blockchain technology offered a way for both the port and the banks to have easily accessible details on the loans, she said.

“It ties a better relationship between the lender and borrower,” she said.

Bloomberg Markets

By Amanda Albright

August 16, 2021, 10:00 AM MDT

— With assistance by Martin Z Braun

Reported hacking incidents have increased nearly fivefold since 2016. Virtual learning during the pandemic created even more access points for attackers.

Cyber criminals are targeting U.S. schools at an increasing rate after remote learning during the pandemic left them more vulnerable to hacks, and the risk shows no sign of abating as students and teachers head back to the classroom this month.

The number of publicly disclosed computer attacks on schools has exploded since 2016 to a record 408 in 2020, according to the K-12 Security Information Exchange, a nonprofit that tracks such incidents, and those figures are almost certainly an undercount because many go unreported. While schools are opening back up across the country for in-person instruction, many are expected to retain virtual learning as an option and that means more access points for potential intrusion with financial consequences for districts that are already facing increased costs to bring students back.

The growing frequency of hacks — averaging more than two per school day last year — has school officials worried about the potential for the theft of students’ identities and the added cost to insure against attacks and repair breaches. In Del Rio, Texas, the district comptroller mistakenly wired more than $2 million to a hacker’s account. About 170 miles (274 kilometers) away, a district in Live Oak, Texas, paid an undisclosed ransom amount to regain control of some computer platforms, and in Broward County, Florida, thousands of stolen files, including some confidential information, were published after district officials refused to pay a $40 million ransom, according to local reports.

Continue reading.

Bloomberg CityLab

By Nic Querolo and Shruti Singh

August 9, 2021, 12:06 PM MDT

The Reconnecting Communities Initiative aimed to help cities rectify damage caused by highways built through minority neighborhoods. The bipartisan infrastructure bill cut it by 95 percent.

Shawn Dunwoody and Suzanne Mayer can remember when Democratic Sens. Kristen Gillibrand and Chuck Schumer of New York went to Rochester’s Inner Loop at the end of June and emphasized the need to fund projects that reconnected neighborhoods bisected by highways.

The senators’ advocacy meant the world, said Dunwoody and Mayer, who created a group called Hinge Neighbors. Their goal was to fill in the Inner Loop, a part of Interstate 490 that the federal government built after it plowed through minority neighborhoods in the 1950s, destroying hundreds of homes and businesses.

They said the words of support feel confusing now that they have seen the details of the bipartisan infrastructure bill. The Reconnecting Communities Initiative — which began as a bill written by Gillibrand and Schumer, whose offices did not respond to requests for comment — was cut from a proposed $20 billion in the American Jobs Plan to $1 billion in the recently proposed legislation.

Continue reading.

nbcnews.com

By Phil McCausland

Aug. 5, 2021

Here’s a deep dive into the final bipartisan infrastructure deal approved by the Senate impacting those in agriculture.

The U.S. Senate’s passage of the more than 2,700-page Infrastructure Investment and Jobs Act offers many important provisions that those in rural America were seeking. The bill provides $548 billion in additional spending. When combined with existing baseline infrastructure spending, total funding for infrastructure will be approximately $944 billion over five years and $1.2 trillion over eight years.

The House has already passed its own version of an infrastructure bill – the INVEST In America Act, also in H.R. 3684, which the Senate replaced with this plan. The House could take up the Senate’s version, but it’s unlikely given House Transportation and Infrastructure Chairman Peter DeFazio, D-Ore., concerns with missing provisions after he spent months on his own plan.

The Infrastructure Investment and Jobs Act represents a highlight reel of the Senate’s bipartisan work. It includes several bills that have already won bipartisan action in the Senate, including a must-pass highway bill to extend programs set to expire this fall.

Continue reading.

farmprogress.com

Jacqui Fatka | Aug 11, 2021

The federal government is urging states and localities to study the results of their American Rescue Plan Act spending and to adopt programs with proven track records.

As state and local governments get started spending billions in federal recovery dollars, public officials are making bold predictions about how far the money will go to help their communities with issues like homelessness, upgrading infrastructure and job training.

But to know how well these investments are paying off, it will be necessary to have systems in place to assess whether they’re meeting their goals. With this in mind, the federal government is pushing states and localities receiving American Rescue Plan Act funds to think about ways to evaluate the results of their spending, and also to pursue “evidence-based” programs.

“Evaluation lets us understand if something is working as intended, why and for who,” Diana Epstein, who leads a team focused on evidence-based policymaking at the White House Office of Management and Budget, said during an online seminar the Treasury Department held this week to discuss program evaluation and other issues tied to ARPA’s state and local aid funding.

Continue reading.

ROUTE FIFTY

by BILL LUCIA

AUGUST 12, 2021

Yesterday, the Senate released legislative text for its highly anticipated bipartisan infrastructure package, titled the ­­­­­­­­Infrastructure Investment and Jobs Act. Negotiations have been ongoing for months, and while several political and policy hurdles remain before this proposal can arrive on the President’s desk for his signature, agreement on this bipartisan package is a hugely positive development. Project sponsors and practitioners have closely tracked the development of this package not only with respect to overall funding levels and policies but also with an eye towards specific provisions relevant to public-private partnerships (“P3s”) and other alternative delivery methods. The bipartisan package includes three provisions, in particular, that will provide tremendous benefit to P3s if enacted.

First, Section 80403 would raise the cap on private activity bonds (commonly known as “PABs”) for highway and surface freight transfer facilities from $15 billion to $30 billion. PABs allow private entities to benefit from tax-exempt bond treatment to finance certain public works improvements. However, the federal $15 billion allocation of highway and surface freight transfer facility PABs has been exhausted, eliminating the ability of private entities to access tax-exempt bonds for these projects. Increasing the cap from $15 billion to $30 billion would address current demand and lower the cost of private financing on future P3 projects.

Second, Section 71001 would provide $100 million in grants to project sponsors for technical assistance with P3 procurements. While this may seem a bit esoteric, it is incredibly challenging for a public agency with needs that outweigh resources to consider P3 delivery without technical support, especially if the project sponsor has never used this delivery method before. These grants would provide particular benefit to agencies with significant infrastructure needs but without the internal capacity or resources to engage experts to assist in P3 delivery.

Third, Section 70701 would require a value-for-money (“VfM”) analysis for any project seeking credit assistance under the TIFIA or Railroad Rehabilitation & Improvement Financing (“RRIF”) programs with estimated capital costs of $750 million or more. A VfM analysis evaluates the benefits of P3 delivery for a certain project against conventional delivery, looking across the spectrum of project costs during the lifecycle of the asset. While P3 delivery will not be the most efficient option for every project, this VfM requirement will ensure that projects receiving TIFIA and RRIF credit assistance evaluate whether P3 delivery would provide public benefit over conventional delivery.

While the future of this legislation is not yet clear, inclusion of these three provisions marks a positive step for federal P3 policy and would provide tremendous benefit to the industry if enacted.

By Shant Boyajian on 08.02.2021

Nossaman LLP

In 1934, Congress mandated the newly created Federal Communications Commission (FCC) “to make available, so far as possible, to all the people of the United States a rapid, efficient, Nation-wide, and world-wide wire and radio communication service”—but left it largely up to the FCC and the states to figure out how to do so. In 1996, Congress expanded that universal service goal to include access to “advanced services,” meaning high-speed internet, and explicitly established a goal of “affordable” services, including to “low-income consumers.” There, too, Congress declined to provide appropriations to achieve those goals.

Now in 2021, Congress has done a lot more than just set goals for access to these services—it finally provided the funding to do so.

Continue reading.

The Brookings Institution

by Blair Levin

Friday, August 13, 2021

Next week, the House is expected to return from August Recess early for a week-long session to debate multiple infrastructure packages’ processes and potential passage. This includes the Senate passed bipartisan 1 trillion dollar infrastructure package that includes $600 billion in new money and relies heavily on PAB financing. The Chamber also passed a budget reconciliation resolution, an outline paving the way for an additional $3.5 trillion in infrastructure spending this year. Both items are now awaiting review in the House.

In response to a group of 9 rank-and-file Democrats demanding the House pass the bipartisan infrastructure package before advancing the budget reconciliation outline, House Leadership has taken steps to pass a rule allowing for the Chamber to take up the bipartisan infrastructure bill alongside the budget outline. It seems this is the most likely path to be followed next week, however, the Rule needed to attempt this gambit has yet to be drafted or approved.

House Leadership has set a deadline of September 15th for Committee Chairs to submit legislative priorities for the budget reconciliation infrastructure package, setting up a fall debate on the $3.5 trillion package.

The BDA and MBFA continue to press for the inclusion of key muni priorities in the budget reconciliation package. Last week, the MBFA met with Senior Staff in Rep. Terri Sewell’s (D-AL) office to discuss the Congresswoman’s muni package, the LIFT Act, and possible inclusion in the draft budget bill. The MBFA plans to continue meeting with key offices leading up to the introduction of legislative text promoting all muni priorities including:

• The reinstatement of tax-exempt advance refundings,
• Raise the BQ debt limit, and
• Creation of a new direct-pay bond exempt from sequestration.

The MBFA and BDA will continue to provide updates as they become available

Bond Dealers of America

August 17, 2021

The lasting problems of infrastructure aren’t of need or construction, but of overbuilding, delayed costs and the challenges of thinking ahead.

Over the past two centuries, federal, state and municipal governments across the U.S. have launched wave after wave of infrastructure projects.

They built canals to move freight in the 1830s and 1840s. Governments subsidized railroads in the mid- and late 19th century. They created local sewage and water systems in the late 19th and early 20th centuries, and then dams and irrigation systems through much of the 20th century. During World War II, massive amounts of public money were spent building and expanding ports, factories, airfields and shipyards. And after the war, highway construction – long a state and local project – became a federal endeavor.

Many of these projects did not end well. The problem wasn’t that the country didn’t need infrastructure – it did. And the troubles weren’t the result of technical failures: By and large, Americans successfully built what they intended, and much of what they built still stands.

Continue reading.

governing.com

August 15, 2021 | Richard White

The US Senate this week passed a sweeping $1.2 trillion infrastructure bill, marking President Biden’s biggest legislative victory to date. But it remains unclear if the bill will be a win for a US private equity industry that has raised hundreds of billions over the past decade to rebuild the country’s roads, bridges, utilities and more.

Public-private partnerships, also known as P3s, have struggled to gain traction in the US, even as the country’s infrastructure has slowly crumbled. The Senate bill, which totals some 2,700 pages, attempts to change that by directing states and municipalities to consider instituting public-private agreements. Part of the infrastructure bill requires local governments seeking federal funding for a project of over $750 million to run a cost analysis on a private partnership.

But the bill reportedly doesn’t require local governments to actually create public-private partnerships. That means investors that have raised billions for infrastructure deals could be in the precarious position of having ample dry powder but few opportunities to spend.

And the bill still needs to pass a divided House of Representatives before being signed into law.

Investment is needed. The American Society of Civil Engineers gave the country’s infrastructure a “C-” grade in a 2021 report card, reportedly estimating that it would cost almost $2.6 trillion to implement the necessary repairs and earn a “B” grade.

Some within the private equity industry have sounded an optimistic tone about the legislation. Adam Bernstein, a managing director at infrastructure and impact investor North Sky Capital, said the bill could open the door for more investment in electrical vehicle infrastructure, renewables and the electrical grid. And that could open the door for mega-deals.

“You’re going to have to take some big swings,” Bernstein explained. “And you would just have to think that a larger infrastructure fund would be able to participate in that.”

Over the past decade, infrastructure fundraising has climbed, albeit in fits and starts, with the total raised peaking at more than $46 billion in 2018, according to PitchBook data.

Private equity firms have turned to infrastructure deals in part because they are often immune to the level of volatility seen by fixed income or equities, for instance. And the contracts can often last decades, providing steady returns regardless of broader market trends.

In 2017, Blackstone announced it would raise $40 billion for an infrastructure fund, with $20 billion coming from the Public Investment Fund of Saudi Arabia. But the vehicle has struggled to get off the ground. In Blackstone’s fourth quarter earnings call, president Jonathan Gray said the vehicle had raised around $14 billion, well short of its original target.

Over the past few years, there’s been growing angst about allowing private equity firms to dip their beaks into public works projects. In Bayonne, N.J., water bills spiked 28% after KKR invested in the city’s public water systems, according to an analysis by The New York Times. Other cities including Missoula, Mont. have actually sued to buy back their water systems.

Private equity investments in public utilities haven’t always gone well for the firms, either. In 2014, electricity company Energy Future Holdings filed for Chapter 11 bankruptcy protection, bogged down by more than $40 billion in debt after TPG, KKR and the private equity arm of Goldman Sachs took the company private in 2007 in a $45 billion deal.

At the time, The Wall Street Journal reported it was the eighth largest bankruptcy in the history of the US. And it’s one of the most high-profile LBOs to ever fail, with the firms reportedly losing a combined $8 billion of their invested capital.

“Overall, a lot of money has been raised, and that’s commensurate with the capital needs of the amount of infrastructure spending,” Bernstein said. “That, of course, doesn’t guarantee it’ll end up being a good investment.”

For local and state governments, it’s not always easy to know whether or not to partner with PE. Governments often tap the $4 trillion municipal bond market for financing. This allows them to keep more of the profits from massive infrastructure projects to themselves, but they are then responsible for any cost overruns.

For North Sky, Bernstein sees an opportunity to pour more capital into lower-middle-market infrastructure projects, with investments ranging between $15 million and $20 million and on a shorter timeline than the typical private equity holding period, which can extend up to seven years.

“Where we see the opportunity is to really partner with those smaller counties [and] cities that may not necessarily need 100 MW solar or wind farms or electricity, but may need to refurbish a recycling facility, or a water treatment plant, or a smaller, renewable electricity facility,” he said. “And those are the kinds of transactions that aren’t going to get attention from some of the larger players.”

Yahoo Finance

August 14, 2021

What’s in them and what could happen next

By a vote of 69 to 30, including 19 Republicans and all 50 Democrats, the U.S. Senate passed a $1.2 trillion infrastructure package, known as the Infrastructure Investment and Jobs Act, on Tues., Aug. 10, 2021.1 Following passage, the proposed legislation was sent to the House of Representatives where further adjustments are expected. Should the bill pass, the House and Senate will need to consolidate their respective versions for a final bill to go to President Biden for his signature.

Tuesday’s bill is one of two pieces of infrastructure legislation under consideration in the Senate. In addition to the $1.2 trillion bipartisan bill, a second $3.5 trillion Democratic proposal is in play.

On Aug. 9, Senate Majority Leader Chuck Schumer addressed this second bill in a letter to colleagues saying, “I will immediately move to the FY2022 Budget Resolution with reconciliation instructions.”2 Reconciliation means the $3.5 trillion bill could pass the Senate by a simple majority vote avoiding the risk of a filibuster. And some House progressives had said they would not support the bipartisan plan unless the Senate moved quickly on the second bill.

Continue reading.

INVESTOPEDIA

By JIM PROBASCO Updated Aug 11, 2021

The pandemic worsened the U.S. affordable-housing crisis. Increasingly, public and private entities are tapping the bond market to finance development.

The shortage of affordable housing has long plagued low-income families in the U.S., and racial inequity is one significant factor that’s contributed to the crisis. Minority groups, especially Blacks and Hispanics, suffer higher rates of housing insecurity due to homeownership discrimination—particularly in the mortgage application process—which leaves them disproportionately exposed to the increasingly unaffordable rental market, according to a recent Morgan Stanley Research report.1

The affordable housing deficit has only worsened since the pandemic. The country now lacks as many as 6.8 million homes for households with income at or below the poverty guideline, or 30% of the local median income. That’s nearly double the 3.6 million shortfall in 2019, according to a recent report from the National Low Income Housing Coalition.2

“The housing affordability crisis in the U.S. has grown acute over the years, and only became more so during the pandemic, amid the spike in unemployment and homelessness,” says Joan Tally, Managing Director in Morgan Stanley’s Community Development Finance, which helps the firm meet obligations to lend, invest in and provide services to low- and moderate-income communities.

The long-term solution entails an obvious, if costly, solution: Build more affordable housing. One increasingly promising model of financing taps into the growing investor appetite for sustainable bonds, especially those that target projects tied to social equality. That’s prompted more issuers of this debt to enter the market, including state housing finance agencies, community development financial institutions (CDFIs), affordable-housing developers and corporations.

DEMAND FOR AFFORDABLE-HOUSING BONDSThe focus on racial and economic justice during the pandemic has elevated social bonds and sustainability bonds in this space. Traditionally, allocators financed affordable housing projects through green bonds tailored to deliver positive environmental impact through LEED certification or energy-saving infrastructure to combat climate change.

Now, affordable housing is also included in social and sustainability bonds. In 2020, green, social and sustainability bonds raised more than $600 billion from investors, nearly double the $326 billion issued in 2019; the majority of growth came from an increase in social and sustainability bonds.3 In particular, robust demand came from investors who prioritized financing for social inequities exacerbated by COVID-19, such as decreased nonprofit funding, falling health-care system revenues and unequal access to resources and opportunities.

“Affordable-housing finance has been an important part of the ‘E’ in ESG­—environmental, social and governance—investing for more than 15 years,” says Geoff Proulx, Managing Director and Co-Head of the Affordable Housing and Community Development Group in the Public Finance Banking Group within the Fixed Income Division at Morgan Stanley. “Now the ‘S’ is emerging as a driver of demand for those interested in investing in affordable housing.”

NEW ISSUERS IN THE SUSTAINABLE BOND MARKETSome nontraditional organizations also have started to tap capital markets to fund affordable housing. CDFIs, Treasury-certified private financial institutions, are increasingly turning to the bond market to raise money for affordable-housing projects, according to Grace Chionuma, Executive Director and Co-Head of the Public Finance Affordable Housing and Community Development Group.

Only in recent years have CDFIs issued bonds to access longer-term capital. In 2017, Local Initiatives Support Corp. issued the first-ever CDFI bond—a $100 million offering underwritten by Morgan Stanley to help fuel new businesses, jobs and large-scale redevelopment efforts. Since then, Morgan Stanley has underwritten four other bond offerings for CDFIs, totaling $332 million, as investors sought new and additional forms of sustainable investing, Chionuma says.

Other entities continue to broaden the sustainability bond market. In December, Morgan Stanley underwrote the first taxable social bond by BRIDGE Housing, a nonprofit affordable-housing developer that builds, owns and manages properties in high-cost, high-density areas on the West Coast, including San Francisco, San Diego, Los Angeles, Seattle and Portland. The proceeds of that $100 million issue will go toward developing and acquiring multifamily affordable housing, transit-oriented development, green building and energy efficiency.4

“Demand is extreme for this type of housing in areas that have average median incomes at these levels,” says Chionuma, and the goal is to help facilitate more capital to additional nonprofit affordable-housing developers like BRIDGE Housing. “Given the maturity of the sector, with the right execution, we’ll be able to enable more capital flow from public markets into these projects,” she says.

HOMEOWNER LENDING AND SINGLE-FAMILY HOUSINGSocial bonds are also starting to fund homeownership programs that extend affordable loans to first-time homebuyers, says Proulx, with many programs devoting a significant portion of lending specifically to minority homeowners. Examples of housing finance agencies that aim to help mitigate the racial homeownership gap include the Massachusetts Housing Finance Agency, Florida Housing Finance Corp. and Rhode Island’s RIHousing, he says.

In the past year, Morgan Stanley has facilitated inaugural bonds to finance single-family affordable housing by underwriting social bonds for agencies in several states, including Iowa, Florida, Massachusetts, Rhode Island and New York, Proulx says. A recent example is the Massachusetts Housing Finance Agency’s first-ever social bond, which Morgan Stanley underwrote in December. Proceeds will fund new mortgages, including down-payment assistance loans to first-time homebuyers for owner-occupied, single-family affordable housing for low- and moderate-income households throughout the state.

MORE CORPORATES ISSUE AFFORDABLE-HOUSING BONDSCompanies have also issued affordable-housing bonds in response to growing investor demand, according to Cristina Lacaci, Morgan Stanley’s Head of ESG Structuring in Global Capital Markets. “Investor desire, especially from younger generations, is driving the growth of sustainable investing in both mainstream funds and sustainability funds,” she says.

One recent example: last August, Alphabet issued a $10 billion offering, underwritten by Morgan Stanley, that included $5.75 billion of sustainability bonds, the largest-ever corporate sustainable financing deal. A portion of the proceeds from the sustainability bonds will finance the repurposing of land owned by Alphabet to develop affordable housing across the Bay Area.

And Morgan Stanley offered its own inaugural $1 billion social bond in October to finance housing at affordable rates for low- or moderate-income individuals or families. Proceeds will support a range of affordable housing developments across the U.S., including a project for homeless veterans in Washington, D.C., and the construction of new affordable homes close to high quality public transit in South Salt Lake, Utah.

“As the recovery from the pandemic continues, our clients and our firm have a unique opportunity to address issues of systemic injustice through the capital markets,” says Audrey Choi, Morgan Stanley’s Chief Sustainability Officer. “Morgan Stanley is excited about our ability to both underwrite and issue innovative financial solutions like social bonds that continue to gain traction with investors demanding to address societal challenges by providing capital that makes a positive impact on a large scale.”

Morgan Stanley’s social bond is one of the most recent examples of the firm’s decade-long leadership in sustainable finance, which includes the establishment in 2013 of the Institute for Sustainable Investing, which accelerates the mainstream adoption of sustainable investing. That same year, Morgan Stanley helped support the first corporate green bond and, in 2017, priced the first public market bond deal for a CDFI to help advance economic opportunity in underserved neighborhoods in the U.S.

_______________________________________________

1 American Community Survey (ACS), Home Mortgage Disclosure Act (HMDA), Morgan Stanley Research.

2 https://reports.nlihc.org/sites/default/files/gap/Gap-Report_2019.pdf

3 https://www.environmental-finance.com/assets/files/research/sustainable-bonds-insight-2021.pdf

4 https://bridgehousing.com/press_releases/bridge-housing-issues-100m-in-series-2020-sustainability-bonds/

Morgan Stanley

August 10, 2021,

After a strong start to 2021, more tailwinds could keep the momentum going for municipal bonds and the Vanguard Tax-Exempt Bond ETF (VTEB).

The expectation of higher taxes next year could spur a flight to municipal bonds in the second half of 2021. Thus far, the threat of inflation and potentially higher rates hasn’t turned investors away from municipal bond products.

“During the first half of the year, municipal bonds (munis) shrugged off the rise in long-term U.S. interest rates and crushed their taxable counterparts,” an Advisor Perspectives article noted. “Expectations for higher taxes in 2022 that could be included in a potential stimulus package have kept demand high, while muni net supply was constrained the last few months.”

As the stock market continues to flux up and down on Covid news, municipal bonds can provide some level of stability. Municipal bonds are traditionally less volatile than their corporate bond counterparts.

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. MUB seeks to track the investment results of the S&P National AMT-Free Municipal Bond Index, which also measures the performance of the investment-grade segment of the U.S. municipal bond market.

The sampling approach means that both funds hold a subset of bonds within the index to replicate the debt’s yield, duration, and credit quality. This method allows the funds to avoid trading expensive bonds that could harm performance. It also minimizes tracking errors.

Continued Strength for Munis

Passage of the trillion-dollar infrastructure could also give municipal bonds a boost. Local government infrastructure projects are typically funded by municipal bonds.

“The driving force for the rest of the year should continue to be technical demand, driven largely by the U.S. government’s fiscal plan,” the Advisor Perspectives article said further. “Barring a total derailment of the infrastructure and social-stimulus packages, we can expect this demand to stay high and muni yields to remain tight to Treasuries, with returns approximating muni market yields. Any strong selloff in munis is likely to quickly snap back as investors jump in to capture value.”

ETFTRENDS.COM

by BEN HERNANDEZ

AUGUST 9, 2021

Joe Mysak, Editor of Bloomberg Brief: Municipal Market, discusses the latest news from the muni market. Hosted by Paul Sweeney and Matt Miller.

Listen to audio.

Bloomberg Radio

August 13, 2021

In this week’s broadcast featuring Bloomberg Intelligence analysts and their research, Alison Williams assesses the state of big bank equities trading and M&A fees, Rob Barnett breaks down the pace of solar capacity additions this year and Eric Kazatsky discusses the hot run by tax-exempt municipal bonds. Michael Halen digs into casual dining’s recovery from the pandemic and Kevin Ryan explains how insurers may benefit from the cyberthreats exposed by Covid-19.

Hosts: Alix Steel and Paul Sweeney. Producer: Tim Herro.

The BI Radio show podcasts through Apple’s iTunes, Spotify and Luminary. It broadcasts on Saturdays and Sundays at noon on Bloomberg’s flagship station WBBR (1130 AM) in New York, 106.1 FM/1330 AM in Boston, 99.1 FM in Washington, 960 AM in the San Francisco area, channel 119 on SiriusXM, www.bloombergradio.com, and iPhone and Android mobile apps.

Bloomberg Intelligence, the research arm of Bloomberg L.P., provides in-depth analysis and data on more than 2,000 companies and 130 industries. On the Bloomberg terminal, run BI .

Listen to audio.

Bloomberg

August 6, 2021

The summer has seen a wave of ESG-related filings, with the focuses ranging from traditional environmental, social and governance (ESG) to political affiliations to alternative energy to female empowerment.

Roughly 100 new filings were made for ETFs or ETF families since the end of May, and at least 25 of those have an ESG element.

Climate Change Funds Emerging

The largest group of these funds are focused on climate change and carbon emissions, with the most notable being FlexShares’ family of five “ESG & Climate” ETFs covering various core asset classes and tracking in-house indexes. That family includes the following funds:

Continue reading.

etf.com

by Heather Bell

August 16, 2021

Municipal bond yields aren’t exactly thrilling these days, but the asset class remains an important income-generator and risk-reducer for investors in retirement.

While yields are broadly low today in the municipal bond space, there are some positive points for retirement investors to consider, and the asset class is proving sturdy even as the delta variant of the coronavirus vexes investors.

“Municipals maintained their seasonal trend and posted strong performance throughout the month of July. The market benefited from a favorable supply-demand backdrop and rallying interest rates due to excess liquidity, short covering, and Delta variant fears,” according to BlackRock research.

More recently, longer duration munis and those with lower credit ratings delivered upside for investors as muni market participants sought to embrace credit and duration risk. A recent decline in supply could be another factor supporting municipal bonds.

“Supply moderated from the robust levels experienced in June and trended more in line with historical expectations. Issuance of $35 billion was down -26% month-over-month but just 5% above the 5-year average, bringing the year-to-date total to $255 billion,” notes BlackRock.

While yields are low within the broader municipal bond universe, investors are still displaying enthusiasm for this form of debt, with flows to related funds, including exchange traded funds, poised to hit records this year.

“Demand remained firm with the asset class garnering continued inflows. While fund flows slowed slightly into month end amid lower absolute yields, 2021 remains on pace to eclipse 2019 as the best fund flow year on record,” continues BlackRock.

The asset manager recommends underweighting munis tied to “speculative projects with weak sponsorship, unproven technology, or unsound feasibility studies,” as well as senior and assisted living facilities in markets that already have plenty of those establishments. However, BlackRock is bullish on munis issued by states in strong fiscal positions as well as munis issued by cities and school boards with robust property tax bases. The fund issuer also likes some high-yield munis.

ETF TRENDS

TOM LYDON | AUGUST 16, 2021

President Biden’s proposal to raise taxes on capital gains has many investors concerned. But before you make any rash decisions with your own portfolio, it’s important to understand whether you’ll be among those affected — because not everyone will be — and if so, what steps you can take to help minimize the impact.

In addition, if you own investments you’re looking to leave to your heirs, you should also be aware of a possible change in estate tax treatment that could mean a higher tax bill for your loved ones that could be somewhat avoidable if you take action.

Managing Your Capital Gains Taxes

Before digging into the possible changes, it may be helpful to recap what capital gains taxes are. Capital gains taxes simply are taxes levied on profits from selling an investment. So, if you buy $10,000 in stock and sell those shares five years later for $20,000, you will likely owe taxes on your $10,000 capital gain, unless the investment is held in a tax-deferred account, such as a 401(k) or an IRA.

Under President Biden’s proposal, the highest tax rate for capital gains would increase to 39.6%, up from a top rate of 20% currently. But because the higher tax rate as proposed would only impact investors earning more than $1 million a year, most people wouldn’t be affected. Also, it’s important to note that the proposed changes may evolve as they move through the legislative process.

Still, if you would be impacted by this change, or are just looking to reduce your potential capital gains tax exposure, consider these actions:

• Invest in municipal bonds. These are generally exempt from federal income tax, and they are also exempt from state income taxes if the bond issuer is from the investor’s home state, making them appealing to investors in high-tax states. Still, be sure to also consider out-of-state municipal bonds, which provide portfolio diversification and can provide higher after-tax yields.
• Max out what you contribute to your tax-deferred retirement accounts, including your 401(k) and IRAs. Any capital gains you earn from investments in these accounts will be tax-deferred until you begin withdrawing the funds in retirement.
• Utilize tax-loss harvesting to help lessen the tax bite from capital gains. Under this strategy, you can sell an investment that’s fallen in value and use that loss to reduce any taxable gains. If you’d like, you can then reinvest your proceeds into a similar type of investment to maintain your asset allocation but beware of the Wash Sale Rule if you reinvest within 30 days of the sale because the loss may be disallowed. Note that only $3,000 of capital losses can be used to offset ordinary income over and above offsetting any capital gains in the same tax year –any remaining losses can be carried forward to any future tax year, indefinitely, until exhausted. So, for example, if you sell a stock that’s declined in value by $20,000, that loss can reduce a $10,000 capital gain to $0 and help lessen your overall tax burden. In addition, $3,000 of unused capital losses can be used to offset your ordinary income. Finally, the remaining $7,000 in unused losses can be carried forward and used to offset future taxable gains and up to $3,000 in ordinary income.
• Consider investing in separately managed accounts (SMAs) as an alternative to mutual funds. Fund investors are often surprised to receive taxable gains statements at the end of the year, even when they didn’t sell any shares of the funds. SMAs do not have embedded capital gains, unlike mutual funds. And because an investor who invests in an SMA owns the portfolio’s securities directly, they can take advantage of tax-loss harvesting.

Managing the Potential Elimination of Step-Up in Basis for Inherited Assets

Another potentially important change to be aware of is the proposed elimination of the step-up in basis for inherited assets. Currently, the step-up provision means that the cost basis of the inherited asset is adjusted (stepped-up) to reflect the fair market value of the asset at the time of the owner’s death. For example, if you inherited shares worth $100,000 from a deceased loved one and then sold those assets, you wouldn’t owe capital gains on that sale, even if the stock appreciated in value from an original purchase price of say $10,000.

Under President Biden’s proposal, when someone passes away, their death would trigger capital gains taxes on appreciated assets for their heirs, either at the time of death or when their heirs sell the assets. So, as with the previous example, if you inherited shares worth $100,000 that had been purchased for $10,000, you’d owe capital gains on the $90,000 worth of appreciation.

Buy-and-hold investors who own assets that have appreciated considerably in value may want to speak with an attorney or tax adviser to shrink the size of their estate. You may simply choose to realize the gains at the current lower capital gains tax rates and re-establish the basis by purchasing the same security again if the goal is to continue to hold the investments and pass them to your heirs. When repurchasing the security, be careful of the wash-sale rule, which may affect your ability to claim a deduction if you sold at a loss.

In addition, possible strategies you may want to consider include:

Annual gifting of assets to heirs. You can give up to $15,000 per person during the year without having to pay any tax, and if you are married, your spouse also can give $15,000 to the same person, for a total of $30,000 per beneficiary per year.

• Donating appreciated assets to charity.
• Placing assets into a trust.
• Purchasing a life insurance policy. The funds from a life insurance policy can help replace the loss of funds from an estate due to estate taxes or capital gains if the step-up in basis is eliminated.

Note that you should discuss your particular situation with a trusted accountant or tax adviser.

Revisit Your Plan with Your Financial Adviser

Tax laws are always evolving, and what’s proposed is often not the same as what becomes law. It’s important to add that these are proposals made by the administration, but also need to be passed by Congress. Regardless of what happens with taxes, consider meeting with your financial adviser. The past year has brought many developments, and it’s worth revisiting your overall plan in light of any changes COVID-19, a new administration or your personal situation may mean to your financial plan.

Yahoo Finance

Chuck Cavanaugh, Head of Wealth Planning

Sun, August 15, 2021

Yields are low across the fixed income spectrum and municipal bonds aren’t being spared. The positive is that bond prices are appreciating, but when yields get too low, investors are often compelled to embrace riskier fixed income assets.

Investors looking for high yields with some protection and tax benefits in the municipal bond universe have a friend in the VanEck Vectors High Yield Muni ETF (HYD). HYD, which tracks the Bloomberg Barclays Municipal Custom High Yield Composite Index, sports a 30-day SEC yield of 2.17%. That’s not the high yield investors are accustomed to with junk-rated corporates, but it’s well in excess of standard muni benchmarks.

HYD isn’t just about yield. More speculative munis are outperforming their investment-grade counterparts, and improving state finances support the case for this asset class.

Continue reading.

etftrends.com

by TOM LYDON

AUGUST 10, 2021

The BDA’s quarterly digital magazine, Fixed Income Insights, is now available right here by clicking here.

It can also be viewed on the new BDA app, which can be downloaded in the Apple store, Google play store, and Amazon app store.

This month’s edition contains articles by the industry’s top contributors and relevant topics:

• Cover Story – A conversation with US Senator Roger Wicker (R-MS) on Infrastructure and Municipal Bonds
• Municipal Markets – Articles from DPC Data and Hilltop Securities
• Taxable Markets – Kevin McPartland of Greenwich Associates
• BDA Member Profile – Ted Karn, President and Founder of The Karn Group

If you are unable to access the online version, a pdf can be found here.

If you have any questions or about the magazine or the new app, please contact Rebecca Rodriguez at rcrodriguez@bdamerica.org

Bond Dealers of America

August 6, 2021

Local governments could turn to special assessment districts to cost-effectively assure safety improvements, bypassing occupants’ foot-dragging and dysfunctional homeowners’ associations.

Experts have yet to determine the precise causes of the June 24 collapse of a Surfside, Fla., condominium tower in which 98 residents died. But policymakers don’t need to wait for engineering reports to tell us what is painfully obvious: Condo ownership associations and their volunteer boards are ill-equipped to tackle serious safety deficiencies in high-rise buildings. Of the 160,000 condominium buildings in the U.S., tens of thousands are precariously underfunded.

The public finance profession has long understood the “tragedy of the commons,” in which everybody enjoys the benefits of community property but their self-interested collective neglect leads to its demise. In the Surfside property, the homeowners’ association had been delivered a clear warning that structural defects were mounting and collective remedial action was required. Yet the building’s HOA board became so frustrated with securing unit owners’ consent that many of its members resigned, and costs kept mounting. A problem that might have been solved a few years ago expanded — “exponentially,” in the words of an inspector — to the point of no return. The Champlain Towers South disaster goes down as one of American history’s most horrific and insightful examples of the tragedy of the commons.

Finger-pointing and blame-laying will go on for months, and undoubtedly there will be new laws to require more frequent safety inspections. But where local governments also need to focus their policy reforms is on the remediation process itself, to provide a cost-effective mandatory protocol for timely funding of structural repairs in isolated cases when private ownership fails.

Anybody who’s lived in a residential community with HOA fees knows how much carping goes on over dues assessments to advance-fund repairs and replacements of common facilities. “Why should we pay now for benefits that will be enjoyed by future owners?” is the all-too-familiar complaint of the tightwads and procrastinators. Even if an HOA is able to borrow money for necessary repairs and bill the owners through installments, there will be defaults and delinquencies. In the Champlain Towers case, the cost per unit for remediation was estimated to be six figures, a staggering cost for some occupants. Would you want to serve on an HOA board facing such opposition and likely litigation from all ends?

A SAD Opportunity

Fortunately, there is a legal and financial tool that can be adapted to solve the problem of the tragedy of the condominium commons: special assessment districts. In California, they are known as Mello-Roos districts, and most states have laws on the books that authorize municipalities to levy a special charge on properties for a wide variety of public improvements that benefit the owners within a designated district, or in some cases even a single building. The bill can be per owner or (in some states) ad valorem based on property values. The municipality that establishes such SADs, as they are known, can take out bank loans or sell bonds, often at lower tax-exempt interest rates, to finance the improvements that are secured by the liens on the properties. In the case of condos, the special financing bonds would have to be secured by a senior tax lien on the underlying land, and in some states, new laws may be needed for single-building districts.

Few condo boards can ever hope to attain long-term financing at such low costs. Most importantly, the SAD tax collections are liens on property and payable by installments so that owners don’t have to cough up the full cost of repairs immediately. When a unit is sold, some states and escrow companies require that the entire assessment be paid off to remove the lien, and the new owner essentially absorbs that cost in the mortgage. But however they are structured, SADs can accomplish what HOAs sometimes cannot.

Of course there are drawbacks. For municipal finance departments and property tax collectors, administering these special districts poses a thankless task. Most assessment districts are relatively small and clutter the books, so many localities charge modest administrative fees to compensate for the staff work they require. Unless consolidated into an annual debt issue, the litter of small individual SAD debt issues can become a fiscal management nuisance — but nothing in comparison with the resources demanded of a municipality that suffers a building collapse. It’s important to retain perspective here and put safety before bureaucracy.

When Lives Are at Risk

This brings us to the implementation process, which will require thoughtful policy design. In some localities, existing laws and policies may require tweaking. One example is how timely intervention could be triggered proactively by the municipal governing body, either upon recommendation of the building inspection department or the HOA board. Usually such municipal actions require a public hearing, but the authority ultimately resides with the municipal governing body. Typically the project work is performed by the local government by contract, which raises questions about eminent domain, indemnification, property access and possibly private activity bond tax rules that may require updated laws and local policies.

Those laws and policies should establish criteria for declaring a demonstrable and documented public safety interest in mandatory improvements to a privately owned building. Doing this without stigmatizing the property is an issue to address. By state law, an intervening local government should be indemnified, given the legal jeopardy and certified structural risks. Statutory or written criteria could provide a checklist for local officials to follow before instigating public intervention.

Perhaps every new high-rise building’s land-use permit and periodic recertification should require creation of a dormant special assessment district that can be activated and invoked immediately upon certification of major structural remediation requirements. If time allows and depending on the severity of defects and risks, the HOA could be given a short grace period to undertake repairs on its own. But the community interest should not be hamstrung by time-wasting protocols or stalling tactics, especially when lives are at risk. In some cases, precautionary evacuations may be necessary, with temporary housing allowances added to an owner’s amortized project assessment.

This financial tool is no panacea, and should be used only in rare cases. But its availability will provide a safety net. Municipal attorneys, along with policy and professional organizations, can guide the way for precautionary enabling legislation and local risk management policies.

governing.com

August 3, 2021 • Girard Miller

Our Chief Market Strategist, Stephen Dover, believes that water risk is global now—devastating floods, unseasonal hurricanes, droughts, megafires, and more demonstrate this. The economic implications of risks related to water are significant and should be considered when investing.

Devastating floods, unseasonal hurricanes, excessive droughts, megafires, and more demonstrate how extreme water risk is global now. From an investor’s perspective, the economic implications of risks related to water are significant and should be a consideration when investing.

• By 2030, the global population will likely exceed nine billion and the world will require 40% more fresh water than it does today.1 The global supply of accessible freshwater accounts for less than 1% of water supplies.
• In my view, risks associated with water affect economic policies, constrain economic growth, and should be incorporated along with other climate-related market risks. Critical investments in water purification, reuse, efficiency, and delivery infrastructure are required on a global scale and could provide opportunity to investors.
• The projected declines in freshwater availability will likely affect gross-domestic-product (GDP) growth, present wide-ranging risks for investors across all asset classes, and encompass a broad range of sectors, from those with logical connections, like agriculture and utilities, to those that may not be so apparent, like packaging and semiconductors.
• Communities and companies must consider how to plan for and mitigate water risk. Companies that lack a full understanding of water risk, lag in disclosing water risk, or postpone adjustments to regulatory reforms, present long-term risks for both the communities and investors that invest in those companies.
• Infrastructure investment opportunities may be found globally as governments and municipalities prioritize managing water risk. China’s Maritime Silk Road and Russia’s Ice Silk Road expand their water infrastructure. The US bipartisan infrastructure proposals include investment in sewage systems, water supplies, and replacing lead pipes.

There are also opportunities in identifying companies that can provide solutions to deal with water scarcity, water sanitation, and water efficiency. Water impacts the day-to-day operations of companies and how they think through their business models. For details on water risk and investing, read “Water Disruption: Investment Risk From Multiple Angles,” a 2020 research epitome from Franklin Templeton and K2 Advisors. In “Muni Market View on the American Jobs Plan,” Jennifer Johnston, Director of Research, Franklin Templeton Municipal Bonds, discusses how infrastructure funding could filter through the US municipal bond market.

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.

China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

by Stephen Dover of Franklin Templeton, 8/5/21

Fitch Ratings-New York-04 August 2021: Employment recovery is far from complete and largely unequal, with a new Fitch Ratings report pointing to how the pandemic is disproportionately hitting relatively lower-wage service jobs where human interaction is essential.

There are early signs of this labor market mismatch in some states. For instance, while the labor market is very tight in Vermont and New Hampshire, the labor market is showing more slack in Hawaii, California and New York. Relatively low wage service jobs in the leisure and hospitality sector are accounting for a disproportionate share of these job losses, a disconnect that will likely remain in place at least through the end of next year.

“It would be hard to design a labor market shock that more drastically targeted low-wage workers. We’re seeing widening of existing inequalities and a rise in the risk of long-term labor force detachment and economic scarring in the most affected states,” said Fitch Senior Director Olu Sonola. ‘The segment of the population that has been unemployed for an extended period of time is most at risk for the impending government support cliff.’

This mismatch shines more of a light on the employment to population ratio (EPR), which Fitch views as a more holistic measure of disequilibrium than the unemployment rate because it combines the impact of both labor force participation and unemployment. South Dakota, Kansas and Mississippi are the only states that are now back to pre-pandemic EPR levels. However, despite significant recovery, Mississippi, West Virginia and New Mexico have the lowest three EPR levels. This suggests that that the long-term economic growth trajectory of these states will likely continue to be slower, relative to other states, absent offsetting productivity gains. ‘U.S. States Labor Market: Disparities in Pandemic Job Losses to Persist Beyond 2022’ is available at ‘www.fitchratings.com’.

Contact:

Olu Sonola
Regional Credit Officer, U.S. Public Finance
+1 212 908 0583
Fitch Ratings, Inc.
300 W 57th Street
New York, NY 10019

Eric Kim
Senior Director, Head of U.S. State Government Ratings
+1 212 908 0241

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com

Fitch Ratings-Austin-03 August 2021: U.S. vaccination efforts have placed early coronavirus fears in the rear-view mirror, though Fitch Ratings’ latest median report for the sector says operational stress will still likely be felt by healthcare providers for the foreseeable future, and there is looming concern over the rise of the Delta variant.

Medians were mixed for U.S. not-for-profit hospitals and health systems amidst the fallout of the global pandemic, yet proved the sector’s resiliency. That said, expenses are still quite high for NFP hospitals. “Capital spending post-pandemic will increase slightly seeing as organizations necessarily curtailed capex during the height of the pandemic,” said Fitch Senior Director Kevin Holloran. “Higher expenses are likely here to stay, as is an emerging credit split between stronger and weaker hospitals, which could spur more M&A and expansion activity.”

“That said, hospital finances would have taken a more serious drubbing were it not for stimulus relief and re-bounding elective procedural volumes,” said Holloran.

2021 median operating margins and operating EBITDA decreased incrementally to 1.5% and 7.3%, respectively, from 2.3% and 8.7% in the prior year. Yet days cash on hand improved to 241.4 days, compared with 219.8 in the prior year.

The 2021 medians largely reflect the direct coronavirus shock to hospitals and health systems. “Health organizations continue to be hampered by traditional fee-for-service reimbursement due to their experience during the coronavirus pandemic, which resulted in “no services and no fees,” said Holloran.

Fitch’s ‘2021 Median Ratios: Not-for-Profit Hospitals and Healthcare Systems’ is available at ‘www.fitchratings.com’.

Contact:

Kevin Holloran
Senior Director, Head of U.S. NFP Hospitals & Health Systems
+1-512-813-5700
Fitch Ratings, Inc.
2600 Via Fortuna, Suite 330
Austin, TX 78746

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com

Fitch Ratings-Hong Kong/New York-02 August 2021: Issuance of green infrastructure and project finance bonds is expected to rise as more governments adopt a net-zero carbon emission target by 2050, says Fitch Ratings in a new report. This will be supported by strong investor demand for ESG-labelled bonds. We believe the bulk of financing required to address climate transition and adaptation will be allocated to sustainable infrastructure assets, such as renewable energy, and to upgrade existing assets to function in a 2°C temperature increase scenario.

The achievement of net-zero emissions by 2050 will require a plunge in fossil-fuel consumption. This will affect infrastructure associated in the production, transport and use of fossil fuels and could constrain medium- to long-term profitability and capital access for infrastructure asset owners. Fitch considers oil production and refining, liquids transportation, oilfield services and coal-fired power generation to be highly vulnerable to climate-related financial risk.

Climate change mitigation could require investment upwards of USD13 trillion by 2030, but the International Energy Agency estimates that current investment levels are one-third of that required. Infrastructure also faces adaptation costs for the physical risks caused by climate change. Changes in precipitation, temperature, sea levels and more extreme weather events can affect the operation and performance of infrastructure assets. Roads, railways, airports, seaports as well as coastal and urban infrastructure are among the most exposed sectors.

There has been consistent demand for high-quality green bonds in recent years. Green project finance bonds can limit an investor’s exposure to non-green activities compared with green corporate bonds, where the issuer may have carbon-intensive operations outside of the bond’s specific use of proceeds. As banks increasingly impose negative screening policies on fossil-fuel related activities, reallocation of capital towards sustainable investments can meet requirements under new climate-focused financial regulations.

Contacts:

Nneka Chike-Obi
Director, Sustainable Finance
+852 2263 9641
Fitch (Hong Kong) Limited
19/F Man Yee Building
68 Des Voeux Road Central, Hong Kong

Cherian George
Managing Director, Global Head, Infrastructure and Project Finance
+1 (212) 908 0519

Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com
Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com
Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com

By tomorrow, the Senate bipartisan infrastructure bill is expected to pass the Senate, setting up a September fight to get the package through the House prior to the Highway Trustfund running out of funding on September 30th. While the American Infrastructure Bond amendment did not receive a vote during the prolonged debate, the package includes multiple bond financing provisions that expand the usage of PABs, including:

• The Rural Broadband Financing Flexibility Act (S.1676) is the template for adding broadband as an allowable use for private activity bonds (PABs). This would allow states to issue PABs to finance broadband deployment, specifically for projects in rural areas where a majority of households do not have access to broadband.
• Carbon Capture Improvement Act (S. 1829) allows carbon capture and direct air capture (DAC) technologies to be eligible for PAB financing. Private activity bond financing encourages commercial deployment, which is essential for bringing costs down and developing these technologies to scale. These bonds would be outside the volume cap.
• The bill increases the current cap of tax-exempt highway or surface freight transfer facility bonds from $15 billion to $30 billion as proposed by the bipartisan BUILD Act (S.881). Currently, $14,989,529,000 billion of the $15 billion caps has been issued or allocated. Increasing the cap will allow state and local governments to enter into additional public-private partnerships to supplement future surface transportation projects with private investment.

Budget Reconciliation–Additional Opportunities for Munis

Later today Senate Budget Chairman Bernie Sanders (I-VT) is expected to release the $3.5 trillion dollar budget outline, setting up the next infrastructure fight for later this fall in the House. The Senate is expected to pass the bare budget outline this week prior to adjuring for August recess, without policy detail included. This package will provide additional opportunities for the passage of key muni priorities.

The MBFA and BDA have learned through conversations with senior Administration staff and key Capitol Hill contacts that muni provisions remain a priority for Congressional tax writers as Democrats eye the next spending opportunity this fall.

These muni provisions under consideration include:

• The restoration of tax-exempt advance refundings;
• Raising the BQ limit; and
• The direct-pay American Infrastructure Bond.

The MBFA and BDA will continue to provide updates as they become available.

Bond Dealers of America

August 9, 2021

State and local governments are set to receive billions if the legislation passes, including funding to support cybersecurity, broadband, transit, roads, water and more. Here are the details.

A bipartisan infrastructure bill now under debate in the U.S. Senate promises more than $500 billion in new spending — including massive programs that will benefit state and local government.

The spending, contained in a 2,700-page bill passed by the House of Representatives and going through amendments in the Senate now, covers a wide range of programs but delivers the bulk of the funding to roads, bridges, transit and water. Here are the broad funding areas, as outlined in a White House fact sheet:

Continue reading.

governing.com

August 6, 2021 • Ben Miller

Today, Senator Roger Wicker (R-MS) introduced an amendment to the bipartisan infrastructure agreement that would create a new direct-pay bond, the American Infrastructure Bond. The AIB’s would have a flat 28% reimbursement rate. While not exempt from sequestration, the text provides the ability to increase reimbursement rates to offset any potential negative impacts in the case of sequestration. The Infrastructure Financing Authority provision in the original agreement was removed after an outcry from muni advocates, including the MBFA and BDA before the text was released. At this time, there was no amendment to reintroduce the federal government bond bank that has been submitted.

At this time it is unknown which amendments will receive consideration.

The MBFA and BDA will continue to provide updates this week as the legislation and amendments debate develops further.

Bipartisan Infrastructure Agreement

Last week, the Senate voted 67-32 to move the bipartisan infrastructure agreement to debate without full legislative text-a a key step in advancing the 1 trillion dollar package. This vote sets up an extensive debate process, kick-starting a week’s worth of debate and more compromise, to get the package across the finish line in the Senate before sending across the Capitol to the House for an early fall vote. While this is an important first step in the legislative process, expect many hiccups to arise over the next few weeks.

The updated agreement includes multiple private activity bond provisions. These provisions include:

• The Rural Broadband Financing Flexibility Act (S.1676) is the template for adding broadband as an allowable use for private activity bonds (PABs). This would allow states to issue PABs to finance broadband deployment, specifically for projects in rural areas where a majority of households do not have broadband access.
• Carbon Capture Improvement Act (S. 1829) allows carbon capture and direct air capture (DAC) technologies to be eligible for PAB financing. Private activity bond financing encourages commercial deployment, which is essential for bringing costs down and developing these technologies to scale. These bonds would be outside the volume cap.
• The framework increases the current cap of tax-exempt highway or surface freight transfer facility bonds from $15 billion to $30 billion as proposed by the bipartisan BUILD Act (S.881). Currently, $14,989,529,000 billion of the $15 billion caps has been issued or allocated. Increasing the cap will allow state and local governments to enter into additional public-private partnerships to supplement future surface transportation projects with private investment.

Update on Other Muni Provisions

The original bipartisan agreement included a provision that would create a new direct-pay bond the American Infrastructure Bond. The provision was removed as a way to find needed revenue to ensure the package would be “revenue neutral.” This offer was publicly rejected by both Republican and some Democratic negotiators, and we continue to work with our partners on the Hill and in the Administration promoting these key financing options. The next steps for the package at this time remain murky, with portions of the upcoming August recess likely to be cut short.

The MBFA and BDA have learned through conversations with senior Administration staff and key Capitol Hill contacts that muni provisions remain a priority for Congressional tax writers as Democrats eye the next spending opportunity, the likely $3+ trillion-dollar budget reconciliation package later this summer.

These muni provisions under consideration include:

• The restoration of tax-exempt advance refundings;
• Raising the BQ limit;
• The direct-pay American Infrastructure Bond;

Bond Dealers of America

August 3, 2021

There are a lot of challenges to spending the $350 million allocated to states and localities, but effective centralization and standardization can better ensure economic recovery.

Across the nation, grant dollars are playing a vital role in fiscal recovery and delivering impact to those who need it most–from getting PPE to hospitals, equipping homeless shelters with more beds, to helping local businesses stay afloat. While the Covid-19 pandemic has emphasized its urgency, the focus on grant funding as a revenue source has been steadily growing. Just over the last five years, federal grant spending grew from $576 billion in 2014 to more than $800 billion in 2020.

In the latest federal stimulus package, $350 billion has been allocated to state and local governments. All those extra grant dollars sound great, right? While the funds and the possibilities they bring are welcome, they also pose many challenges for local governments. Lower head count, remote work environments and existing grant management responsibilities (including those involving previous Covid-19 relief funds), complicate already tedious efforts to ensure funding is well managed and has the desired impact.

Ensuring that funding is spent transparently and according to federal requirements laid out in Uniform Grant Guidance is a feat in itself. According to the Government Accountability Office, one in every six grant dollars is mismanaged.

While the challenges are many, so are the possibilities when it comes to delivering impact through grants. Yet, those possibilities can only be realized if local governments master a few critical areas: planning ahead as much as possible, ensuring cross-departmental coordination, agreeing upon priorities, carefully tracking project finances, and creating a system of accountability. Here’s how:

Centralizing With Priorities and Targets

Whether it’s a large team of 15 or more, or a small but mighty team of two, cities should aim to have at least one grant manager overseeing all grant portfolio activities. This person should know the details of funding requirements and help to ensure compliance. If possible, teams can bring in a senior procurement officer to help stay on top of procurement regulations and processes while supporting purchasing contracts and subawards. In addition, an internal auditor can be essential to helping the team establish and monitor a clear audit trail and stay on top of all grant activities to ensure compliance.

It’s also important to align grant funding with the priorities that matter most to target communities by ensuring prioritized, data-driven projects and programs actually meet community needs in advance of receiving funds. One way cities and local jurisdictions can get ahead is by holding comprehensive preplanning and kickoff meetings for all staff across departments before funds start arriving. This will help the grant team to know where to focus incoming funding and where it will deliver the most impact.

To effectively execute current and new emergency grant programs, grant teams must also understand how much has been spent by creating a system of internal controls to help track future spending. To accomplish this, teams should separate budgets into two groups: Covid-19 relief funding and reallocation of previous awards for other projects. This will help teams track grants better while staying ahead of new federal guidelines and reporting requirements.

Once these two groups are identified, it’s important to document expenditure data to support cost allocation plans and indirect cost rates on an ongoing basis. This will inform teams so they know how much has already been spent before executing any emergency grant programs. Then, teams can prepare additional appropriation and spending plans in order to respond quickly to new emergency appropriations, contingency appropriations, and special appropriations.

Standardizing Through Digitization

In addition to a sound strategy that standardizes grant management processes, local governments need the proper tools to execute their plans. Many are turning to cloud-based grant management tools to help aggregate data, increase visibility throughout their organizations, support remote collaboration, and ensure compliance with federal grant requirements.

A digital grant management solution can help government administrators, grant managers and staff save time, reduce redundancies, streamline data entry, and mitigate compliance risk. Rather than spending time on the administrative work of grants, teams can focus on tracking where grant dollars are going and ensure they are meeting departmental goals, mayoral goals, and identified needs in the community.

Delivering Economic Recovery and Real Impact

Ultimately, there are many challenges for grant management, but the possibilities that come with innovating these processes are even greater. If governments start the important work of centralizing, standardizing, and digitizing their grant processes now, they will better ensure economic recovery for the future while streamlining grant dollars to quickly get them into the hands of those that need it the most.

Route Fifty

By James Ha

AUGUST 6, 2021

Some state and local governments are turning to Zoom and Survey Monkey polls to ask residents how to use their federal Covid relief aid.

As America’s states and cities decide how to spend their share of the $350 billion in Covid relief funds they’re getting from the federal government, some are asking residents for ideas. Richmond, Virginia, turned to Survey Monkey.

Through a web page using the popular survey tool that can be accessed via a QR code, Richmond has found plenty of ideas to choose from, with about 750 people responding in its first two days online. The results aren’t public yet. “This should be an exciting question to answer,” said Sam Schwartzkopf of the city’s Office of Public Information and Engagement. “People really seem to be taking interest in it.”

Government officials across the U.S. have set out to gather ideas from citizens on how to spend the money that’s part of the $1.9 trillion American Rescue Plan. The ideas, both big and small, speak to the unusual position that cities and states find themselves in after the federal government provided them with an unprecedented amount of cash. The funds will help local governments take an active role in the recovery and avoid the municipal budget cuts that weighed on the economy after the 2008 recession.

Continue reading.

Bloomberg CityLab

By Amanda Albright and Skylar Woodhouse

August 5, 2021, 8:13 AM PDT

Eric Kazatsky, Senior Municipal Strategist for Bloomberg Intelligence, discusses muni market news. Hosted by Paul Sweeney and Matt Miller. (Renita Young fills in for Matt Miller)

Listen to audio.

August 6, 2021

Interest on many municipal bonds issued by local and state governments and some non-profits is exempt from federal income taxes. As a result, investors, mainly high-income individuals, are willing to lend money to issuers at a lower interest rate than they would demand if the bonds were taxable. Build America Bonds (known as BABs or direct-pay bonds) were created by the American Recovery and Reinvestment Act of 2009 as an alternative way for the federal government to subsidize local and state government borrowing. Instead of making the interest on those bonds exempt from federal income taxes, the federal government provided a subsidy directly.

The BABs program ended in 2010, but the concept has been part of the 2021 debate over financing increased federal infrastructure spending. Here is a primer on these bonds.

HOW DID BABS WORK?

Because the interest investors earn on municipal bonds is generally exempt from federal income taxes, an investor in the top income tax bracket can earn the same after-tax return on a lower-yielding municipal bond as on a higher-yielding taxable bond. For example, for an investor in the top tax bracket, the after-tax return on a 1.3% tax-exempt bond is the same as on a 2.15% taxable bond.

Continue reading.

The Brookings Institution

by Nasiha Salwati and David Wessel

August 4, 2021

Joe Mysak, Editor of Bloomberg Brief: Municipal Market, discusses the latest news from the muni market. Hosted by Paul Sweeney and Matt Miller.

Play Episode

July 30, 2021

Back in March, Warren Buffett warned that fixed-income investors “face a bleak future.”. A few months later, inflation is starting to rear its ugly head, and fixed-income investors feel the pain. The bond market has recovered from the pandemic and yields remain low, but rising inflation means that bond yields could move higher over the coming years.

There are many ways to shield a portfolio from inflation, but investors that rely on a fixed income cannot always avoid bonds. Fortunately, municipal bonds may provide an attractive safe haven from inflation, particularly for high net worth investors maximizing their tax advantages. The challenge is finding the right opportunities in a highly competitive market.

Let’s look at the current state of inflation and how muni bonds may help protect your portfolio.

Continue reading.

dividend.com

by Justin Kuepper

Aug 04, 2021

Summary

• State and local governments saw much stronger fiscal performance coming out of the pandemic than many might have expected.
• Part of the reason we have not seen many credit downgrades has been because of massive federal support. This has improved the outlook for general obligation bonds, and also revenue bonds.
• High-yield munis tend to perform well in a rising rate environment since that correlates with a strong macro environment. As I expect higher rates in 2022, high-yield munis are helping me prepare.
• This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory.

Continue reading.

Seeking Alpha

Aug. 08, 2021

• Venture that turns rice straw into panels needs $18 million
• High board prices, surging demand for junk muni debt pave way

In the heart of California’s rice country, a project that dealt municipal-bond investors one of the biggest high-yield defaults of the past decade is about to ask them for more cash. And there’s every reason to expect burned debtholders to go along.

After years of delay and setbacks including the pandemic and a fire, CalPlant I LLC last year finally finished building a facility that produces a unique type of fiberboard made from a rice-cultivation byproduct called rice straw. The company has equity backing from entities including a subsidiary of the Teachers Insurance & Annuity Association of America and has already borrowed $344 million since 2017 through sales of unrated tax-free debt, most of which is in default.

Still, the plant, which started making panels in November, needs about $18 million more to fully scale up to commercial operations. Bondholders appear to have faith, despite the missed debt payments. The company is poised to win final approval from California officials on Aug. 11 to sell that amount of new securities, most of which will likely go to the existing investors.

The quest for additional financing comes at an opportune time for the borrower: Portfolio managers have plenty of room to plow more money into a struggling venture because there’s so much cash in the $4 trillion muni market seeking tax-free income with a bit of yield. There are other forces at work, too: The residential construction boom has lifted the prices of materials that go into furniture and cabinets. And investors have an incentive to lay out more money if it helps ensure the project succeeds instead of getting caught up in an uncertain bankruptcy process.

It makes sense for bondholders to keep the plant going, said Matt Fabian, a partner at research firm Municipal Market Analytics.

“They’re already educated and exposed and they have money to burn,” he said. “So why not invest it in more CalPlant if that creates a positive outcome? If they remain constructive on the project, then pricing on their bonds remains constructive as well.”

Farmer’s Dream

Leaning again on debt investors could help achieve the dream of CalPlant co-founder Jerry Uhland, who quit rice farming to bring the patented idea to fruition at a site in Glenn County, north of Sacramento. The company says it’s producing the world’s first medium-density fiberboard made from rice straw.

“I have no hair left, but other than that, things are going better than they were a year ago,” Uhland, speaking from the facility’s straw yard, told board members of a California agency in a virtual meeting in July. “I believe the light at the end of the tunnel is nearing.”

Uhland and other executives didn’t respond to requests for comment. But in updates posted online for bondholders, they describe difficulties such as worker injuries and construction disputes. And they cited cause for optimism, such as rising prices for fiberboard.

They also spell out the need for more money: Talks with more potential equity investors haven’t progressed and the company will run out of cash in November, according to recent monthly reports.

Such tribulations may be expected given the unique nature of the project, which seeks to turn the tons of debris cast off by California’s rice growers into an environmentally friendly, profitable product that the company has dubbed Eureka MDF.

The fiberboard market shows the potential for CalPlant should it finally achieve full commercial operations, which it’s anticipating by the end of 2023. Average prices in July were 27% higher than the five-year average ending in 2020, according to industry publication Fastmarkets Random Lengths.

“The market for medium-density fiberboard is very hot, and we expect it to remain that hot for at least the next 18 months to two years,” said Andy O’Hare, president of the Composite Panel Association.

Jane Abernethy, chief sustainability officer of Humanscale, a New York-based maker of ergonomic office furniture, said she’s interested in Eureka MDF. Depending on factors such as durability, it’s possible Humanscale might pay a premium for it, she said.

“They have a very good shot at ramping up and getting into production,” she said. “It sends the signal for others to see that finding innovative ways of reusing material that could be waste, that people do value it.”

Default History

The company first sold unrated municipal bonds in 2017 to build the factory, issuing $228 million of debt. Two years later, it sold about $74 million, and soon ran into trouble. It alerted bondholders in December 2019 that it would tap reserves to make debt payments. It ultimately defaulted on those two borrowings by mid-2020. It’s the third-largest high-yield muni default of the last decade, according to Municipal Market Analytics. CalPlant in October 2020 raised a third round of debt, totaling $42 million and due in 2032. It priced to yield 8.17%, at a time when rates on top-rated munis with a similar maturity were roughly 1%, data compiled by Bloomberg show.

The bid to sell more tax-exempt debt won approval on July 20 from the California Pollution Control Financing Authority. One more sign-off remains from another agency, the state’s Debt Limit Allocation Committee, whose board has the same voting members and which determines what projects get access to the low-cost financing. Uhland said in the July meeting that the amount may be less than the requested $18 million as talks with the senior bondholder group, who signed a forbearance agreement, continue.

Municipal junk-bond funds pulled in a record amount of money in the first half of the year, and underwriters of new deals have often been swamped with orders that are multiples of what’s available.

“The demand side is so strong that you’re able to get most deals done,” said Terry Goode, a senior portfolio manager at Wells Capital Management, which doesn’t hold CalPlant bonds. “That includes some that have had challenging credit stories or even defaulted securities.”

The top three bondholders — Franklin Resources, Invesco Ltd. and Sun Life Financial — hold a combined $162 million, according to the most recently available data compiled by Bloomberg. Spokespeople for the three firms declined to comment.

“None of us bondholders want to see the project fail,” said Jim Colby, senior municipal strategist at Van Eck Associates Corp., which says it holds about $28 million of CalPlant debt.

Bloomberg Finance

By Romy Varghese

August 4, 2021, 7:00 AM PDT

— With assistance by Natalia Lenkiewicz, Philip Brian Tabuas, and Kenneth Hughes

Most states saw revenue growth in fiscal 2021 primarily resulting from a strengthening national economy and federal stimulus programs. The revenue gains in fiscal 2021 were in contrast to fiscal 2020, when states saw revenues decline after nine consecutive years of growth. Overall, revenues have outperformed projections from earlier in the pandemic (when most states enacted their fiscal 2021 budgets). Several factors help explain recent improvements in states’ revenue outlooks, including: federal stimulus measures have put a lot of additional money into the economy, which helped to lessen state revenue losses; high-income earners have been relatively insulated from the pandemic’s economic effects, which has limited impacts on personal income tax collections; the types of consumption most curtailed by the pandemic comprise a relatively small portion of states’ sales tax bases; and the enabling of online sales tax collections following the U.S. Supreme Court decision in Wayfair v. South Dakota.

Fiscal 2021 revenue collections were also impacted by the shifting of the 2020 tax deadline from April 15 to July 15. According to NASBO’s Spring 2021 Fiscal Survey of States, nineteen states reported that they recognized these delayed revenues due to the deadline shift in fiscal 2021 instead of fiscal 2020, depressing fiscal 2020 revenues and leading to greater growth in fiscal 2021.

As a result of the preceding factors, most states saw strong year-over-year growth in overall tax collections for fiscal 2021, with a number of states reporting double digit increases. Many states reported that revenue from all major taxes, including sales, personal income, and corporate income, experienced gains in fiscal 2021 compared to fiscal 2020. In addition, most states saw revenues exceed earlier projections leading to budget surpluses. States have begun identifying possible uses of their fiscal 2021 budget surpluses, including: bolstering rainy day funds; restoring prior spending cuts; increasing education funding; additional roads funding; increasing the Medicaid trust fund; additional contributions to retirement funds; paying down future obligations for employee and retiree health care; providing more money to cover the cost of unemployment benefits; repaying federal loans for jobless benefits; refundable income tax credits; property tax relief; and other tax reforms. NASBO’s 2021 Budget Processes in the States report details states’ legal requirements and policies for determining how to handle a general fund budget surplus in Table 15.

Continue reading.

NASBO

Does the U.S. need a coordinated national response or will it be every city for itself?

In 1988, Congressional testimony from NASA’s Dr. James Hansen helped cement the words “climate change” in the national consciousness. In 2015, nearly 200 countries met in Paris to pledge to address the problem. But 2020, the year the skies over San Francisco turned a sick shade of orange, the Earth’s temperature hit its highest ever, the Atlantic hurricane season smashed records, and nearly every state west of the Mississippi suffered severe drought, may well be remembered as the year it finally hit home.

Across the U.S., state and local governments and the bond market that helps them do business are coming to grips with a situation that can’t be ignored any longer. They’re taking increasingly proactive, if piecemeal, steps toward making their communities ready for extreme weather and pollution scenarios that once seemed unimaginable.

“I feel like there’s been a revolution in the past year in terms of thinking about climate change,” said Kevin DeGood, director of infrastructure policy at the left-leaning Center for American Progress. “What’s that old saying — everything seems impossible until it happens, and then it feels inevitable?”

Continue reading.

marketwatch.com

By Andrea Riquier

July 30, 2021

Last night, the Senate voted 67-32 to move the bipartisan infrastructure agreement to debate without full legislative text – a key step in advancing the $1 trillion dollar package. This vote sets up an extensive debate process, kick-starting a week’s worth of debate and more compromise, in an effort to get the package across the finish line in the Senate prior to sending across the Capitol to the House for an early fall vote. While this is an important first step in the legislative process, expect many hiccups to arise over the next few weeks.

The updated agreement includes multiple private activity bond provisions. These provisions include:

• The Rural Broadband Financing Flexibility Act (S.1676) is the template for adding broadband as an allowable use for private activity bonds (PABs). This would allow states to issue PABs to finance broadband deployment, specifically for projects in rural areas where a majority of households do not have access to broadband.
• Carbon Capture Improvement Act (S. 1829) allows carbon capture and direct air capture (DAC) technologies to be eligible for PAB financing. Private activity bond financing encourages commercial deployment, which is essential for bringing costs down and developing these technologies to scale. These bonds would be outside the volume cap.
• The framework increases the current cap of tax-exempt highway or surface freight transfer facility bonds from $15 billion to $30 billion as proposed by the bipartisan BUILD Act (S.881). Currently, $14,989,529,000 billion of the $15 billion caps has been issued or allocated. Increasing the cap will allow state and local governments to enter into additional public-private partnerships to supplement future surface transportation projects with private investment.

Update on Other Muni Provisions

The original bipartisan agreement included a provision that would create a new direct-pay bond the American Infrastructure Bond. The provision was removed as a way to find needed revenue to ensure the package would be “revenue neutral.” This offer was publically rejected by both Republican and some Democratic negotiators, and we continue to work with our partners on the Hill and in the Administration promoting these key financing options. The next steps for the package at this time remain murky, with portions of the upcoming August recess likely to be cut short.

The MBFA and BDA have learned through conversations with senior Administration staff and key Capitol Hill contacts that muni provisions remain a priority for Congressional tax writers as Democrats eye the next spending opportunity, the likely $3+ trillion-dollar budget reconciliation package later this summer.

These muni provisions under consideration include:

• The restoration of tax-exempt advance refundings;
• Raising the BQ limit;
• The direct-pay American Infrastructure Bond;
• Further consideration of expanding PABS.

Bond Dealers of America

July 29, 2021

This weekend, bipartisan infrastructure negotiations continued with Senate Democrats and the White House presenting their “global offer,” an extensive list of revenue compromises, which includes removing all bond provisions from the agreement outline amongst other changes to the spending plan.

The original bipartisan agreement included provisions that would raise the PABs cap for transportation purposes and create a new direct-pay bond the American Infrastructure Bond. The provisions were removed as a way to find needed revenue to ensure the package would be “revenue neutral.” This offer was publicly rejected by both Republican and some Democratic negotiators, and we continue to work with our partners on the Hill and in the Administration promoting these key financing options. The next steps for the package at this time remain murky, with portions of the upcoming August recess likely to be cut short.

The MBFA and BDA have learned through conversations with senior Administration staff and key Capitol Hill contacts that muni provisions remain a priority for Congressional tax writers as Democrats eye the next spending opportunity, the likely $3+ trillion-dollar budget reconciliation package later this summer.

These muni provisions under consideration include:

• The restoration of tax-exempt advance refundings
• Raising the BQ limit;
• The direct-pay American Infrastructure Bond;
• Further consideration of expanding PABS.

The MBFA is in the process of setting up virtual meetings with key Hill staff during August recess to discuss these and other municipal bond priorities for infrastructure. More details are expected later this week.

If you are interested in participating, please email Brett Bolton at brettbolton@munibondsforamerica.org

Bond Dealers of America

July 27, 2021

The Senate has begun deliberations over a bipartisan plan to provide $550 billion in new spending for a wide range of infrastructure projects, including roads, bridges, public transit, broadband, and the electrical grid. The good news is that lawmakers avoided raising taxes to cover the cost of the new spending and instead used some reasonable fees and asset sales. The bad news is that half of the offsets come from unused, debt-financed COVID-19 relief funds and the economic return on many of these investments is questionable.

Let’s first review some of the budgetary offsets and then assess the economic value of the various infrastructure projects.

Continue reading.

Tax Foundation

by Scott A. Hodge

July 30, 2021

The proposal puts $150 billion in new funding toward surface transportation and transit, but won’t close the backlog in maintenance and capital costs.

Update: The Senate released the 2,700-page bipartisan infrastructure bill Sunday night. The text of the bill can be found here.

The bipartisan infrastructure package working its way through the Senate will provide nearly $150 billion in new surface transportation and transit funding, part of a broader $1.2 trillion plan the White House has called a “once-in-a-generation investment.”

While the investment would rank among the largest in transportation infrastructure in the nation’s history, experts say it will not uniformly close the gap in funding needed to address structural deficiencies.

Public transit systems, for example, have a $176 billion backlog in funding, according to a report by the American Society of Civil Engineers. The infrastructure package would provide $39 billion in funding for transit over five years. That’s $10 billion less for public transit than was initially proposed in the initial infrastructure framework.

Continue reading.

Route Fifty

By Andrea Noble

JULY 30, 2021

Vote caps weeks of negotiations, but challenges await in the House

The Senate on Wednesday voted to advance bipartisan infrastructure legislation, capping weeks of late-night negotiations and launching the next step in what has become one of President Joe Biden’s key domestic priorities — even as challenges await the measure in the House.

By a 67-32 vote, the Senate moved to invoke cloture on a motion to proceed to the legislative vehicle for a bipartisan infrastructure plan with $550 billion in new spending. Seventeen Republicans, seven more than the 10 needed to invoke cloture in a 50-50 Senate, joined Democrats to vote to move forward.

Among the Republicans who voted to invoke cloture were members of the negotiating team, including Sens. Mitt Romney of Utah, Rob Portman of Ohio, Susan Collins of Maine and Lisa Murkowski of Alaska, as well as some relative surprises: Sens. Jim Risch of Idaho, Charles E. Grassley of Iowa, Shelley Moore Capito of West Virginia and Lindsey Graham of South Carolina.

The negotiators, who stood in a huddle on the floor, cheered at one surprise yes vote: John Hoeven of North Dakota. Collins grinned widely throughout the vote, while at one point, Sen. Kyrsten Sinema of Arizona, the lead Democratic negotiator, did what appeared to be a restrained happy dance.

Also voting yes was Minority Leader Mitch McConnell, who tweeted his support earlier in the day.

Doubts in House

Although Senate negotiators were celebratory in a post-vote news conference, the bill’s future is already in question in the House, where Speaker Nancy Pelosi has vowed not to take it up until after the Senate approves a $3.5 trillion budget reconciliation package that includes many of Biden’s other domestic priorities.

Democratic hopes for a package of that size dimmed a little Wednesday when Sinema said she won’t support a price tag that high.

House progressives, meanwhile, say they’re not willing to advance one without the other.

On Wednesday, Rep. Pramila Jayapal, D-Wash., the chair of the Congressional Progressive Caucus said, “Progressives have been clear from the beginning: a small and narrow bipartisan infrastructure bill does not have a path forward in the House of Representatives unless it has a reconciliation package, with our priorities, alongside it.”

The final version was $29 billion lower than the original $579 billion legislative framework agreed upon by White House and Senate negotiators in June and would be a one-time supplemental appropriation.

A source familiar with the revisions said the lower topline number resulted in part from decreasing a one-time infusion into public transit systems from $48.5 billion to $39.2 billion. Negotiators also agreed to eliminate a $20 billion infrastructure bank.

Portman, the GOP’s lead negotiator, described the legislation as a major infrastructure package that would be popular both inside and outside Washington. For weeks, 11 Republicans and 11 Democrats have been involved in the talks with White House officials.

“It’s going to help with regard to our roads and our bridges and our ports and our waterways,” Portman said. “It also helps expand the digital infrastructure of broadband.”

In a statement Wednesday afternoon, Biden said the deal “signals to the world that our democracy can function, deliver, and do big things. As we did with the transcontinental railroad and the interstate highway, we will once again transform America and propel us into the future.”

Offsets

A summary released by the White House said the spending would be “financed through a combination of redirecting unspent emergency relief funds, targeted corporate user fees, strengthening tax enforcement when it comes to crypto currencies, and other bipartisan measures, in addition to the revenue generated from higher economic growth as a result of the investments.”

A list of offsets circulating among lobbyists and confirmed by congressional sources included $53 billion from some states returning unused enhanced unemployment insurance benefits, $20 billion from sales of future spectrum auctions, $56 billion in economic growth from a 33 percent return on investments and $2.9 billion from extending available interest rate smoothing options for defined benefit pension plans.

The offsets also included $49 billion stemming from a partial delay of a Trump-era rule limiting drug manufacturer rebates to pharmacy benefit managers, $8.7 billion from extending statutory sequester cuts to Medicare and $3 billion from requiring drugmakers to reimburse Medicare for certain wasted medications.

Another $205 billion would come from repurposing unused COVID-19 relief funds, although three lobbyist sources said that reportedly excludes money set aside for hospitals and medical providers.

Medical provider funds

Senate Finance Chair Ron Wyden, D-Ore., told reporters that people he spoke to, including White House staff, indicated the medical provider relief fund is off the table but stressed that wasn’t totally clear yet.

“We woke up this morning in Oregon today with a headline of hospitalizations up 25 percent, so I’ve been very concerned about that,” he told reporters.

Left out from the latest list is a ban on spread pricing, in which pharmacy benefit managers pocket the difference between what they charge insurance companies and what they paid for a drug. The provision was initially floated as a potential offset last week.

The White House summary listed spending provisions included in the deal, headlined by its $110 billion for roads, bridges and major projects.

The deal includes $39 billion for modernizing transit infrastructure and addresses a backlog of rail cars, stations and tracks that need replacement while improving accessibility, according to the summary.

The White House touted the historic nature of that spending despite the fact that some Democrats had been pushing for even higher levels. The deal also has $66 billion to address Amtrak’s maintenance backlog, modernize its Northeast Corridor and expand rail service to other parts of the country.

Spending

The deal — which calls for $944 billion in new and baseline spending over five years, according to a GOP aide close to the negotiations — would devote $7.5 billion to building out a national network of electrical vehicle charging stations, a key agenda item for the Biden administration. It seeks to address climate change while creating domestic manufacturing jobs. The deal also would spend $2.5 billion each for zero-emission buses, low-emission buses and ferries.

It would spend more than $50 billion on improving the resiliency of U.S. infrastructure to protect against droughts, floods and other natural disasters, as well as cyberattacks.

It would spend $21 billion on cleaning up polluted areas, including money to reclaim abandoned mines and cap orphaned gas wells. And it would spend $73 billion on upgrading the nation’s power infrastructure, emphasizing renewable energy sources.

It would provide $55 billion for drinking and wastewater infrastructure, with money specifically to replace poisonous lead service lines, and would invest $65 billion in improving access to broadband internet.

Sen. Thomas R. Carper, D-Del., the Environment and Public Works Committee chairman, voted Wednesday to take up the bill but criticized it for not going far enough in addressing environmental justice and climate change.

“That’s why I will continue to fight for more to be done in our upcoming reconciliation bill and work to get assurances from the White House and Senate leadership to ensure that it includes the policy and the resources we need to take bold, transformative action to invest in climate change and environmental justice,” Carper said in a statement. “There is no time to waste on this existential threat.”

rollcall.com

By Joseph Morton, Jessica Wehrman, and Lauren Clason

Posted July 28, 2021 at 1:08pm, Updated at 9:29pm

Fitch Ratings-New York-28 July 2021: Fitch Ratings expects follow-on health implications related to COVID-19 to continue to drive elevated health system utilization long after the acute phase of the pandemic has concluded, likely leading to increasing costs and higher insurance premiums for decades. These costs will emerge from the necessary addition to mostly outpatient capacity that is expected to come on line as needed to deal with ongoing treatment of chronic conditions related to potentially permanent damage caused by COVID-19.

The magnitude of these effects is currently inestimable, and will include tangential health issues related to deferred diagnostic testing and treatment during the pandemic. As related conditions are likely to develop over time, Fitch does not anticipate these issues to directly affect the credit profile of issuers in the U.S. healthcare system.

In the near term, health insurers have been able to incorporate expanding COVID-19 claims data, estimates of infection trends and pent-up demand for previously deferred care into 2021 premium rates, which should benefit cost management and pricing this year and next. However, for healthcare providers, the expansion of the healthcare system over the long term will likely exacerbate traditional pressures on operating performance such as tight labor and wage markets for experienced staff, rising pharmaceutical expenses and supply costs in general.

Although the U.S. has glimpsed signs of the pandemic’s potential end over the past couple of months, the ultimate story of the pandemic is still being told. The infection rate is once again trending up, presumably due to a combination of factors including a dramatic reduction in demand for new vaccinations, the rapid spread of the more infectious Delta variant in the U.S., as well as the reduction in mitigation measures.

Contacts:
Bradley S. Ellis, CFA
Senior Director, North American Insurance
+312 368-2089
Fitch Ratings, Inc.
One North Wacker Drive
Chicago, IL 60606

Kevin Holloran
Senior Director, U.S. Public Finance
Sector Leader, Not-For-Profit Healthcare
+1 512 813 5700
Fitch Ratings, Inc.
2600 Via Fortuna, Suite 330
Austin, TX 78746

Britton Costa, CFA
Senior Director, US Corporates
+1 212 908 0524
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY, 10004

Laura Kaster, CFA
Senior Director, Fitch Wire
North and South American Financial Institutions
+1 646 582-4497

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Key Takeaways

• The combination of federal stimulus aid, vaccine progress, easing mobility restrictions, strong economic growth, and pent-up demand is improving the recovery curves for our activity estimates among certain asset classes like air travel, while the prospect of a continued or permanent shift to remote or hybrid work and the growth of online shopping will limit the recovery in public transit ridership for the foreseeable future.
• The U.S. public transit and airport sectors still face the longest recovery relative to other U.S. transportation subsectors, with our current baseline activity estimates for 2021 showing public transit recapturing 45% and airports 70% of pre-pandemic activity levels.
• We see public transit ridership recovering to only 80% of pre-pandemic levels by the end of 2023 and full U.S. systemwide enplanements not returning to near pre-pandemic levels until late 2023 or early 2024, with the international component lagging the broader domestic rebound.
• The threat of coronavirus variants or weakening consumer confidence could slow or stall the recovery for certain modes of transportation, like transit or air travel. However, S&P Global Economics forecasts that U.S. economic activity and growth will accelerate in 2021 as mobility increases and business activity catches up to the reopening demand surge.
• Any upgrades to individual transportation debt ratings lowered in the past 12-18 months will depend on our assessment of the staying power of current recovery trends along with issuer forecasts demonstrating a return to sustainable financial performance metrics consistent with their pre-pandemic levels.

Continue reading.

29 Jul, 2021

Fitch Ratings-New York-29 July 2021: Record volume at US cargo ports has led much stronger financial performance than pandemic expectations, Fitch Ratings says. However, maintaining operational efficiency is more challenging as bottlenecks increase due to pressured supply chains, mismatched rolling stock, capacity-strained logistics networks and coronavirus shutdowns at Chinese ports. Ports will continue to see congestion pressures well into the upcoming peak shipping season, with throughput patterns not expected to normalize until the beginning of 2022.

West Coast ports have seen exceptionally high volumes through the pandemic, driven by robust goods consumption. The Port of Long Beach’s (POLB, AA/AA- Stable) total fiscal 2021 YTD 20-foot equivalent units (TEUs) through June have grown 33% over the same nine-month period a year prior. POLB saw a dip in its June 2021 throughput as a result of the shutdown of Yantian, one of China’s key export hubs, in May. Yantian recently resumed full operations, but the ripple effects will also be seen at other ports in summer throughput as it will take time to unwind the resulting cargo backup.

Port of Los Angeles’ (POLA, AA) YTD TEUs through May were up 48.2% versus the same period in 2020. Fitch-tracked West Coast port TEUs were up 37% through May 2021 from the same period in 2020, and up 17% from the same period in 2019. Port volumes generally track GDP, and Fitch expects 2021 US and China GDP growth of 6.8% and 8.4%, respectively.

Both POLA’s and POLB’s ability to handle larger ships, sizable local market shares and strong representation across shipping alliances continue to position them favorably amid shipping volatility. POLA showed strong financial results for the nine months ending March 2021, with operating revenues up 22% and operating expenses increasing modestly by 1% yoy. Operating income increased a robust 44% yoy.

Minimum annual guarantees accounted for 88% and 80% of POLB’s and POLA’s operating revenues in fiscal 2020, respectively, consistent with prior years, insulating the ports from trade-related revenue volatility. Counterparties have largely continued to honor their agreements despite coronavirus-related volatility. Volumes have heavily favored imports, generating challenges for US agricultural exports as shippers prefer to send empty containers to China rather than waiting for export loads, which are constrained by higher shipping costs. US lawmakers are drafting legislation to force ocean carriers to accept exports.

Although the San Pedro Bay Port Complex has more overall capacity than any other US port with faster routes to Asia, congestion has led some ships to be rerouted, benefiting ports such as Oakland as shippers add additional direct services. Some East Coast and Gulf Coast ports have also seen large increases in container volumes, with the Port of Savannah (GA) growing the fastest (up 31% through May 2021 versus 2020, and up 21% as compared with 2019). East Coast port TEUs were up 23% through May 2021 versus the same period in 2020, and up 16% from the same period in 2019. Cargo volume increases at these ports are constrained by capacity limitations, Panama Canal ship size restrictions and comparatively more congested inland transportation networks.

Congestion is expected to persist through YE 2021 and possibly into 2022, with peak shipping season beginning at the end of the summer with back-to-school and office shopping and continuing through the holiday season. Volume growth will ebb as supply catches up with demand toward YE 2021 and will likely continue at lower rates into 2022. Outbreaks of coronavirus variants that lead to revived restrictions and further shutdowns along the supply chain may further affect volumes. Margins could be pressured if congestion persists well into 2022 with decreases in yard efficiency and increases in labor costs.

Contacts:

Emma Griffith
Senior Director, Global Infrastructure & Project Finance
+1 212 908-9124
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019

Sarah Repucci
Senior Director, Fitch Wire
Credit Research & Risk Analytics
+1 212 908-0726

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Water may be among the least cyber-defended critical infrastructure sectors. Keeping it safe may include channeling more funds and training to tiny agencies and establishing voluntary guidelines.

Public water systems are exceptionally vulnerable to cyber attack, said senators during a U.S. Senate Committee on Environment and Public Works hearing July 21.

The White House has deemed sixteen industry sectors as essential to the nation’s health, safety economy and/or security. Among them, the financial services sector has emerged with particularly robust defenses, while drinking water and wastewater systems may be among the most loosely protected.

Water systems on both coasts were hit by digital tampering efforts this year, in incidents that did not ultimately harm residents but which nonetheless raised alarm bells about the utilities’ cyber preparedness. Criminals broke into a Bay Area California water facility’s systems to delete programs involved in treating drinking water, a former employee allegedly used remote access to shut down a Kansas water system’s cleaning and disinfection processes and hackers seemingly tried to poison Oldsmar, Fla., residents by elevating the amount of the lye used during water treatment — before staff detected and reversed that attempt.

Continue reading.

governing.com

July 27, 2021 | Jule Pattison-Gordon

On July 15, 2021, the Federal Energy Regulatory Commission (“Commission” or “FERC”) issued a Final Rule amending its regulations pertaining to: (1) the information required to be filed with a notice of intent to construct a qualifying conduit facility and (2) the licensing requirements applicable to major projects up to 10 megawatts (MW). The Final Rule was issued to align the Commission’s regulations with changes to the Federal Power Act (“FPA”) that were made as part of the Hydropower Regulatory Efficiency Act (“HREA”) of 2013.

Enacted in August 2013, the HREA amended section 30 of the FPA to create a subset of small conduit hydroelectric facilities that are excluded from the jurisdiction of the FPA. Under those amendments, any party proposing to construct a “qualifying conduit hydropower facility”—a facility that uses “only the hydroelectric potential of a non-federally owned conduit,”—must file a notice of intent with FERC, demonstrating that the proposed project meets certain qualifying criteria. In instances where a dam would be constructed as part of the facility, the Commission required an applicant’s notice of intent to include a profile drawing showing that the conduit—rather than the dam—creates the hydroelectric potential. The Commission clarified this requirement in a 2015 order, Soldier Canyon Filter Plant, in which it concluded that the relevant factor in its consideration of qualifying conduit facilities is whether the facility would use water “within a conduit operated for the distribution of water for agricultural, municipal, or industrial consumption and not primarily for the generation of electricity,” and that the presence of an upstream dam is not relevant to this determination, even where the head from the dam contributes to the facility’s generating potential.

A separate provision of the HREA amended section 405 of the Public Utility Regulatory Policies Act of 1978 (“PURPA”), which provided that certain hydropower projects that produce 5 MW or less were exempted from the licensing requirements of Part I of the FPA. The HREA amended section 405 to increase the limit for exemptions to 10 MW.

On February 18, 2021, the Commission issued a Notice of Proposed Rulemaking (“NOPR”) in which it proposed revisions to its regulations that would: (1) remove the requirement that a notice of intent to construct a qualifying conduit include a profile drawing depicting the source of hydroelectric potential, in cases where a dam would be constructed as part of the facility; and (2) extend the licensing requirements previously applicable to major projects up to 5 MW to major projects 10 MW or less, pursuant to the revised definition of a “small hydroelectric power project” enacted in the HREA 2013.

In its Final Rule, the Commission adopted the changes set forth in the NOPR. It noted that, based on the language in Soldier Canyon Filter Plant, the profile drawings of dams would no longer be required as part of the notice of intent submittal for qualifying conduits. The Final Rule also included changes to the licensing and amendment filing requirements in Parts 4 and 5 of the Commission’s regulations to extend the requirements that previously applied to major projects up to 5 MW to major projects 10 MW or less, to be consistent with the revised definition of a “small hydroelectric power project” under the 2013 HREA. The Commission’s Final Rule provided that such a change is appropriate to “expedite hydropower development by easing the burden of preparing an application for license and by assisting the Commission in more rapid processing of applications.” As part of the Final Rule, the Commission made revisions to 18 C.F.R §§ 4.40–41; 18 C.F.R. §§ 4.50–51; 18 C.F.R. §§ 4.60–61; 18 C.F.R. §§ 4.70–71; 18 C.F.R. §§ 4.200–202.

As of this drafting, the Final Rule had not yet been published in the Federal Register. The Final Rule will be effective 60 days after such publication.

Troutman Pepper – Elizabeth J. McCormick

July 26 2021

On July 15, 2021, in Docket No. RM21-17-000, the Federal Energy Regulatory Commission (FERC or the Commission) issued an Advance Notice of Proposed Rulemaking (ANOPR) pursuant to its authority under Section 206 of the Federal Power Act to consider various reforms to improve the electric regional transmission planning, cost allocation and generator interconnection processes.[1] The ANOPR was published in the Federal Register on July 27, 2021. Initial comments are due October 12, 2021 and reply comments are due November 9, 2021.

The ANOPR is an ambitious, early-stage rulemaking that seems to be an attempt to establish the necessary groundwork for potential reforms to transmission planning, cost allocation and the generator interconnection processes. The ANOPR touches on a wide array of issues and will certainly generate a multitude of comments from a wide range of stakeholders.

Need for Reform
The Commission identifies the continuing evolution of the wholesale electric industry since the issuance more than 10 years ago of major orders on transmission planning and cost allocation (Order Nos. 890 and 1000) and generator interconnection (Order No. 2003), including the changing generation fleet, the effects of state policies, the anticipation of future generation projects, and the ability of current processes to plan and pay for the transmission and generator interconnection as major factors in the potential need for reform. The Commission notes that “regional transmission planning processes may not adequately model future scenarios to ensure that those scenarios incorporate sufficiently long-term and comprehensive forecasts of future transmission needs.”[2] The Commission concludes that a system that fails to account for future scenarios does not capture economies of scale and leads to infrastructure development that may not be efficient or cost-effective and may not satisfy the Commission’s statutory mandate or its policies in Order Nos. 890, 1000 and 2003.

The Commission also notes that when Order No. 2003 was issued, it was less likely that interconnection customers would be responsible for significant transmission-related upgrades associated with the interconnection of their project. “Now, however, there is little remaining existing interconnection capacity on the transmission system … that may require new resources to fund [upgrades] that are more extensive and, as a result, more expensive.” The Commission questions whether these upgrades benefit more than just the interconnection customer. Given that the Commission’s cost allocation precedent requires that costs be allocated on a basis roughly commensurate with benefits, failing to adequately capture the benefits of a project could lead to unjust and unreasonable rates.

Proposed Potential Reforms[3]
Generally, the ANOPR reflects the Commission’s goal to “ensure the development of regional transmission facilities needed to meet the transmission needs of the changing resource mix occurs in a more efficient or cost-effective manner, at just and reasonable rates” while maintaining reliability.[4] The Commission proposes several reforms consistent with this goal and makes numerous requests for comment related to these proposals. The proposals range across three main themes: (1) regional transmission planning and cost allocation processes, (2) identification of cost and responsibility for regional transmission facilities and interconnection-related network upgrades, and (3) enhanced transmission oversight.

Regional Transmission Planning and Cost Allocation Processes

The Commission proposes reforms to plan for the future needs of anticipated generation and to coordinate between the regional transmission planning, cost allocation and generator interconnection processes. First, the Commission discusses a few potential reforms to anticipate future generation and requests comment on the following, among other issues:

• Changing the modeling scenarios for transmission planning, proposing to examine factors using a longer-term outlook and to incorporate new factors such as state and local climate and clean energy regulation.
• Requiring transmission providers in each region to establish a process to identify geographic zones that would potentially support large amounts of renewable generation and to plan transmission investment to facilitate the integration of renewable generation in those zones.
• Incentivizing the development of regional transmission facilities that may offer a solution that is more efficient or cost-effective than a local alternative.
• Increasing interregional and state-to-state coordination that may be necessary for reforming the transmission planning and cost allocation processes.

Additionally, the Commission seeks comment on coordination between the regional transmission planning, cost allocation and generator interconnection processes.

Cost and Responsibility for Regional Transmission Facilities and Interconnection-Related Network Upgrades

The Commission devotes a significant portion of the ANOPR to a discussion of cost allocation and to the participant funding and crediting policy approaches to funding interconnection-related network upgrades.

With regard to cost allocation, the ANOPR notes that an existing cost allocation approach that considers only a single category of needs (reliability, economic or public policy) may fail to consider all relevant benefits and therefore fail to allocate costs commensurate with benefits. Thus, the Commission proposes to require a more “holistic” or “portfolio” approach for regional transmission planning.[5] The ANOPR does note, however, that this type of holistic approach may produce benefits that are very difficult to quantify, and it seeks comments on how to account for these benefits while still ensuring that both transmission and interconnection customers benefiting from the facilities pay their fair shares under the cost-allocation regime.

On the issue of funding, the ANOPR focuses on the current provisions for participant funding and crediting for interconnection-related network upgrades. The Commission suggests that the participant funding model, under which the interconnection customer pays all the costs of the network upgrades, may no longer be just and reasonable. The Commission proposes eliminating or reducing participant funding for such upgrades and, correspondingly, revisiting the crediting policy (under which the interconnection customer funds the interconnection facilities and the interconnection-related network upgrades subject to reimbursement for the network upgrades through transmission service credits). The Commission proposes the following alternatives to this form of funding and seeks comment on these alternatives:

• Each transmission provider provides upfront funding for all interconnection-related upgrades on its transmission system and, once the interconnection-related network upgrade is in service, rolls the cost of that interconnection-related network upgrade into its transmission service rate base paid by all customers.
• Interconnection customers contribute to the upfront funding of interconnection-related network upgrades through payment of a fee.
• Transmission providers provide upfront funding for only higher-voltage interconnection-related network upgrades, and interconnection customers fund the cost of interconnection-related network upgrades below the threshold and are reimbursed through transmission service credits pursuant to the crediting policy.
• The upfront costs of interconnection-related network upgrades are allocated to the interconnection customer on a percentage basis that could be less than 100%.

Enhanced Transmission Oversight
Finally, in recognition of the fact that other suggested proposals in the ANOPR could result in major transmission infrastructure upgrades, the Commission presented two potential approaches to enhance transmission oversight: (1) establish an independent transmission monitor on a regional or multiregional basis to review and provide input on transmission planning and spending, and (2) provide for an increased role for state involvement in regional transmission planning through structures like regional state committees. The Commission seeks comment on both of these proposals.

Commissioner Concurrences
The ANOPR was approved unanimously by all participating commissioners, but separate concurrences were issued.

In a joint concurrence, Chairman Glick and Commissioner Clements discussed the change in the resource mix in the United States and the pressing need for updates to the transmission planning process to accommodate renewable resources and state policies, while ensuring just and reasonable rates. Commissioner Danly wrote a separate concurrence to emphasize the potential limits of the Commission’s jurisdictional authority for each of the ANOPR proposals and to bring attention to the potential effect on ratepayers. Commissioner Christie issued a concurrence emphasizing the importance of comments in this proceeding and supporting the Commission’s approach in the ANOPR seeking comments on a broad range of proposals.

Conclusion
The ANOPR is an ambitious, early-stage rulemaking that has the potential to generate voluminous comments. Since the change in administration, the Commission has taken on many complex and aggressive issues, such as cybersecurity and reliability, the integration of distributed energy resources, and carbon pricing, and the priority to be placed on this issue is not entirely clear. The history of prior ANOPRs is mixed, with some not even advancing to proposed rules and others resulting in major reforms to existing rules and the creation of new rules on regional transmission planning, cost allocation and generator interconnection. Given the changing composition of the Commission and policymakers’ emphasis on infrastructure, it seems more likely than not that some of this ANOPR will evolve into major rule changes for the industry.

_____________________________________________

[1] See Building for the Future Through Electric Regional Transmission Planning and Cost Allocation and Generator Interconnection, Advance Notice of Proposed Rulemaking, 176 FERC ¶ 61,024 (2021) (ANOPR); see also 16 U.S.C. § 824e (requiring that the Commission ensure that transmission rates are just and reasonable and not unduly discriminatory or preferential). The ANOPR can be found at https://elibrary.ferc.gov/eLibrary/filedownload?fileid=15829875.

[2] ANOPR at P 31.

[3] The Commission notes specifically that it “has not predetermined that any specific proposal discussed herein shall or should be made or in what final form”; rather, it seeks comment on the proposals. ANOPR at P 4.

[4] ANOPR at P 70.

[5] ANOPR at P 86.

Day Pitney Advisory

Day Pitney Author(s) Margaret CzepielEvan C. Reese, IIIEric K. Runge

July 27, 2021

Joe Mysak, Editor of Bloomberg Brief: Municipal Market, discusses the latest news from the muni market. Hosted by Paul Sweeney and Matt Miller.

Listen to audio.

Bloomberg Radio

July 30, 2021

Eric Kazatsky, Senior Municipal Strategist for Bloomberg Intelligence, discusses the latest news from the municipal bond market. Hosted by Paul Sweeney and Matt Miller.

Listen to audio.

Bloomberg Radio

July 26, 2021

Key Takeaways

• Credit stability has returned for U.S. public finance and we expect it to continue for the remainder of the year.
• Strong economic growth has translated to positive revenue performance for most issuers and the economic outlook for the rest of the year is favorable.
• The unprecedented federal response to the pandemic with multiple rounds of stimulus has supported the economy and finances of issuers.
• Active management by issuers has supported credit quality across all sectors and will continue to be important as COVID-19 lingers and other ESG related risks present fiscal challenges.

Continue reading. [Registration required.]

22 Jul, 2021

State and local governments will have access to the money, which is flowing from the Economic Development Administration.

A federal economic development agency provided more details on Thursday about how it plans to invest $3 billion in American Rescue Plan Act funds, money that state and local governments will be able to tap into. Department of Commerce Secretary Gina Raimondo during a press conference described the suite of programs as one of the largest economic development initiatives in the department’s history and said it would create jobs.

“Millions of Americans continue to struggle. … Ensuring that these $3 billion are distributed equitably is core to our investment strategy,” she said. “We know that equity is good for workers, good for business, and good for the economy.”

The Economic Development Administration, housed within Commerce, said the new Investing in America’s Communities initiative will provide:

Continue reading.

ROUTE FIFTY

By Jean Dimeo

JULY 22, 2021

Washington is sending cities a gigantic fiscal gift. They have to produce results. The danger is that the money will be squandered. Republicans are watching all that generosity with skepticism.

Urban advocates have long sought more federal money for cities. Now, they are getting it – bigtime. The aid being provided to cities under the coronavirus relief act represents a major test of the thesis that federal aid can be transformative for urban America. Cities should make the most of this opportunity. If they can use these funds to move the needle on substantial change, this would create a strong case for future aid. But if the money is simply frittered away, there’s no reason to expect such extensive help in the future.

The American Rescue Plan contains $350 billion in funding for state and local governments. This includes $45.6 billion for large metropolitan areas. The quantity of funds for these bigger metro areas is significant. Birmingham, Ala., is getting $141 million, Phoenix nearly $400 million, Chicago a bit less than $2 billion.

These are very large sums, particularly when county-level funding is also taken into account. In the merged government of Louisville-Jefferson County, Ky., the “city” is collecting $240 million, plus another $149 million in “county” funding, a bit less than $400 million total. The independent city of St. Louis is getting almost $500 million.

While the rules around how this money can be spent are not entirely clear, there is no mistaking the scope of the grants. Louisville’s annual budget is about $1 billion. That means its allocation is equivalent to 40 percent of its entire annual budget.

It is imperative that cities use this money to produce tangible and material benefits. The all too real danger is that instead it will be wasted. An example is excessive “state of good repair” spending on public transit. The highly respected global transit analyst Alon Levy has described state of good repair as “a racket permitting agencies to spend vast sums of money with nothing to show for it.”

It is very possible that cities will end up spreading their funding across a variety of programs such that billions of dollars are spent, but the material impact is limited, either in physical improvements or moving the needle on social or economic progress.

What should the money be spent on? There are many potential ways that this funding could be directed to making a big impact. It could be used to pay for a major residential street and sidewalk program, thus wiping out a major portion of a city’s infrastructure maintenance backlog. Or it could put a new or renovated playground within walking distance of most kids in the city. It could create more supportive housing units for the homeless. The details will vary from city to city and will depend on federal guidelines around what can be done with the money. The key is to focus on delivering real, material change that is proportionate to the large sums invested.

The imperative to spend the money well is increased by the way that Democrats structured the aid to favor deep blue cities. Money to metropolitan areas was allocated using HUD formulas that greatly privileged deep blue central cities over red or purple suburbs.

For example, in Indiana, South Bend, Evansville, Carmel and Fishers are all about the same size in population. But Evansville is getting $64.5 million and South Bend $58.9 million, while Carmel is getting $7.5 million and Fishers only $6.9 million. The former two vote strongly Democratic while Carmel and Fishers are more conservative suburbs. On a rough per capita basis, Evansville is getting $546 per person and South Bend $577, but Carmel only $74 per person and Fishers $72. This is a difference of about 7.5 times per capita. School funding from the recovery act has been even more lopsided.

With Democrats having shoveled the bulk of the money into their own strongholds, Republicans at both the federal and state level will rightly be looking at this generosity with skepticism. Quite apart from political considerations, however, they should be watching to see whether the money does any real good. If it does, they should be willing to look beyond politics and provide more investment funds to places that have spent previous money wisely. If it doesn’t, if these very large sums deliver little to show for them, there’s no reason for cities to expect more money like this ever again.

governing.com

Aaron M. Renn

July 22, 2021

Fitch Ratings-Austin/New York-22 July 2021: Ever-increasing cyberattacks on the US public healthcare sector will place material revenue and expense pressures on not-for-profit (NFP) hospitals and health systems, Fitch Ratings says. The healthcare sector has seen a historic increase in the number and severity of cyber assaults over the past 18 months. The sector is viewed as a target-rich environment due to the large amount of sensitive data that healthcare entities maintain for patient care and operations.

Cyber-crime accelerated during the pandemic as cyber criminals took advantage of the crisis, causing immense disruption to the healthcare sector at a time when it was facing enormous patient care demands. Ransomware pay-outs and efforts to protect or “harden” healthcare systems and cyber defenses are affecting hospital financial flexibility by increasing on-going operating expenses. Attacks may also hinder revenue generation and the ability to recover costs in a timely manner, particularly if they affect a hospital’s ability to bill patients when financial records are compromised or systems become locked. The recovery time and costs associated with breaches of critical data not only pose significant financial burdens but also hamper the ability of healthcare institutions to provide care, which could ultimately have human costs.

The US Department of Health and Human Services estimates that sizable cyber breaches in 2020 exposed patient data of more than 22 million Americans. Cyberattacks against US healthcare entities rose by over 55% in 2020 compared with the previous year according to the cloud security firm Bitglass. Attacks also increased in sophistication and scale, with more than a 16% increase in the average cost to recover each patient record in 2020 versus 2019. Restoration of systems to pre-attack status took an average 236 days.

Hospital and health system databases are a treasure trove of critical and sensitive patient data, which are highly sought after by cyber criminals for ransomware and double extortion schemes. In the US, patient data is considered confidential, and the maintenance and disclosure of such data are governed by patient confidentiality laws, e.g., Health Insurance Portability and Accountability Act (HIPAA), on the federal and state levels. Cyber breaches that disclose patient information carry the risk of loss of consumer confidence, litigation costs and federal enforcement actions due to regulations around patient confidentiality.

Remote work for nonessential staff opened up opportunities for infiltration, as did the sector’s increased use of integrated technology, such as smart medical monitoring devices, telehealth and other virtual care capabilities. Software for such devices and heavy medical equipment such as CT scanners and MRI machines are often proprietary and designed with patient care and not necessarily cyber risk in mind. Thus, such software may not always be fully integrated in the institutional cyber defense framework. Additionally, the large costs of such equipment generally mean that institutions, particularly smaller hospitals, may rely on these devices for many years, even with outdated or unsupported software, leading to gaps in institutional security systems.

Fitch includes cybersecurity in its analysis of the sector and as part of its corporate-wide Environmental, Social and Governance (ESG) framework. Cyber risk is both a social risk in terms of safety and security, and a governance risk in terms of management effectiveness. A hospital’s ESG Relevance Score would be elevated if cyber risk were deemed to be material to the rating.

Read the White Paper.

20 Jul, 2021

We often hear phrases like environmentally friendly, social and equitably beneficial, and financial transparency when it comes to assessing the forward-looking strategy of companies in both the private and public sector. However, in recent years, we have been hearing these phrases cross into local and state government operations such as debt issuances and other financial reporting.

The acronym ESG refers to ‘Environmental, Social, and Governance Evaluation’ often focuses on a local government’s ability to sustainably manage the future risks and opportunities related to its current governance structure along with opportunities to reduce its carbon footprint through the green projects/initiatives that will have a positive social or environmental impact; for example, renewable energy projects, smart infrastructure, affordable housing, and clean transportation.

In this article, we will take a closer look at the ESG efforts related to local government operations, the review of rating agencies, and how it can be mutually beneficial for both issuers and investors.

Continue reading.

municipalbonds.com

by Jayden Sangha

Jul 21, 2021

Yesterday, SEC Commissioner Pierce–one of two Republicans serving as an SEC Commissioner–delivered a speech criticizing the “potential ESG rulemaking.”

Specifically, Commissioner Pierce propounded ten theses questioning the SEC’s focus on this issue:

“I. ESG as a category of topics is ill-suited, and perhaps inherently antithetical, to the establishment of clear boundaries and internal cohesion.

II. Many ESG issues lack a clear tie to financial materiality and therefore do not warrant inclusion in SEC-mandated disclosure.

III. The biggest ESG advocates are not investors, but stakeholders.

IV. ESG rulemaking is high-stakes because so many people stand to gain from it.

V. “Good” in ESG is subjective, so writing a rule to highlight the good, the bad, and the ugly will be hard.

VI. An ESG rulemaking cannot resolve the many debates around ESG models, methodologies, and metrics.

VII. Emotions around ESG issues may push us to write rules outside our area of authority.

VIII. ESG issues are inherently political, which means than an ESG rulemaking could drag the SEC and issuers into territory that is best left to political and civil society institutions.

IX. ESG disclosure requirements may direct capital flows to favored industries in a way that runs counter to our historically agnostic approach.

X. An ESG rulemaking could play a role in undermining financial and economic stability.”

Notably, many of these critiques–which are explored in depth in her speech–identify potential legal flaws with the SEC’s approach to ESG rulemaking (e.g., “many ESG items may not be material to the issuer making the disclosure . . . .”), which could provide a roadmap to future challenges to any such regulations. The venue of the speech is also noteworthy–Commissioner Pierce delivered it at the Brookings Institution, a respected think tank that is generally perceived as non-partisan, indicating that this issue is seen as worthy of debate, and not merely where each side retreats to its partisan corner.

This speech is merely the latest volley in a longstanding war of words between the Republican and Democratic SEC Commissioners concerning whether the SEC should promulgate rules concerning ESG disclosures, and, if it does so, the nature of such disclosures. The particular significance of this speech is twofold. First, Commissioner Pierce identifies legal theories that could be used to challenge this SEC rulemaking (e.g., that the SEC acted ultra vires) should the ESG disclosure regulations be enacted. Second, Commissioner Pierce has continued to challenge the propriety (as well as the extent) of this potential ESG rulemaking by the SEC even after the SEC requested public comment on the proposal and Chairman Gensler identified ESG financial disclosures as a top priority for the Biden Administration’s SEC. In other words, Commissioner Pierce’s continued dissent indicates that this regulatory arena will continue to be the site of frequent battles between these opposing viewpoints.

Rather than embarking on a prescriptive ESG rule that departs from and undermines our agency’s limited, but important, role, we could work within our existing regulatory framework. We could put out updated guidance to help issuers think through how the existing disclosure regime already reaches many ESG topics and to address frequently asked questions that arise in connection with the application of the existing disclosure regime.[61] We also might consider whether we can give any Commission-level comfort about forward-looking statements along the lines of what former Chairman Clayton, Corporation Finance Director Bill Hinman, and Office of Municipal Disclosure Director Rebecca Olsen did in connection with COVID-19.[62] Finally, we can work with investment advisers using ESG strategies and products to ensure that investors understand what that adviser’s brand of ESG means in theory and practice.[63]

Mintz – Jacob H. Hupart

July 22 2021

The municipal bond market is one of the largest segments of the overall bond market, and it’s a favored destination for investors seeking steady, low-risk income.

Muni bonds are not, however, often thought of as creative or inventive. That could be changing, and could carry with it implications for the VanEck Vectors Green Bond ETF (NYSEArca: GRNB). GRNB, the original exchange traded fund focusing on green bonds, currently doesn’t feature much exposure to government debt, just 5.8% according to issuer data, but that figure could increase over time.

“While dozens of green-bond strategies have emerged over the last several years, significantly fewer have arisen with a specific focus on the municipal market,” writes Morningstar analyst Gabriel Denis. “This may be surprising for some given that the U.S. muni market, where many issuers have been offering debt that supports environmentally responsible infrastructure projects for decades, appears a natural fit for green bonds.”

Green Space in the Muni Arena

Green bonds are a small, but growing part of the fixed income market. Explaining that growth and investors’ increasing enthusiasm for such debt, green bonds are issued by companies or governments for the sole purpose of funding environmentally friendly projects.

For example, a state that wants to develop a new wind farm can issue green bonds to that effect, and it’s possible those bonds will eventually be included in GRNB’s roster.

“The green-bond market within the U.S. has grown quite rapidly over the last few years. According to the Climate Bond Initiative, a nonprofit that certifies green bonds, total U.S. green-bond issuance grew from $12.8 billion over the 2015 calendar year to $61.5 billion over 2020,” adds Denis.

The bulk of green bonds are taxable issues from companies, essentially making those bonds corporate debt, but last year, green munis accounted for almost a third of the market – a figure that’s forecast to grow alongside the broader green debt arena. As that happens, GRNB’s muni exposure could increase.

If that happens, it would jibe with GRNB’s mostly low-risk roster. Over three-quarters of the fund’s holdings carry investment-grade ratings and of that group, over 51% are rated AAA, AA, or A, confirming robust credit quality and low credit risk.

“The green-bond market within the U.S. has grown quite rapidly over the last few years. According to the Climate Bond Initiative, a nonprofit that certifies green bonds, total U.S. green-bond issuance grew from $12.8 billion over the 2015 calendar year to $61.5 billion over 2020,” concludes Morningstar’s Denis.

ETF TRENDS

TOM LYDON

JULY 22, 2021

What does the market for green muni bonds look like, and where is it going?

Investors today can expect to see a plethora of gardening-related puns when reading about the blossoming green-bond market. Green bonds, fixed-income instruments whose use of proceeds are specifically linked to the undertaking of environmentally sustainable projects, have surged in size over the previous decade. We dug into this topic in our recent white paper, including assessing the growth of the green-bond market itself, how asset managers both in the United States and in Europe are seeking to take advantage of this new market, and whether these bonds belong in your portfolio.

While dozens of green-bond strategies have emerged over the last several years, significantly fewer have arisen with a specific focus on the municipal market. This may be surprising for some given that the U.S. muni market, where many issuers have been offering debt that supports environmentally responsible infrastructure projects for decades, appears a natural fit for green bonds. Why are there not more green-bond muni strategies for investors to consider? Should tax-free investors keep their eyes peeled for such an option? Here, we dig further into the green-muni-bond market to learn more.

Green Munis: Growing, but Still a Tiny Part of a Niche Market
As with many areas of the world, the green-bond market within the U.S. has grown quite rapidly over the last few years. According to the Climate Bond Initiative, a nonprofit that certifies green bonds, total U.S. green-bond issuance grew from $12.8 billion over the 2015 calendar year to $61.5 billion over 2020.[1] The majority of this issuance stems from taxable issuers, including from major securitized players like Fannie Mae and from corporations like Apple and Coca-Cola. Yet muni bonds are no small part of this market: of the $61.5 billion of total issuance over 2020, 25% ($15 billion) stemmed from muni issuers.[2] This too represents a substantial increase over the same period; in a 2017 analysis, Nuveen Asset Management cited Bloomberg data showing that green muni issuance was just over $4 billion over calendar 2015.[3]

This growth is impressive but represents merely a drop in the bucket of total U.S. muni issuance. According to the Securities Industry and Financial Markets Association, the U.S. muni market reached just shy of $4 trillion outstanding at the end of 2020, with $485 billion alone issued over 2020[4]; the $15 billion in green muni debt cited earlier represents just 3% of that total issuance. Most of this debt is held directly by individual investors or through mutual fund strategies. Additionally, the market remains fragmented and less liquid than the U.S. corporate bond market as there are about 1 million outstanding muni securities, and only between 30,000 and 40,000 of them trade on an average day.

Certifying Green Munis Remains Tricky
Investors should also note that there’s currently substantial uncertainty in the market over how to determine which muni bonds are truly “green.” “Greenwashing,” wherein companies advertise stronger environmental, social, and governance standards than they are truly practicing, is a serious concern for sustainability-minded investors across asset classes. Within munis, part of the problem is that most muni issuers have arguably been working alongside green principles long before green bonds emerged as an asset class. Organizations like CBI, which offers its own certification service for green bonds, and the International Capital Markets Association, which since 2014 has published a set of voluntary reporting principles for green bonds, seek to minimize the risk of greenwashing by providing issuers a framework through which to prove their proceeds are going to environmental projects. A plethora of second-party opinion organizations, including Kestrel Verifiers and Morningstar-owned Sustainalytics, have emerged over the same period offering to substantiate which issuers are offering truly “green debt.” Many muni issuers, whether or not they are intentionally adhering to these frameworks, might be issuing debt that qualifies for consideration but are just not seeking out those green designations. A substantial part of the muni market over the past several decades has been debt issued by states and local authorities to finance construction of capital infrastructure projects, including improvements to water mains, new water and sewer treatment facilities, renewed roads and bridges, and energy-efficient electric utilities. Many of these projects would likely fulfill the use-of-proceeds requirement of a green mandate but just aren’t labeled as such.

Even so, caution is warranted in determining which muni bonds are truly green. In a 2019 opinion piece in the Bond Buyer, Dana Villanova and Monica Reid of Kestrel Verifiers noted that while the ICMA and CBI encourage issuers to undergo independent external reviews, muni issuers are still able to “self-label” their debt as being green, and there is no mechanism for removing the green label from a muni bond that does not meet its original output goals as long as the funds are used for their original purpose.[5] With these factors under consideration, both CBI certification and additional verification from SPOs have become quite popular in the taxable green-bond market as investors seek ways to determine which bonds are truly following ICMA and other green-bond principles.

Within munis, however, this type of work remains somewhat stunted in comparison. The managers of Wells Fargo Municipal Sustainability (WMSAX), a strategy focused on investing in muni bonds with strong ESG characteristics, noted that CBI certifications and SPO verifications are rarer in the muni market given the budgetary restraints of the issuers themselves. U.S. municipalities, the majority of which are smaller agencies, often operate with limited budgets, and staff and may struggle to justify the added expenses of tracking bond proceeds and preparing annual disclosures to meet green certification requirements. This problem is compounded by the fact that green muni bonds themselves don’t appear to trade with the same price premium (often dubbed a “greenium”) exhibited by taxable issuance. To varying degrees of intensity, many market observers have noted that when issuers issue both a green and a nongreen bond with otherwise identical characteristics, the green bond will trade with a higher price (and thus lower yield) than its nongreen equivalent. Generally, this would suggest that investors are willing to be compensated less in their quest for investing sustainably, and issuers can expect to pay less over time for a green bond than a nongreen bond. Wells Fargo, for their part, stated that it did not see evidence for a greenium within the muni market. Furthermore, in a 2020 study entitled “Where’s the Greenium?”, David Larcker and Edward Watts, Stanford and Yale academics writing for the Journal of Accounting and Economics, concluded that investors appeared unwilling to pay more for green munis than their traditional equivalents and suggested that there was no greenium within the muni market.[6] While muni issuers may have an incentive to self-label their bonds as being green in some circumstances, the financial incentive to undergo a formal certification and verification process through a third-party appears less clear.

All things considered, investors may therefore want to take the headline growth of the green muni market with a grain of salt. Even with third-party certification and SPO verification, there is room for additional due diligence to ascertain which green bonds are truly meeting sustainability objectives across the broad fixed-income market. Given the additional certification challenges within munis, investors should be doubly cautious while considering this asset class.

What Are Your Investing Options?
Perhaps in part because of these challenges, the investing universe for green muni strategies remains limited in 2021. As of July 2021, there are only two strategies available to U.S. investors that focus exclusively on green muni bonds: Franklin Municipal Green Bond (FGBKX), incepted in October 2019, and Green California Tax-Free Income (CFNTX), incepted in December 1985 but rebranded as a green-bond fund in 2019. Franklin Municipal Green Bond defines green bonds as those funding projects linked to environmental sustainability. The fund’s prospectus, however, acknowledges that while the managers may consider external reports (such as those provided by CBI certification or by an SPO) while determining which bonds are green, ultimately they can choose to invest in any issuers they determine as meeting their stated requirements of a green bond. The strategy has a limited record given its relative youth and remains small: The fund’s AUM was just $8 million as of May 2021, and it held only 55 individual securities as of that date. Green California Tax-Free Income is larger and has a longer track record but has applied ESG screens to its investment process only since 2019; while the strategy seeks to be a “green-bond fund” according to its prospectus, it can invest in any issues it judges as meeting its proprietary ESG screens.

These two strategies, both actively managed, do not have any passive competitors. The market for green muni indexes remains quite slim, with the S&P U.S. Municipal Green Bond Index being the only one extant as of July 2021. This index tracks muni bonds which are judged to be green via a certification from CBI. VanEck mentioned this index in the context of its launch of VanEck Vectors Green Bond ETF (GRNB), which tracks the S&P U.S. Select Green Bond Index. The managers there determined that while the universe of U.S.-domiciled, CBI-certified taxable green bonds (which the latter index tracks) was broad and developed enough to support a passive product, the muni market remained too small and concentrated to support a muni-focused product. The amount of issuers in the green muni bond index versus the broader S&P Municipal Bond Index underscores that fact: Whereas the S&P Municipal Bond Index tracked more than 200,000 constituents for a total market cap of $2.7 billion as of June 2021, the S&P U.S. Municipal Green Bond Index tracked just over 2,850 constituents for a market cap of $53 million.[7]

The path forward for the green muni bond investor is uncertain, with both the current strategy options and the incentives for green muni bonds limited. Yet there is optimism that the market for both green muni bonds and for the strategies that invest in them will grow substantially in the years to come. Lauren Kashmanian of Parametric Portfolio Associates, in an interview with Bloomberg News, anticipated that total green muni debt issuance could balloon to $30 billion-35 billion in the wake of additional federal stimulus for U.S. infrastructure.[8] Should the market continue to expand, however, green muni investors should consider their options with a discerning eye and seek to invest with managers with proven teams, sensible processes, and low fees.

[1] Climate Bond Initiative. 2021. “Sustainable Debt: Global State of the Market 2020.” https://www.climatebonds.net/resources/reports/sustainable-debt-global-state-market-2020

[2] Ibid.

[3] Liberatore, S., & Levy, J. 2017. “Green Muni Bonds: Responsible Investing in a Centuries-Old Asset Class.” TIAA. https://www.tiaa.org/public/pdf/C29869_TGAM_whitepaper_muni_bonds.pdf

[4] Securities Industry and Financial Markets Association. “U.S. Municipal Bonds: Issuance, Trading Volume, Outstanding, Holders.” https://www.sifma.org/resources/research/us-municipal-bonds-statistics/

[5] Villanova, D., & Reid, M. 2019. “What’s in a Municipal Green Bond?”, The Bond Buyer. https://www.bondbuyer.com/opinion/whats-in-a-municipal-green-bond

[6] Larcker, D., & Watts, E. 2019. “Where’s the Greenium?”, J. Accounting and Econ., Vol. 69, No. 2–3, P. 101312. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3333847

[7] S&P Dow Jones Indices.

[8] Moran, D. 2021. “Biden Spending Plan Seen Jolting Muni Green-Bond Sales to Record,” Bloomberg News. https://www.bloomberg.com/news/articles/2021-04-20/biden-spending-plan-seen-jolting-muni-green-bond-sales-to-record

morningstar.com

by Gabriel Denis

Jul 19, 2021

In this report, you will learn:

• A comprehensive analysis of green bonds’ asset flows and growth
• Our view of the catalogue of green bond indexes
• How green bonds fit into a conventional bond portfolio

Download report.

The BDA’s quarterly digital magazine, Fixed Income Insights, is now available.

It can also be viewed on the new BDA app, which can be downloaded in the Apple store, Google play store, and Amazon app store.

This month’s edition contains articles by the industry’s top contributors and relevant topics:

• Cover Story – A conversation with US Senator Roger Wicker (R-MS) on Infrastructure and Municipal Bonds
• Municipal Markets – Articles from DPC Data and Hilltop Securities
• Taxable Markets – Kevin McPartland of Greenwich Associates
• BDA Member Profile – Ted Karn, President and Founder of The Karn Group

To view the new summer edition online, please click here. If you are unable to access the online version, a pdf can be found here.

If you have any questions or about the magazine or the new app, please contact Rebecca Rodriguez at rcrodriguez@bdamerica.org

Bond Dealers of America

July 20, 2021

Negotiators looking to finalize a $1 trillion bipartisan infrastructure deal say they’re getting close, but funding for transit remains a hangup — and frustrations are starting to show as the talks drag on.

Republicans and Democrats are at odds over funding for highways and public transit. The bipartisan negotiators had seemingly agreed for the most part on an increase in funding for public transit, but Sen. Pat Toomey (R-PA), the top Republican on the Banking Committee, which has jurisdiction over transit, reportedly objected. Now Republicans are looking to change a long-standing 80-20 split of money going to roads versus that going to rail and bus systems, according to reports.

“The split — giving transit one dollar for each four that highways get — has its roots in the 1980s, but has only been sustained by an uneasy truce between lawmakers,’ The Washington Post’s Ian Duncan reports. “Republicans have sometimes proposed scaling back transit funding, while Democrats have hoped to increase its share. The dispute has arisen again as a group of senators tries to wrap up the infrastructure package.”

Republicans reportedly want to cut the transit share from 20% to 18%, arguing that transit agencies already got some $70 billion in Covid relief funds and that the funding split in recent years has seen more than 82% go to highways.

An infrastructure bill without transit? Sen. Rob Portman (R-OH) suggested dropping transit funding from the infrastructure package entirely. “Transit funding has not yet been resolved. That’s important, but if we can’t resolve it then we could leave that out. I hope not,” he said, according to The Hill. Portman, the lead GOP negotiator on the deal, told reporters that Democrats “are not being reasonable in their requests right now.

Sen. Chris Coons (D-DE), an ally of President Joe Biden’s, told CNN Friday that he would support the package even if it excluded the transit portion because Democrats could add transit funding to the budget reconciliation package they plan to pass. But other Democrats have made clear they won’t go for that.

Democratic Sens. Sherrod Brown of Ohio and Tom Carper of Delaware said Thursday that they won’t vote for a package that lowers transit funds. “Robust funding for transit must be included in the legislation,” they said in a statement. “We will not support any package that neglects this fundamental part of our nation’s infrastructure.” Brown reportedly accused Republicans of stalling the talks in an effort to derail Biden’s agenda.

Why it matters: “The question of transit funding underscores different ideas among Republicans and Democrats about what infrastructure spending should achieve,” writes the Post’s Ian Duncan. “Democrats argue that boosting transit funding would encourage more Americans to use buses and trains, reducing carbon emissions from cars and tackling congestion without building new road lanes.”

The bottom line: The transit issue isn’t the only remaining difference, making it unclear if negotiators will be able to finalize a deal by early next week. But given how far they’ve gotten, it’s far too soon to think any of the remaining hurdles will scuttle a deal.

Yahoo Finance

by Yuval Rosenberg

July 23, 2021

Overview

The Council of Development Finance Agencies (CDFA) reports that in 2019 housing finance agencies issued a record $16.4 billion in multifamily private activity bonds (PABs), a $1.69 billion or11.5% increase from 2018. Furthermore, $9.48 in single family mortgage revenue bonds were issued, a $2.12 billion or 22.4% gain from 2018. A combined $25.9 billion in multifamily and single-family housing bonds were issued; while this was a $3.81 billion increase in numeric terms, it was a reduction as a proportion of total PAB issuance ($30.8 billion), falling from 91.5% in 2018 to 84.1% in 2019. Six states reported no multifamily PAB issuance (another two states failed to report), repeating 2018’s historic low. This number has been trending down since 2011 when 32 states issued no multifamily PABs.

Continue reading.

Novogradac

Published by Peter Lawrence on Tuesday, July 20, 2021 – 12:00am

On July 15, 2021, the Federal Energy Regulatory Commission (“Commission” or “FERC”) issued a Final Rule amending its regulations pertaining to: (1) the information required to be filed with a notice of intent to construct a qualifying conduit facility and (2) the licensing requirements applicable to major projects up to 10 megawatts (MW). The Final Rule was issued to align the Commission’s regulations with changes to the Federal Power Act (“FPA”) that were made as part of the Hydropower Regulatory Efficiency Act (“HREA”) of 2013.

Enacted in August 2013, the HREA amended section 30 of the FPA to create a subset of small conduit hydroelectric facilities that are excluded from the jurisdiction of the FPA. Under those amendments, any party proposing to construct a “qualifying conduit hydropower facility”—a facility that uses “only the hydroelectric potential of a non-federally owned conduit,”—must file a notice of intent with FERC, demonstrating that the proposed project meets certain qualifying criteria. In instances where a dam would be constructed as part of the facility, the Commission required an applicant’s notice of intent to include a profile drawing showing that the conduit—rather than the dam—creates the hydroelectric potential. The Commission clarified this requirement in a 2015 order, Soldier Canyon Filter Plant, in which it concluded that the relevant factor in its consideration of qualifying conduit facilities is whether the facility would use water “within a conduit operated for the distribution of water for agricultural, municipal, or industrial consumption and not primarily for the generation of electricity,” and that the presence of an upstream dam is not relevant to this determination, even where the head from the dam contributes to the facility’s generating potential.

A separate provision of the HREA amended section 405 of the Public Utility Regulatory Policies Act of 1978 (“PURPA”), which provided that certain hydropower projects that produce 5 MW or less were exempted from the licensing requirements of Part I of the FPA. The HREA amended section 405 to increase the limit for exemptions to 10 MW.

On February 18, 2021, the Commission issued a Notice of Proposed Rulemaking (“NOPR”) in which it proposed revisions to its regulations that would: (1) remove the requirement that a notice of intent to construct a qualifying conduit include a profile drawing depicting the source of hydroelectric potential, in cases where a dam would be constructed as part of the facility; and (2) extend the licensing requirements previously applicable to major projects up to 5 MW to major projects 10 MW or less, pursuant to the revised definition of a “small hydroelectric power project” enacted in the HREA 2013.

In its Final Rule, the Commission adopted the changes set forth in the NOPR. It noted that, based on the language in Soldier Canyon Filter Plant, the profile drawings of dams would no longer be required as part of the notice of intent submittal for qualifying conduits. The Final Rule also included changes to the licensing and amendment filing requirements in Parts 4 and 5 of the Commission’s regulations to extend the requirements that previously applied to major projects up to 5 MW to major projects 10 MW or less, to be consistent with the revised definition of a “small hydroelectric power project” under the 2013 HREA. The Commission’s Final Rule provided that such a change is appropriate to “expedite hydropower development by easing the burden of preparing an application for license and by assisting the Commission in more rapid processing of applications.” As part of the Final Rule, the Commission made revisions to 18 C.F.R §§ 4.40–41; 18 C.F.R. §§ 4.50–51; 18 C.F.R. §§ 4.60–61; 18 C.F.R. §§ 4.70–71; 18 C.F.R. §§ 4.200–202.

As of this drafting, the Final Rule had not yet been published in the Federal Register. The Final Rule will be effective 60 days after such publication.

Troutman Pepper – Elizabeth J. McCormick

July 26 2021

If you have a client with a goal to earn a specific level of income every year, how does it look when the payout on her bond funds declines with interest rates? Or, what if interest rates rise, and the fund’s value drops instead?

For these reasons, some advisors favor buying individual bonds for clients instead of bond funds. Now seems a particularly compelling time to employ this strategy.

Rates on most bonds are so low that finding safe individual ones that yield a little extra that you can hold until maturity makes sense, especially if rates kick back up again. (Bond prices move inversely with rates so that existing bonds’ yields can match those of newly issued ones with higher payouts.) That way, an investor won’t lose any principal.

Year to date the average bond fund in Morningstar’s popular Intermediate Core Bond category is down 0.6%, while the Long-Term Bond category is down 0.8%. That isn’t appealing for investors seeking a steady fixed payout and return of their principal at their goal’s end date. “Interest rates are near all-time lows, but a bond fund is a bet that interest rates will fall,” says Stan Richelson, a Bluebell, Pa.-based advisor and co-author of Bonds: The Unbeaten Path to Secure Investment Growth.

Richelson and his wife Hildy — his fellow advisor and president of Scarsdale Investment Group — often buy individual municipal bonds with high credit ratings for clients and ladder their portfolios by holding issues of different maturities. That way, if rates rise as bonds with shorter maturities mature, clients get their principal back and it can be reinvested in new bonds with higher yields. They generally hold bonds until maturity so there is no potential for a loss from a rate shift, like in a bond fund. Because they’re buy-and-hold investors, they also don’t encounter the trading costs of mutual funds buying and selling bonds constantly as new money flows into a fund or old money exits.

Many clients also like the transparency and consistency of buying individual muni bonds, especially from their home state where they can get not only a federal but a state tax exemption. By contrast, many single-state funds only invest in the largest states like California and New York and often aren’t the purest or safest plays in those states. “If you looked at these single-state funds, you’d never buy them now because they have huge numbers of low-rated bonds,” Richelson says. “In the past, they were loaded with Puerto Rico [which defaulted on its debt] and Virgin Island bonds because they had a tax exemption, like the same state.”

Building a bond portfolio requires more time and research than buying a single fund. The Richelsons have invested in individual bonds and written about bonds for some 30 years. The less experienced may require outside help. “It’s way easier just to put somebody in a bond fund or an ETF,” says advisor David Haverstick at Ables, Iannone, Moore & Associates, which has built individual bond and stock portfolios for clients since its founding in Savannah, Ga., in 2003. “You can click the button and be done with it. For us, we think the specific [bonds and stocks] that we can bring to clients’ portfolios is where our value is. But you have to have time, and the resources to be able to do that,” he says.

Despite his experience, Haverstick still relies on outside research and analyst reports to pick primarily individual corporate bonds for clients. Though he won’t disclose his analytical sources, free bond research is available at most brokers and more detailed research can be bought from ratings services like Moody’s Analytics and S&P Global Ratings.

The main concern with an individual bond portfolio is default or credit risk since such portfolios generally aren’t as diversified as funds. Although Haverstick doesn’t have a standard bond account size, he says the larger the better, since a portfolio can diversify into more bonds. As for Richelson, he says the high-quality muni issues he generally buys—which are often state issues or general obligations, as opposed to local revenue bonds dependent on a single project, such as a hospital’s or school’s finances—telegraph problems well in advance of a potential default. For instance, he sold out of Illinois municipal bonds seven years ago, based on its history of problems funding government employee pensions. Only in 2020’s pandemic did the state’s debt get downgraded to near-junk-bond levels.

Moreover, because states have the ability to raise taxes to pay debts, defaults have been rare. Since 1970, the default rate for high-quality or investment-grade muni bonds has only been 0.1%, versus 2.3% for similarly rated corporate bonds.

If picking bonds is too much work, one alternative is to invest clients’ assets in a private account of individual bonds run by a professional money manager. For instance, Pimco, one of the world’s largest bond fund managers, also runs private accounts for high-net-worth investors in its Global Wealth Management division, which oversees $381 billion (as of March 31). The minimum account size to build a basic muni or corporate bond ladder is $150,000 but as high as $1 million for more active strategies, says Mark Thomas, an account manager at Pimco’s Global Wealth Management group. “The minimums are important, because we need to make sure that we get access to a diversified pool of assets,” he says.

Outsourcing adds an extra layer of fees for clients. How much depends on the level of account customization. “Fees are commensurate to the work we’re doing,” Thomas says. If the account is a buy-and-hold bond ladder, fees “generally compare pretty well to ETFs, and on the active [bond] account side, they would be comparable to our active mutual funds.”

In other words, if clients want individual bond portfolios, there are competitively priced solutions.

Barron’s

By Lewis Braham

July 20, 2021

• ‘Some of this sunshine is artificial,’ investor Venditti says
• Money managers’ dilemma is that cash keeps pouring in

The influx of federal aid to U.S. municipal-bond issuers has papered over longstanding credit risks that threaten to come back to bite investors when the relief runs dry.

States, local governments and other borrowers are receiving $350 billion through the American Rescue Plan, a short-term infusion meant to cover revenue lost to the pandemic or offset its economic toll. The aid, combined with a rebound in tax revenue, has boosted confidence across the municipal market and helped some lower-rated credits reach lofty valuations.

Some investors say parts of the market — from states and cities with chronic fiscal strains to small private colleges grappling with affordability and demographic pressures — still face abundant challenges. The risk, the money managers say, is that fiscal headwinds such as underfunded pensions and budget deficits will resurface and weigh on portfolios after the aid is spent.

The federal funds “stabilized every balance sheet of every municipality everywhere, but eventually the money will bleed out,” said Nicholos Venditti, a senior portfolio manager at Wells Fargo Asset Management Corp. “I’m largely bullish on munis, but I don’t think investors should ignore that some of this sunshine is artificial.”

Wall Street strategists are already talking about the rally in munis running out of gas. The bonds have offered an oasis in 2021, at a time when most parts of fixed income have delivered losses. The outperformance is due in part to a push by the Biden administration to hike taxes on the wealthy, bolstering demand for tax-exempt funds that have been luring heaps of cash.

The dilemma for asset managers is that they have to put the money to work in the face of ever-rising prices on even the riskiest debt. There’s been a big reward to trading down in credit quality. Junk and non-rated munis have earned 7.1% this year, compared with 1.7% for the broad muni market, Bloomberg Barclays index data show. Treasuries have lost 2.3%.

‘So Expensive’

Investors have to decide how much more spreads can narrow, Venditti said. When the aid runs out, bonds sold by the more challenged issuers will likely trade back to values more consistent with their underlying risk, producing losses, he said.

“You don’t need a default to have a bad day as a muni investor,” he said. “Just because they’re going to survive doesn’t mean you want to buy them today, because they’re just so expensive.”

Case in point: At one point this month, yields on 10-year Illinois general-obligation bonds were barely 50 basis points above those on top-rated debt, the lowest gap in Bloomberg data going back to 2013 and almost 400 basis points narrower than in May 2020.

The state, among those logging better-than-expected revenue collections, has been allocated $8.1 billion of aid from the federal rescue plan. It had its credit rating upgraded by Moody’s Investors Service and S&P Global Ratings in recent weeks, bringing it back from the brink of junk. Yet it’s still the lowest-rated state, its pensions are only roughly 40% funded and it’s bleeding residents.

Not Buying

Eve Lando, a portfolio manager at Thornburg Investment Management, said she’s not buying Illinois bonds at current levels.

“They have been helped definitely by the stimulus, but I feel like people overbuy there thinking that it can only go up,” she said. “I don’t think it reflects the correct state of affairs.”

Lando said that when she and her team evaluate bonds, they “discount” the stimulus aid a borrower may have gotten, to make sure the credit can stand on its own.

Chicago is another issuer that has seen yields decline in the face of fiscal woes. Citigroup Inc. analysts say that while they’ve historically been bullish on the city, they’ve recently turned more hesitant because of its unfunded pension liability and a limited ability to raise revenue given its already-high combined state and local sales-tax rate.

“Now, we run the risk of becoming bearish on Chicago” despite the federal aid package, the group led by Vikram Rai wrote in a mid-year outlook report late last month. The junk-rated city received $1.9 billion in relief funds. “It is a legislative success story in the near-term, but structural issues are yet to be tackled.”

‘Priced to Perfection’

For Craig Brothers, a portfolio manager at Bel Air Investment Advisors, the relief funds afford a reprieve, but the structural challenges some governments face are evident. He said he’s avoiding reaching down in credit quality, a view that Mellon Investments Corp. is taking as well.

“Everything is just really priced to perfection,” Brothers said.

The stimulus has had a “tremendous” impact on the municipal market, said Susan Courtney, head of the municipal-bond team at PGIM Fixed Income. “But with certain credits that had specific challenges pre-pandemic, those still exist. They don’t just go away.”

Bloomberg Mrkets

By Danielle Moran

July 14, 2021, 9:30 AM PDT Updated on July 14, 2021, 12:17 PM PDT

— With assistance by Michael B Marois

It is always a good thing when you can replace your existing home mortgage loan with one having a lower interest rate. My original mortgage loan in 1981, for my house I still live in, had an interest rate of 16.25%. Fortunately, I was able to refinance it a few times into lower and lower interest rates, and finally – one of the few benefits of getting older – I paid it off!

If you are a governmental entity, the same thing is true when you refund your existing bonds with lower interest rate refunding bonds. In 1981, tax-exempt municipal bonds were bearing interest at 13%. For a governmental issuer, the ability to prepay debt is one of the most important terms in a financing; the issuer should look askance at any structure that materially limits the ability of the issuer to refinance its debt.

First Call Date. The ability of the issuer to prepay bonds is referred to in the legal documents as an “optional redemption.” There are certain basic conventions. A bond issue typically has a “no call” period during which the bonds cannot be optionally redeemed. In most cases the “first call date” is about 10 years after the bonds are issued. In my state of Pennsylvania, small bond issues under $10 million in principal amount often have a five-year first call date. This “no call” period ensures the bond purchaser that it will be able to take advantage of its interest rate for a minimum set period of time without worrying about having its bond optionally redeemed by the issuer.

The Price of the Call. Most municipal bonds, when they reach their first call date, are redeemable “at par.” That means the bonds are prepaid at 100% of the principal amount plus any accrued interest to the redemption date. Some bonds, particularly for issuers with lower credit ratings, are prepayable at “par plus a premium.” For example, a nursing home bond issue may have a 10- year no call period, then be callable at 103% of principal amount in year 11, 102% of principal amount in year 12, 101% of principal amount in year 13, and at par in year 14 and thereafter (in all cases plus accrued interest to the redemption date). From the issuer’s perspective, a redemption premium makes the refunding more expensive and requires rates to go even lower before a refunding makes economic sense.

Issuer Beware: Noncallable Bonds. In the world of finance, everything has a price. If you as an issuer are willing to forgo any optional redemption right (that is, the bond purchasers know their bonds will never be optionally redeemed), then you will probably be able to sell your debt at lower interest rates than an issue with a normal call feature. That is initially good for the issuer, but the issuer will never be able to take advantage of potentially even lower rates in the future. There is nothing more frustrating to an issuer than to have noncallable, high interest rate bonds in a declining interest rate environment.

Issuer Beware: CABs. In the late 1990’s the hot technique du jour was capital appreciation bonds or “CABs”. Normal fixed- rate municipal bonds pay accrued interest semiannually. CABs have no periodic interest payments. Interest accrues on the CABs, but the principal amount and all accrued interest are not payable to the bondholder until the maturity date of the bond. CABs are noncallable and they carry a “yield penalty” to the issuer (the investor wants higher interest to compensate for no payments received prior to maturity). After the CABs are issued, if you are an issuer who needs to pay off its existing debt (to eliminate a trust indenture with problematic covenants, or to be able to sell a sewer system financed with the CABs), the existence of your CABs is a major financial and legal headache.

Issuer Beware: Make-whole calls. The corporate bond world has different prepayment conventions. Rather than pricing a call at par or at par plus a fixed percentage premium, corporate bond calls are usually priced using a “make-whole” premium. The premium is calculated using a formula that gives the bondholder the benefit of a declining interest rate environment. If the rate environment is declining, then the amount of the make-whole premium increases when the issuer optionally redeems the bond. This is essentially the deal: “Go ahead issuer, you can optionally redeem this bond, but you will do so at a price that will make the bondholder whole based on current market conditions. That means you will lose the savings you would otherwise achieve in the refunding.”

Governmental issuers sometimes find it advantageous to issue taxable bonds rather than tax-exempt bonds (usually because certain uses of bond proceeds do not conform to the tax-exempt bond regulations, or because the issuer wants to do an advance refunding it cannot do on a tax-exempt basis (see below)). In such cases, their call features will usually employ the make-whole prepayment structure, because the potential bond purchasers are used to, and want, the corporate bond structures. But if a governmental issuer is issuing tax-exempt debt, it should be wary of anyone who recommends using a make-whole prepayment structure. This is particularly true when an issuer is obtaining a tax-exempt loan from a bank – often the bank will ask for a make-whole prepayment structure.

Issuer Beware: Synthetic fixed-rate bonds. In the decade after the heyday of CABs, the new product du jour was interest rate swaps. Where do I begin on this topic? Here was the pitch: “Hello, issuer – instead of issuing regular fixed rate bonds at 5.00%, issue variable rate bonds and enter into a variable-to-fixed rate interest rate swap, and you will end up with a “synthetic fixed rate” of 4.75%.” These structures were based on certain market assumptions and involved novel risk allocations. When the Great Recession hit in 2008 and 2009, the market assumptions went kaput, and supposedly “remote” risks came home to roost with a vengeance on issuers. For purposes of this article, the relevant point is: interest rate swaps can be very expensive to get out of. If the issuer wants to terminate a swap, it could have to pay a large termination fee calculated in a similar fashion to the make-whole calls described above. It may make it practically impossible to prepay the variable rate bonds and associated swap.

The Important Point: Issuer beware. I am a bond lawyer not a municipal advisor. I do not pretend to understand all the mathematical and market nuances involved in these matters. But I have seen issuers be seriously hamstrung by bonds that do not have traditional fixed-rate bond prepayment features. Issuers should be wary of anyone who shows up at their door selling “noncallable bonds” or “CABs” or “make-whole calls” or “interest rate swaps” or “synthetic fixed rate bonds.” This does not mean that these products are always bad. They might be good in specific situations for specific issuers. But they can be so complicated that the issuer is unlikely to know the difference between good and bad without assistance. If you, as an issuer, hear these magic words uttered, it is time to call in your municipal advisor to help you sort through them. And if you are dealing with a swap, make sure your municipal advisor has expertise in swaps as well as bonds.

Variable-rate bonds. Most of the concepts described above relate to fixed rate municipal bonds. In the 1980s, municipal issuers, tired of high fixed rates, started issuing variable rate bonds. These bonds typically can be put on short notice by the bondholders to the issuer to be remarketed, and they bear interest at a much lower variable rate. Variable rate debt is typically prepayable by the issuer at par plus accrued interest at any time with no “no call” period. But the variable rate debt can become difficult to prepay if it is tied to a swap (see synthetic fixed rate bonds above).

The issuer should also consult closely with its municipal advisor on any variable rate debt structures. There was a Wall Street-created variant of variable rate debt called “auction rate bonds” that went completely kaput in the Great Recession. Once again, issuer beware!

Bond Pricing and Prepayment. When fixed rate bonds are priced during their initial issuance, they can be sold at par (at 100% of principal amount), at a discount (less than 100% of principal amount) or at a premium (over 100% of principal amount). The rate on a bond is called the “coupon rate”. A bond sold at a discount may have a coupon rate of 4.00%; but because the bondholder buys it at a discount (less than 100 cents on the dollar), the bond has a yield to the bondholder higher (say, 4.10%) than the coupon rate. A bond sold at a premium may have a coupon rate of 4.00%; but because the bondholder buys it a premium (more than 100 cents on the dollar), the bond has a yield to the bondholder lower (say, 3.90%) than the coupon rate.

Many municipal bonds are purchased by municipal bond funds. For reasons related to the marketing of those funds, the funds do not like to buy bonds with low coupon rates. So, the funds may say, “I want to buy this bond at 4.00% even though the market rate is lower, and I’m willing to pay a premium to buy the bond at that coupon rate.” With rates going lower and lower in the last few decades, many refunding bonds have been marketed with relatively high coupon rates and lots of premium. As a result, when five or 10 years later we come up to the first call date, the artificially high coupon rates on the existing bonds means they can be refunded at a substantial savings. That is why, even if market rates went lower in small increments over the five to 10 years, the savings could still be substantial.

Current Refundings and Advance Refundings. A current refunding is a refunding in which the refunded bonds are redeemed within 90 days of the issuance of the refunding bonds. An advance refunding is a refunding in which the refunded bonds are redeemed more than 90 days after the issuance of the refunding bonds. In either case, the redemption usually occurs as soon as possible after the refunded bonds’ first call date.

When an advance refunding occurs, for a period of time until the first call date on the refunded bonds, there are two sets of bonds outstanding with respect to the original project. So, if an issuer issues $10 million of bonds with a ten-year call to finance a capital project, and then four years later issues $10 million of bonds to advance refund the original bonds, the result is that for the next six years there are about $20 million of bonds outstanding relating to a $10 million capital project. If both series of bonds are tax-exempt, the U.S. Treasury hates this – bondholders are getting twice the tax-exempt interest benefit they should be getting for a $10 million project.

When I was a young bond lawyer in 1981, I told the senior partner I worked for that I was nervous because we were doing so few bond deals that year. He told me, “Don’t worry, Dave, every new deal we do in this 13% interest rate environment, we will be able to advance refund three or four times over the next decade.” I remember one advance refunding deal in which, between the sale date and the closing date, interest rates were taking such a dive that it already made sense to advance refund the advance refunding bonds we had not yet closed.

The U.S. Treasury and Congress clamped down on tax-exempt advance refundings, first in the 1986 tax act, and then again a few years ago to totally eliminate them. There is now a movement in Congress to liberalize the advance refunding rules again. Back to the future.

Issuers should recognize that their ability to prepay debt they are entering into is an extremely important term, and they should consult with their municipal advisors to achieve the most liberal prepayment term consistent with the type of financing they are doing. This becomes important when, down the road, the issuer wants to take advantage of a lower interest rate environment, or the issuer needs to get out of certain existing debt for other business reasons.

By David Unkovic

BY SOURCEMEDIA | MUNICIPAL | 07/19/21 12:09 PM EDT

The threshold to be considered a ‘metropolitan statistical area’ will not be doubled

The Office of Management and Budget on Tuesday backed off from a proposed change to the federal definition of “city” that could have scrambled billions of dollars in federal spending for more than 100 communities across the country.

Each decade, OMB tweaks the definition of “metropolitan statistical area,” but it hit a sore spot in January when it proposed doubling the threshold from 50,000 to 100,000 people. Members of Congress, business leaders and communities themselves pushed back, arguing the agency’s proposed change would have an impact on programs ranging from housing to health care.

In a news release Tuesday, OMB said it would announce in a Federal Register notice on Friday that it would back off the proposed doubling of the threshold and instead make “modest revisions” to 2010 definition standards.

At a House Budget Committee hearing last month, acting OMB Director Shalanda Young acknowledged the resistance the agency has received, saying that “this issue shows bipartisanship is alive.”

Originally a statistical marker, the MSA has grown into a designation used in funding decisions for hundreds of federal programs, including Community Development Block Grant programs, which distributed $3.4 billion this fiscal year.

The National League of Cities and other organizations have argued that OMB hasn’t done enough research on the potential impact of changing the MSA threshold, which could cause a ripple effect and disrupt Department of Transportation grants, Medicare reimbursements, rent calculations and more.

The Senate Homeland Security and Governmental Affairs Committee was scheduled to mark up a bill on the issue Wednesday that would mandate that OMB study the effects of the change.

Committee Chairman Gary Peters, D-Mich., one of the bill’s sponsors, in a statement Tuesday praised OMB for dropping the “potentially harmful proposal.”

“Communities of all sizes across Michigan and the United States are counting on federal resources to recover from the ongoing unprecedented public health and economic crisis,” he said.

Nearly two dozen senators raised concerns about the issue in a March letter to OMB.

A federal interagency Metropolitan and Micropolitan Statistical Area Standards Review Committee, which recommended OMB make the change, argued that the country’s population has more than doubled since the standards were established in 1950, making them due for an update.

The final register notice from the White House agency noted that the vast majority of comments opposed the proposed change.

The new MSA definition will not touch the 50,000 threshold but will make other adjustments to the definition. OMB will adopt a public update schedule for changes and make more use of the American Community Survey conducted by the Census Bureau, according to the notice.

The MSA threshold issue has not gone away, however, as the agency said it intends to take another look at the definitions after the 2030 census.

“Recognizing the committee’s concern that MSA thresholds have not kept pace with population growth, OMB will work with the Standards Review Committee to conduct research and stakeholder outreach to inform the 2030 standards update,” the OMB news release said.

The Hill

By Michael Macagnone

Posted July 13, 2021 at 6:34pm

• Cities, lobbying groups ask Treasury to loosen limits on aid
• Biden stance reflects effort to ensure funds boost the economy

America’s states and cities are receiving $350 billion from Washington, an unprecedented move to head off a fiscal crisis that could have derailed the economic recovery.

But at least two dozen local governments and lobbying groups are pushing President Joe Biden’s administration to allow the federal funds to be used for something the Treasury Department hadn’t envisioned: paying down debt or socking it away.

Among them is Oceanside, a 176,000-person city on the Southern California coast. Michael Gossman, assistant city manager, wants to be able to use the federal aid to replenish reserves drawn down last year so the city could increase services for the homeless and deliver meals to the elderly during the pandemic.

“It’s not that we’re asking for a blank check,” he said.

The push shows a small rift that’s opened as the economy surges back from the pandemic, saving governments from facing the type of crippling budget deficits that lingered for years after the last recession. With their finances broadly on the mend, some officials want to use it to replenish depleted savings accounts or pay off debt run up last year to stay afloat as much of the nation shut down. That’s put them at odds with Treasury regulations seeking to ensure the funds are plowed back into the economy.

Bounty of Cash

Marc Goldwein, senior vice president for the Committee for a Responsible Federal Budget, a nonpartisan think tank, said push-back against the administration’s rules reflect the fact that governments were given more “than they know what to do with.”

Overall, states and cities have been eager to put the aid to work, using it to fund direct relief for small businesses, upgrades to water and sewer infrastructure, and even local experiments with universal basic income. And the wide range of spending on which the aid can be used can easily free up locally generated funds for paying down debt or bolstering savings. Both Illinois and New Jersey, for example, have used unexpectedly large tax collections to chip away at their debts.

Even so, cities including Philadelphia and lobbying groups like the National League of Cities have asked the Biden administration to relax some of the restrictions. Treasury officials could make changes to its rules after accepting comments that are due Friday.

Stoking the Recovery

The Treasury’s initial guidance emphasizes potential uses of the money like rehiring workers and helping lower-income and minority communities hardest hit by the pandemic. It also included a variety of restrictions, including a ban on using it to offset tax cuts. Those rules were designed to encourage states and cities to spend the money quickly, said Dan White, director of public sector research for Moody’s Analytics.

Putting the money in rainy day funds is “not going to do anything to increase GDP or job growth today,” White said.

It’s unclear how much of an economic impact it would have if the Treasury rolled back some of the limits. But many governments sold debt in the early days of the pandemic as they prepared for tax revenues to tumble. In the second half of 2020, for example, at least one quarter of state and local government debt sales over $100 million included a material element of deficit financing, according to Municipal Market Analytics.

“We had to balance our books. We had to issue debt,” said Gary Dickson, town supervisor for West Seneca, New York, which took out a loan of $600,000 last year.

While he said the aid is “fungible,” giving the town flexibility to pay off the loan with other funds, loosening the restrictions would make things easier, he said.

Philadelphia’s finance director, Rob Dubow, told Treasury that helping local governments rebuild their finances would prepare them for the next economic downturn, according to a letter to the department. Philadelphia, which drew heavily on reserves during the pandemic, is projecting that its general-fund balance will fall to a surplus of $78.7 million from $438 million before the pandemic, according to a city spokesperson.

Rebecca Rhynhart, the city’s controller, wants part of the rescue funds earmarked for future tax shortfalls. She said other funds should be used for combating gun violence, reducing poverty, addressing the opioid epidemic and business growth.

“We need to make sure we are fiscally sound,” she said. “At the same time, significant amounts of money needs to be used for investments to tackle these challenges.”

Chicago has seen a political debate over how to best divvy up the aid. Before the Treasury rules were released, Mayor Lori Lightfoot’s administration floated using it to pay down a loan taken to help close a nearly $800 million deficit and cancel a debt refinancing plan, which together would take up almost half of the $1.9 billion in recovery funds the city expects to receive.

She’s faced pressure from progressive politicians like Alderwoman Rossana Rodriguez Sanchez, who said it would be a waste to pay down debt given a spike in violence and an uneven recovery that’s leaving behind people of color and lower-income communities.

“This is the moment to make an argument for the massive injection of resources,” she said.

Bloomberg Politics

By Amanda Albright and Shruti Singh

July 16, 2021, 8:00 AM PDT

— With assistance by Madeline Campbell, and Michelle Kaske