30 Jun, 2021
Key Takeaways
30 Jun, 2021
Fitch Ratings-New York/Austin-28 June 2021: U.S. life plan communities (LPCs) are proving to be quite resilient so far against the coronavirus, though Fitch Ratings says that the sector is not out of the woods yet.
‘Healthy residential real estate markets and increased market interest in life plan communities are translating into consistent demand for retirement living, ‘ said Fitch Director Margaret Johnson. ‘Sales of independent living units have also accelerated following a slowdown in resale activity throughout 2020 due to the coronavirus and related governmental lockdown measures.’
Of the 87 LPC rating actions year-to-date (not including names placed Under Criteria Observation [UCO]), 55 (63%) were rating affirmations. Fitch has downgraded nine (10%) communities due largely to LPCs borrowing additional debt to finance expansion projects, rather than operational pressures.
In March, Fitch released revised LPC rating criteria. Following that release, Fitch placed 22 LPCs UCO. Fitch has so far resolved nine of the UCO ratings, all of which were affirmations, except for two downgrades — one driven solely by credit reasons (a large additional borrowing) and one driven by a combination of criteria and credit factors. Updated review status of UCO names is available in the special report linked above.
Rising operating costs remain the most significant pressure, especially with regulatory requirements for long-term care facilities likely to become stricter and staffing shortages being experienced across the industry. ‘The debate over making the COVID-19 vaccine a condition of employment could increase staff turnover and operating expenses for life plan communities,’ said Johnson. ‘That said, voluntary vaccination rates among employees at Fitch-rated life plan communities are reportedly very high.’
As the sector emerges from the pandemic, Fitch expects life plan communities will continue to consolidate over the next few years. Lower-rated communities with high exposure to skilled nursing operations, undergoing expansions and that are in areas heavily affected by subsequent waves of the pandemic will be most susceptible to rating pressure.
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
Fitch Ratings-Austin/New York-29 June 2021: Fitch Ratings has published the following report: “U.S. Public Finance Prepaid Energy Transaction Rating Criteria.” This report updates and replaces the prior report published on July 14, 2020.
Primary revisions to the criteria include a slight revision of Fitch’s stressed gas price assumption to $8.60 per million British thermal units (MMBtu) from $8.70 per MMBtu and a clarification of Fitch’s use of Private Ratings and Credit Opinions in the prepay transaction counterparty credit analysis.
The key criteria elements remain consistent with those of the prior report, and there is no impact on outstanding ratings. The previous version of the criteria has been retired.
Contact:
Dennis Pidherny
Managing Director
+1-212-908-0738
Fitch Ratings, Inc.
300 W. 57th Street
New York, NY 10019
Tim Morilla
Director
+1-512-813-5702
Nicole Wood
Director
+1-212-908-0735
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com
Additional information is available on www.fitchratings.com
Written for newcomers and veterans alike, this book examines the foundations of public utility law and applies them to future challenges. Mixing case narratives and doctrine drawn from all legal sources, its analysis of the complexities of public utility regulation covers market structure, pricing, and jurisdiction.
Click here to learn more and to purchase.
Last Thursday, the Treasury released updated FAQs for the Coronavirus State and Local Fiscal Recovery Fund (CSLFRF) and the Emergency Rental Assistance (ERA) program. New additions to the CSLFRF FAQs provide clarification on eligible expenditures regarding small businesses, community violence, eviction and housing stability services, government services, as well as revenue loss.
Updates to the ERA FAQs mostly consist of revisions to a handful of existing questions regarding reporting requirements, administrative expenses, and housing stability services. New additions focus on eviction prevention, promoting access to eligible households, and payments.
Click here to view the updated FAQs for the CSLFRF.
Click here to view the updated FAQs for the ERA.
GFOA will continue to monitor the programs for additional updates.
Property and casualty insurers boosted their stakes in municipal holdings in 2020 for the first time in several years amid a positive climate for government-issued debt securities.
Insurance companies hold significant investments in municipal bonds, with the P&C space being the largest holder by sector. Since at least 2016, the P&C industry has been reducing its positions in municipal bonds, though they have remained a significant part of the industry’s investable assets.
Year-end 2020, municipal bonds accounted for roughly 13.5% of the P&C industry’s investable assets, with a reported carrying value of $271.47 billion, an S&P Global Market Intelligence analysis shows. The year-end 2020 values were up $11 billion compared to the previous year, but down nearly $60 billion versus 2016. Full-year statutory insurance data from late filing companies, as well as group-level calculations, are not available until at least April of each year.
2 Jul, 2021
Key Takeaways
1 Jul, 2021
Fitch Ratings-New York-30 June 2021: Amid overall flat job growth for U.S. metropolitan cities, Fitch Ratings’ latest U.S. Metros Job Tracker report shows leisure and hospitality jobs are returning in greater numbers.
Loosening pandemic restrictions and increasing vaccination rates are helping to add jobs back for leisure and hospitality with Miami and New Orleans seeing relatively strong improvement from prior months. Miami has recovered 61% of leisure and hospitality employment, while New Orleans has recovered 42%. That said, ‘leisure and hospitality is still responsible for roughly 40% of all major metro jobs lost between February 2020 and April of this year,’ said Senior Director Olu Sonola.
From a regional standpoint, the median recovery rate for major Midwest metros rose to 68% in April from 66% in February. Eight out of nine major metros in the Midwest had employment recovery rates above 50%, the lone outlier being Chicago. By contrast, the employment recovery rate for major southern MSAs fell to 65% in April from 68% in March, the only region to experience a decrease in its median recovery rate. ‘Richmond, New Orleans and Orlando remain particularly challenged by the current economic environment with employment recovery rates below 50%,’ said Sonola.
New York City remains the only northeastern metro to have recovered less than 50% of jobs lost at the start of the pandemic, and the employment recovery rate remained flat at 48% between March and April. One ray of light, however, was mobility to work. ‘New York City was the only major northeastern metro where mobility to work improved between March and April, a possible harbinger for improving job growth for New York City as the economy reopens,’ said Sonola.
‘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
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com
Additional information is available on www.fitchratings.com
Joe Mysak, Editor of Bloomberg Brief: Municipal Market, discusses the municipal bond markets. Hosted by Paul Sweeney and Matt Miller.
Bloomberg Radio
July 2, 2021
Plan secures bipartisan agreement on overhauling the nation’s transportation, water and broadband infrastructure
WASHINGTON—President Biden and a group of 10 centrist senators agreed to a roughly $1 trillion infrastructure plan Thursday, securing a long-sought bipartisan deal that lawmakers and the White House will now attempt to shepherd through Congress alongside a broader package sought by Democrats.
Mr. Biden and Democratic leaders said that advancing the deal on transportation, water and broadband infrastructure will hinge on the passage of more elements of Mr. Biden’s $4 trillion economic agenda. The two-track process sets up weeks of delicate negotiations to gather support for both the bipartisan plan and a separate Democratic proposal, a challenging task in the 50-50 Senate and the narrowly Democratic-controlled House.
“What we agreed on today is what we could agree on. The physical infrastructure. There’s no agreement on the rest,” said Mr. Biden, who said he wouldn’t sign the bipartisan deal into law until a bill containing the rest of his agenda also is on his desk. “If this is the only one that comes to me, I’m not signing it.”
With $579 billion of spending above expected federal levels and a total of $973 billion of investment over five years and $1.2 trillion if continued over eight, the agreement will make new investments in the electrical grid, transit, roads and bridges and other forms of infrastructure.
The cost of the spending will be covered by repurposing existing federal funds, public-private partnerships and revenue collected from enhanced enforcement at the Internal Revenue Service, according to a list distributed by the White House. The list also included sales from the strategic petroleum reserve and wireless-spectrum auction sales among the other revenue raisers.
Emerging from a noontime meeting at the White House to announce the deal, Republicans and Democrats cast the agreement as proof that bipartisan progress is still possible in a polarized Washington.
“We’ve agreed on the price tag, the scope and how to pay for it,” said Sen. Susan Collins (R., Maine) on Thursday. “It was not easy to get agreement on all three, but it was essential.”
Mr. Biden framed the infrastructure investment as critical to compete with global rivals. “We’re in a race with China and the rest of the world for the 21st century,” he said. “This agreement signals to the world that we can function, deliver and do significant things.”
In trading Thursday, shares of machinery giant Caterpillar Inc., building-materials supplier Martin Marietta Materials Inc. and construction-aggregates producer Vulcan Materials Co. moved higher on news of the agreement.
President Biden’s infrastructure plan calls for non-traditional projects like the removal of some highways. What Democrats want for cities like Baltimore says a lot about the President’s goals in the next wave of development. Photo: Carlos Waters/WSJ
While the framework between the bipartisan group of lawmakers and the White House marks an important step toward a final agreement, passing the legislation will require top Democrats to walk a tightrope between maintaining Republican support for one package and unifying Democrats around a second.
Senate Majority Leader Chuck Schumer (D., N.Y.) has said the Senate will simultaneously move forward with both a bipartisan agreement and a larger bill that includes spending on education, healthcare, and antipoverty efforts. Democrats can skirt the 60-vote threshold for advancing most Senate legislation through a budget process called reconciliation, which requires only a simple majority.
House Speaker Nancy Pelosi (D., Calif.) said that the House won’t take up the bipartisan agreement until the Senate approves a package through reconciliation.
“I said there won’t be an infrastructure bill unless we have a reconciliation bill, plain and simple,” Mrs. Pelosi said.
Senate Majority Whip Dick Durbin (D., Ill.) said passing two complex bills through different procedures at the same time would be challenging. The reconciliation process alone is time-consuming and complicated, he noted.
“I don’t know that it’s possible, but we’ll see,” he said. Mr. Durbin added that he wasn’t sure how Democratic leaders would be able to give liberal Democrats the reassurance they are seeking, given the procedural complexities. “That’s the tough part,” he said.
If some Democrats ultimately oppose the bipartisan infrastructure package, Republicans would need to sign on in larger numbers to ensure its passage. A group of 21 Senators, including 11 Republicans, have previously lent their support to the bipartisan efforts, though some of those lawmakers said Thursday they were still reviewing details of the emerging deal.
Sen. Rob Portman (R., Ohio), the lead Republican negotiator, spoke with Senate Minority Leader Mitch McConnell (R., Ky.) and other top Republicans Thursday morning to discuss the agreement. Mr. Portman said Mr. McConnell told him he was open-minded about the framework.
But late Thursday, Mr. McConnell criticized Mr. Biden’s decision to commit to passing a separate, broader package.
“Less than two hours after publicly commending our colleagues and actually endorsing the bipartisan agreement, the president took the extraordinary step of threatening to veto it,” Mr. McConnell said.
“That’s not the way to show you’re serious about getting a bipartisan outcome,” he added.
A previous effort to craft an infrastructure agreement between the White House and a separate group of Senate Republicans fell apart earlier this month, with the GOP group proposing roughly $300 billion in funding above baseline levels.
Sen. John Thune (R., S.D.), the No. 2 Senate Republican, said the plan’s funding for transit was potentially a problem for him. He said wasn’t yet sure if the plan would win 60 votes and would need to discuss it with other Republicans. “We’re going to have to socialize that,” Mr. Thune said.
Much of the negotiations between the bipartisan group and the White House, which took place in marathon sessions in rooms around the Capitol in recent weeks, focused on the question of how to finance the spending. The White House had originally proposed paying for the infrastructure spending with tax increases on corporations, part of a broader tax agenda that also included rate increases on high earners.
But Republicans rejected any tax increases that would alter elements of the 2017 tax law, passed with only GOP votes, and the bipartisan group instead included indexing the gas tax to inflation and charging fees on electric vehicles in drafts of their plan. The White House staunchly opposed those two ideas, though, with the group debating alternatives, including how much money could be raised from enhanced IRS enforcement.
Lawmakers expect to raise about $100 billion through public-private partnerships and direct-pay municipal bonds, according to someone familiar with the discussions, and generate a net of about $100 billion by investing $40 billion in the IRS to collect taxes that are owed but not paid. They also repurpose about $80 billion from prior pandemic relief bills to pay for the package, which Mr. Portman said would increase to about $125 billion in repurposed prior aid, when including previously approved broadband funding and money from states returning unused unemployment benefits.
The plan also includes $20 billion in funding for an infrastructure financing authority, which Sen. Mark Warner (D., Va.), one of the negotiators, said would yield $180 billion in infrastructure spending.
Lawmakers and aides expect bringing all 50 Democrats together on a second, reconciliation package to be a complicated, lengthy process. Sen. Bernie Sanders (I., Vt.), the chairman of the Senate Budget Committee, has floated a $6 trillion package Democrats could consider through reconciliation, proposing investments beyond what Mr. Biden has included in his agenda.
Two centrist Democrats who have emphasized bipartisanship, Sen. Joe Manchin of West Virginia and Arizona Sen. Kyrsten Sinema, indicated Thursday they would be willing to work with party colleagues on helping craft a reconciliation plan.
But Mr. Manchin signaled discomfort with its proposed multitrillion-dollar cost, of which half is expected to be paid for with new revenue. “That sounds extremely, extremely high, for us to take on that much debt,” he said.
Mr. Warner said that completing the overall agreement will take some time.
“Until it’s signed by the president, anything can happen,” he said.
The Wall Street Journal
By Andrew Duehren, Kristina Peterson and Sabrina Siddiqui
Updated June 24, 2021 5:54 pm ET
Finance experts say the plan to pay for the infrastructure proposal, in part by clawing back unspent covid relief funds, is unlikely to cover the full cost.
The White House and a bipartisan group of senators heralded agreement on an infrastructure package framework as a major breakthrough. But policy and finance experts say the real breakthrough will come if lawmakers find a way to pay for the proposal.
President Biden has promised not to raise taxes on people earning less than $400,000 while senators said the infrastructure proposal would not include new taxes. Details about the financing of the $1.2 trillion proposal are limited, and experts have questioned whether the mishmash of possible funding sources outlined in a White House proposal will be enough to pay for the project.
Route Fifty
By Andrea Noble
JULY 2, 2021
Today, President Biden and Vice President Harris announced their support for the Bipartisan Infrastructure Framework, the largest long-term investment in our infrastructure and competitiveness in nearly a century – an investment that will make our economy more sustainable, resilient, and just.
The President came into office promising to find common ground to get things done – and he’s delivering on that promise.
The $1.2 trillion Bipartisan Infrastructure Framework is a critical step in implementing President Biden’s Build Back Better vision. The Plan makes transformational and historic investments in clean transportation infrastructure, clean water infrastructure, universal broadband infrastructure, clean power infrastructure, remediation of legacy pollution, and resilience to the changing climate. Cumulatively across these areas, the Framework invests two-thirds of the resources that the President proposed in his American Jobs Plan.
JUNE 24, 2021
KEY POINTS
Many investors already know about the tax benefits of municipal bonds — also known as muni bonds or “munis.” Now these assets have also become popular among those who want to have an impact on climate and social change.
In addition to tax savings and relatively low risk, muni bonds may be attractive to those seeking funds in areas such as renewable energy, clean water, low-carbon transportation or infrastructure.
The muni bond market increased by $474 billion in 2020, with $27.6 billion issued for green, social or sustainable bonds, more than double the numbers from 2019, according to S&P Global Ratings.
“We expect growth in the green bond market to also be driven by a renewed focus on climate change and the aging state of the nation’s infrastructure,” said Laura Levenstein, chief risk officer at Build America Mutual, speaking at the CNBC Financial Advisor Summit on Tuesday.
As the muni bond market explodes for retail, institutional and international investors, experts at the FA Summit shared the latest updates.
Labeled vs. unlabeled muni bonds
One of the biggest challenges for investors is finding legitimate green or social muni options, as there may be labeling inconsistencies across the bond market.
Some are wary of “greenwashing,” whereby issuers misrepresent their bonds’ environmental impact for marketing purposes. However, there are also some muni bonds funding climate or social projects without the impact label.
“We see a lot of unlabeled impact [bonds] in the muni market, especially on the social side,” said Michael Kashani, global head of ESG portfolio management at Goldman Sachs Asset Management and panelist at the FA Summit.
For example, there may be muni bonds funding the construction or expansion of K-12 schools in underserved communities without the “impact” label, he said.
Build America Mutual, the largest provider for external green bond verifications, has identified about 175 green U.S. municipal bonds worth about $2.5 billion, Levenstein said.
Over time, more social, green and sustainable bonds have aligned with one of the United Nations’ 17 sustainable development goals, she said.
“I think the alignment provides further comfort to investors that they’re buying legitimate green, social and sustainable bonds,” said Levenstein. “And that’s sort of where we see the market going in the next year.”
Impact investing returns
While many impact-driven investors want to support green or social projects, portfolio returns are still the top concern, Kashani said.
But with approximately 50,000 municipal bond issuers and 1 million securities, there are endless ways to customize a client’s portfolio based on individual preferences, he said.
“There’s a lot of flexibility and variability, depending on how deep a client wants to go,” Kashani said.
For example, some clients may prefer higher percentages of impact funds for specific sectors, which may affect returns. However, there are many options to bring “economic, environmental justice, transparency and equality” across their portfolio, without sacrificing their goals, said Kashani.
With current yields above Treasurys, muni bonds — which generally bypass federal levies on interest — have been a refuge for those worried about impending tax hikes from President Joe Biden.
Muni bonds, already known for relatively low default risk, scored a credit boost in 2021 as state and local governments received billions in federal stimulus money.
cnbc.com
by Kate Dore
JUN 30 2021
A Q&A with Adasina Social Capital and Activest on muni bonds as the intersection of finance and policy.
Investors may not think of the municipal-bond market when it comes to building an impact portfolio around racial justice, but it’s one area where their dollars can have a direct connection with public policy.
We spoke about this intersection of social impact investing and public finance with Rachel Robasciotti, founder of Adasina Social Capital, Ryan Bowers, co-founder of Activest, and Chelsea McDaniel, a senior fellow at Activest. Adasina and Activest work together on the Adasina Fiscal Justice Municipal Strategy.
Q: Rachel, Ryan, Chelsea, thanks for joining us. Let’s start at the beginning. Why municipal bonds?
Ryan: The municipal market is supposed to be not only low risk but also public purpose. But we’re seeing things in the market that are neither good for a city’s fiscal health or its residents.
morningstar.com
by Tom Lauricella
Jun 28, 2021
29 Jun, 2021
Fitch Ratings-London-28 June 2021: Fitch Ratings has been named the most transparent credit rating agency (CRA) for ESG for the third successive year by key industry publication “Environmental Finance” in its 2021 Sustainable Investment Awards. Fitch has won the award each year since it was established in 2019.
In its award citation, Environmental Finance magazine said the judges again rewarded Fitch for the breadth of its ESG Relevance Scores, which now cover all asset classes. The citation highlighted work undertaken on two degree centigrade scenario-based ESG Vulnerability Scores, which evaluate the vulnerability of sectors’ and entities’ creditworthiness to ESG-driven risks in a two degree warming scenario to 2050. The citation also highlighted the introduction of ESG ‘heat maps’ and the provision of Fitch’s ESG research free-of-charge through a dedicated ESG website.
“We are very pleased to receive this continued external recognition of our work,” said Andrew Steel, Head of Fitch Ratings’ Sustainable Finance Group. “In 2021 we have our sights set on further increasing our presence and reach in ESG, while maintaining our reputation for quality, in-depth and independent insights and opinions.”
Environmental Finance’s full citation for the award can be by clicking on this link.
Contact:
Andrew Steel
Managing Director
Global Head of Sustainable Finance
+44 20 3530 1596
30 North Colonnade
London, E14 5GN
UK
Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com
Adrian Simpson, London, Tel: +44 20 3530 1010, Email: adrian.simpson@thefitchgroup.com
Additional information is available on www.fitchratings.com
Exchange-traded funds focused on municipal bonds are raking in unprecedented amounts of cash.
The funds have seen a record $5.8 billion of inflows in the second quarter, according to data compiled by Bloomberg, driving this year’s haul to about $11 billion. That has been a boon to the two biggest ETFs, run by BlackRock Inc. and Vanguard Group, which received nearly half of the funds.
ETFs are a small-but-growing force in the $4 trillion state and local government debt market, with about $75 billion of assets. The funds are benefiting from a broader influx of demand for municipal securities this year as President Joe Biden pushes to raise taxes on the highest earners, driving investors to look for ways to shield income from taxes.
During the summer months, the market also typically benefits from a wave of debt payments that bondholders typically seek to reinvest. Issuers are scheduled to pay $41.5 billion of principal and interest on July 1, adding to the cash hitting the market, according to a June 28 note by CreditSights strategists Patrick Luby and John Ceffalio.
The Vanguard Tax-Exempt Bond ETF, the second-biggest muni ETF with over $13 billion of assets, has seen $2.8 billion of inflows year-to-date, more than any other state and local debt ETF tracked by Bloomberg. And BlackRock’s iShares National Muni Bond ETF, the biggest muni ETF with $22.7 billion of assets, has notched inflows of $2.2 billion so far this year.
Bloomberg Markets
By Amanda Albright
June 29, 2021, 8:03 AM PDT
With data gathered from all 50 state budget offices, this semi-annual report provides a narrative analysis of the fiscal condition of the states and data summaries of state general fund revenues, expenditures, and balances. The spring edition details governors’ proposed budgets; the fall edition details enacted budgets.
Overview – Spring 2021
State general fund spending is projected to grow 5.0 percent in fiscal 2022 compared to fiscal 2021 levels, with 39 states proposing spending increases according to governors’ budgets. While the effects of COVID-19 on state budgets were not as severe as anticipated earlier in the crisis, both general fund spending and revenue levels remain below pre-pandemic projections, based on estimates at the time of data collection.
Other key highlights from the report:
Downloads
Staff Contact
Kathryn White
202-624-5949
kwhite@nasbo.org
Over the past year, many communities have started to understand the ways in which local policies have the potential to affect communities. Whether it be policies on imposed fees and fines, zoning or land use regulations, economic development incentives, or policing strategies, there is potential for disadvantaged neighborhoods and select demographics to face challenges not found in the larger population.
Democrats and Republicans finally agreed on an infrastructure deal, something the market desperately wanted.
Or did it? The remarkable aspect of the announcement of a bipartisan infrastructure bill agreement is that there wasn’t much market reaction at all.
Yes, the Dow Jones Industrial Average got a bit of a bump, and the S&P 500 ended at a high, but it’s done that 30 times this year. But there were no fireworks in the bond market, and the currency markets were quiet, too.
True, the agreement still has to go through the process of becoming law, and that’s easier said than done. But given the monthslong behind-the-scenes maneuvering, there’s a decent chance the legislation will make it to the finish line.
One could argue that infrastructure was already priced in, but the announcement wasn’t greeted with sell-the-news behavior, either. So you’re left with two conclusions.
One is that the markets are so perfectly in tune with Washington that major spending initiatives are precisely baked in.
The other is that financial markets are so obsessed with the Federal Reserve and monetary policy that they’re willing to shrug off the equally potent economic force of fiscal policy.
Don’t be surprised if that starts to change.
Barron’s
by Al Root
June 25, 2021
Key Takeaways
23 Jun, 2021
Key Takeaways
23 Jun, 2021
Key Takeaways
23 Jun, 2021
Fitch Ratings-New York/San Francisco/Chicago-24 June 2021: The coronavirus pandemic is creating new cracks in the already fragile foundation of affordable housing, according to Fitch Ratings in a new report.
Low-income households have been facing daunting affordability with over 10 million low-income renter households facing economic stress and substandard housing for several years. After the onset of the pandemic, “COVID-19 caused an economic contraction felt among millions of American of many economic strata, and those at the most vulnerable level of the economic scale saw their tenuous grip loosen on housing security,” said Senior Director Mikiyon Alexander.
The pandemic has intensified rising input costs, generational shifts in demand, changes in regulations and slower wage growth already in place that have all led to supply deficits and rising home prices that affect U.S. housing affordability. Affordable housing stock has decreased, causing demand to outstrip supply, and leaving a gap that particularly pressures the affordable housing segment.
The root of the affordable housing issues rests with a deficiency in the general housing supply. Only seven homes were built for every 10 households formed from 2010 to 2016. This creates a strong competition for the existing affordable housing supply for both homeownership and rental housing. This intensifying competition, according to Alexander, “makes the housing shortage more acute for those in the market for affordable housing.”
Renters are facing similar struggles. Among the 10.8 million renter households with incomes at or below the poverty line, these extremely-low income households faced a shortage of nearly seven million rental homes. Just 37 affordable homes are available for every 100 extremely low-income rental households.
“COVID-19 Complicates Housing Affordability: Defining the Gaps for 2021” is available at www.fitchratings.com.
Contact:
Mikiyon Alexander
Senior Director
+1-646-582-4796
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
Read the Fitch Special Report.
Thu 24 Jun, 2021
Fitch Ratings-New York-24 June 2021: Continued elevated expenses due to moisture remediation could lead to further negative ratings pressure for US military housing bonds with exposure to environmental issues, Fitch Ratings says. Some military housing operators have been accused of neglecting routine maintenance, allowing unsafe housing conditions to develop. Over the past year, Outlooks for 11 of 13 rated military housing transactions have been revised to Negative from Stable due to liquidity erosion and increased expenses.
In 2020 and 2021, Fitch downgraded and placed on Negative Outlook four transactions with Negative Outlooks because of large increases in operating expenses that negatively affected debt service coverage ratios (DSCR). Fiscal 2019 operating expenses increased substantially from 2018, in many cases by double digits, as a result of maintenance and repairs tied to environmental remediation. DSCRs continue to decline from historically high levels in 2018.
The operator’s ability to maintain housing quality, sustain strong occupancy levels and control project operating expenses is important to project cash flow stability. Military housing transactions also benefit from cash reserves, usually sized at maximum annual debt service, to guard against cash flow volatility. Some transactions have reinvestment funds to offset some of the increased expenses that are only to be spent with the approval of the appropriate service branch. Reinvestment funds are quickly being depleted, and should they be exhausted, the DSCR could plummet.
Military housing operators have been hit with a number of lawsuits in Texas and Washington alleging unsafe housing conditions. Operator revenue is often based in part on meeting performance objectives set forth in contracts with the applicable service branch. Two former employees of Balfour Beatty pleaded guilty to fraud for covering up military housing issues between 2013 and 2016 at Lackland, Travis, Vandenberg, Tinker and Fairchild Air Force Bases (AFBs). Maintenance documents were falsified to allow the company qualify for incentive payments received upon meeting certain maintenance targets. Capmark Military Housing Trust XXXIX AMC West (which covers Travis, Tinker and Fairchild AFBs) was downgraded last July to ‘A+’/Outlook Negative from ‘AA’/Outlook Stable.
Military bases saw a rise in insurance premium expenses. Some incident claims are coded as uninsured losses until it is determined whether the claim will be covered. Once bases receive reimbursement, Fitch may attribute insurance payments to cash flows when invested back into the project.
Higher expenses and marginal basic allowance for housing (BAH) increases can result in some deals having less than break-even coverage, per Fitch’s Military Housing Criteria break-even thresholds for investment-grade ratings. Most military housing project revenue is derived from the BAH, which is informed in part by the rental rates in the community. Given the reliance on federal appropriations, BAH may be impacted in the longer-term by the uncertainty of future federal programmatic spending on housing programs. The median BAH rate for all military service members across all installations increased 3% from 2020 to 2021, similar to the 2.7% increase from 2019 to 2020. For Fitch-rated military housing projects, median rates increased 1.1% from 2020 to 2021.
Sustained declines in occupancy could also pressure ratings. Project vacancy rates have increased, primarily driven by increased remediation and the Department of Defence’s freeze of Permanent Change of Station during the pandemic. This resulted in a subsequent decline in rental revenues for the duration of the freeze, which was lifted in June 2020.
Military housing projects with a Negative Outlook or Watch have been assigned elevated environmental, social and governance (ESG) relevance scores of ‘5’, reflecting the concerns regarding exposure to environmental site risk and associated remediation costs.
Contact:
Mikiyon Alexander
Senior Director, US Public Finance
+1 646 582-4796
Fitch Ratings
Hearst Tower
200 W. 57th Street
New York, NY 10016
Sarah Repucci
Senior Director, Fitch Wire
+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.
The top 10 U.S. commercial airports will receive almost $2.4 billion in pandemic relief funds based on a formula set by Congress earlier this year.
The Federal Aviation Administration on Tuesday announced it is providing $7.4 billion to scores of airports as well as the restaurants, shops and other businesses that have suffered as the coronavirus severely cut air travel, starting in early 2020. Another roughly $600 million will be disbursed to airports through existing grant programs, the agency said.
“The Airport Rescue Grants keep workers employed and help the aviation sector recover as more Americans get vaccinated and begin traveling again,” Transportation Secretary Pete Buttigieg said in a release.
The funds are part of President Joe Biden’s $1.9 trillion Covid-19 relief package. Passage of the legislation in March helped prompt a rally in airport municipal bonds.
The largest grants were based on passengers, and Atlanta’s Hartsfield-Jackson International, the busiest U.S. hub, will get the most of any airport, about $370 million, according to FAA data.
After falling 96% of pre-pandemic levels in April 2020, air travel has gradually ramped up. In recent days, airline passenger numbers are about 27% below the equivalent period before the virus hit, according to Transportation Security Administration data.
Bloomberg Politics
By Alan Levin
June 22, 2021, 5:00 AM PDT Updated on June 22, 2021, 6:20 AM PDT
— With assistance by Nic Querolo
As Republicans and Democrats argue over the size and funding of an infrastructure bill, the idea of a national infrastructure bank is back on the table—and not a moment too soon. It is the right way to fund our infrastructure by bringing private investment to bear, and to break the partisan standoff that threatens our ability to solve our infrastructure crisis. The dire condition of our roads, bridges, public transport, water supply, and power grid threatens our economic growth.
What is the infrastructure bank? It has taken different forms in proposals since 2007. But simply put, the proposal is to create a government-sponsored institution, such as Fannie Mae, alongside private money that consolidates funds and distributes them to public projects in the form of loans or direct equity investments.
The bank needs to be of a size and scope to provide for long-term strategic infrastructure investment on a national scale and with a long-term time horizon. It should have $100 billion in equity capital and a $1 trillion balance sheet, sufficient to galvanize the capital markets and generate funding on a sustainable long-term basis. It can also play additional critical roles: Removing structural barriers to infrastructure funding—there are a surprising number—and providing expertise in planning and project management that exceeds what existing state and municipal resources can accomplish.
There are several compelling reasons for committing to the infrastructure bank. The first has simply to do with the scale of the infrastructure emergency. The $2.3 trillion proposed for infrastructure investment under President Biden’s first American Jobs Plan sounds enormous, as does the $1.7 trillion in the administration’s later proposal and the $1.2 trillion in the bipartisan deal under discussion today. Unfortunately, these figures are not as big as they seem. While the initial plan is bold, necessary and ambitious—it aims for nothing less than to transform infrastructure for the 21st century and revitalize American productivity for decades to come—the proposed expenditure is not nearly adequate. The latest bipartisan deal would add only $600 billion in new spending over five years. The American Society of Civil Engineers has called for $2.59 trillion in infrastructure spending just to bring our existing infrastructure into a state of adequate repair—that is, without starting any new projects. A true modernization and revitalization would cost dramatically more.
Public funding options are limited by political reality. The current stalemate over the Biden infrastructure plan is driven partly by how infrastructure should be defined, but primarily by how it should be paid for. The proposed mechanisms—higher taxes or a bigger deficit—are politically unpopular. One can argue that taxation is an appropriate way to pay for public projects, but it is a hard sell for politicians. There are other disadvantages to public funding. Government budgets are short-term and subject to political whims. Infrastructure needs a long-term planning horizon.
The alternative is to turn to private investment. The good news is that ample private funding is available. U.S. pension funds had over $18 trillion in assets under management at the end of 2019. Add in overseas pension funds and that total climbs to over $40 trillion. Private equity funds and overseas sovereign wealth funds bring the total still higher. There might even at some future point be a dedicated Infrastructure IRA as I have proposed. All of these investors would benefit greatly from exposure to infrastructure, which is highly predictable and generates stable, predictable cash flows that are maintained over the decades-long life of the investment.
Still, raising dedicated private funds and channeling them to infrastructure projects is no easy matter. That’s where the infrastructure bank comes in.
The hard but surprising truth is that there is currently no direct path for private investment in infrastructure. Many pension funds and other private investors want to invest in infrastructure. But they have a hard time finding projects in the labyrinth of federal, state, and local entities that control the nation’s infrastructure. Even when projects can be found, they are often not designed for private investment. They are largely funded by federal grants and state and municipal bond issues. There is limited equity opportunity through public-private partnerships, but not nearly enough.
The bank’s first task is simply to take in both federal and private funds—at massive scale—and direct them to state and local infrastructure projects. And, working in the other direction, it brings the most promising projects to the attention of investors. Like Fannie Mae, it brings liquidity and transparency to an illiquid, opaque market.
An infrastructure bank can do more. It can provide project management and oversight. Developing projects via public-private partnerships is complex and time-consuming—beyond the capacity of many state and local agencies. The bank can recruit and deploy experts and staff. It can help local agencies with the strategic and day-to-day demands of project management: permitting and contracting, helping define and then oversee major technical elements, determining concession timeframes that structure public-private partnerships, and monitoring contractor performance.
The bank can support the underserved, by investing in regions such as inner cities or low population density towns that because of acute needs and weak revenues are unable to fund infrastructure on their own. As a government-sponsored bank, it can plow back profits to subsidize projects in less wealthy areas at lower returns. Think of this U.S. infrastructure bank as the equivalent of the World Bank but for the 50 states and thousands of municipalities that need the help to devise and execute on long-term infrastructure plans.
In the face of the infrastructure crisis—and of our political paralysis—innovative and bipartisan solutions are needed. The bank is one such innovation. The idea has been in circulation long enough. It is time to act to make it a reality.
Barron’s
By Sadek Wahba
June 24, 2021
Sadek Wahba is a senior fellow at the Development Research Institute of New York University. He is also chairman and managing partner of I Squared Capital, an infrastructure investment company. The views expressed in this commentary do not necessarily reflect those of either organization.
Earlier this year, President Biden introduced one of the largest-ever U.S infrastructure plans, roughly $2 trillion investment over a decade, to address the aging and underfunded infrastructure, which has often been neglected through the years.
This infrastructure push entails efforts to revamp the transportation sector, roads and highways, shift to green energy, and more importantly the aging sewage systems throughout the U.S. It’s also important to note the timing of this expenditure plan, which comes after the United States government has already distributed over $6 trillion in COVID-19 economic relief funds in the form of direct impact payments, state and local government aid and extended unemployment benefits.
The funding for the infrastructure plan is expected and proposed to come from a potential increase in the corporate tax rate that’ll take the tax rate back up from 21% to 28%. Although the plan focuses on many different areas of American infrastructure – including manufacturing, commercial and residential construction, veterans’ hospitals, schools, digital infrastructure, airports and creating well-paying American jobs – in this article, we will take a closer look at how the proposed transportation revamp and fixing the water infrastructure fits into the overall strategy of President Biden’s overall vision.
Push for Transportation Revamp
One of the central pieces of President Biden’s plan is to bring the American transportation infrastructure into the 21st century, to not only compete with other international powers but also meet the growing demand of the American travel industry – mainly airports and modernizing the rail infrastructure.
In addition, the plan also entails a strong push for the allocation of a significant amount of funds to fix economically significant bridges, highways, roads and main streets. The plan also allocates over $85 billion dollars to modernize transit agencies throughout the United States; this push will bring much-needed funding for repair backlogs and modernizing existing infrastructure, especially coming out of the COVID-19 downturn and low ridership.
We can decipher two main areas of the transit infrastructure push that will require joint efforts from multiple local governments and jurisdictions: public-private partnerships and public debt financings in the sector to fund certain projects and then potentially seek reimbursements from the federal programs.
Let’s take a look at some prominent issues in the public infrastructure spaces that are currently issuing private activity bonds (PABs). Public-private partnerships have been in place for quite some time and are increasingly utilized for transit projects to access the tax-free capital markets. The issuance of PAB bonds in southern California by the city of Long Beach for major improvements at the Long Beach airport is a prime example of this type of venture, which was taken in conjunction with the local government and resulted in two debt financings (private and governmental) totaling over $61 million. In another example, Denver, Colorado Transit District issued $396 million in debt for its rail line expansion project and it was made successful through the public-private partnership between a local transit agency and a private firm.
President Biden’s plan also highlights the proposition to accelerate the shift to electric vehicles by building more charging stations and providing certain incentives to purchase American-made electric vehicles – this push will not only go in-line with the green infrastructure push, but also reduce oil dependency.
America’s Aging Water and Wastewater Infrastructure
Another big push in President Biden’s plan is to ensure clean, safe drinking water and the treatment of wastewater that’s safe for the environment. The recent White House publication regarding the water infrastructure push states, “An estimated six to ten million homes still receive drinking water through lead pipes and service lines. The President’s investments in improving water infrastructure and replacing lead service lines will create good jobs, including union and prevailing wage jobs. President Biden’s plan invests $111 billion to address these issues”.
From the public debt financing view, the water utilities and various local governments have often used public debt for traditional infrastructure financings like centralized water and wastewater plants, pipes, pumps and other treatment plants. With the renewed focus on these areas, we are likely to see more of these financings, which may be funded collectively by both the public debt and by the federal grant monies.
We are also seeing local and state governments starting their own programs that are more environmentally friendly and curb excess water usage.
The Bottom Line
President Biden’s ambitious view on revamping America’s infrastructure will inevitably face its own political roadblocks in different levels of governments, but it will likely be a give-and-take proposition for both political parties for a larger good. In recent years, we have already seen local governments and transit agencies pushing their respective governing bodies for considerations that are in line with the American infrastructure plan; furthermore, investors will likely see an increase in municipal capital market activity related to the infrastructure push and issuance of debt.
dividend.com
by Jayden Sangha
Jun 23, 2021
The impacts of a changing climate are no longer a hypothetical. Each year, extreme events such as hurricanes, droughts, fires, and freezes grow more frequent and more intense—destroying homes, disrupting businesses, and damaging the natural world along the way. Chronic challenges—including gradually rising temperatures, precipitation, and flooding—are adding even more stress. Minimizing and adapting to these impacts must be a priority for every unit of government and every sector of the economy.
Financial markets represent one of the most powerful ways to drive public and private action on climate resilience, as reflected in a May executive order from the Biden administration. The order calls for the Office of Management and Budget, the Department of the Treasury, and other federal agencies to better measure and address financial risks resulting from climate change.
The order’s core intent is for federal agencies and businesses—including financial service firms and insurance companies—to proactively account for and respond to climate risks, including the physical destruction of buildings and the disruption of business operations. Doing so can “promote the flow of capital toward climate-aligned investments and away from high-carbon investments,” as the White House said this April.
The Brookings Institute
Joseph W. Kane, Adie Tomer, and Caroline George
June 22, 2021
Municipal securities dealer groups said Friday they are opposed to the creation of a $20 billion Infrastructure Financing Authority as part of a $1.2 trillion bipartisan infrastructure framework announced Thursday.
Other public finance groups have varying positions.
National Association of Counties spokesman Paul Guequierre said in an email, “Counties support federal investments in infrastructure using a variety of financing tools, including but not limited to, a national infrastructure bank.”
The National Association of Health & Educational Facilities Finance Authorities has not taken a position, said Charles Samuels of Mintz Levin of Mintz Levin, who serves as the group’s legal counsel.
“In my personal opinion it’s of marginal uncertain value,” said Samuels. “I don’t know what the gap is in current state and local financing that this is supposed to fill.”
Samuels said he agrees with state and local government groups that the focus should be on reinstating tax-exempt advance refunding bonds and expanding the current financing tools.
Other state and local government groups did not immediately announce their positions.
Emily Brock, director of the federal liaison center for the Government Finance Officers Association, said she was trying to determine whether there will be room for inclusion of the other municipal financing priorities in the package.
Some of the measures are not big-ticket items and the framework announced Thursday does not yet have legislative language.
An increase for small issuers to $30 million from $10 million of the amount of tax-exempt bonds they can sell to banks can buy under favorable terms as bank-qualified would cost only $118 million over 10 years, according to an estimate last year by the nonpartisan congressional Joint Tax Committee. Bank qualified debt, also known as BQ debt and bank eligible, allows the bank to deduct the carrying cost of that debt as a business cost.
The framework announced by President Biden and a bipartisan group of senators has $312 billion for transportation. It includes $109 billion for roads and bridges, $11 billion for safety, $49 billion for public transit, and $66 billion for passenger and rail freight.
That’s $16 billion more for road, rail and transit spending than the transportation bill passed by the House Transportation and Infrastructure Committee, according to an analysis by the independent Eno Center for Transportation.
There’s also $25 billion for airport infrastructure, $16 billion for ports and waterways, $7.5 billion for electric vehicle charging stations, and $7.5 billion for electric buses and other transit.
Other areas of infrastructure spending include $73 billion for electric grid, $65 billion for broadband, $55 billion for water projects, $47 billion for resilience, $21 billion for environmental remediation, and $5 billion for Western water storage.
It was not immediately clear how the categories listed by the White House compare to legislation the House and Senate are working on. For instance, the bipartisan agreement lists $55 billion for water projects. The Senate recently voted overwhelmingly to approve the $35 billion Drinking Water and Wastewater Infrastructure Act of 2021. And the House version of the water bill is for $50 billion.
The House Democratic leadership, meanwhile, is sticking with its plan to move its own surface transportation bill. House Majority Leader Steny Hoyer, D-Md., said Thursday the Democrats’ INVEST in America Act will be brought to a floor vote the week of June 28.
The House bill includes $343 billion for roads, bridges and safety, another $109 billion for transit and $95 billion for freight and passenger rail.
Despite the apparently higher spending in Biden’s deal with the bipartisan Senate group, the proposal for a new federal financing bureaucracy met with immediate and strong opposition from Municipal Bonds for America, the Bond Dealers of America and the American Securities Association.
“By nationalizing federal investment in local infrastructure via an infrastructure bank, the provision would minimize a centuries-long partnership among federal, state and local governments in infrastructure investment,” said BDA and Municipal Bonds for America in a joint statement.
The two groups said that Congress and the administration instead should empower state and local governments to make additional investments by “reinstating tax-exempt advance refundings, expanding private activity bonds, raising the limit of bank qualified debt and creating a new direct pay bond, the American Infrastructure Bond exempt from sequestration.”
ASA CEO Chris Iacovella said the proposed federal financing authority is based on a misguided bill called the Repair Act (S. 1499) authored by Sen. Mark Warner, D-Va.
Warner’s bipartisan bill would create a new federal entity to finance projects of regional or national significance, including the construction, consolidation, alteration, or repair of airports and air traffic control systems, highway facilities, and transmission or distribution pipelines.
Cosponsors include three Republicans led by Sen. Roy Blunt of Missouri.
“Rather than creating a centralized bureaucracy to dictate funding from Washington, the federal government should instead promote and encourage the use of taxable municipal bonds for infrastructure projects,” Iacovella said in a press statement. “ASA’s regional financial services members have a long history of successfully financing “hard” infrastructure investments and are more than ready to do so again.”
The bond financing provisions of the Moving Forward Act that was advanced by House Democrats last year totaled $83.9 billion over 10 years, so the deal announced by Biden for a $20 billion financing authority is less than one-quarter of that.
Biden said Thursday he is committed to a two-track process in which his American Families Plan moves simultaneously through the budget reconciliation process with Democrats-only support.
“The bipartisan bill from the very beginning was understood there’s going to have to be the second part of it,” Biden said. “Not just signing the bipartisan bill and forgetting about the rest I have I proposed.”
That other legislation is expected to include a number of tax provisions, including an increase in the corporate tax rate and an increase in the top personal income tax to 39.6%.
Muni provisions could conceivably be included in that Democrats-only bill. The Moving Forward Act passed by the House last year had provisions for school bond financing and multifamily housing private activity bonds that would be more suited to that legislation.
By Brian Tumulty
BY SOURCEMEDIA | MUNICIPAL | 06/25/21 01:49 PM EDT
Package includes funding for roads, bridges, transit, airports and broadband
A core bipartisan group of 10 senators reached a deal with the White House on Thursday to spend $973 billion over five years, and $1.2 trillion if continued over eight years, on a package that would fund improvements to roads, bridges, transit, airports and enhanced infrastructure for broadband, water and electric vehicles. It leaves out many of President Biden’s top priorities for “human infrastructure” such as child care, elder care, and education provisions.
The bipartisan plan’s authors describe it as a framework, and note that some of the details remain to be ironed out, though they agreed on the major pieces and how to pay for them. Here’s what’s in the agreement, and what comes next.
The Wall Street Journal
By Gabriel T. Rubin
June 24, 2021
A bipartisan group of 21 Senators has come to a soft agreement with the Biden Administration on a $1 trillion infrastructure package. While the deal has yet to receive support from Congressional Leadership, this is a promising step. The group plans to meet with the President this afternoon.
The framework includes nearly $600 billion in new spending and relies heavily on muni provisions such as the expansion of Private Activity Bonds and creates a new direct pay bond, the American Infrastructure Bond. The AIB legislation introduced by Senators Wicker (R-MS) and Bennet (D-CO) would create a new direct-pay bond with a flat 28% reimbursement rate. In the original legislation, the AIB would be exempt from sequestration, however, no details on the sequestration treatment were included in the original document.
While there was no direct mention of the reinstatement of tax-exempt advance refundings or raising the BQ debt limit, the MBFA and BDA remain committed to ensuring all priorities be included in the final package once Congress and the Administration begin to write legislative text.
Bond Dealers of America
June 24, 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.
Bloomberg Markets
June 25, 2021
A bipartisan Senate group succeeded in finding $579 billion to pay for their infrastructure framework by relying on tried-and-true budget maneuvers that have yet to be scrutinized by Congress’s official scorekeepers.
The spending on roads, bridges, public transit and other items in the deal is offset by a hodgepodge of revenue-raising measures, economic-impact assumptions and projected savings from eliminating waste.
It’s the result of weeks haggling over where to find hundreds of billions of dollars without reversing the 2017 tax cuts — a red line for Republicans — or increasing levies on households making less than $400,000, a Democratic priority.
The bipartisan deal uses budgetary maneuvers to close the gap by finding the most money from politically palatable sources that both parties can agree to, including special municipal bonds, selling spectrum, and imposing a fee on chemical polluters.
“This deal is the usual host of not-wildly-innovative, plain-vanilla pay-fors that have been used in the past,” Gordon Gray, a former Senate Budget Committee aide, said. “There’s not a conspicuous tax increase or a conspicuous spending cut.”
Reused Funding
The plan relies on repurposing some funding allocated in already passed legislation, as well as factoring in economic growth and associated revenue that would come about as a result of the infrastructure investment. The recycled funds include unspent money for broadband and federal unemployment benefits leftover from states that ended early some $300 a week in supplemental jobless payments.
“It all adds up to $125 billion that comes out of Covid funding repurposed,” Senator Rob Portman, an Ohio Republican who was one of the leaders of the negotiations, said.
However, that money isn’t “free,” said Gray, now with the right-leaning think tank American Action Forum. “They want to have benefits without costs, but those costs happened at some point.”
The plan also is offset by $58 billion generated by extra economic growth, something known in budget circles as dynamic scoring. Portman called that estimate “conservative,” though he acknowledged the Congressional Budget Office had not completed its modeling of the dynamic impact of the spending on the economy.
‘Feedback Loop’
“Every economist has looked at this and said, this is not spending on social programs. This is spending on long-term capital assets that make the economy more efficient, and therefore add to the productivity of the country,” he said. “It also obviously adds jobs. And there’s a feedback loop there for revenue.”
But not all economists are as optimistic as the lawmakers, saying some figures could be overly rosy. That could mean that members of Congress may have to find more revenue or agree to deficit-finance a portion of the plan if the CBO doesn’t agree with their estimates.
“There are some good policies in here. I’m concerned that they only cover a fraction of the cost,” Marc Goldwein, senior vice president for the think tank, Committee for Responsible Federal Budget, said. “A lot of the numbers seem inflated from what I would expect.”
For example, the lawmakers are projecting that strengthening federal programs against fraud and waste will raise $72 billion, according to a draft of the deal obtained by PBS. That’s a lot higher than previous estimates, Goldwein said, noting that Biden’s budget proposal in May projected that so-called integrity initiatives would raise $12 billion over five years, or $45 billion over 10.
Tougher IRS
One of the thorniest issues for lawmakers was how much money could be raised from giving the Internal Revenue Service $40 billion to ramp up audits and enforcement on wealthy taxpayers. Republicans had pointed to a CBO report from last year that said a $40 billion proposal would generate an additional $103 billion, for a net $63 billion. Democrats had pushed for more. The group compromised on a net $100 billion raised, which was done in consultation with the CBO, Portman said.
The additional money could also help improve customer service at the IRS and help the IRS deal with Bitcoin and digital currencies, he said.
The deal also calls for $100 billion to come from private investment, including public-private partnerships. That money could be used to build private highways or bridges that would also likely mean user fees or tolls for drivers using the new roadways.
More than half of the bill has already been written but will likely take weeks to finalize, Portman said.
Bloomberg Politics
By Laura Davison and Steven T. Dennis
June 24, 2021, 2:48 PM PDT
— With assistance by Erik Wasson
Without federal help, cities in the Northeast and Midwest face heavy cost burdens to upgrade aging roads, bridges and water systems. Younger municipalities in the South and West are beginning to have similar problems.
Woodward Avenue is the most storied roadway in Michigan, and arguably in America. This 27-mile stretch of asphalt runs from central Detroit through its northwestern suburbs and up to the city of Pontiac. In 1909, a single mile of it in the city, between Six Mile Road and Seven Mile Road, became the first stretch of paved street in the U.S.
For Ferndale Mayor Melanie Piana, however, her two miles of Woodward Avenue are a constant source of concern. The eight-lane roadway slices through her downtown, and she constantly hears from residents who feel endangered when they cross this thoroughfare in her otherwise pedestrian-friendly town.
“The No. 1 reason people move to Ferndale is because of our walkability,” says Piana, “and the No. 1 complaint I get from residents is they feel uncomfortable and unsafe getting across this eight-lane corridor.”
governing.com
June 24, 2021 • Jake Blumgart
Earlier this year, President Biden introduced one of the largest-ever U.S infrastructure plans, roughly $2 trillion investment over a decade, to address the aging and underfunded infrastructure, which has often been neglected through the years.
This infrastructure push entails efforts to revamp the transportation sector, roads and highways, shift to green energy, and more importantly the aging sewage systems throughout the U.S. It’s also important to note the timing of this expenditure plan, which comes after the United States government has already distributed over $6 trillion in COVID-19 economic relief funds in the form of direct impact payments, state and local government aid and extended unemployment benefits.
The funding for the infrastructure plan is expected and proposed to come from a potential increase in the corporate tax rate that’ll take the tax rate back up from 21% to 28%. Although the plan focuses on many different areas of American infrastructure – including manufacturing, commercial and residential construction, veterans’ hospitals, schools, digital infrastructure, airports and creating well-paying American jobs – in this article, we will take a closer look at how the proposed transportation revamp and fixing the water infrastructure fits into the overall strategy of President Biden’s overall vision.
municipalbonds.com
by Jayden Sangha
Jun 23, 2021
This installment of Bonding Time featuring Tom Kozlik of HilltopSecurities discusses the continued debate over a potential federal infrastructure spending package, and the possibilities of achieving bipartisanship. The podcast also debates potential pay-for and the increased push to repurpose COVID state and local funds to pay for the package as outlined in a recent BondBuyer op-ed.
Bonding Time will continue to feature a selection of market experts to discuss the current state of the municipal market combined with Federal legislative and regulatory policies impacting muni market structure.
Topics will include:
Click here for podcast.
Bond Dealers of America
June 24, 2021
The Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation today announced the availability of the 2021 list of distressed or underserved nonmetropolitan middle-income geographies. These are geographic areas where revitalization or stabilization activities are eligible to receive Community Reinvestment Act (CRA) consideration under the community development definition.
Distressed nonmetropolitan middle-income geographies and underserved nonmetropolitan middle-income geographies are designated by the agencies in accordance with their CRA regulations. The criteria for designating these areas are available on the Federal Financial Institutions Examination Council (FFIEC) website (http://www.ffiec.gov/cra). The designations continue to reflect local economic conditions, including unemployment, poverty, and population changes.
As with past releases, the agencies apply a one-year lag period for geographies that were listed in 2020 but are no longer designated as distressed or underserved in the current release. Revitalization or stabilization activities in these geographies are eligible to receive CRA consideration under the community development definition for 12 months after publication of the current list.
The current and previous years’ lists can be found on the FFIEC website, along with information about the data sources used to generate those lists.
2021 List of Distressed or Underserved Nonmetropolitan Middle-Income Geographies (PDF)
Source Information and Methodology (PDF)
June 25, 2021
Although there are several versions of the American Jobs Plan at this point, nearly all include a provision to refurbish the nation’s crumbling infrastructure, including roads, bridges, public transit, airports, clean water, rail, and ports. Most of the components of these bills contain an element that may affect the municipal market. The three most talked about ideas include tax-exempt bonds, private activity bonds and taxable direct pay bonds. The focus of this article will be to explore the taxable direct pay bonds.
The government’s last involvement in taxable direct pay bond issues date back to 2009 and 2010, when the Build America Bond program was introduced. Build America Bonds (BABs) were issued as part of the American Recovery and Reinvestment Act (ARRA). Some $180 Billion of debt was issued using two types of BABs, Tax Credit and Direct Payment.
Tax Credit bonds gave bondholders a 35% federal subsidy on the interest paid through refundable tax credits which could be carried forward. Direct Payment offered a rebate that was paid to the bond issuer. This feature allowed municipalities to issue fully taxable municipal bonds with the Federal Government reimbursing the issuer with a tax subsidy of 35% of the issuers interest expense owed to investors.
Many issuers realized that short-term tax-exempt rates had lower interest costs than the 35% subsidy. Consequently, a hybrid approach was utilized. Shorter maturities were issued as tax-exempt, and as the rebate made it more advantageous, longer maturities were structured using the BABs program. Payments ran smoothly until 2013 when budget spending cuts forced the IRS to reduce the allowable 35% interest subsidy. In 2013 it declined to 26.3% and is currently at 29.3% which is anticipated to remain in effect until 2030 without further congressional actions.
Municipal issuers now realize that without appropriations by Congress the rebate can be affected, and they may be hesitant to utilize the program without those agreements. The taxable direct pay bond programs currently under discussion are trying to overcome obstacles such as sequestration and debit limit ceilings. We believe, depending on market conditions, any future taxable direct pay programs will likely include both tax-exempt and taxable bonds.
The effect on the municipal bond market could be increased issuance which could satisfy the demand from both individual and corporate investors. Depending on the plan adopted by Congress and the President, other changes could be in store for the municipal market.
by Aquila Distributors LLC of Aquila Group of Funds
6/24/21
The typically sleepy market for municipal bonds is on a hot streak.
Investors have piled into muni bonds, sending yields to historically low levels. The yield on the Bloomberg Barclays Municipal Bond High Yield Index, which tracks riskier muni borrowers, fell to 3.11% last week as bond prices rallied, the lowest level of the past decade, FactSet data show. They’ve hovered in that range since, settling at 3.14% on Tuesday.
Borrowers like state and local governments as well as universities and local school districts tap the muni market to fund projects.
The high-yield corner of the market is typically reserved for lower-rated borrowers like retirement communities and charter schools, which don’t have the backing of a state or local government. It has boomed in recent years as investors have searched for higher returns, with Treasurys and other safer debt offering meager yields. The run in high-yield munis comes as Treasury yields have tumbled, falling for five consecutive weeks.
Investors have piled into riskier munis and extended a lifeline to some troubled corners of the market, helping the sector, according to research firm Municipal Market Analytics. That’s kept some projects from running into trouble and kept default rates surprisingly low.
As a result, the high yield muni market has swelled to 13% of the muni market, up from 10% last year, the firm said.
The Wall Street Journal
By Gunjan Banerji
Jun 23, 2021
KEY POINTS
cnbc.com
by Kate Dore
JUN 24 2021
Municipal governments have proven more resilient than anticipated.
When the COVID-19 pandemic hit in 2020, municipal bond investors braced for a slew of defaults by overburdened state and local governments. But more than a year later, these municipalities are holding up better than expected.
With the help of stimulus payments, tax revenues from workers who were able to continue working remotely, and quick rallies in the stock and real estate markets, some states (California, for one) are even showing budget surpluses for the fiscal year starting in 2020. The result was far fewer state and local municipal bond defaults than anticipated.
To get a clearer picture of the municipal bond market and where financial advisors and investors can look for investment opportunities in the sector today, we spoke with Catherine Stienstra, senior portfolio manager and head of municipal bond investments at Columbia Threadneedle Investments.
usnews.com
By Coryanne Hicks
June 23, 2021, at 3:43 p.m.
In spite of this year’s challenging fixed income environment, bonds remain vital portfolio components for retirement investors. How the bonds are deployed in retirees’ portfolios is meaningful as well.
For investors with tax-advantaged accounts, embracing a taxable bond fund makes sense, but for those with the bulk of their assets in a taxable account, municipal bonds and funds are practical ideas due to the tax benefits associated with the asset class.
“Municipal bonds, which are issued by state and local governments, offer tax advantages to investors in higher tax brackets,” writes Morningstar’s Susan Dziubinski. “So even though a muni-bond fund’s yield may look shrimpy when you compare it against the yield on a similar quality and similar term taxable-bond fund, that muni fund’s yield doesn’t reflect the tax advantages that may apply to you.”
The tax benefits offered by municipal bonds could take on added importance if Congress is successful in passing the White House’s proposed capital gains tax hike.
While it remains to be seen what happens on that front, it’s clear the outlook for municipal bonds is solid. State and local finances were pinched at the height of the coronavirus pandemic, but the punishment was never as severe as originally feared. Plus, the federal government stepped up to support state finances, effectively reducing muni default risk.
With credit risk of minimal concern over the near- to medium-term, investors considering municipal bond funds still need to make rate risk part of the evaluation equation. Muni funds with longer durations could be susceptible to spikes in long-term interest rates.
“If there is in fact a tax advantage for you, you can begin the search for a muni-bond fund with the term and interest-rate sensitivity that meets your time horizon and appetite for risk,” adds Dziubinski.
Morningstar has “gold” ratings on nine municipal bond funds, one of which is an ETF – the Vanguard Tax-Exempt Bond ETF (VTEB).
VTEB, which follows the Standard & Poor’s National AMT-Free Municipal Bond Index, holds nearly 5,800 bonds with an average duration of 5.2 years. It’s also cost-effective. With an annual fee of just 0.06%, or $6 on a $10,000 investment, VTEB is one of the least expensive funds in its category.
ETF TRENDS
TOM LYDON
JUNE 24, 2021
Summary
Seeking Alpha
Jun. 22, 2021
NEW YORK, June 16, 2021 /PRNewswire/ — CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for May 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 increase in request volume for new municipal identifiers and a significant decline in request volume for new corporate identifiers.
CUSIP identifier requests for the broad category of U.S. and Canadian corporate equity and debt declined 24.8% in May from last month. The monthly decrease was driven largely by U.S. corporate debt and equity identifier requests, which declined by 18.5% and 7.8%, respectively. On a year-over-year basis, corporate CUSIP requests were down 16.9%, reflecting a significant year-over-year decline in January of 2021.
Monthly municipal volume increased in May. The aggregate total of all municipal securities – including municipal bonds, long-term and short-term notes, and commercial paper – rose 5.0% versus April totals. On an annualized basis, municipal CUSIP identifier request volumes were up 7.9% through May. Texas led state-level municipal request volume with a total of 180 new CUSIP requests in May, followed by California with 96 and New York and Oklahoma, which each had 90.
“Though we’re starting to see some volatility in corporate request volume as the prospect of a Fed taper looms, there is still a great deal of debt and capital markets activity taking place – particularly in the municipal sector,” said Gerard Faulkner, Director of Operations for CGS. “The next several months will be an important indicator of the continued liquidity of the markets in a possible rising rate environment.”
Requests for international equity and debt CUSIPs were mixed in May. International equity CUSIP requests were up 2.1% versus April. International debt CUSIPs decreased by 13.0% on a monthly basis.
To view the full CUSIP Issuance Trends report for May, click here.
A reprisal of Build America Bonds, the popular Obama-era infrastructure financing tool, is part of a bipartisan plan gaining traction in Congress, but states and cities are reluctant to show support without knowing their share of the cost.
A group of 21 Senators propose including so-called direct-pay municipal bonds in a $579 billion package designed to spur construction on roads, bridges and other projects, and its bipartisan sponsorship is raising hopes of passage. The direct-pay provision is being closely watched by municipal borrowers, investors and bankers because of its similarities to the Build America Bonds program, which spawned $180 billion of debt sales in 2009 and 2010.
But municipal finance has changed in the last decade. Then, the fact that Build America Bonds were taxable, unlike traditional muni bonds that pay tax-free interest, opened the market to a broader group of investors and promised reduced borrowing costs. Now, tax-free bond yields are near historic lows compared to taxable securities, meaning states and municipalities want the federal government to provide a generous subsidy as an incentive to use the borrowing program.
For a taxable bond program to compete with the cost of capital in the tax-free muni market, an average subsidy covering around 50% of interest costs for AA-rated borrowers is needed, said Peter DeGroot, head of municipal strategy for JPMorgan Chase & Co. For BBB rated issuers, the subsidy would need to be around 35%, he estimates.
“The higher the subsidy rate, the lower the cost of capital to the bond issuer,” DeGroot said. “Yields in the tax-exempt market are so low relative to taxable rates that issuers would need a very high cost of capital subsidy to compete with the tax-exempt bond market.”
He said that those subsidy rates are higher than what was offered in a Senate bill earlier this year. The legislation introduced in April by Senator Roger Wicker, a Republican from Mississippi, and Michael Bennet, a Democrat from Colorado, offered a subsidy of 28% of the bond’s interest. In April, JPMorgan released an analysis estimating “modest utilization” of the proposal at current market levels.
Ben Watkins, director of the Florida Division of Bond Finance, said the subsidy rate will help determine the attractiveness of the program.
“They have to sweeten the pot and make it cheaper for me,” Watkins said. “It better be deep in the money or otherwise I’m not playing.”
The bipartisan Senate plan was scant on details about the direct-pay bonds. The financing mechanisms listed also included the use of private activity bonds, something that businesses can use to raise money in the $3.9 trillion muni bond market.
Getting state and local support for the plan, which would affect its chance of becoming law, is made more difficult by the latter history of the Build America Bonds program. Borrowers shied away from using them after the federal government adopted sequestration that forced budget cuts, including reduction in the subsidy payments that Build America Bond issuers received starting in 2013.
”I think it’s a hard sell,” Watkins said of the current push to revive the bonds. “I think people have been made aware of the risks associated with relying on D.C. to come through on their promises.”
While state and local lobbying groups generally support the revival of a Build America Bonds-type tool, they’ve stressed that they’d like the process to be exempt from sequestration. David Moore, director of municipal research at American Century Investments, said usage of the bonds could depend on it.
“Issuers are still going to have a hard time taking that seriously” if the program doesn’t include an exemption from sequestration, he said.
Moore said that a federally-subsidized bonding plan would provide issuers with more flexibility, which would be helpful to them if the tax-exempt market became weaker, he added. “It really is another tool in the toolbox for them,” he said.
Bloomberg Markets
By Amanda Albright
June 17, 2021, 11:20 AM PDT
— With assistance by Erik Wasson
Fitch Ratings-San Francisco/New York-17 June 2021: The outcome of the US Supreme Court ruling in the case of California v. Texas is neutral to not-for-profit hospitals and healthcare system ratings, Fitch Ratings says. The Court rejected the challenge to the Affordable Care Act (ACA) on the basis that the plaintiff states do not have legal standing to bring the suit. The Court did not rule on the validity of the ACA without the individual mandate requiring Americans to obtain insurance. The ruling maintains the status quo that has existed since the tax penalty for not obtaining health insurance was set at zero in 2017.
Today’s ruling maintains healthcare coverage for tens of millions of Americans under the ACA, and we expect this to prevent a decline in operating margins associated with a shift in payor mix that would have reversed the positive margin trend evidenced at hospitals in the years following the ACA rollout. Fitch’s not-for-profit (NFP) hospital operating margin median rose during those years the ACA was fully implemented, increasing from 2.2% in 2013 to 3.0% in 2014 and again in 2015 to 3.5%. Operating margins have continued to benefit since then, due to the incremental revenue from patients enrolled in the healthcare exchanges or under expanded Medicaid programs.
Rated hospitals saw a significant decrease in self-pay during 2014-2016, particularly at hospitals in Medicaid expansion states, which now number 38 plus Washington, DC. The Kaiser Family Foundation reports that the US saw a significant drop in the number of non-elderly uninsured to 26.7 million in 2016 from 44.4 million in 2013 following the enactment of the ACA in 2010 and implementation of key provisions in 2014, before increasing to 28.9 million in 2019 after the individual mandate was eliminated.
Premium subsidies and tax credits provided under the American Rescue Plan Act of 2021 that intend to make marketplace coverage plans more affordable are expected to modestly increase the number of insured. Insurance coverage affordability is the major concern for those who remain uninsured in the US.
Today’s decision to uphold the ACA resolves another significant Supreme Court challenge to the law. It may also signal growing reluctance to invalidate a law that has become an important aspect of the US healthcare system by providing coverage to millions of Americans under Medicaid or private insurance. With the Supreme Court’s ruling, we continue to believe that the ACA is likely to remain the law, even if portions of it are enhanced or diminished in future legislation.
Contact:
Melanie Her
Director, US Public Finance
+1 415 732 5629
Fitch, Inc.
One Post Street, Suite 900
San Francisco CA 94104
Olga Escobar Beck
Senior Director, US Public Finance
+1 212 908-0772
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019
Sarah Repucci
Senior Director, Fitch Wire
+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.
Arizona, Michigan and Texas are showing how to create resilient systems for government retirees.
State and municipal debt has tripled since 2000, with unfunded public pension liabilities mostly to blame. After 20 years of inadequate funding policies, failure to meet overly optimistic investment return targets, and other factors, state and local government pension systems are now $1.5 trillion in debt.
That debt is ultimately borne by taxpayers, and like any debt, when unfunded pension liabilities rise, so do the costs of servicing it. As pension debt payments start to siphon money away from other government priorities, such as education and infrastructure, some lawmakers are now pushing for much-needed reforms.
In Texas, the state Legislature passed a major pension reform that tackles the Employees Retirement System of Texas’ nearly $15 billion in pension debt. The ERS serves more than 300,000 current and retired Texas government workers. But driven largely by rosy investment-return assumptions and a history of underfunding by the state, the system’s unfunded liabilities have skyrocketed. The ERS’s consulting actuary says the plan will be insolvent by 2061 even if it meets its lofty long-term investment return goals, and as early as 2047 if it doesn’t.
The reform legislation commits Texas to paying the bill for retirement benefits promised to workers by shifting the ERS to actuarially based funding and a fixed payoff schedule. The new law also enters all future employees into a new low-risk “cash balance” retirement plan that provides a guaranteed minimum 4% return on investment along with the portability of a 401(k). In short, the reforms would enable Texas to keep the promises made to current and retired workers but would stop making unsustainable pension promises to workers in the future.
The pension reform bill will become law this weekend if Gov. Greg Abbott doesn’t veto it, which he hasn’t indicated he will do. Texas will then join a growing list of states—including Michigan, Arizona, Pennsylvania and Colorado—that have created or expanded retirement plans that reduce financial risks for governments and can help avoid burdening future taxpayers with more unfunded liabilities.
Arizona and Michigan have enacted more than a dozen substantive pension reform bills over the past five years. Credit-rating agencies and national retirement experts have cited Arizona’s public-safety pension reforms. Moody’s Investors Service gave Michigan’s teacher retirement reform a “credit positive” review because the state and participating local governments “will no longer carry the entire burden of investment performance risk for new employee pensions.”
Pension reform need not be partisan. After gaining input and buy-in from unions for police officers, firefighters and other public employees, New Mexico Gov. Michelle Lujan Grisham, a Democrat, overhauled her state’s public-employee pension plan for workers who aren’t teachers. “We must make changes now—the alternative is to saddle New Mexicans with unacceptable risk,” Ms. Grisham said, urging fellow Democrats to pass reforms. In 2018, Colorado legislators bridged their differences in a divided government to pass comprehensive reforms that increased employee and employer contributions, reduced cost-of-living adjustments, raised the retirement age, and expanded the use of defined-contribution plans for future employees to address the chronic structural underfunding of the state’s main public pension system.
Public pension reforms aren’t politically easy. With Republicans in control of Florida’s state government and the Florida Retirement System $36 billion in debt, the state Senate passed a bill that would have closed the state pension plan to new hires. But the bill died in the House because lawmakers couldn’t agree on how to pay down the state’s pension debt.
Meaningful pension reforms are difficult to accomplish but will be increasingly necessary as state and municipal pension debt service eats up larger chunks of government budgets. State and local leaders seeking to make lasting improvements to government finances should look to Texas, Arizona and Michigan. These states are showing that it’s possible to create resilient retirement systems that can promote long-term financial security for taxpayers and public employees alike.
The Wall Street Journal
By Leonard Gilroy and Steven Gassenberger
June 18, 2021 1:55 pm ET
Mr. Gilroy is vice president of Reason Foundation and senior managing director of its Pension Integrity Project. Mr. Gassenberger is a policy analyst at Reason Foundation.
Fitch Ratings-New York-21 June 2021: U.S. public power utilities are generally seeing a continuation of strong financial trends and improving credit quality, according to Fitch Ratings’ 2021 U.S. Public Power Peer Review.
“The latest peer review shows that modest ratios of capital investment to depreciation and improving coverage medians again contributed to low leverage and improving credit quality throughout the public power sector in 2020,” said Dennis Pidherny, Managing Director, U.S. Public Finance. “These results are particularly surprising given the impact of the coronavirus outbreak and the related economic contraction. They further illustrate the sector’s operating and financial resilience, and its ability to record strong performance even through a very challenging period.”
Trends highlighted in the 2021 peer review include:
Fitch’s U.S. Public Power Peer Review is a point-in-time assessment of Fitch-rated public power utilities. It assists market participants in making their own comparisons among the recent financial performance of wholesale and retail public power systems, and rural electric cooperatives. It is accompanied by the 2021 Fitch Analytical Comparative Tool (FACT) for Public Power, an interactive tool that provides enhanced trend analysis and peer comparison tables.
The full report, “2021 U.S. Public Power Peer Review,” is available at www.fitchratings.com.
Contact:
Dennis Pidherny
Managing Director
+1-212-908-0738
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
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 presents the 2021 edition of its annual U.S. Public Power — Peer Review. This report compares the recent financial performance of wholesale and retail public power systems, as well as rural electric cooperatives. The ratios highlighted in this report are some of the financial calculations used in comparing utility systems in Fitch’s committee process, and can assist market participants in making their own comparisons. Financial metrics represent only one key component among others in Fitch’s utility credit analysis. To review Fitch’s full public power criteria, please see U.S. Public Power Rating Criteria. The U.S. Public Power — Peer Review is a point-in-time assessment of Fitch-rated public power utilities. The ratios for each issuer are calculated using audited information. While more than half the audits used in this study are dated Dec. 31, 2020, different audit dates may skew the ratio distribution. Financial ratios and metrics detailed in the report may occasionally differ from those reported in new issue and rating reports. This can be a result of adjustments made by Fitch during the rating review process to reflect additional information received from the issuer and circumstances unique to the credit. In each case, Fitch seeks to highlight these adjustments for the benefit of the reader in the reports and press releases it publishes during the rating process.
There are eight of them.
As a new infrastructure week begins, we’ve reached the peak confusion stage in Washington. It is genuinely difficult to keep straight all the gangs, working groups, and bipartisan agreements on bills that fall under the rubric of infrastructure. So let this be a public service straightening all that out. There are actually eight infrastructure bills floating out there right now, though none of them appears at this moment to have the votes needed to pass into law. Walking through them can illuminate what the Biden administration’s strategy should be going forward.
First, you have the surface transportation bills, one each in the House and Senate. The House bill, called the INVEST in America Act, is a five-year, $547 billion package that passed the House Transportation and Infrastructure Committee last Thursday along mostly party lines; just one Republican, Brian Fitzpatrick (R-PA), voted for it in committee. (The House passed largely the same bill last year; it didn’t go anywhere.) The Senate has its own surface transportation bill, which was introduced on a bipartisan basis in May by two Democratic and two Republican members of the Environment and Public Works Committee. That bill has $303.5 billion for highways, roads, and bridges; the House bill reserves $334.2 billion for that purpose.
It’s important to understand that these surface transportation bills represent no new federal spending on infrastructure; they are reauthorizations of the money Congress sends out to the states for infrastructure projects routinely. And it has to be reauthorized by September 30, or all federal spending on infrastructure would expire.
THE AMERICAN PROSPECT
BY DAVID DAYEN
JUNE 14, 2021
Joe Mysak, Editor of Bloomberg Brief: Municipal Market, discusses municipal market news. Hosted by Paul Sweeney and Matt Miller.
Bloomberg Radio
June 18, 2021
A rise in violent crime is a concern for some municipal-bond investors watching the economic recovery of U.S. cities, according to Hilltop Securities Inc.
The uptick, which pre-dates the pandemic, marks a reversal from decades of improvement. From the early 1990s to 2014, the rate of murders fell by more than half, but since 2014, the rate has slowly begun to climb, according to data compiled by the Federal Bureau of Investigation.
The resurgence represents another potential credit risk for urban hubs already grappling with Covid-19 recovery efforts and outmigration. Taken together with the prospect of higher taxes and more flexible work-from-home policies, cities run the risk of losing residents, handicapping their revenue. About 40% of urban officials have seen an increase in crime over the past year, a higher rate than non-urban communities, according to a survey by the National League of Cities.
“What I’m most concerned about is all of these variables building on top of each other in the near to medium term.” said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities Inc. “This is something that investors are looking at and reacting to.”
The recovery and attractiveness of cities has been a cultural flashpoint throughout the pandemic, spurring impassioned opinion pieces from critics and defenders, and a migration of some Wall Street jobs to the warmer weather of Florida.
Crime has the potential to play a role in residents’ decisions to leave, or return to, their urban office setups. In New York City, the year-to-date murder rate in 2021 increased 13.5% compared to the prior year, the highest in about a decade, according to data from the New York City Police Department. Chicago has seen murders and shootings climb in 2021, though total crime is down since 2017.
Even though the statistics aren’t uniform across cities, Gallup surveys show perceptions of crime in the U.S. are at their highest since 1993, largely driven by Republicans, the polling company found.
”It has the potential to have some, at the very least, indirect impact on municipal finance if there is even just the perception of a permanent increase in crime in a city,” said Patrick Luby, senior municipal strategist at CreditSights.
Luby said there is broad variation in the data, which still generally shows rates lower than 15 years ago, and that is probably not as big of a factor on municipal bonds as the working-from-home trend.“All of those things have the potential to impact prices, tax revenues, and therefore the resources available to a city,” Luby said.
There is greater awareness of crime as more people are home and cities are emptier, according to Luby.
“We believe that rising violent crime has the potential to negatively impact municipal credit quality, and this is especially true for the medium and larger cities,” Kozlik wrote in a note this month. “Even if all types of crime rates are not rising, the perception of a rise in crime matters. This perception is enough to have political and fiscal consequences.”
Bloomberg Markets
By Nic Querolo
June 16, 2021, 12:00 PM PDT
— With assistance by Peyton Forte
As the municipal bond market absorbs more inflows. assets like the IQ MacKay Municipal Intermediate ETF (MMIT) are worth considering.
Per a Financial Times article, more investors are “pouring into the $4tn US municipal bond market, pushing yields on debt issued by state and local governments across the country to the lowest level on record. The voracious investor appetite has helped state agencies and governments lock in low borrowing costs and at times raise more money than bankers working on the projects initially anticipated.”
Per the fund description, MMIT seeks current income exempt from federal income tax. The fund is an actively managed ETF and thus does not seek to replicate the performance of a specific index.
ETF TRENDS
by BEN HERNANDEZ
JUNE 21, 2021
Mutual-fund inflows are hot too
Municipal-bond exchange-traded funds took in the most money on record in the week ending June 16, as investors continue to snatch up debt issued by U.S. local governments.
Muni ETF inflows totaled $704 million, according to Refinitiv Lipper, the biggest weekly haul since September 2007, when those records begin. It was their sixteenth straight week of inflows.
One fund, the iShares National Municipal Bond ETF MUB, -0.01%, took in nearly half of the weekly total at $316 million. The fund has posted a total return of 1.17% in the year to date, according to FactSet data.
Investors have flocked to municipal bonds this year as the prospect of tax increases gathers pace. Unlike sovereigns and corporate bonds, munis offer tax advantages. What’s more, the local governments that issue the bonds aren’t just good credit risks: in some cases, they have more money than they know what to do with.
Demand for munis has been so strong that one mutual fund recently closed to new investors. Refinitiv Lipper data show that such funds had their eleventh consecutive week of inflows, picking up $1.1 billion in the most recent week.
MarketWatch
By Andrea Riquier
June 18, 2021
Peter Hayes, Head of BlackRock’s Municipal Bonds Group joined Yahoo Finance Live to break down his thoughts on the municipal bond market.
Video Transcript
SEANA SMITH: Peter, it’s great to see you again. And we know the muni bond market has been attracting pretty significant inflows so far this year, right around $49 billion so far. So now that it seems like we have some progress at least on infrastructure talks, is that going to be enough do you think to keep this rally going in the muni market?
PETER HAYES: Yeah, I think, I mean, look, there’s a lot of positive things and from a fundamental credit standpoint, it’s about as constructive as I’ve seen in the market perhaps ever. You think about the stimulus, the accommodative Fed policy, all that has really been a boon to state and local revenues. Even many of the revenue sectors, like transportation are coming back as the economy reopens. So all that’s positive. And I think even talk of infrastructure, some kind of package will ultimately lead to some degree of increased issuance in the market.
But the demand is just insatiable. It’s on track to be more than we saw in 2019, which is probably the largest we’ve ever seen in terms of those flows that you spoke about. So I don’t think an infrastructure package necessarily derails the market rally that we’ve seen. I think it’s more what we see it going on in the bond market, and that’s interest rates being a bit volatile here.
ADAM SHAPIRO: In regards to the volatile interest rates, Peter, and it’s good to see you, a lot of us are approaching that age where we need to start looking at ways to protect future retirement income with less risky assets. Muni bonds would be one of the ways to do that. But you wrote here in your most recent note that long duration, lower credit quality bonds outperform as coupon return drove performance.
A lot of us get that. But then you added, as a result, the yield toward the S&P municipal bond high yield index pushed to a new all time low. Give us a 101 from the investor standpoint. What are you talking about here? Because a lot of us really do want to protect future income.
PETER HAYES: As most people know, that interest rates and prices have an inverse relationship. So as yields go down, prices go up. So we’ve seen, as Seana mentioned, we’ve seen a really good rally in municipal bonds really that began in April of last year, and it’s continued again through this year, which means the higher prices go, the lower yields go. So you’re taking more risk obviously the further out the curve you go to get some of that incremental income.
And it’s interesting, when you break down the flows this year, a lot of those flows have gone to the long-term category and the high yield category, which means people are taking more duration risk, they’re taking more credit risk. And what happens when interest rates go up, is the value of their investments actually go down. So it’s a precarious situation, because yields are so low and as people stretch for that income. So I think you’ve got to be careful about where we are in the cycle, what are interest rates likely to do. It may not be a bad time to just sit in cash, sit in very low duration, protect some of that principal, wait for a better opportunity ahead.
SEANA SMITH: Peter, how about state finances? Because going back what, 16 months ago, 15 months ago to the start of the pandemic, there was lots of questions, lots of uncertainty about how state finances were going to be impacted. And I know the last time we spoke with you, they were actually faring much better than we had initially anticipated. Is that still the case right now?
PETER HAYES: It is. The bounce-back has been incredible. I think about a year ago came on the show, we were talking about California projecting the potential for a $56 billion deficit given the impact of the shutdown of the US economy and what that means for state and local government. And here, we’re actually talking about a $75 billion surplus. That’s an enormous swing.
And we’ve seen that in other states as well, not just California. Some states that are a little bit more reliant on tourism haven’t fared quite as well. But in general, when you think about what the stock market had done and you think about the housing market, incomes have done well. People have spent. They’ve spent differently, but that means sales taxes are up as well. So I would say yes, fundamental credit picture in the muni market is as good as we’ve seen it in some time.
ADAM SHAPIRO: And Peter, we’ve talked about the tax implications with muni bonds. With the current discussion about changing the tax code in the United States, are you hearing anything pro or con coming out of Washington which will impact again, those people I talk about who may be looking at protecting capital going forward?
PETER HAYES: We have. And I think that the marginal rate going from its current 37% to 39.6% is certainly a possibility as they figure out ways to pay for this infrastructure package, but at the margin. Does 2 and 1/2 percentage points make a big difference in the after tax value of municipals? Probably not. I think people are already anticipating that, and that’s why we’ve seen this tremendous demand materialize.
The other aspect is the corporate rate. After the 2017 tax change, we went from a 35% corporate rate to 21%. And we did see corporations, who are often big buyers of municipals, pare back their holdings. So we saw some selling. If that rate were to go back up to 25% however, you wouldn’t see all that demand materialize.
You wouldn’t see all that selling that took place in 2018 all of a sudden turn into buying. One of the reasons is that our valuations are very, very stretched, and they could probably do better by buying corporates or other fixed income asset classes. So I don’t think the change in the tax code is necessarily going to be a big benefit or a game changer for munis any time this year.
Yahoo Finance
June 17, 2021
Tim Heaney, a senior managing director at Newfleet Asset Management, favors higher-quality municipals that have fallen out of favor as investors shift into riskier assets, he said on “Bloomberg Markets: The Close.”
Bloomberg MarketsTV Shows
June 15th, 2021, 1:50 PM PDT
On the back of surprisingly strong tax collection, state and local finances are solidifying and that’s constructive for municipal bonds.
The VanEck Vectors CEF Municipal Income ETF (XMPT) is higher by nearly 2% over the past month, an impressive feat in that time frame for a municipal bond exchange traded fund. The $194.5 million XMPT, which is just a few weeks away from its tenth anniversary, follows the S-Network Municipal Bond Closed-End Fund Index. That benchmark is a basket of closed-end municipal bond funds focusing on dollar-denominated tax-exempt debt.
For investors considering XMPT and other muni bond ETFs, it’s encouraging that states and cities are thriving on the tax collection front. Another positive is that public pension returns are perking up.
“With under a month left until their fiscal 2021 year end on 30 June, many US public pension systems are on pace to post exceptional, and potentially record-setting investment returns,” according to Moody’s Investors Service. “Such strong investment returns would broadly improve near-term funding, lessen negative non-investment cash flow (NICF) relative to retirement system assets and provide governments with a respite from growth in annual costs.”
Why It’s Important to XMPT
Many novice muni bond investors may be apt to simply assess a state’s economic health when venturing into individual issuers or funds such as XMPT, but public pension health is vital to investor outcomes in this asset class as well.
Several state public pension systems, including CalPERS and CalSTRS, are among the largest pension investors in the world. Additionally, some states are grappling with the scenario of lavish benefits to plan participants that guaranteed young retirement ages (in some cases in a worker’s early 50s) and increasingly long life expectancies.
Municipalities can issue pension obligation bonds (POBs) to fill shortfalls in their contributions to public pension systems, but too much of that type of issuance can prompt rising pension risk, potentially leading to downgrades or higher interest rates on new issues. Over the near-term, those ominous scenarios don’t appear to be cause for concern for investors considering XMPT.
“With the 30 June fiscal year end for many US public pension systems, we project that investment returns are approaching 25%-30%for many if market conditions maintain their strength in the coming weeks, based on our composite of market indices meant to represent typical US public pension system asset allocations,” adds Moody’s.
XMPT, which yields 3.89%, is up 6.06% year-to-date, an advantage of nearly 400 basis points over the widely followed S&P National AMT-Free Municipal Bond Index.
ETF TRENDS
by TOM LYDON
JUNE 16, 2021
‘Money just keeps pouring in’
The U.S. municipal bond market is known for being many things: staid, stuffy, well-suited to capital preservation, if not growthy opportunity. But now, lopsided metrics of supply and demand, with no relief in sight, suggest it might be outright shrinking.
Investors have poured record amounts of money into muni funds, even as a series of events have conspired to keep state and local government entities from issuing enough debt to satisfy investors. Some corners of the market are so tight that funds are turning money away, noted Brian Steeves, portfolio manager for Rye Brook, New York-based Belle Haven Investments.
“It’s a food fight,” Steeves told MarketWatch.
MarketWatch
By Andrea Riquier
June 11, 2021
For municipal-bond fund managers flush with cash, it’s not easy finding something to buy.
The amount of debt changing hands in the secondary market has become unusually thin, with investors holding on to their bonds after a rally that drove a key measure of valuations to a record high.
There were an average of about 32,500 municipal-bond trades every day since the start of the year, the smallest average over the same time period since 2005, according to Municipal Security Rulemaking Board transaction data. That added up to about $9.3 billion worth changing hands each day, the lowest over that same time period in two decades.
Bloomberg Markets
By Danielle Moran
June 10, 2021, 10:01 AM PDT
The strength of the municipal-bond market shows no sign of fading in the next few months, sustaining the securities’ historic valuations with investors plowing money into funds that buy tax-exempt debt.
Amid robust demand as lawmakers in Washington debate higher taxes on the wealthy, munis have offered shelter in a tough year overall for fixed-income securities. They’ve eked out a positive return in 2021, while most parts of the bond market have lost money.
The outperformance relative to Treasuries has been historic. Yields on 30-year state and local bonds are about as low as they’ve ever been compared with their federal counterparts. The upshot is that it’s an appealing time to borrow for issuers of all stripes. In just one example, American Samoa is bringing junk-rated debt to market this month, in its first offering in years.
“Yes, munis are expensive, but there’s a lot of technical tailwinds that could help support those prices, at least on a near-term basis,” said Lawrence Gillum, fixed-income strategist at LPL Financial. “Valuations in and of themselves don’t mean that markets need to sell off, especially if there’s a technical tailwind and that’s certainly what we’re seeing in the municipal market.”
Municipal mutual funds and exchange-traded funds have seen a flood of cash in 2021. The ETFs have pulled in $9.4 billion this year, on track to beat the record set in 2020, data compiled by Bloomberg show. With investors hunting for extra yield, junk muni funds have seen 13 straight weeks of inflows, according to Refinitiv Lipper US Fund Flows data.
In the U.S. summer months, the state and local debt market also typically benefits from a surge of principal and interest payments, adding to demand as buyers look to reinvest.
It’s all happening against an improving credit backdrop as the economy reopens from the pandemic and as municipalities receive an influx of federal aid through President Joe Biden’s American Rescue Plan Act. The president’s pitch for higher levies helps as well.
“The market is preparing for the current administration to spend and lay out their tax plan,” said Debra Crovicz, a portfolio manager at Chilton Investment Co. “If tax rates go up, I still think we’re going to see inflows into this sector because June, July and August coupon reinvestments will typically outstrip the amount of supply.”
Bloomberg Markets
By Peyton Forte
June 9, 2021, 11:15 AM PDT
— With assistance by Amanda Albright
The appetite for municipal bond exchange traded funds (ETFs) has been readily apparent, with the start of the year through May bringing in over $100 billion in net inflows, further fueling funds like the Invesco National AMT-Free Municipal Bond ETF (PZA).
“More than a dozen municipal bond ETFs each gathered over $100 million of net inflows year-to-date through May 2021 highlighting the diversity of popular offerings,” CFRA Research noted in an email. “The sub-category gathered $8.6 billion of new money and is on pace to exceed 2020’s flows.”
PZA seeks to track the investment results of the ICE BofAML National Long-Term Core Plus Municipal Securities Index. The fund generally will invest at least 80% of its total assets in the components of the index.
The index is composed of U.S. dollar-denominated, tax-exempt municipal debt publicly issued by U.S. states and territories and their political subdivisions in the U.S. domestic market. PZA’s expense ratio comes in at 0.28%.
A “Food Fight” in the Muni Space
While municipal bonds may not have the risk appeal of high-yield debt, investors remain interested. An influx of investor capital came as U.S. president Joe Biden presented his massive infrastructure plan, which would require state and local debt funding.
“The U.S. municipal bond market is known for being many things: staid, stuffy, well-suited to capital preservation, if not growthy opportunity,” a MarketWatch article said. “But now, lopsided metrics of supply and demand, with no relief in sight, suggest it might be outright shrinking.”
The article also noted: “Investors have poured record amounts of money into muni funds, even as a series of events have conspired to keep state and local government entities from issuing enough debt to satisfy investors. Some corners of the market are so tight that funds are turning money away, noted Brian Steeves, portfolio manager for Rye Brook, New York-based Belle Haven Investments.”
“It’s a food fight,” Steeves told MarketWatch.
How long this proverbial food fight can last remains to be seen. For now, municipal bonds have been the toast of the town in the debt market.
“Bankers and buyers may both see less activity than needed, the influx of Federal cash and surging state and local revenues cut borrowers’ needs for working capital,” wrote analysts at Municipal Market Analytics in a June 7 note. “State and local governments, which are not yet showing a strong rebound in hiring, are also likely a few quarters away from restarting traditional new money infrastructure plans in earnest.”
ETF TRENDS
by BEN HERNANDEZ
JUNE 14, 2021
Investors could be forgiven if, at the height of the coronavirus pandemic, they grew jittery over municipal bonds.
Back then, concerns about some states’ and municipalities’ finances were exposed amid economic shutdowns and accelerating unemployment. Fast forward to 2021 and the darkest of scenarios didn’t come to pass for municipal bonds, indicating that debt and exchange traded funds such as the Invesco Taxable Municipal Bond Fund (NYSEArca: BAB) are on firm footing.
“Higher-earning individuals remained disproportionately employed, and real estate and equity markets bounced back fairly quickly—all of which helped buoy tax revenues in certain states,” writes Charles Schwab’s Cooper Howard. “As a result, the municipal bonds issued by state and local governments proved similarly resilient, with defaults in 2020 tracking well below the totals realized in the wake of the Great Recession.”
Some of the progress on the state and local financing front is starting to be reflected in BAB’s price action. The Invesco ETF gained 1.07% last week and resides just 2.36% below its 52-week high.
Building Back Better with BAB
There are other encouraging signs for muni bonds and BAB. As Schwab’s Howard notes, despite the pandemic, almost half the 50 states actually collected more in taxes during the April through December 2020 period than they did in year-earlier time frame. Plus, municipal bond credit risk appears benign for now.
“Indeed, credit risks in the muni market are waning, largely due to the recently passed $1.9 trillion relief package, which provided substantial direct aid to many muni issuers,” said Howard. “It also contained a number of provisions to help support economic growth, which should eventually flow to many municipalities via higher income, sales, and other tax revenues.”
On the credit quality front, BAB is ideal for conservative investors because 85% of its 585 holdings are rated AAA, AA, or A on the S&P scale, according to Invesco data.
Even if state finances suddenly sour, which doesn’t appear likely at the moment, prevailing wisdom is that the worst-case scenario is ratings downgrades, not defaults. With the economic recovery gaining traction, neither outcome appears likely. Additionally, BAB’s credit profile is ideally positioned for an environment in which the unexpected could arrive at any moment.
“Although credit risks are lower now, it’s wise to focus the bulk of your portfolio on issuers rated A/A and higher, with some exposure to issuers at the lower end of the investment-grade spectrum (BBB/Baa) if your risk tolerance allows it,” concludes Howard.
ETF TRENDS
JUN 14, 2021
The municipal junk-bond boom is roaring back.
With the economy rebounding swiftly from the pandemic, interest rates on high-yield state and local government securities have tumbled to the lowest in over two decades. Cash is pouring into mutual funds focused on the junk-rated debt so quickly that money managers are fighting to get in on new deals. And prices have rallied, driving high-yield bonds to their biggest run of outperformance since 2014.
The demand is so strong that a California agency sold 35-year bonds for the development of a senior-living community at a yield of 4.43%, about two-and-a-half percentage points less than bankers initially anticipated. The price went on to surge 8% in secondary trading.
“We couldn’t think of a better time to come to market,” said Sarkis Garabedian, an investment banker at Ziegler, the underwriter on the bonds. He said the firm hadn’t seen such interest in a transaction for a new senior living campus since they started tracking the metrics in the 1980s. “We really hit the sweet spot here.”
Recent bond sales have raised money for an ethanol production facility in North Dakota, a bevy of charter schools, and a youth-sports complex in Arizona. American Samoa, a junk-rated territory, is tapping the market for the first time since 2018. And the owner of a plant that recycles rice waste into fiberboard may sell more debt even though it has already been driven to default.
The dynamics show how much the municipal-bond market has been swept up in the global push into higher yield assets as central banks worldwide hold interest rates low to stoke the economic recovery.
That’s fueled a surge in debt sales by corporations and governments battered by virus lockdowns. And for the state and local government debt market, it has revived the years-long rally in junk bonds that was only temporarily derailed by the coronavirus lockdowns.
So far this year, government agencies across the U.S. have sold more than $6.5 billion of bonds that can only be marketed to institutional investors able to bear the risk, driving such issuance toward the biggest year on record, according to data compiled by Bloomberg.
Cynthia Clemson, co-director of municipal investments at Eaton Vance, said the flood of demand means it’s harder for buyers to push for better protections on such deals.
“It’s definitely an issuer-driven market right now as opposed to a lender-driven market,” she said.
Emboldened Borrowers
Junk or unrated municipal bonds are often sold by governments or public agencies on behalf of businesses like real estate developers, clean-energy factories and others that are qualified to borrow in the tax-exempt market.
“I’ve never seen a market environment more favorable to borrowers than this one,” said Charles Peck, head of public finance investment banking for Wells Fargo & Co.
Buyers may be emboldened by the experience during the pandemic, when defaults remained rare even as the economic shutdowns threatened many industries that have raised money in the municipal market. Only a little over $3 billion of bonds defaulted in 2020 and 2021, a small share of the $3.9 trillion market, according to data compiled by Bloomberg Intelligence.
“Through Covid and into today, market defaults continue to be exceedingly, exceedingly low,” said Ben Barber, head of municipal investing at Franklin Templeton. “A lot of sectors that caused great concern have survived in pretty remarkable fashion.”
‘Full-blown Return’
After a steep downturn when the pandemic first hit in 2020, high-yield municipal bonds have rallied strongly back, delivering a return of 5.8% so far this year. That’s over 4 percentage points more than the broader market, the biggest gap in returns since 2014, according to Bloomberg Barclays indexes.
Nuveen’s Anders Persson and John Miller highlighted the demand for high-yield municipals in a note this week, saying that some offerings have been as much as 30 times oversubscribed.
There seems to be little sign that demand is slowing. High-yield funds have absorbed a fourth of the $44.7 billion of inflows into muni funds this year, according to Refinitiv Lipper US Fund Flows data.
“We are on the precipice of going into full-blown return to normal and the commensurate economic boost as a result of that,” Nuveen’s Miller said in an interview this month.
“There is a lot of cash coming in and not that many bonds,” he said. “In that environment, I think spreads are going to keep tightening, bottom line.”
Bloomberg Markets
By Amanda Albright and Danielle Moran
June 10, 2021, 7:00 AM PDT Updated on June 10, 2021, 7:26 AM PDT
— With assistance by Shruti Singh, and Nic Querolo
Eric Kazatsky, Senior Municipal Strategist for Bloomberg Intelligence, discusses the latest news from the municipal bond market.
Bloomberg Radio
June 11, 2021
11 Jun, 2021
10 Jun, 2021
Key Takeaways
Nearly a quarter of municipalities surveyed by the National League of Cities took on fewer infrastructure upgrades over the past year, and projects are still in need of funding.
The White House’s multibillion-dollar rescue package to U.S. cities won’t solve their infrastructure challenges, underscoring the case for more support as Congress debates a federal infrastructure plan, according to a report by the National League of Cities.
The lobbying group released its State of the Cities report on Thursday that uses survey data from about 600 communities and mayoral speeches, finding that some city infrastructure upgrades have fallen by the wayside during the pandemic. Funding for those projects ranked as one of the top challenges facing cities and a top mayoral priority for 2021, according to the report.
The findings bolster the case for more federal funding for roads, bridges and other projects, with nearly a quarter of cities experiencing fewer infrastructure upgrades over the last year, according to the group. The path to a bipartisan plan got more complicated this week after talks ended between President Joe Biden and Republican Senator Shelley Moore Capito, who couldn’t agree on the scope of spending or how to pay for it.
Bloomberg CityLab
By Amanda Albright
June 10, 2021, 7:00 AM PDT
The warring camps in Washington are unlikely to find a middle ground on their own. Governors and mayors need to take a seat at the adult tax-policy table.
It’s too early to predict which, how or whether any of the competing federal infrastructure proposals now bouncing between the White House and Capitol Hill will eventually become law. Perhaps a bipartisan deal can be reached on at least the physical infrastructure features that are of utmost importance to states and localities, but Senate GOP resistance to “pay-for” rollbacks of the 2017 corporate tax breaks could be a deal-killer. Republicans’ recent shell-game pitch to fund $300 billion worth of projects by “repurposing” aid committed to the states and municipalities in the American Rescue Plan Act has rankled most local officials as disingenuous.
As various counterproposals ping-pong up and down Pennsylvania Avenue, the partisan dynamics are clear: Democrats might be able to cram a bill through by using the budget reconciliation process, if they can hold together all 50 blue votes in the Senate. But if they are unable to take the reconciliation route, they will need at least 10 GOP senators’ votes to achieve a bipartisan compromise.
If Democrats decide to go it alone, it’s pretty clear that they will include a host of progressive tax features to pay for some or much of the deal. Meanwhile, GOP leaders aligned with business and wealth lobbyists oppose both a corporate tax hike and deficit financing for infrastructure.
governing.com
June 8, 2021 • Girard Miller
Fitch Ratings-Austin/New York-09 June 2021: The recent Colonial Pipeline cyberattack illustrates the broader financial effects that can result from attacks on critical public infrastructure, Fitch Ratings says. A breach of critical assets, such as power or water supply or public transportation, that halts service could result in widespread public and private sector shutdowns if utilities cannot provide service or employees are not able to commute to their places of work.
Infrastructure that has been compromised can directly affect state and municipal government finances in the near term through ransom payments and/or the costs of remediation and restoration of data and service, as well as over the longer term, as a result of broad economic disruption that leads to loss of tax revenue.
The highly public nature and necessity of critical public infrastructure marks it as an extremely tempting target for cyber criminals, where the rewards for successful breaches can be significant. Public safety and security and the direct accountability of government entities to their citizens make infrastructure attacks attractive to those who seek to maximize headline risk.
The Biden administration issued exploratory executive orders directing federal agencies to look into ways to strengthen cyber defenses in recognition of the threat to public works. The comprehensive federal regulations around grid security are a prime example of the focus on national security and economic and public safety concerns. Public power entities are required to maintain the cyber best practices of the North American Electric Reliability Corporation.
The trend of global cybercrime has been undergoing a metamorphosis in the past two years. Criminals are now more focused on pivoting from the direct theft of data to disrupting critical operations using ransomware and exfiltrating information. Making systems more resilient to evolving cyberattacks requires ongoing and robust capital investment in digital defenses to ensure operational security and physical safety. Employee and management vigilance remains an important guard against cybercrime.
Remote work and the use of technology in the operation of public critical infrastructure has created new cyber challenges and vulnerabilities. Service and safety were not jeopardized in the recent attacks on the Metropolitan Transportation Authority of New York (transportation revenue bonds rated ‘A-‘/Negative) and the Massachusetts Steamship Authority (not rated by Fitch), but the breaches pointed to the need for robust digital security.
Attacks on the water infrastructure in the City of Oldsmar, Florida and Post Rock Rural Water District, Kansas (neither rated by Fitch) evidence the importance of manual redundancies and safeguards if cyber defenses are breached. Management was able to limit damage at these utilities, even though the control systems of water treatment plants were compromised.
Fitch considers cybersecurity in its review of public sector credits and as part of its global environmental, social and governance (ESG) framework. Cyber breaches pose significant social risks in terms of public safety and security, as well as a governance risk in terms of management effectiveness. An entity’s ESG Relevance Score (ESG.RS) for Customer Welfare – Fair Messaging, Privacy & Data Security (SCW), could be elevated if cyber risk were deemed to be material to the rating, such as the score assigned to Marriott International, prior to the issuer’s rating withdrawal in September 2020, in recognition of the widescale data breach of their systems in 2018, and to Capital One (COF; ‘A-‘/Stable) following a July 2019 data breach. COF’s elevated ESG.RS for SCW was reduced in May 2021, as the breach did not result in any noticeable damage to COF’s franchise.
Contact:
Omid Rahmani
Associate Director, US Public Finance
+1 512 215 3734
Fitch, Inc.
Terrace 1
2600 Via Fortuna, Suite 330
Austin, TX 78746
Sarah Repucci
Senior Director, Fitch Wire
+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.
For governments considering spending under eligible use category C, “for government services to the extent that there was a reduction in revenue,” calculating the jurisdiction’s base revenue, revenue loss and growth rate are among the first steps of the process.
The American Rescue Plan Act (ARPA) of 2021 was signed into law by President Biden on March 11. The bill includes $350 billion in emergency funding for state, local, territorial, and Tribal governments. These State and Local Fiscal Recovery Funds are to remain available until December 31, 2024. The legislation details certain eligible use of the funds including responding to the public health emergency or its negative economic impacts, providing premium pay for essential front-line workers, replacing revenue losses due to the COVID-19 public health emergency, and necessary investments in water, sewer, or broadband infrastructure. Meanwhile, restrictions include using the funds to either directly or indirectly offset a reduction in net tax revenue or depositing the funds into any pension fund. Governors’ initial plans for spending ARPA funds have included: continued efforts to address COVID-19; economic recovery and relief; public health and other health initiatives; education; workforce training; promoting economic development and tourism; bonuses for first responders; shoring up the Unemployment Insurance Trust Fund; housing assistance; and infrastructure including broadband, water, and sewer.
National Association of State Budget Officers
By Brian Sigritz
Summary
Seeking Alpha
Jun. 11, 2021
Conservative income-seeking investors, including plenty of retirees, often flock to municipal bonds. However, the asset class encountered some headwinds earlier this year as 10-year Treasury yields spiked.
Fortunately, those yields are steadying and the iShares National Muni Bond ETF (NYSEArca: MUB) is getting its groove back. MUB, the largest municipal bond exchange traded fund by assets, is higher by almost 1% over the past month. In muni bond terms, that’s good work in such a short time frame.
“Municipals posted a third consecutive month of positive performance in May amid a backdrop of rangebound interest rates and favorable supply-demand dynamics,” according to BlackRock research.
ETF TRENDS
by TODD SHRIBER
JUNE 11, 2021
Summary
Seeking Alpha
Jun. 12, 2021
Summary
Seeking Alpha
Jun. 12, 2021
Want to learn more about the current landscape for U.S. municipal bonds market? SIFMA Research tracks issuance, trading, and outstanding data. 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. Download monthly, quarterly and annual statistics with trend analysis below. YTD statistics include:
Issuance (as of May) $177.7 billion, +12.5% Y/Y
Trading (as of May) $9.4 billion ADV, -36.3% Y/Y
Outstanding (as of 4Q20) $3.9 trillion, +2.2% Y/Y
As the health and safety crisis resulting from the pandemic wanes in the U.S., S&P Global Ratings believes U.S. public finance (USPF) issuers will face challenges adapting to a rapidly evolving environmental, social, and governance (ESG) landscape while adjusting to a sharp shift in federal policies under the Biden administration. We believe these issues will shape emerging risks or opportunities with the potential to alter USPF issuers’ credit fundamentals. In this inaugural ESG Brief, we provide an overview of these themes and examples of forward-looking analytical considerations.
The wave of U.S. municipal-bond distress set off by the pandemic is still spreading even as the economy recovers from the devastation of the outbreak.
Eight muni borrowers became distressed last week, lifting this year’s tally to 76, according to Municipal Market Analytics. That puts 2021 on track to exceed almost every year since 2012 in terms of impairments. Only 2020, when the coronavirus caused some of the worst market turmoil on record, was worse.
The isolated cases of deterioration in certain smaller, typically lower-rated or unrated issuers stand at odds with the optimism in statehouses nationwide, which have been buoyed by strong tax revenue and federal stimulus. It’s been a banner year for munis, with tax-exempt yields near record lows relative to those on Treasuries. Any defaults have mostly been confined to a corner of the market where businesses borrow through government agencies.
“While credit conditions are clearly better than at this time last year, they are by no means fully corrected,” Matt Fabian, a partner at Municipal Market Analytics, wrote in a Wednesday note.
Overall muni credit health is on the mend as the economy revives. And the tally of issuers in distress is a drop in the bucket when compared to the tens of thousands of separate borrowers that compose the $3.9 trillion market.
‘Last Throes’
Eric Kazatsky, senior U.S. municipals strategist for Bloomberg Intelligence, sees the trajectory relative to last year as a sign of growing strength.
“You have to take things with a grain of salt given the fact that we are coming out of the last throes of a global pandemic,” he said. Total distress and default activity is running at about half of last year’s rate, which “shows there is a lot of resiliency, there are less credit issues lingering.”
Fabian cited concern for a few areas: smaller senior-living projects that are struggling to survive the pandemic and its aftermath as well as smaller hospitals and colleges.
MMA defines a distressed issuer as one that defaulted, used support measures, like emergency means to cover debt service, violated a covenant or had a developer that went insolvent.
Default Flag
Emergency borrowing can be an indicator of more severe distress down the line in a market where defaults are rare, with about two in five impaired muni borrowers ultimately falling into default.
Last week’s impairments included five land-secured districts and three retirement projects. This year, retirement facilities have accounted for the largest segment of outstanding bonds with impairments, excluding Puerto Rico, at about $6.5 billion.
A Reno, Nevada, bond deal is also showing signs of lingering financial pain from the pandemic, drawing on a supplemental reserve account to pay bondholders on June 1, according to a regulatory filing.
The hotel-tax bonds were undermined by a drop in tourism to the area and pandemic-mandated closures of casinos and hotels, according to the filing.
Bloomberg Markets
By Nic Querolo
June 3, 2021, 10:44 AM PDT
— With assistance by Amanda Albright
Following a White House meeting between President Biden and Senator Shelly Moore Capito (R-WV) yesterday afternoon, time is running out on hopes for a large-bipartisan infrastructure package. Key differences remain between negotiating parties such as what actually constitutes infrastructure and how to pay for such a large spending package. Following the meeting, Administration officials made it clear that they will proceed with robust action regardless if their Republican counterparts join, so we expect in the next few weeks for the next steps to be taken. A follow-up discussion between the two parties is scheduled for Friday afternoon.
As we noted last week, there are many scenarios in which infrastructure can be addressed over the next 6 months. Regardless of the legislative path chosen, the MBFA and BDA remain bullish for key muni priorities being enacted into law in 2021.
New Muni Co-Chair Announced
Yesterday, Rep. Dutch Ruppersberger (D-MD) announced that Rep. Jackie Walorski (R-IN) will replace former co-chair Steve Stivers (R-OH) who recently resigned his Congressional seat. The caucus remains vitally important to the promotion of municipal bonds in the House, including the recent reintroduction of legislation that would reinstate tax-exempt advance refundings, legislation that the group also introduced in the prior Congress.
The MBFA and BDA are planning outreach to the new Co-Chair and will continue to work with our partner in the House Muni Finance Caucus to promote municipal bonds in the contract of infrastructure.
Bond Dealers of America
June 3, 2021
Many questions remain unanswered as we enter the 6th month of infrastructure discussions with little tangible accomplishments achieved. While some compromise has been reached in recent weeks, frankly, both parties remain miles apart and the most likely outcome is an infrastructure spending bill passed via reconciliation with only Democratic votes. However, that as well remains in flux.
News of a recent shift in tactics has also been discussed. Senate Democratic Leadership may be shifting course in the short term on the size and scope of infrastructure spending to focus on a 2 part legislative push-allowing the President to continue to pursue some bipartisan solutions, while planning for a more robust party-line package either later this fall or early in 2022.
What does this mean for municipals in 2021? Are MBFA and BDA priorities still on track for enactment in this legislative year?
Expectations for Remainder of 2021
Following the introduction of the LIFT Act in the House and several companion pieces of legislation in the Senate, legislators made their intentions clear to promote infrastructure financing through municipal bonds a priority. Below is an outlook for municipal provisions that both the MBFA and BDA have advocated for:
Restoration Tax-Exempt Advance Refundings
As a top legislative priority for the municipal market, the restoration of tax-exempt advance refundings remains in a strong position for advancement this year. The legislative text was reintroduced by the House Municipal Finance Caucus earlier this year (the bill was identical to the version introduced in the 116th Congress) and absorbed in the later introduced LIFT Act. Following the House release, Senators Wicker (R-MS) and Stabenow (D-MI) introduced the LOCAL Infrastructure Act which much like the House companion, would fully restore tax-exempt advance refundings to their pre-2018 form.
Sentiment on Passage: BULLISH
Raise BQ Debt Limit
Much like AR, legislation was introduced in the House this Congress and absorbed into the LIFT Act. However, there has yet to be a Senate companion introduced, a potential hurdle in advancement. We still feel there is an above-average chance for passage this year, however believe it falls short of the bullish sentiment of other provisions.
Sentiment on Passage: NEUTRAL
New Direct Pay Bond Exempt from Sequestration
Legislation has been introduced in both chambers of Congress and promoted by the Administration that would establish a new category of tax-preferred financing for state and local governments to be known as American Infrastructure Bonds (AIBs). Similar to the previous Build America Bonds program, AIBs would be an alternative to tax-exempt financing. The Senate American Infrastructure Bond is exempt from sequestration and has a flat 28% reimbursement rate while the House is not while varied reimbursement. There is a general consensus that the new AIB will be included in any infrastructure package passed, however, sequestration provisions remain in flux.
Sentiment on Passage: BULLISH (with a caveat on sequestration exemption)
Expand the Usage of PAB’s
Although PABs are not part of the LIFT Act, they continue to receive ample attention from both Congress and the Administration. Last week, the Biden Administration called for an increase in the PAB limit for transportation infrastructure, doubling the limit to $30 billion dollars. This build off pending Senate legislation that would expand the usage for affordable housing amongst other provisions. PABs for GSE use has also been a popular discussion item, but little legislative text has been produced.
Sentiment on Passage: BULLISH
Bond Dealers of America
June 4, 2021
This report explores the facets of society that changed during the coronavirus pandemic as it relates to toll roads and how we work, play, shop, learn and live. Some longer term trends, such as telecommuting and e-commerce, were accelerated by the crisis. However, many of the largest shifts, such as the dramatic losses in transit and aviation, are likely to be shorter term, as society regains aspects of its pre-coronavirus footing.How We Work Telecommuting among U.S. workers more than doubled at the pandemic’s peak, especially for white collar jobs, which are better positioned to transition to telework than blue collar jobs. Consequently, toll roads serving affluent commuter regions, such as Northern Virginia and Silicon Valley, suffered some of the largest declines, a major difference compared with prior recessions. The prevalence of telecommuting is waning as the crisis begins to ebb. However, a permanent but more modest share will remain.How We PlayModes of leisure travel involving multiple occupants in close quarters, especially aviation, experienced significant declines. While some losses stem from canceled trips, a proportion of trips shifted to single-occupant vehicles as a safer alternative. This dynamic benefited some toll roads, such as facilities that serve outdoor leisure destinations accessible by car.
Wed 02 Jun, 2021 – 8:53 AM ET
Fitch Ratings-New York/San Francisco-02 June 2021: With daily lives dramatically altered as a result of the global pandemic, a Fitch Ratings special report points to an uneven recovery for U.S. toll roads as people adjust to new ways of working, playing, shopping and living.
“The pandemic is a test like no other that crippled or dislocated economies, commuting behavior and social patterns,” said Senior Director Scott Monroe. “The sector’s recovery reinforces the importance of the road network, especially the highway network, to the functioning of society.”
Telecommuting is waning as the crisis begins to ebb, although it will stabilize at a higher baseline, which will act as a long-term drag on traffic levels. Less ridesharing is pushing traffic and revenues down for urban toll roads while less carpooling may benefit some networks if two or more individuals who previously carpooled are now driving solo. “It will be interesting to see how toll roads serving affluent commuter regions like Northern Virginia and Silicon Valley fare over time, as they were amongst the hardest hit by traffic declines once the pandemic took hold,” said Monroe.
The same uneven outlook applies to toll roads as they pertain to schooling with some districts returning to full in-person learning, others using full distance learning and many districts falling in between. “Toll roads in areas where schools are returning to full in-class learning are likely to benefit from a faster traffic recovery,” said Monroe.
As for travel, the shift away from long-distance destinations via airplane toward outdoor leisure destinations accessible via car will continue to be a plus for toll roads. The prevalence of e-commerce was already in place before the pandemic rapidly accelerated the move away from shopping in brick-and-mortar locations. That said, it is more difficult to know what the net impact will be on overall traffic. “Roads near distribution centers stand to benefit while those near malls may experience declining traffic,” said Monroe.
Contact:
Scott Monroe, CFA
Senior Director
+1-415-732-5618
Fitch Ratings, Inc.
One Post Street, San Francisco, CA 94104
Anne Tricerri
Director
+1-646-582-4676
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com
Additional information is available on www.fitchratings.com
GFOA’s Federal Liasion Center continues to update CSLFRF Guidance FAQs based on the most common inquiries received from members.
Many of America’s governors and mayors suddenly have a surplus of cash, giving them a chance to showcase their priorities.
Governors and mayors across the U.S. have had to grapple with previously unthinkable questions over the past year. Do I shut down my economy and upend livelihoods or try to press forward and risk a public-health crisis? How do I pitch my state or city over others when employees and executives are growing more comfortable with the possibility of working from anywhere? How can I most effectively distribute critical vaccines across disparate communities?
After all that, you might say they deserve an easy question. For instance: How would you spend $350 billion?
That, of course, is the amount of aid for state, local and tribal governments included in the $1.9 trillion American Rescue Plan. It was enough for Moody’s Investors Service to brighten its outlook across municipal finance sectors, arguing that the money “will help stabilize state finances.” A strange thing happened along the way, however: Revenue in a majority of states rebounded entirely from the pandemic, with California’s stunning $76 billion surplus as the most prominent example. In the aggregate, total state tax receipts were virtually unchanged in the period from March 2020 through February 2021 relative to the same months a year earlier, according to preliminary monthly data from the Urban Institute.
Bloomberg Opinion
By Brian Chappatta
June 2, 2021, 3:30 AM PDT
WASHINGTON —The U.S. Conference of Mayors, National League of Cities and National Association of Counties sent a joint letter to Senate Majority Leader Schumer, Republican Leader McConnell, House Speaker Pelosi and Republican Leader McCarthy adamantly opposing any proposal that would repurpose urgently needed coronavirus relief funds for other activities. A copy of the letter was also sent to all members of Congress.
Signed into law in March, the American Rescue Plan Act provides critical direct aid to local governments on the front lines of the coronavirus pandemic to help pave the way for economic recovery and adequately address rising expenses to fight the virus, growing budget deficits and increasing demand for support services. As President Biden’s proposed FY22 budget prioritizes infrastructure investments and the push for a bipartisan infrastructure package continues, there remains a need in communities for both coronavirus response, relief and recovery, as well as a need to rebuild infrastructure.
The letter read in part:
America’s cities and counties – who are on the front lines of this pandemic – have been working hard since enactment of the American Rescue Plan Act to develop implementation plans that will help spur an equitable economic recovery across the nation. Local governments are using these critical recovery funds to invest in public safety, vaccine distribution, housing and rental assistance, local economic support, economic and workforce development, broadband expansion, social safety-net services, hospitality and tourism development, and hazard pay for public employees.
“Despite the obvious and critical need for these dollars, there have been recent Congressional proposals to clawback these funds. We oppose these proposals, both in general and as a pay-for for infrastructure.
“In order to help our economy further recover and compete globally for decades to come, we continue to urge Congress to pass a comprehensive infrastructure package that addresses our nation’s transportation, water, clean energy, broadband and workforce development needs, but not at the expense of reducing funds already authorized under the American Rescue Plan Act.”
The full text of the letter can be found here.
naco.org
Jun. 1, 2021
The strength of a local economy and its economic activity is directly tied to the health of its population, which affects leading economic indicators like unemployment rates, consumer spending power, and, more importantly, per capita income levels.
It’s widely seen in communities with a widespread opioid dependency or other substance abuse that local and state governments are not only forced to stretch their already thin revenue source, but the greater need for health and safety services aren’t able to be adequately provided. These challenges have been exacerbated during the current pandemic.
In recently published data from the Centers for Disease Control (CDC), prescribed and synthetic drug overdose deaths have accelerated during COVID-19. It states, “Over 81,000 drug overdose deaths occurred in the United States in the 12 months ending in May 2020, the highest number of overdose deaths ever recorded in a 12-month period.”
In this article, we will take a closer look at the inverse relation between the opioid crisis and the economic prosperity of local governments.
municipalbonds.com
by Jayden Sangha
Jun 02, 2021
Mood is cautiously optimistic as the pandemic fades and federal aid arrives
City governments were forced to make difficult decisions in the spring of 2020 when COVID-19 upended their normal budget processes. Now, many of those cities are developing new spending plans for the year ahead. Although uncertainties remain, officials feel a sense of cautious optimism, thanks to the infusion of federal funds and the lessons learned since the start of the pandemic.
This was a key takeaway from a recent virtual panel discussion organized by The Pew Charitable Trusts’ Philadelphia research and policy initiative. Among the themes voiced by city budget representatives and experts on municipal finance were:
“When you’re in uncertain and unprecedented environments, there is a need to forecast more, to monitor more, to report more, and be very transparent with assumptions,” said Matthew Stitt, a director at PFM, a public finance firm based in Philadelphia that works with state and local governments. “If your city was already in growth mode, their investment decisions tend to be more about inclusion. But if you were in a city that was in decline structurally, you have to think of not only ways of including everyone in your investment strategies but also how do you grow the economic pie.”
Three officials from Philadelphia also took part in the panel discussion—Finance Director Rob Dubow, Budget Director Marisa Waxman, and City Council Chief Financial Officer Robert McDermott—as well as Detroit’s Budget Director Steven Watson and Shayne Kavanagh, senior manager of research at the Government Finance Officers Association. The April 27 conversation before an online audience of city policymakers, public finance experts, and other stakeholders was part of Pew’s examination of Philadelphia’s fiscal health in the wake of the pandemic.
The start of the COVID-19 pandemic in early 2020 forced cities to deal with uncertainty in revenues and expenditures—not just in creating budgets, but in managing them throughout the current and future fiscal years. The subject of a virtual convening hosted by Pew last July, this challenge has continued as cities have been developing budgets and financial plans for the upcoming fiscal year and beyond.
“You can’t get rid of the uncertainty; you can only plan for it,” said Dubow. One priority for Philadelphia, he said, is to rebuild year-end fund balances as a way of giving the city budget flexibility in the coming years. To partially close the budget shortfall for the current year, Philadelphia used $229 million from its reserves. That means it will have far less in reserve when this fiscal year ends on June 30.
Like Philadelphia, Detroit develops long-term financial plans as part of its yearly budget process. To assess the potential long-term impacts of the pandemic, the city has partnered with three universities to create Detroit-specific data and economic forecasts and is working with the Michigan Treasury Department to use tax data to better understand the local economy and tax base.
“Much like before the pandemic, it is all that much more important to focus investment and funding on building economic opportunities for Detroiters,” Watson said.
Federal aid from the American Rescue Plan Act will help cities reduce uncertainty and close the budget gaps that have resulted from decreased revenues. In Philadelphia’s case, an influx of $1.4 billion helped to close most of the budget shortfall for fiscal year 2022, which begins this July 1. Officials noted the need to spread these dollars over several years, as they can be used through the end of 2024—with additional federal aid unlikely.
In addition to the need to address uncertainty, participants noted that the pandemic highlighted the often-siloed nature of the budgeting process in comparison with the interdisciplinary nature of the issues facing many cities. When an initiative doesn’t fit neatly into any one department, it may struggle to survive, even if it is effective. The challenge, said Kavanaugh of the finance officers association, is “how do we organize ourselves around solving problems and bring in actors from different sectors to do it?”
Waxman, Philadelphia’s budget director, agreed that the ways in which budgets are set up can complicate spending decisions. For example, “there are still some challenges syncing the collaborative, interlocking nature of the work with traditional budgeting,” she said, referring to the money spent on anti-violence initiatives in her city.
Finally, the participants cited the need to embed equity into budgeting—both as a process and an outcome—moving forward. Waxman cited Philadelphia’s efforts to be more intentional about who is involved in the budget process and who benefits from specific programs. McDermott emphasized the importance of using data, including geospatial data, to inform spending decisions, saying that effective use of such data can effectively target equity outcomes at the neighborhood level.
The speakers agreed that the next several years will be challenging for city budgets, as local officials learn which of the pandemic-spurred economic changes fade away and which are longer-lasting. They also agreed that the one-time federal relief presents a unique opportunity to invest in future growth.
The Pew Charitable Trusts
June 2, 202
Elinor Haider directs the Philadelphia research and policy initiative at The Pew Charitable Trusts. Anjali Chainani is a senior adviser to the What Works Cities’ City Budgeting for Equity and Recovery program.
Joe Biden wants to spend his way to a greener and more sustainable future for America. For now though, he’ll probably be financing it the old-fashioned way — with taxes and traditional bonds.
None of the $21 trillion Treasuries market includes bonds linked to the funding of environmentally-friendly projects, despite a seemingly insatiable investor hunger for these new types of ethical assets.
Germany, France and Italy have capitalized on it, and the U.K. and Canada are both planning debuts. In the U.S., municipalities have been selling record amounts of green bonds, but the world’s largest seller of debt is conspicuously absent.
It’s more than a little ironic. Biden needs trillions of dollars and global investors are only too happy to pour cash into the world’s safest bonds. Such debt could be splashed on new power grids to avoid the kind of chaos seen in the Texan deep freeze this year, or electric-vehicle charging for the fleet of Tesla Inc. devotees.
Yet officials haven’t publicly floated the idea of green Treasuries, with Treasury Secretary Janet Yellen saying private capital must fill most of the funding gap.
Biden’s infrastructure plans and climate agenda come at a time when green bonds have become one of the fastest-growing corners of international finance, with issuance above $200 billion so far this year.
The coronavirus crisis has accelerated the trend, since governments and companies are trying to spend their way to a recovery as well as transition to lower carbon economies. While the administration could easily raise funds from existing borrowing and taxes, debt linked to sustainability projects is a way for many issuers to signal that the money is going into good causes.
Green debt “fits the Biden agenda and investor demand would be strong,” said Ronald van Steenweghen, a money manager at Degroof Petercam Asset Management in Brussels.
In the absence of a move from the federal government, regional administrations in America have already pushed ahead.
Last year saw a record of around $20 billion of green bonds, according to data compiled by Bloomberg show and the municipal debt market may be headed for a second straight year of unprecedented environmental debt issuance, spurred in part by the conversation around Biden’s plans.
The Washington Metropolitan Area Transit Authority just sold $874 million in green bonds, while the New York Metropolitan Transportation Authority is one of the biggest issuers.
Still, that’s a small slice of the $3.9 trillion U.S. municipal market, where states and localities raise money for transport, schools and housing. And it’s minuscule compared to the behemoth that is the funding done by the U.S. Treasury, which has historically tended to take a very long time to ponder any changes to its debt lineup.
Proposals to extend bond market maturities beyond the current limit of around 30 years have been floated repeatedly and gone by the wayside, while the idea of issuing debt linked to a replacement for the discredited Libor benchmark has been kicked around for more than a year.
Green Treasurieies seem “quite far away at the moment,” said Gennadiy Goldberg, senior rates strategist at Toronto-Dominion Bank. “I wouldn’t be surprised to see the Treasury explore the issue at one of their upcoming refunding meetings, but would suspect even such exploration would take a back seat to more timely issues.”
Treasury department spokeswoman Lily Adams declined to comment on whether the U.S. was considering issuing green bonds.
Slow Hurdles
The lack of commitment hasn’t stopped investors from salivating over the prospect of the world’s biggest borrower joining the green rush in coming years. Issuers are managing to lower their costs, since the scramble for these assets creates a so-called “greenium”, as well as boost their image.
To start issuing, the U.S. Treasury would need to create a mechanism to separate the funds raised from green securities from those in the general account, and a framework for what the money could be spent on. That would also take time.
In the European Union, set to become the world’s biggest green issuer, technocrats aim to publish green bond standards this summer, after political leaders first proposed the debt back in September.
Political divisions within government could also prove a roadblock. There is a risk that any future administration would discontinue the program, undermining the Treasury’s “stable and predictable” mantra, Toronto-Dominion’s Goldberg said. Officials are also likely to be aware of the potential liquidity implications, he added.
Some senators are pushing for muni-bond subsidies for infrastructure, similar to former President Barack Obama’s “Build America” bonds that were sold in 2009 and 2010 to help the economy recover from the financial crisis. Others are trying to create a national green bank.
“Another Build America Bond type program would be the easiest way to get a green type bond out there,” said Amar Reganti, a managing director at Wellington Management and a former deputy director of the Treasury’s Office of Debt Management. “The government could kick start a green bond type program through state and local governments, getting those expenditures out faster.”
Ultimately it may come down to how much top-level political support there is for green Treasuries. In the case of the U.K., last year its debt office appeared uncertain over the need for separate green debt, but a push by parliamentarians and ministers looks set to deliver green gilts before the U.K. hosts a major United Nations climate summer this year.
Biden needs to prove to the world that the U.S. is showing climate leadership to overcome a credibility gap, after his predecessor Donald Trump pulled out of the Paris accord on greenhouse gas emissions.
His plans have drawn criticism from the likes of Alexandria Ocasio-Cortez for not going far enough on the environment, so green debt could be a way to show the government is putting its money where its mouth is.
“No other administration has ever talked about climate and the environment as much as this group,” said Ian Katz, an analyst at Capital Alpha Partners in Washington. “The way this administration approaches things on ESG and climate is ‘let’s go as far as we can.’
ThinkAdvisor
by John Ainger and Liz Capo McCormick
June 02, 2021
Joe Mysak, Editor Bloomberg Brief: Municipal Market, discusses the latest news from the municipal bond market. Hosted by Paul Sweeney and Matt Miller.
June 4, 2021
Credit spreads are tightening, which could be causing investors to shy away from the extra risk associated with high yield, but there are safer options like municipal bonds and the Vanguard Tax-Exempt Bond ETF (VTEB).
The past month saw equities get racked with a bout of volatility as inflation fears put investors in a state of unease. Given that rates are still low by historical standards, fixed income investors may be starting to weigh in the risks of higher yield.
“The US junk bond market has begun wavering on rising inflation worries, raising the risk that the powerful rally since the depths of the pandemic in the debt issued by the riskiest corporate borrowers may be coming to an end,” a Financial Times article noted. “The high-yield bond market has been a shelter for investors seeking to avoid the volatility in stocks and government bonds this year, but these riskier assets have now begun flashing signs of caution.”
In the meantime, investors can check out municipal bonds, which are more stable. Default odds for municipal bonds are lower given that municipal bonds are backed by state and local governments.
ETF TRENDS
by BEN HERNANDEZ
JUNE 4, 2021
In 2021, municipal (“muni”) bonds have been a tough asset class to manage due to overwhelming demand and limited supply in the market. Fundamentally, there are a few reasons for these conditions, and we’ll take a look at some data points to bring the bigger picture into focus.
Advisor Perspectives
by Michael Landrum of Advisors Asset Management, 6/3/21
Cash coming back to investors from municipal bond coupons and maturities in June, July and August will far outstrip new issues. The municipal bond market is more sensitive to changes in supply and demand than any other sector of the bond market. This will be the summer of municipal bond imbalances.
Every week there’ a relentless surge of money going into municipal bond funds of all types. Lipper Fund Flow says 2021 has ran the biggest influx of new money in municipal bond funds since 2000. The numbers as reported by Bloomberg for redemptions and calls look like this:
· $40.5 billion munis maturing in June
· $34.9 billion in July
· $43.9 billion in August
· Perhaps another $10 billion in bond calls in each of these three months.
This creates a good selling opportunity for those who need to raise cash. On the other hand, it isn’t so good for buyers. Buyers should not jump into the feeding frenzy. Patience and easing into the municipal bond market makes much more sense as new issue volume ramps up in the Fall.
I recognize how counter intuitive this may seem, considering the historically low bond yields we’ve experienced since 2020. But factor in potentially higher tax rates and the municipal bond buying frenzy makes sense.
Investors don’t like paying increased federal tax. But that’s where we are heading. Washington wants to boost top personal tax rates to 39.6%. Glom on to that state income tax from the greediest states like California, Hawaii, New York, New Jersey, Oregon and Minnesota that fall between 9.85% and 13.30% for the highest earners. What you’ve got is a rush to munis to lessen the tax burden.
With $28.2 trillion in existing Treasury debt, continuing Federal Reserve debt purchases, and inflation, some may think investing in munis is a death wish. Not at all.
The Federal Reserve has, and will continue to, monetize our debt. They will keep rates low in order to manage the cost of government borrowing. The Fed controls interest rates. All this as individual and corporate tax rates increase.
Once the media gurus touted REITs and dividend paying stocks as the “new bonds.” That is, until many companies reduced or omitted their dividends. This happened to companies like AT&T T +0.1%, Disney DIS +0.5%, Southwest Airlines LUV +0.5%, Halliburton HAL +0.1%, Royal Dutch Shell, Harley Davidson HOG -1.9%, and Expedia, to name just a few. Municipal issuers don’t have that luxury. Skipping a municipal bond coupon means the issuer is bankrupt—a rare occurrence indeed. So viva le difference. Stocks are here to increase wealth. Municipal bonds exist to preserve wealth.
The drum beat you hear is the government relentlessly marching toward higher tax rates. Be a tax-smart investor and take heed.
Forbes
by Marilyn Cohen
Jun 1, 2021,
Much depends on their tax structures, particularly if Prop. 13-style tax caps are in place. But inflation-driven pressure for wage increases could squeeze budgets and crush pension funds.
Wall Street is abuzz about inflation. Recent Consumer Price Index data showing a 4.2 percent rise from a year ago spooked investors briefly as costs spiked for food, energy, used cars and commodities ranging from microprocessors to lumber. But one or two hot readouts alone do not signal persistent inflation — or at least that is what White House and Federal Reserve officials are preaching. Should state and local leaders brace for something worse?
Let’s be optimistic and assume that Congress eventually passes some kind of physical infrastructure bill paid for with tax increases and user charges. That’s unlikely to stir up inflation by itself. But the remainder of the Biden agenda, which includes “soft” infrastructure and the American Family Plan’s social spending, seems unlikely to secure enough votes for offsetting tax increases to avoid yet more deficit spending. Add to that the certainty that a big blue health-care bill will surface next year, and the recipe for inflationary deficits is bubbling in the federal fiscal kitchen.
governing.com
May 25, 2021 • Girard Miller
Industry has long opposed municipal broadband, but the idea has gained momentum this year with help from Washington.
After years of unhappy reliance on Comcast Corp. and other carriers, Pleasant Grove, on Utah’s Wasatch Front, is turning to a new broadband option: a municipally owned company called Utopia Fiber. The choice follows a pandemic year that showed just how much households need fast, reliable internet connections for jobs, schooling, and medical care.
To reach homes that lack good service, or have none at all, President Joe Biden has proposed funding networks such as Utopia Fiber that are run by cities and nonprofits. That’s not sitting well with Comcast, AT&T, Verizon Communications, and other dominant carriers, which don’t like the prospect of facing subsidized competitors.
Pleasant Grove shows why established carriers might be vulnerable. With 38,000 residents, it’s nestled between the Wasatch Range and the Great Salt Lake Basin, just south of Salt Lake City. When it asked residents about their broadband, almost two-thirds of respondents said they wouldn’t recommend their cable service. Almost 90% wanted the city to pursue broadband alternatives.
“We could sit and wait for the private sector to do this—we just didn’t really know when that would be,” says City Administrator Scott Darrington. Residents have complained of slow broadband, and Utopia’s fiber network holds out the promise of fast speeds that don’t lag as more households log on, Darrington says. It will also reach areas not served by current providers.
Bloomberg Businessweek
By Todd Shields
May 27, 2021
Pension bonds are sometimes likened to weight-loss surgery: a drastic step that only works with real discipline afterward
Pension obligation bonds are a municipal red flag.
When a state or local government’s liability to its pension system grows beyond what seems manageable, officials are often tempted to issue debt to pay down some or much of that amount. Bonds have fixed interest rates, and they’ve been near long-time lows for the past decade.
In contrast, a pension liability can fluctuate from year to year — and usually just gets bigger as the necessary annual budget contribution gets added to an existing funding hole.
MarketWatch
By Andrea Riquier
May 26, 2021
Key Takeaways
27 May, 2021
Capitol Hill and Wall Street are in two different cities, but when they interact on a regular basis, the results can beneficial for investors.
A prime example of investors deriving benefit from a policy push is the recent passage of the American Rescue Plan, which fixed income market observers view as a plus for municipal bonds. There could be benefits for taxable munis, which are accessible with the Invesco Taxable Municipal Bond Fund (NYSEArca: BAB).
Most municipal bonds are tax exempt, but the 584 holdings in BAB are taxable. These bonds are usually issued by a state or city or county when the federal government won’t assist with funding. Usually, taxable munis raise capital for projects that don’t benefit the public at large, such as a sports stadiums or private real estate projects.
That’s not a detriment for BAB. In fact, the case for the Invesco ETF is bolstered by the American Rescue Plan.
“State and local governments are receiving $350 billion of direct aid from the American Rescue Plan,” writes Charles Schwab’s Cooper Howard. “The restrictions on what the aid can or cannot be used on are much less stringent than the aid provided under the CARES Act that was signed into law in March 2020.”
BAB: A Solid Bond Bet
While BAB lacks the tax benefits that come with traditional municipal bond ETFs, the Invesco fund makes up for it in other areas. For example, BAB has outperformed the S&P National AMT-Free Municipal Bond Index by 820 basis points over the past three years.
BAB also offers a higher level of income. It yields 2.88%, 77 basis points higher than the yield on the S&P National AMT-Free Municipal Bond Index. That’s an important point because the American Rescue Plan jumpstarted muni bond prices, meaning yields declined.
“Prior to the COVID-19 crisis, the five- and 10-year municipals over bonds (MOB) spreads averaged 88.9% and 94.5%, respectively. They quickly spiked in March 2020 due to the COVID-19 crisis and have since fallen. In fact, both the five- and 10-year tenors are the lowest going back to 2001,” according to Schwab’s Howard.
Over 28% of BAB’s components have maturities of one to five years or five to 10 years. BAB has a modified duration of 9.49 years, according to issuer data. Eighty-four percent of the ETF’s portfolio is rated AAA, AA, or A on the S&P scale.
ETF TRENDS
by TOM LYDON
MAY 26, 2021
Under the surface of Washington’s negotiations over infrastructure – and buried in jargon like “municipal networks” and “overbuilding” – is a debate about how Americans may get their internet in the years ahead.
Will your broadband bill come from a purely private company or will it be more like a public utility?
The Biden administration wants to at least nudge the country toward the latter.
The effort is being led by Vice President Kamala Harris and one aspect of the administration’s plan would encourage government-owned broadband networks. In other words, they want to prod more cities to set up shop and offer service directly.
Yahoo Finance
by Ben Werschkul
May 26, 2021
President Biden’s American Jobs Plan, which would finance high-return infrastructure investments partly by undoing some of the dramatic 2017 corporate tax cuts, would make the tax code fairer and raise substantial revenue without undermining economic growth. Our newly updated paper has the details, including analyses from Moody’s Analytics and International Monetary Fund (IMF) researchers with further evidence on the equity and growth benefits of this approach.
The 2017 law slashed the corporate rate from 35 to 21 percent. The Jobs Plan would raise the rate to 28 percent and reduce tax incentives for companies to shift profits and investments overseas.
Critics of progressive tax changes like these often don’t acknowledge the benefits of the investments that the added revenue makes possible. In contrast, a recent analysis by Mark Zandi and Bernard Yaros of Moody’s Analytics estimated the combined effects of the Jobs Plan’s infrastructure investments — in broadband, roads and bridges, and research and development — and its corporate tax increases. Using a model similar to those used by the Congressional Budget Office and Federal Reserve Board, they found that:
Center on Budget and Policy Proposals
by George Fenton
MAY 25, 2021
U.S. airlines carried the most passengers in almost 15 months on Friday, rebounding from the pandemic as travelers took advantage of relaxed restrictions and expanding vaccinations to take off for Memorial Day weekend.
The Transportation Security Administration reported that it screened almost 1.96 million people at airports, compared with 1.85 million on Thursday. That’s the most since March 7, 2020, when the Covid-19 pandemic was in its early stages.
The U.S. Centers for Disease Control and Prevention eased its guidance on wearing masks in public this month, saying fully vaccinated people could generally do without face coverings. Masks while flying or riding public transit remain a CDC recommendation.
While airline passenger numbers have yet to reach pre-pandemic levels, they are much improved this year. The number of people who passed through TSA checkpoints during last year’s Memorial Day weekend averaged slightly more than 300,000, according to data on the agency’s website.
Growing traveler numbers have buoyed airline stocks this year. Moody’s this month lifted the credit outlook for municipal bonds sold on behalf of U.S. airports.
Bloomberg Business
By Miles Weiss
May 29, 2021, 11:22 AM PDT
The bill approved unanimously Wednesday by the Senate Environment and Public Works Committee would allocate $311 billion over five years for roads and highways.
A bipartisan proposal to spend hundreds of billions of dollars on highways advanced through a Senate committee Wednesday even as negotiations on a much bigger package continued to struggle — offering a possible off-ramp for Congress to make some progress on infrastructure this year.
The bill approved unanimously Wednesday by the Senate Environment and Public Works Committee would allocate $311 billion over five years for roads and highways. Its bipartisan approval stands in contrast to floundering efforts to broker a deal between Senate Republicans and the White House on a multitrillion-dollar package that would fund everything from roads to broadband to blunting climate change.
A bipartisan deal on anything resembling President Joe Biden’s $2.2 trillion American Jobs Plan, with the parties so far apart on core issues, was never a good bet. And on Wednesday, Republicans seized on the committee’s action to say that bolsters their arguments that a package limited to “traditional” infrastructure like roads can get strong bipartisan support.
“Our success this morning shows that we can accomplish a lot when we work together and focus on real transportation infrastructure,” said Sen. Joni Ernst (R-Iowa) as the markup ended.
Even Democrats said it offered fresh momentum to the other committees that need to weigh in on a transportation-centered bill. Those include the Senate Banking Committee, which has to craft a portion dealing with transit, and the Finance Committee, which needs to decide how to pay for it all.
“It won’t be the final version,” EPW Chair Tom Carper (D-Del.) said of the bill his committee passed Wednesday. “It’s not going according to anybody’s plan, but at least we’re going forward.”
Sen. Shelley Moore Capito (R-W.Va.), ranking member of EPW and lead GOP negotiator on the broader push, said the bill approved Wednesday can serve as an “anchor” for broader efforts. She said she plans to return to the White House on Thursday to plead her case that the bill, along with earlier approval of a water infrastructure package, S. 914 (117), by the full Senate, shows the possibilities of a narrowly-tailored infrastructure package.
“Those are two significant pieces of what we agree is physical for infrastructure, so we’re gonna take that back to the White House and see what we can build on,” she told reporters. “What we’ve shown is that the regular order through the committee’s can really work a lot of the priorities and I think that’s significant.”
Senate Minority Leader Mitch McConnell said the EPW committee bill is “modeling the approach that would let Congress build a successful big-picture infrastructure bill this year.”
People involved in the infrastructure effort have largely viewed it as inevitable that Congress would pass a bipartisan transportation bill and the rest would fall to a reconciliation package that Democrats could enact without GOP support. Lawmakers have a Sept. 30 deadline to pass a “surface” transportation bill that includes highways, transit and likely rail.
“If they can get a deal on [surface transportation reauthorization] I think that’s just fine,” said one transportation industry lobbyist. “And you take that off of what would then go into reconciliation, and that’s good. I still think Biden’s going for reconciliation no matter what.”
Another lobbyist said he was “optimistic as far as where things are both on the surface bill and on the macro package.”
Asked if he was expecting reconciliation, the lobbyist said: “Sure. What’s wrong with that, though? We still get one big package that could be bipartisan, and then one big package that won’t be bipartisan. At the end of the day you still get a lot of money for infrastructure.”
Of course, the bill approved Wednesday by the EPW committee is the easiest lift — due to legislative jurisdiction, the bill only can cover roads — and there is additionally a storied history of bipartisan collaboration in the space. Political opposites like Sen. Jim Inhofe (R-Okla.) and former Sen. Barbara Boxer (D-Calif.) regularly bridged their divides to generate bills.
Whether that can translate to other panels is an open question.
Some progressives say the bipartisan highway bill should in no way be seen as a ceiling for the scale of their ultimate ambitions on infrastructure and climate change legislation.
“It’s always been the premise that whatever we agreed to with the Republicans on infrastructure would be the limit on the bipartisan bill, but not the limit on what we accomplish. And that reconciliation would allow us to go beyond it,” Sen. Sheldon Whitehouse (D-R.I.) told POLITICO. “The important thing is that we not allow Republicans to limit our aspirations.”
Outside environmental groups echoed that disappointment. Will Anderson, associate director of legislative advocacy for Sierra Club’s Clean Transportation for All campaign, called the legislation a “noteworthy start, but much, much more is needed to act on climate and fund the transformative change needed in our transportation systems.”
In contrast, Republicans have already jumped to declare EPW’s moves as an example of the proper way to produce infrastructure legislation, a message they elevated at their weekly leadership news conference on Tuesday.
“We are hopeful that the president will look at the work we have done in EPW … use that as the basis of an infrastructure package and we can move it forward,” Ernst said. “This is what Americans think of as infrastructure: roads, bridges, waterways, locks and dams — and throw in some broadband and we’ve got a bill.”
Even amid those calls, Carper is framing Wednesday’s movement as a step he hopes will prod other committees into moving.
“I’m encouraged by the kind of conversations that are going on — bipartisan conversations — in Finance, in Banking, in Commerce,” he said. “My hope is what we’re doing here today will encourage them to speed up.”
POLITICO
By ANTHONY ADRAGNA
05/26/2021
Tanya Snyder contributed to this report.
Take a road trip from New York to California to see infrastructure projects with the potential to make cities more livable and equitable.
In 2011, then-President Barack Obama stood in front of the deteriorating Brent Spence Bridge linking Ohio and Kentucky with a plea to Republican leadership: Pass the jobs bill to rebuild America. (It did not pass.) Six years later, when asked about the same bridge, then-President Donald Trump answered “we’re going to get it fixed.” (It did not get fixed.)
It took two trucks colliding on the Brent Spence’s lower deck — leading to a massive fire — just before 3 a.m. on Nov. 11, 2020, for work to begin. A post-crash inspection found the bridge structurally sound, and more than $3 million in repairs were made by year-end. But with traffic volume at around double its intended capacity, much more work is needed to alleviate persistent jams and accidents.
Such has been the state of infrastructure in the U.S. for decades — fixes get put off until they’re absolutely necessary, and U.S. airports, roads and public transportation draw frequent comparisons to those in nations with far fewer resources. Meanwhile, countries in Europe, Asia and the Middle East have leapt ahead with so-called smart cities, high-speed trains and eco-friendly buildings. In 2019, the U.S. ranked 13th in the world in a broad measure of infrastructure quality — down from fifth place in 2002, according to the World Economic Forum’s Global Competitiveness Report.
Bloomberg CityLab
May 27, 2021, 6:00 AM
Key Findings
Tax Foundation
by Ulrik Boesen
August 25, 2020
Early this week, news began to emerge from Capitol Hill that Senate Democratic Leadership may be shifting course in the short term on the size and scope of infrastructure spending for this year due to a budgetary time crunch. While details are still being worked out, at this time it seems that infrastructure may come in a 2 part legislative push-allowing the President to continue to pursue some bipartisan solutions, while planning for a more robust party-line package either later this fall or early in 2022.
The MBFA and BDA continue to work to ensure that muni priorities are included in the initial infrastructure package. Many of these provisions, such as those included in the LIFT Act, have received bipartisan praise in the last weeks, and are in a good position for inclusion.
Expected Process
September 30th will remain a crucial date no matter which path Congress decides to take on infrastructure spending this year. On that date, the Surface Transportation Reauthorization Act of 2021(or funding from the prior year to be extended) is required to be enacted as well the FY 2021 budget resolution has to be passed. This opens the door to a multi-part process:
This leaves multiple opportunities for the advancement of MBFA and BDA priorities to become law. At this time it is unclear which vehicle Congressional Leaders prefer for these provisions, however, we will provide more details in the coming days when the process becomes clearer.
If you would like to get more involved with the MBFA, please contact Brett Bolton at brettbolton@munibondsforamerica.org
Bond Dealers of America
May 25, 2021
A national green bank could be a game changer.
In the United States, financing infrastructure and clean energy projects is often contingent on the quirks of partisan dealmaking in Congress. But there may be a better way.
A green bank model has been successful in several other countries. The United Kingdom’s green bank funded much of its offshore wind boom before the government sold it in 2017. (The current UK government is exploring bringing it back.) Through Australia’s green bank, the largest in the world, the country has invested in wind, solar, and hydrogen development in addition to financing the construction of energy-efficient homes.
A green bank isn’t government grants, and it’s not tax credits — which are the primary federal drivers of clean energy development in the United States. Instead, these banks typically take the form of either a government-owned or quasi-public bank that takes a set amount of government money to launch and then leverages private money to fund different projects. And like private banks, green banks expect to be paid back.
vox.com
By Ella Nilsen
Jun 1, 2021, 10:00am EDT
Michael Zezas, Managing Director, Head of U.S. Public Policy Research and Municipal Credit Strategy, discusses the municipal bond market. Hosted by Paul Sweeney and Matt Miller.
Bloomberg Radio
May 25, 2021
We believe the municipal bond market is on the brink of major changes. The Biden administration has proposed legislation that, if passed, could meaningfully increase both taxable and tax-exempt supply in the municipal bond market. While this potential shift could cause some short-term disruption, we believe it could result in more balanced supply and demand over the medium term.
Revisiting Trump’s Tax Cuts and Jobs Act
To explain the impact of the proposed changes, we need to revisit how the Tax Cuts and Jobs Act (TCJA) of 2017 affected the municipal bond market. In our view, the TCJA significantly changed supply and demand in the municipal market in three key ways:
advisorperspectives.com
by Jim Grabovac of Loomis, Sayles & Co., 5/24/21
U.S. president Joe Biden’s $2 trillion infrastructure proposal was expected to give municipal bonds a boost, and so far, the proof is in the pudding. Data from municipal bond space show that inflows have been surging, giving exchange traded fund (ETF) investors something to cheer about.
With Biden’s proposal, local and state government bonds are expected to help fund the ambitious plan to improve the country’s infrastructure. From the traditional roads and bridges to new initiatives to bolster internet access and renewable energy sources, municipal bonds will be at the forefront of the plan’s funding.
This, in turn, is fueling investor demand for munis. Rather than hold individual debt issues, fixed income investors can get access to the municipal debt market through the ETF wrapper.
ETF TRENDS
by BEN HERNANDEZ
MAY 26, 2021
Fixed income investors are looking into municipal bonds and their related exchange traded funds this year.
Investment interest for the munis market has increased this year as rising taxes, the search for more attractive yields, and bets that states and municipalities would benefit from the new stimulus measures have all contributed to rising demand, MarketWatch reports.
According to Refinitiv Lipper data, investors funneled $41.7 billion into muni bond funds for the year through mid-May or nearly the same amount as for all of 2020, putting 2021 on pace to be one of the best years for muni funds ever.
Weekly inflows have also touched records multiple times this year, according to Lipper data, even as such funds underperformed.
Investor demand for muni bonds has been a boon for state and local governments, which still face a backlog of large spending needs from construction projects to systems modernization.
As a way to focus on the muni bond market, fixed income investors can look to the American Century Diversified Municipal Bond ETF (NYSEArca: TAXF). The American Century Diversified Municipal Bond ETF is an actively managed municipal bond fund that combines investments in thoroughly researched high yield and investment grade municipal bonds. Designed for investors seeking current income, the fund dynamically adjusts investment grade and high yield exposures based on prevailing market conditions.
Additionally, the more recently launched Avantis Core Municipal Fixed Income ETF (AVMU) invests primarily in investment grade quality municipal debt obligations from a diverse group of issuers. The actively managed fund’s investment process uses an analytical framework, including assessing securities’ expected income and capital appreciation, to seek securities with high expected returns.
ETF TRENDS
by MAX CHEN
MAY 25, 2021
Summary
Seeking Alpha
May 26, 2021
The Biden Administration is proposing significant increases to capital gains taxes, and while those levies are aimed at big earners and the wealthy, the debate is bringing renewed attention to tax-advantaged asset classes.
That group includes municipal bonds. While some municipal bonds are taxable, the bulk of the debt issued by states, cities, and counties come with tax breaks. Not only is the new tax debate stirring talk of investments with tax perks, some market observers believe it will continue to boost assets like the VanEck Vectors High Yield Muni ETF (HYD) and the VanEck Vectors Short High Yield Muni ETF (SHYD).
Municipal bonds in junk territory usually aren’t as risky as high-yield corporate counterparts and the muni space has seen limited defaults in recent years, adding to the allure of funds like HYD and SHYD. Bolstering the case for the VanEck funds is that, in today’s low-yield environment, investors want high-yield munis, but supply isn’t particularly abundant.
“For the past two to three years, demand for municipal bonds has been increasing. Moreover, certain legislation passed to limit issuance of some types of bonds as well as a generally conservative approach by states and cities to hold down spending have led to insufficient bonds being issued to meet demand,” says VanEck portfolio manager Jim Colby. “Even as demand has grown in high yield, according to fund flow data from Morningstar, MSRB new issuance supply has not been strong enough to prevent spreads from narrowing.”
More Tailwinds for High-Yield Munis
Enhancing the case for municipal bonds is the American Rescue Plan. That recently passed legislation is helping states shore up their fiscal houses as needed.
While the bill doesn’t allow states to plug gaps in public pensions, previously a source of consternation for the municipal bond market, it is providing cash for other purposes. That liquidity is reassuring some muni market participants.
In the case of SHYD, an effective duration of 4.24 years is a plus if Treasury yields continue to rise. The ETF boasts $322 million under its belt.
“SHYD seeks to provide a certain degree of protection against interest rate moves with a lower duration profile than HYD—generally from 1.25 years to 3 years. Its average credit quality, by design, is slightly higher, historically offering a higher liquidity profile,” adds Colby.
ETF TRENDS
by TOM LYDON
MAY 27, 2021
Key Takeaways
ETF Trends
by Todd Rosenbluth
May 27, 2021
There has been much speculation about the impact that COVID-19 has had on population changes across the country since the pandemic began in the early part of 2020. Most of this discussion has been focused on the ways COVID-19 has affected moves across the US—from large metropolitan areas to smaller ones, and from cities to suburbs—largely reflecting a “flight from density” and greater capabilities to telecommute.
Yet, there are other demographic components that have been impacted by the pandemic and hold important consequences for these shifts—a marked downturn in immigration to the U.S. from abroad, along with well documented reductions in the number of births and rising number of deaths. Changes in each of these components since the pandemic began have affected population growth in much of the U.S., especially in large metropolitan areas and their urban core areas.
The analysis below examines annual population changes for metropolitan area and core counties resulting from each of these demographic components based on recently released Census Bureau data showing annual population changes from July 1, 2019 to July 1, 2020.[1] As such, it provides the first comprehensive assessment of how domestic migration, international migration, and natural increase (the excess of births over deaths) impacted area population change during the year that the pandemic hit.
The Brookings Institution
by William H. Frey
May 20, 2021
A startup bond rating firm is working on quantifying how much social injustices such as police brutality could end up costing cities and states.
The Fiscal Justice Credit Rating Agency is looking to sell research and ratings to investors one year after the murder of George Floyd in Minneapolis galvanized the Black Lives Matter movement and spurred many money management firms to look more closely at social issues. The debt grader, a new arm of municipal market researcher Activest LLC, plans to start issuing ratings as soon as next month, and will have to persuade bondholders to buy such research even as cases of injustice typically don’t hurt bond prices.
But expenses linked to injustice can weigh on a city’s budget, strain its finances and erode its economic growth, exposing investors to risk they may not be getting paid for, said Ryan Bowers, a co-founder of the firm. That’s happened at least once, when Ferguson, Missouri saw its credit rating cut seven notches to junk in the fallout from the police killing of an unarmed black 18-year-old in 2014. Protests and litigation ensued, and the city had to reduce its reliance on traffic tickets and court fees to help balance its budget after entering a federal consent decree.
“These issues add up,” Bowers said in an interview. “They are not small. While a single incident won’t necessarily result in a downgrade, they do have a cumulative effect that increases the risk and volatility for bondholders and residents.”
Investor Buy-in
Convincing money managers to pay may not be easy. For many cities and states, expenses like police brutality settlements as well as fines and fees that disproportionately burden minority communities may represent a small portion of annual budgets or may not be fully understood.
Bonds and debt sellers rarely take a hit when these problems emerge. When Minneapolis sold bonds in September, for example, months after a city police officer killed Floyd and riots had erupted in its streets, it saw borrowing costs still below the levels it paid in 2019.
And getting investors to pay for analysis in general has proven difficult since at least 2003, when Eliot Spitzer tried to tame conflicts in brokerage research, and is only getting harder after European rules have forced brokerages to separate trading and research costs.
But investors are starting to pay more attention to social issues and their financial implications, both for specialized portfolios of socially responsible investments and for their broader holdings. The major bond grading firms are further along with their efforts to research environmental risks than they are with racial or social issues, said Eric Glass, a portfolio manager and lead on the municipal impact investment policy group for AllianceBernstein LP, which has about $52 billion of municipal assets under management.
Firms such as the Fiscal Justice Credit Rating Agency may be able to fill that niche, according to Glass.
“There’s going to be a class of investor that’s going to want this information and seek it out,” Glass said.
Emerging Issue
Activest was started in 2016 by Bowers and Napoleon Wallace, a former high-yield bond trader at Wells Fargo. They started the firm in wake of their analysis on Ferguson, Missouri. In fall 2020, Activest worked to advise 29 city mayors and budget directors on equitable Covid-19 fiscal recovery efforts with Bloomberg Philanthropies, the charitable organization founded by Michael Bloomberg, founder and majority owner of Bloomberg News parent company Bloomberg LP.
Data and other information about potential social justice problems at cities and states can be hard to come by, while those making budget decisions may not even be thinking about these issues, said Witold Henisz, a professor of management at the University of Pennsylvania’s Wharton School. Henisz has been working on a project analyzing the impact of environment, social and governance issues on the municipal bond market.
“This issue is still a new and emerging one in the muni market,” Henisz said. “It’s not as developed as ESG issues are in equities or corporate bonds.”
Injustice can be costly, according to Activest. Municipalities, for example, pay $1.5 billion a year for police misconduct settlements, according to the firm. People of color end up paying around $7 billion in extra fines and fees because of issues including unequal policing, Chelsea McDaniel, a senior fellow with Washington, D.C.-based Activest said during a congressional hearing on April 28. That revenue could disappear if governments embrace more equitable policies.
‘Regressive Expenses’
For decades, municipal bonds have helped exacerbate inequality, according to Destin Jenkins, an assistant professor of history at the University of Chicago and author of “The Bonds of Inequality: Debt and the Making of the American City.”
“Since racism is structural, then racial, social, and economic justice demand structural solutions across all sectors and markets, including the field of municipal research and the municipal bond market,” Jenkins said in an email.
Now, some in the municipal market are paying more attention. S&P Global Ratings is working to make social and racial justice a bigger part of its efforts to evaluate cities’ and states’ credit profiles, with issuers volunteering more information and its analysts asking more questions, said Nora Wittstruck, the ESG lead for S&P’s U.S. Public Finance group.
The firm did cut the outlook for the city of Minneapolis to negative from stable in September, signaling there’s at least a one-in-three chance of a downgrade from its AAA credit rating in the next one to two years. S&P cited factors including settlement payments related to George Floyd’s death, expenditures for police reforms, and a budget gap created by Covid-19, for example, she said.
Credit Negative
Intense social unrest is a negative for credit, according to an October report from Moody’s Investors Service, especially if it leads to long-term costs, tax-base declines or economic disruption. That said, such incidents over the past few decades have generally had a “muted credit impact,” according to the report.
Some local government officials want bond investors and bond graders to pay more attention to social injustice as well. Philadelphia Controller Rebecca Rhynhart and other municipal finance professionals and Pennsylvania elected officials sent a letter in January to S&P, Moody’s and Fitch Ratings, calling on them to look more closely at how equitable city and state revenue collection policies are and how much they rely on fines and fees.
Even if cities’ and states’ expenses from injustice aren’t high in the near term, they can sting in the long run, said Activest’s Bowers.
“These fiscal justice issues have very long tails,” Bowers said. He said that information about such issues is “important for investors who are taking on uncompensated risk.”
Bloomberg Equality
By Shruti Singh and Saijel Kishan
May 19, 2021, 8:54 AM MDT
Fitch Ratings-New York/London-21 May 2021: Fitch Ratings’ new ESG Sector Discovery Tool for Public Finance and Global Infrastructure provides a top-down view of the credit relevance and materiality of ESG issues across regions and sub-sectors.
The tool shows the distribution of Fitch’s ESG Relevance Scores (ESG.RS) for Global Infrastructure and Project Finance, International Public Finance (IPF) Local and Regional Governments (LRG) and Government-Related Entities (GRE), US Public Finance (USPF) Revenue-Supported issuers (Revenue), and USPF Tax-Supported issuers (Tax) with the ability to see changes in ESG scores between 4Q19 and 4Q20.
It highlights trends and allows users to visualise where ESG issues are affecting portfolios. For example, issuers were overwhelmingly assigned a score of ‘3’ for “Biodiversity and Natural Resources Management’ but there are increased exposures for issuers in the US, Russia and Argentina, with several entities scored with a ‘4’ and one with a ‘5’. The elevated scores are mainly due to the impact of natural resources management on the economy and governmental operations.
‘Human Rights, Community Relations, Access & Affordability’ shows increased impacts for USPF Revenue where eight entities scored a ‘4’ and one a ‘5’. These were led by product affordability and access concerns, which has a significant rating impact.
‘Rule of Law, Institutional & Regulatory Quality, Control of Corruption’ in USPF Tax had seven entities scored a ‘4’ due to governmental effectiveness concerns surrounding budget management decisions that created financial strains. Three entities had a score of ‘5’ that was due to events that also impacted capital management.
Fitch recently published a special report entitled ‘Where ESG Matters in U.S. Public Finance’ and expects to follow this with similar reports for the Global Infrastructure and International Public Finance groups.
The report, ‘Public Finance ESG Sector Discovery Tool’, is available at fitchratings.com.
Contact:
Marcy Block
Senior Director, Sustainable Finance
300 W. 57th Street, New York, NY 10019
+1 212 908 0239
Justin Sloggett
Director, Sustainable Finance
+44 20 3530 2671
Kwok Wan
Associate Director, Sustainable Finance
+44 20 3530 1593
Media Relations: Athos Larkou, London, Tel: +44 20 3530 1549, Email: athos.larkou@thefitchgroup.com
Additional information is available on www.fitchratings.com
Background
The environmental, social, and governance (ESG) movement has been newly adapted as a best practice for disclosure in the municipal market. ESG encompasses many facets of investing, including investments focused on sustainability, such as a green bond, or social improvement, such as a social bond. ESG provides an expansive framework for viewing both risks and opportunities. It may be utilized as a tool for consideration by issuers, rating agencies, and investors to view existing risk factors through a modern lens.
Green Bonds and Social Bonds
Investors’ views of ESG as a broader social movement are represented by the targeted funding of projects that align with specific ESG goals through the emergence and popularization of bond designations, primarily green bonds and social bonds, which are based upon intended project impact. Investors are attracted to these specifically designated bonds because they allow them to better target the impact of their financial investment based upon their personal beliefs and interests. While no formal process for issuing such green or social bonds currently exists, the market has established standards, as published by the International Capital Market Association (ICMA).[1] These standards are fourfold:
Additionally, ICMA recommends external review to verify the issuer’s green or social claims through second opinion, verification, certification, and/or scoring or rating as a green or social bond.
ESG Disclosure as a Best Practice
According to Moody’s, the “ability to address ESG risk will increasingly differentiate credit quality after [the COVID-19] pandemic.”[2] The rating agency discusses how in a post-pandemic world, limited resources and an increase for services will challenge the public issuer’s ability to operate while maintaining a strong financial outlook. Climate risks, if not addressed and properly prepared for, will likely affect credit ratings in the long term. Issuers need to consider which costs may be deferred and which are most critical, as well as which resources are most critical to ensure disaster preparedness due to increased climate risks, such as extreme weather and increased flooding. The pandemic forced social inequities into public view, especially healthcare and racial inequities. Further, demographic trends may play a role in increasing demands upon the healthcare system, while also potentially reducing revenue for higher education institutions. Such social factors are likely to increase the pressure on governments for more public services and intervention amidst sinking revenues and strained budgets. Governance is key to proper budgeting and financial planning, as well as a mechanism for addressing such climate and social issues.
Recent publications by both the Securities and Exchange Commission (SEC) and the Government Finance Officers Association (GFOA) have signaled requirements for ESG disclosures. On March 8, 2021, the GFOA adopted ESG disclosures as a best practice for inclusion in municipal bond offering documents.[3] The GFOA recommends three elements in crafting a suitable ESG disclosure:
“(1) vulnerability assessment, or recognition of ESG related risks, (2) plans/preparedness for mitigating such risks, and (3) progress updates, including impacts of recent ESG elements/events and how they shape future response.”[4]
In a March 11 public statement, Acting Director of the SEC’s Division of Corporation Finance John Coates said, “Going forward, I believe SEC policy on ESG disclosures will need to be both adaptive and innovative. We can and should continue to adapt existing rules and standards to the realities of climate risk. . . We will also need to be open to and supportive of innovation – in both institutions and policies on the content, format and process for developing ESG disclosures.”[5] As ESG grows in significance in both the corporate and municipal worlds, municipal issuers can look to guidance from public bodies, as well as corporate issuers and filings.
This burgeoning trend in disclosure has not been widely incorporated in municipal offering documents. As such, issuers may struggle to determine the materiality of ESG-related issues and disclosures. The GFOA acknowledges such disclosure should be considered a case-by-case basis based on the characteristics of the issuer, noting: “The key for municipal issuers is to determine which ESG factors are material to their own credit profile and relevant to investors.”[6] The GFOA does not provide any standard disclosure language.
Takeaways
Bond markets will likely continue to see a growth in various ESG-targeted bonds, as well as a continued discourse related to ESG issues. Municipal issuers should begin to consider ESG disclosures, if material, as part of their offering documents for the project to be financed, and, more broadly, the ESG factors related to the municipality. Within the ESG risk analysis framework, municipalities and other public issuers must determine which ESG risks or opportunities are material, providing necessary disclosure, but also a mechanism for fostering financial resiliency.
Frost Brown Todd LLC
by Emma H. Mulvaney
May 20, 2021
________________________________________________________
[1] Green Bond Principles, International Capital Market Association, June 2018; Social Bond Principles, International Capital Market Association, June 2020
[2] Sector In-Depth – Public-Finance-US – 30Oct20.pdf (cdfa.net)
[3] https://www.gfoa.org/materials/esg-disclosure (While the GFOA recommends including ESG disclosure information as part of primary offering documents, it also notes that material factors are already required to be included in such documents).
[4] GFOA, ESG Considerations for Governmental Issuers
[6] GFOA, ESG Considerations for Governmental Issuers
In a decision with important implications for climate change tort cases, the US Supreme Court held that federal courts of appeal can consider all potential grounds for federal jurisdiction in certain appeals of district court remand orders.
Since 2017, the companies defending climate change tort suits brought by local municipalities have removed those cases to federal court. Every district court has ordered that the cases be remanded to state court, and every court of appeals has held that it had limited authority to review those remand orders. In a 7-1 decision on May 17, the US Supreme Court rejected the appellate courts’ view of their jurisdiction. The Court held that the courts of appeals must consider every argument the defendants raised in support of removal. Though the decision is a technical one about the scope of appellate review, it sets the stage for many circuit courts to weigh in on the critical question whether these cases must be litigated in state or federal court and the related question whether the municipalities’ claims arise under state or federal law.
Background
In 2018, the City of Baltimore filed suit against 23 oil and gas companies in Maryland state court. Baltimore alleged that the defendants had improperly concealed the environmental harms of fossil fuels. The defendants removed the case to federal court on several grounds. The defendants argued that Baltimore’s claims, though framed as state-law claims, actually arise under federal law; the defendants also argued that Baltimore’s claims implicated the defendants’ work for the federal government and are removable under the federal-officer removal statute, 28 U.S.C. § 1442.
Baltimore moved to remand the case to Maryland court, and the district court rejected all of the defendants’ arguments in support of federal jurisdiction. The defendants appealed to the US Court of Appeals for the Fourth Circuit. By statute, remand orders are normally unappealable, but the statute expressly allows for an appeal if a case is removed on federal-officer grounds. See 28 U.S.C. § 1447(d). The Fourth Circuit interpreted the removal statute as giving it jurisdiction to consider only the defendants’ federal-officer ground for removal, which the Fourth Circuit held lacked merit. The Fourth Circuit therefore refused to consider whether Baltimore’s case arose under federal law.
The Opinion
The Supreme Court reversed. Writing for a 7-1 majority, Justice Neil Gorsuch held that the plain language of the removal statute authorizes appellate review of the entire remand order as long as the federal-officer statute is one ground for removal. Justice Gorsuch rejected Baltimore’s contention that this result will incentivize parties to add frivolous federal-officer grounds for removal arguments, because litigants can be sanctioned for frivolous claims or ordered to pay the costs of removal proceedings. Accordingly, because the removal statute requires appellate review of “an order remanding a case to state court,” the Supreme Court remanded for the Fourth Circuit to address all of the arguments the defendants raised in support of federal jurisdiction.
Implications
The Supreme Court’s ruling sets the table for the regional courts of appeals to decide a question critical to the pending climate change tort suits—whether the municipalities’ claims, though nominally based on state law, actually arise under federal law. The defendants have long contended that climate change is inherently a subject of federal regulation and that, therefore, the municipalities’ claims arise either in whole or in part under federal law.
The stakes are high because, if federal jurisdiction exists, it is more likely that the municipalities’ claims will ultimately fail. New York City’s case exemplifies this. New York filed its climate change claims in federal court, obviating the jurisdictional questions pending in other courts. After the Southern District of New York held that New York’s claims are preempted on the merits, the Second Circuit affirmed.
Oakland’s case exemplifies the other side and confirms the significance of the threshold question of federal jurisdiction. Oakland’s case was removed to the Northern District of California. That court did not remand because it found that the city’s claims arose under federal law and, similar to the Southern District of New York, dismissed the claims as preempted. On appeal, the Ninth Circuit did not address preemption because it instead held that Oakland’s claims did not arise under federal law and should not have been removed in the first place.
Now that all the circuit courts cannot avoid the issue, there is a greater likelihood that the courts of appeals will split over the right answer to the jurisdictional question and, therefore, a greater likelihood that one of the municipal climate-change cases ends up back at the Supreme Court in one or two years.
Morgan, Lewis & Bockius LLP – Bryan M. Killian and Douglas A. Hastings
May 21 2021
Fitch Ratings – New York – 19 May 2021: Fitch Ratings has affirmed the ratings for the following standalone grant anticipation revenue vehicle (GARVEE) bonds:
–Florida Department of Transportation (FL) at ‘A+’;
–Georgia State Road and Tollway Authority at ‘A+’;
–Idaho Housing and Finance Association at ‘A+’;
–Kentucky Asset Liability Commission at ‘A+’;
–Maine Municipal Bond Bank at ‘A+’;
–State of North Carolina at ‘A+’;
–State of Ohio at ‘A+’.
The Rating Outlook on all of the bonds is Stable.
Fitch Ratings also affirmed the ratings for the New Jersey Transportation Trust Fund Authority’s (NJTTFA) GARVEE bonds at ‘BBB+’. The Outlook on NJTTFA’s bonds remains Negative.
RATING RATIONALE
Ratings for standalone GARVEE bonds are derived in large part from the nature of the federal surface transportation funding program (the program). While there is a projected shortfall in the current revenue generating ability of the program when compared with expected outlays, there has traditionally been a short- to medium-term legislative solution to meet funding needs. The program has proven to be an essential investment for the federal government with funding disseminated in a formulaic nature across states. The ratings further reflect the broad revenue pledge of all of the Department of Transportation’s (DOT) or Transit Agency’s federal receipts and leverage covenants that help to mitigate the risk of diminished federal transportation receipts. To a lesser extent, the ratings also consider other resources and financial flexibility available to specific DOTs or Transit Agencies that provide financial cushion to the extent there is a delay in federal funding. In instances where state appropriation policies may affect the distribution of federally received funds, standalone GARVEE ratings are capped below the state rating to reflect appropriation risk.
With the upcoming expiration of the FAST Act at the end of federal fiscal year (FFY) 2021, Fitch will monitor measures taken by Congress that could impact the program, including any multi-year reauthorizing acts or forms of interim funding. Although there is no assurance a reauthorization will pass, the possibility that Congress does not reauthorize the program has historically been remote. Additionally, a reduction in overall vehicle-miles-travelled (VMT) as result of the coronavirus pandemic is likely to reduce fuel tax revenues in the Highway Trust Fund (HTF) for 2021. While there may be competing policy and funding priorities placed on the federal government as a result of the pandemic, Fitch believes that the inherent essentiality of the program will result in supportive funding levels in the future.
KEY RATING DRIVERS
Dependence on General Fund Transfers (Nature of the Federal Program: Midrange)
In Fitch’s view, what was once a formula-driven program funded on a multiyear basis has now morphed into a program where future policy is less certain, and funding levels are less predictable. The Highway Trust Fund (HTF) has been supported by short-term funding authorizations relying upon general fund transfers, which do not address the long-term disparity between revenues and outlays. The essential nature of the investment in addition to the reliable formulaic distribution of funds underpins the ratings on GARVEE bonds backed by future federal receipts from the HTF.
Significant Funding Flexibility – Structural Features: Stronger (Highway GARVEEs)
The standalone highway GARVEE bonds in Fitch’s portfolio benefit from a first lien on all legally available federal transportation funding. In the case of reimbursement GARVEE bonds, this is accomplished by a pledge of all legally available federal transportation funds with early set-aside. Alternatively, in the case of direct-pay GARVEEs the broad pledge is accomplished through a covenant to de-obligate and redirect federal funds. In addition, highway GARVEEs benefit from leverage limitations of at least 3x, which provides the ability to retain sufficient flexibility generally at the ‘A+’ level in the event of a decline in federal revenues.
Reduced Leverage Test Provisions – Structural Features: Weaker (Transit GARVEEs)
The transit GARVEEs in Fitch’s portfolio benefit from a broad pledge of federal transportation funding. However, in contrast to highway GARVEEs, the transit GARVEEs rated by Fitch have materially lower additional bonds test (ABT) requirements of around 1.5x and thus have less protection against declines in federal program revenues should agencies fully lever up to their ABT.
Resources of the DOT/Transit Agency:
In the event of a funding shortfall or a delay in federal funding due to a lapse in authorization the financial resources of the DOT and Transit Agency can provide financial cushion to meet GARVEE payment obligations. Fitch’s assessment of the resources available is derived from several factors including the DOT/Transit Agency’s amount of working capital, size of their capital program, access to liquidity, and their sources of funding. Assessments of this for credits in the portfolio range from stronger, midrange, to weaker; however, it is not the primary driver of standalone GARVEE ratings.
PEER GROUP
Fitch’s standalone highway GARVEE bonds, all of which are in the ‘A’ category, tend to have strong additional leverage limitations of at least 3.0x current receipts to pay debt service. In contrast, standalone transit GARVEE bonds have materially lower leverage limitations of 1.5x, giving them less financial flexibility to protect against declines in federal program revenues, and are thus rated ‘BBB’. Similar to other highway GARVEEs, NJTTFA’s rating of ‘BBB+’ reflects appropriation risk, which is lower given the state of New Jersey’s comparatively weaker Issuer Default Rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive/negative rating action/upgrade/downgrade:
With the upcoming expiration of the FAST Act at the end of FFY 2021, a new funding proposal that results in a change in Fitch’s view of the nature of the federal program to Weaker or Stronger from Midrange could lead to a rating downgrade, or upgrade, respectively.
–For the case of NJTTFA, a change in Fitch’s view of the state of New Jersey’s IDR.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
CREDIT UPDATE
HTF expenditures have been exceeding revenues over the past decade. The longer-term structural imbalance of the HTF was not addressed by the FAST Act passed in early December 2015, instead relying on general fund and Federal Reserve transfers to keep the program afloat through FFY 2020. On Sept. 30, 2020, Congress reached agreement on a Continuing Resolution (CR) to provide current appropriations through Dec. 11, 2020 and a one-year extension of the FAST Act keeping the program afloat for an additional year; however, the extension does not address the longer-term shortfall. Although continued fund transfers have underscored the relative importance of transportation funding within the federal budget, they do not guarantee future commitments. The current administration seeks to invest in infrastructure, but funding remains unclear and difficult to predict beyond FFY 2021. However, it is Fitch’s view that significant changes are needed either on the expenditure side or on the revenue side (potentially through an increase in the motor fuel tax, additional tax revenues or surcharges at federal and state levels, increased toll usage, expanded user fees, or some other alternative revenue source) to put the program on a sustainable trajectory.
Fitch acknowledges the upcoming expiration of the FAST Act at the end of FFY 2021, and continues to monitor any new developments and potential legislative actions that could affect the program. Although there is no assurance a reauthorization will pass, the possibility that Congress does not reauthorize the program has historically been remote. Though highly tentative at this point, lawmakers have proposed potential solutions, which include various methods to raise the motor fuel tax, charging fees related to VMT, applying tolls to federal-aid highway projects, and/or possibly cutting outlays for certain projects.
Fitch also recognizes there will continue to be competing policy and funding priorities placed on the federal government as result of the coronavirus pandemic and the trajectory of recovery efforts. This potentially makes funding decisions regarding the HTF more difficult and Congress may choose to reduce federal highway spending or postpone a longer-term commitment to stabilizing HTF funding. Given the evolving nature of the coronavirus, it is important to note that, in most cases, GARVEE bonds benefit from the broad revenue pledge of all of a department of transportation’s or transit agency’s federal receipts. GARVEE structures also tend to have covenants to obligate first dollars in that pledge to mitigate the risk of diminished federal transportation receipts. Fitch’s analysis of the GARVEE portfolio indicates an ability to withstand a material decline in federal funding and still maintain adequate financial metrics.
FINANCIAL ANALYSIS
Fitch performed an analysis of the federal grant program that assumes the latest CBO projection for outlays, translating into a 2.4% compound annual growth rate (CAGR) in HTF spending through 2031. HTF revenues are projected to grow at a CAGR of 1.5% for the same period. Under such a scenario, the annual gap between HTF spending and receipts averages roughly $19.5 billion from 2022-2031. Under the scenario above, the Federal Highway Administration (FHWA) would have to cut outlays to the states on average by 30% from fiscal 2022 through fiscal 2031 in order to match the revenues coming into the HTF.
Fitch’s base case utilizes reasonable sponsor projections and assumes federal receipts remain flat at the latest available projected year, or otherwise assumes receipts are flat at the 2020 level, which produces strong maximum annual debt service (MADS) coverage across highway and transit GARVEEs.
Fitch’s rating case on all standalone GARVEEs assumes federal transportation spending is cut to keep the HTF solvent (i.e. outflows match inflows). Fitch applied a permanent 30% haircut to receipts beginning in 2022 following expiration of the FAST Act, based on the average required annual reduction mentioned above, and holds receipts flat at that level. A haircut of this size would still result in MADS coverage across the board in excess of 2x for highway GARVEEs. The same reduction for transit GARVEEs would result in similar MADS coverage levels in the mid-2x range.
Fitch also ran an additional one-time breakeven scenario for all GARVEEs. Assuming a permanent reduction in 2022 followed by zero growth, federal receipts for debt service could withstand declines ranging from a minimum of 71% to upwards of 95%, and still meet 1.0x coverage through the life of the debt. The analyses also include the burden of future debt issuances and associated debt service, if any, showing high resilience should a potential decline or lapse in federal funding occur
Should state DOTs and transit agencies fully leverage their GARVEE programs up to their ABT, debt service coverage ratios on GARVEEs could drop significantly lower than current levels. Given their narrower ABT requirements, standalone transit GARVEEs are more susceptible to significant declines or delays in federal funding.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg
Key Takeaways
Continue reading.
Fitch Ratings-New York-19 May 2021: Recently updated cruise guidance from the Centers for Disease Control and Prevention (CDC) provides a more concrete path to potentially resuming some US cruises in July, which would help stabilize cruise port financial performance and ratings, Fitch Ratings says. Port revenues from cruise operations declined sharply over the last year in the US, with cruise ports recovery at a standstill.
Cruise ports have not been collecting revenues from normally stable cruise operations for over a year now. While other leisure and travel sectors started to recover from coronavirus-driven slumps, the CDC moratorium on cruises prevents a recovery in the US cruise sector. Liquidity and diversification from cargo revenues provided some cash flow relief but protracted delays in the resumption of cruising add pressure to port performance the longer they continue.
Should cruise activity not resume until July or later, port revenue streams from cruise-related activity will remain stalled into a second cruising season. Ports with diversified operations are under less pressure, as cargo port operations performed strongly through the pandemic.
The extensive consideration that municipal finance tools are getting as Congress considers infrastructure legislation is producing growing optimism among public finance and local government groups.
Lawmakers have voiced bipartisan and bicameral support for a revival of direct-pay Build America Bonds, reinstating tax-exempt advance refundings and raising the limit on tax-exempt bank-qualified debt to $30 million for nonprofit borrowers.
The Biden administration is scheduled to weigh in on May 28 with its detailed tax proposals as part of its 2022 budget.
“My interpretation is that if they didn’t have a pay-for problem, then they would have bipartisan agreement,” said Charles Samuels of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities.
Brett Bolton, spokesman for the Bond Dealers of America and Municipal Bonds for America, said both groups remain optimistic Congress can take robust action on infrastructure.
“We hope that Congress and the administration are able to work through the gridlock and find a pay-for solution,” Bolton said. “We will continue to work with our partners on the Hill, in the administration and within the issuer community.”
The municipal finance tools such as reinstatement of tax-exempt advance refunding represent small costs next to the trillions that have been spent on COVID relief and other emergency spending since last year.
“Relative to these mega packages that have been passed in the last couple of years, all of a sudden something like advance refundings don’t look that big,” said Samuels. “It all becomes sort of relative.”
Reinstatement of tax-exempt advance refunding of bonds appears to have the broadest support among lawmakers because of its nearly universal impact on state and local issuers as well as nonprofits.
“The talks are continuing in a bipartisan fashion which, of course, is positive,” said Eryn Hurley, associate legislative director for the National Association of Counties. “There is some momentum. And the Biden administration did put forward a plan to pay for it.”
Hurley said NACo has seen “a lot of great provisions” on the spending side of the so-called skinny budget outline released earlier by the administration and remains optimistic about the full budget and tax proposals that will be released next week.
Among some of the provisions in the skinny budget NACo has highlighted to its members are:
A $20 billion increase in Department of Education Title I grants to high poverty schools; a $2.5 billion increase in special education funding through the Individuals with Disabilities in Education Act (IDEA), a $1.6 billion increase in the Community Mental Health Services Block Grant; a $1.5 billion increase in the Child Care and Development Block Grant; and a $65 million increase for the Reconnect Program which provides a down payment for grants and a $500 million increase for the Home Investment Partnerships (HOME) program.
But the Biden administration has not yet officially weighed in on the tax provisions that could spur infrastructure investments such as increasing the $15 billion limit on transportation-related private activity bonds.
Transportation Secretary Peter Buttigieg referred to that cap Thursday while testifying before the Senate Banking Committee.
“We do think there’s a lot more potential here and would welcome opportunities to work with you on building that out,” Buttigieg said in response to a question from Sen. Bill Hagerty, R-Tenn.
Republican Rep. Devin Nunes of California also suggested raising the $15 billion cap during a House Ways and Means Committee hearing a day earlier.
National Association of Bond Lawyers President Teri Guarnaccia, a partner at Ballard Spahr, said NABL has been “encouraged by the level of attention given to municipal market tools at both the House and Senate hearings.”
?With additional assistance from the administration and Congress, these tools would be an integral part of the infrastructure package under development by Congress,? Guarnaccia said.
Guarnaccia, Samuels and NACo’s spokeswoman said that if the Biden administration also advocates for enactment of these municipal finance tools, it will cement the likelihood of them becoming part of any infrastructure legislation that is enacted.
By Brian Tumulty
BY SOURCEMEDIA | MUNICIPAL | 05/20/21 02:31 PM EDT
Democrats and Republicans in Congress are in favor of reviving an Obama-era bond program for states and cities to help spur increased spending on infrastructure projects.
Senator Ron Wyden, a Democrat from Oregon who chairs the Senate Finance committee, said at a hearing of the panel Tuesday that there is bipartisan support for creating a new borrowing program akin to Build America Bonds as President Joe Biden seeks to enact a major infrastructure spending plan. The federal government paid some of the interest bill for such securities under a temporary program enacted after the last recession.
“We’re only 19 minutes into this morning hearing, and we have already had an outbreak of major bipartisanship around Build America Bonds,” said Wyden, who advocated for the creation of the financing tool in 2007.
The hearing on infrastructure financing is promising sign for Wall Street and local government groups that have pushed for the revival of a directly subsidized bond program.
The Build America Bonds program unleashed a wave of debt sales by municipalities, with more than $180 billion of the securities sold before the program lapsed at the end of 2010, according to data compiled by Bloomberg. The securities were a taxable alternative to traditional tax-exempt bonds, which both took the pressure off the municipal-debt market and allowed underwriters to market them to overseas investors and others who don’t typically buy state and local government debt.
In April, a group of Senators including Roger Wicker, a Republican from Mississippi, and Michael Bennet, a Democrat from Colorado, reintroduced a bill that would create similar securities called American Infrastructure Bonds. In the House, Representative Terri Sewell, a Democrat from Alabama, also introduced a bill that would create the tool.
State and local lobbying groups have also pushed for the return of tax-exempt advance refundings, a key debt refinancing tool that was curbed as part of the GOP’s 2017 tax overhaul. Senator Debbie Stabenow, a Democrat from Michigan, said during the hearing that she’d like to see that refinancing tool included in the next infrastructure package.
Bennet, a sponsor of the American Infrastructure Bonds bill, said at the hearing that the comments on Build America Bonds gave him “hope.”
Bloomberg Politics
By Amanda Albright and Kaustuv Basu
May 18, 2021, 10:31 AM MDT
Joe Mysak, Bloomberg Brief: Municipal Market Editor, talks the latest on the municipal bond market. Hosted by Paul Sweeney and Matt Miller.
Bloomberg Radio
May 21, 2021
The muni market is already ‘flooded with demand,’ says Matt Fabian, partner with Municipal Market Analytics
Washington lawmakers considering President Joe Biden’s $2.3 trillion infrastructure package are interested in reviving a program born out of the response to the last recession, even as the state and local governments that it’s meant to help are much more cool on the idea.
The Build America Bond program, created as part of the 2009 American Recovery and Reinvestment Act, allowed municipal entities to issue debt with a federal subsidy. Over nearly two years, about $181 billion of bonds were sold for infrastructure needs, ranging from storm-water capital improvements in the city of Tampa, to building new school buildings in Omaha, Neb.
Unlike most of the $3.9 trillion municipal market, so-called BABs were taxable. That was a positive, because it made muni bonds attractive to a much wider range of investors, said Eric Kim, head of U.S. state government ratings for Fitch. Meanwhile, the federal subsidy –– 35% of the interest cost –– was meant to help state and local governments coming out of a grinding recession finance their projects.
“Democrats and Republicans are in agreement about bringing back the financing tool of tax credit bonds a la Build America Bonds,” wrote Washington-based Beacon Policy Advisors in a May 19 note. “It’s something that is supported by both Senate Finance Committee Chair Ron Wyden (D-Ore.) and Ranking Member Mike Crapo (R-Idaho) and is also a major priority for House Ways and Means Committee Chair Richard Neal (D-Mass.).”
But municipal-market participants are less enthusiastic.
“State and local issuers are deeply ambivalent about the BABs program,” said Matt Fabian, a partner with Municipal Market Analytics. “It’s being talked about like it’s the core of the infrastructure program, but issuers in general don’t care because demand for tax-exempt bonds is now the strongest it’s ever been,” he said.
“We are flooded with demand,” Fabian said.
The yield on the S&P Municipal Bond General Obligation Index is currently about 1.93%, among the lowest on record back to 2009. Bond yields and prices move in opposite directions.
While Washington lawmakers may believe that a lower interest rate would help issuers, thereby boosting the amount of overall spending on infrastructure, MMA’s calculations show the federal subsidy would have to be at least as high as 50% to make BAB issuance worth it.
More to the point, Fabian told MarketWatch, “state and local infrastructure spending is a zero-sum game.” Governments only have so much in revenues to pay back bonds, no matter how low the interest rate.”
The legacy of the BABs program also suffers from a self-inflicted wound. Sequestration, the automatic budget cuts that kicked in when Congress couldn’t agree on a budget in 2012, also reduced the federal subsidies governments had relied on when they issued the debt.
“There will definitely be some hesitancy on the part of governments to participate in a program that has any kind of ongoing subsidy from the federal government because of what happened with sequestration,” Kim said.
Ratings agencies like Fitch are watching the growing backlog of infrastructure needs for states and locals, Kim said in an interview, and it’s clear governments will need to think creatively about solutions, whether by joining with the private sector, requesting outright grants from the federal government, or even raising taxes on their own.
MarketWatch
By Andrea Riquier
May 20, 2021
When hospitals’ leaders come under scrutiny, their patients feel the pain, too.
Facilities whose lenders underwent regulatory stress tests were more likely to readmit patients and forgo some timely or needed treatments, according to a new paper dramatically titled “Merchants of Death: The Effect of Credit Supply Shocks on Hospital Outcomes.”
The study, part of a National Bureau of Economic Research working paper series, highlights how tighter credit to hospitals may be an unintended consequence of the stress tests, which were created to prevent another runaway bout of bank failures and bailouts. It also shows how precarious hospital financing can be.
These facilities carry “a substantial amount of debt,” the authors wrote, and are “particularly risky borrowers” with greater-than-average yields and higher municipal-bond defaults. That means they’re a logical place for lenders to cut back if they’re seeking to improve their credit profile.
“Affected hospitals exhibit significantly lower attentiveness in providing timely and effective treatment and procedures, and are rated substantially lower in patient satisfaction,” according to the report. Hospitals in that group had a “significant increase” in readmitting patients within a month after discharge, considered a key quality gauge, and in deaths from pneumonia, heart attacks and heart failure.
AHA Balks
The study examined 3,658 hospitals from 2010 to 2016. Of those, 537 hospitals had lenders undergoing stress tests in the period. They held loans worth an average of $737 million, with maturities of just under five years.
The American Hospital Association called the study “dramatically oversimplified” and “riddled with wild assumptions” that don’t reflect the complexity of hospital financing and operations.
“Hospitals have continued to provide increasing amounts of uncompensated and unreimbursed care as well as billions of dollars in community benefits over the study period,” Aaron Wesolowski, AHA’s vice president of policy research, analytics and strategy, said in an emailed statement, “showing that despite the existence of financial stress tests, hospitals and health systems have continued to invest heavily in caring for the communities and patients they serve.”
“We don’t really have a theoretical model” around hospital financing or profit maximizing, said Pinar Karaca-Mandic of the University of Minnesota, who wrote the study with Minnesota colleagues Cyrus Aghamolla and Richard Thakor and Xuelin Li of the University of South Carolina.
The stress tests on hospital lenders “are associated with these changes in the type of care that hospitals deliver,” Karaca-Mandic said in an interview with her co-authors.
Hospitals in the study responded to lenders curtailing or raising rates on debt by working to boost revenue while scaling back less-profitable services such as intensive care. That translated into an additional 367 patients per year, on average, and an average revenue increase of about $1,701 per patient from either increased fees or higher collections.
The study’s conclusions rang true to Martin McGahan, managing director for Alvarez & Marsal’s healthcare industry group.
“Health care is a business,” McGahan said. “There is no doubt quality of care is impacted by how you spend your money, what your access to capital is, what your cost of capital is.”
The 2010 Dodd-Frank Act required banks to undergo regular examinations to ensure they have enough access to capital to withstand shocks like the mortgage meltdown that led to the Great Recession.
U.S. hospitals are emerging from the cataclysm of the pandemic dealing with higher safety expenses and fatigued workers.
“Hospitals are facing even smaller profit margins now and are getting more and more financially constrained,” Thakor said. “Our view is that these credit market shocks would be even stronger and more relevant for the hospitals in the post pandemic period.”
Bloomberg Markets
By Lauren Coleman-Lochner
May 18, 2021, 6:25 AM MDT
— With assistance by John Tozzi, and Dawn McCarty
A new data tool offers a detailed look at how real estate and business loans and other investments vary widely across the country and sheds light on the inequities poorer and minority neighborhoods face.
Look across the U.S. and the amount of capital from sources like home mortgages, business loans and federal grants varies widely from state to state and city to city. Within each place, there are further gaps at the neighborhood level, with poorer and minority communities often seeing less investment flow their way.
A new tool the Urban Institute released Thursday provides perspective on how these differences look, with easy-to-view data for states and Washington, D.C., and the nation’s 250 largest cities and counties.
The tool provides information on the overall amounts of investment each place receives. It also features racial and income equity metrics. These gauge how evenly investments are distributed across neighborhoods that have different racial and ethnic demographics or levels of poverty.
There are also scores for specific types of capital investments, such as single-family home loans, small business loans, federal funding and “mission lending” investments made by “socially motivated” entities like community development financial institutions.
The statistics that the tool produces are percentile scores that show how each place stacks up against its peers in different categories.
Selecting Seattle, for instance, reveals that the city ranks in the 91st percentile for overall investment. In other words, it’s attracting a large amount of capital compared to other cities. But on racial equity, or how evenly capital is distributed across Seattle’s neighborhoods, the city scores in the 34th percentile, or almost in the bottom third among its peers.
Looking at the more specific categories shows Seattle in the 7th percentile when it comes to how evenly small business loans are distributed across neighborhoods with different racial and ethnic demographics. The city also ranks low (in the 5th percentile) for how evenly multifamily housing investments are spread across neighborhoods with different poverty levels.
Brett Theodos, a senior fellow and director of the Community Economic Development Hub at the Urban Institute, is one of the researchers who helped build the tool. He says it’s valuable because it can help provide insights into both the overall share of capital investment that each state, city or county is receiving and also how equitably the shares are carved up in each place.
“It can be hard, absent these comparisons, to know if Milwaukee is doing better or worse on a scaled measure than Chicago or Cleveland or Detroit,” Theodos said.
He noted how some places might be strong in certain categories, like multifamily housing investment and weak in others, like small business lending. “It gives a level of granularity.”
Things to Consider
There are some caveats to keep in mind with the statistics. One is that investment in each place is analyzed on a per household, housing unit or employee basis. So while New York City is a magnet for capital, there are also a lot of people living there, upwards of 8 million, and this is a key factor in why it ranks mid-pack in the 47th percentile for overall investment volume.
Theodos also pointed out that the best-off places have some of the most inequality based on the metrics provided. A reason for this is that places with higher concentrations of top earners, affluent areas and thriving businesses—all characteristics that tend to draw in capital—see bigger spreads between neighborhoods and residents that are struggling and those that are doing well.
On the other hand, places with weaker economies and less capital investment overall, might not have the same high-to-low disparities.
“You can be equitable and disinvested,” Theodos said. “You want to be in the quadrant that has lots of investment and that has good equity.”
Lastly, the way that the metrics are presented means that places are effectively graded on a curve, in comparison to their peers.
“Even if you score good on race equity, that doesn’t mean you’re good,” Theodos said. He explained that a better score might mean that majority white neighborhoods in a city or county see two-times more investment than majority Black neighborhoods, instead of, say, eight times more. From an equity standpoint, either scenario is problematic.
There are levers that state and local policy makers can pull to try to increase different kinds of capital flows. But Theodos emphasized that the bulk of capital investment is taking place in the private marketplace and that, in most places, home lending accounts for half or more of it. Federal and mission-driven investments are, by comparison, much smaller.
“The public sector and the mission sector, they’re important, especially for places the market won’t go,” he said. “But they’re never going to be big enough to overcome inequities in the market itself.”
“Part of what states and localities and others have to do is fill in the gaps,” he added, “but also be something of market makers so that the private market sees energy and excitement.”
Route Fifty
by Bill Lucia
May 20, 2021
Fitch Ratings-New York-18 May 2021: The US Treasury’s recent guidance on how US states and local governments can spend the $350 billion of direct American Rescue Plan Act (ARPA) aid will limit their ability to use ARPA to unwind nonrecurring budgetary actions, including deficit borrowing undertaken in 2020 to compensate for pandemic-related revenue declines, Fitch Ratings says. The Treasury’s Interim Final Rule for the Coronavirus State and Local Fiscal Recovery Funds (FRF) prohibits using the funds for debt service and reserve replenishment, tempering the positive rating momentum from the FRF for some credits on Negative Outlook.
Eligible uses are still fairly broad. Virtually all general infrastructure is also eligible up to the amount of a government’s revenue losses relative to a pre-pandemic growth trajectory, which is assumed to be 4.1% annually from fiscal 2019. Authorization for water, sewer and broadband infrastructure projects is broader, allowed up to each government’s full FRF allocation. The rule allows operating uses, including restoring government staffing to pre-pandemic levels, and public health and safety payroll costs. Fitch considers application of one-time FRF for recurring operating needs as a credit negative that could create a fiscal cliff.
The interim final rule is effective immediately but is likely to be amended in the next several months after the Treasury evaluates comments. Given the extensive documentation around the FRF, many governments will need time to evaluate the rule, submit comments and await revisions. Some, such as Kentucky, already enacted legislation laying out their plans. Kentucky proposes using half its FRF for repayment of a loan from the Federal Unemployment Account (FUA), broadband expansion, and drinking water and wastewater infrastructure. All three are explicitly eligible uses.
The rule prohibits repayment of debt service or reserve fund replenishment, which complicates planning and hampers restoration of fiscal resilience for Illinois (BBB-/Negative) and New Jersey (A-/Negative), which both expressed interest in using the funds to pay down liabilities. The Treasury specifically requests feedback on whether the debt service prohibition should be reconsidered. Fitch notes the allowance of FRF to repay prior FUA loans contrasts with the Treasury’s preference that governments use FRF for prospective uses rather than to reimburse prior spending.
Illinois’ comptroller has already submitted comments urging the Treasury to allow the state to use part of its $8.100 billion FRF allocation to repay short-term borrowing undertaken to support operations during the pandemic, including $2.175 billion in outstanding loans from the Federal Reserve’s Municipal Liquidity Facility.
According to the National Conference of State Legislatures, nearly half of states planned or implemented reserve draws during the pandemic and many local governments did the same. Strong revenue growth has allowed many governments to avoid such draws or restore them, but overall reserves remain below pre-pandemic levels. The Treasury’s prohibition on using FRF to restore this key element of financial resilience may leave some governments in a weaker position should tax revenues not be as robust as forecast over the medium term.
The ARPA statute indicates FRF may not be used for standalone direct pension contributions and tax cuts. The rule goes into extensive detail on the tax cut prohibition, which applies only to states, implying the Treasury will be particularly vigilant in monitoring it. Thirteen states have filed a federal lawsuit challenging the tax cut provision as a violation of states’ sovereignty.
ARPA also included a separate $10 billion Coronavirus Capital Projects Fund to be distributed to states, territories and tribal governments. The Treasury anticipates releasing detailed guidance on this fund before the summer.
Contact:
Eric Kim
Senior Director, Head of US State Ratings
+1 212 908-0241
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019
Amy Laskey
Managing Director, US Public Finance
+1 212 908-0568
Michael Rinaldi
Senior Director, US Public Finance
+1 212 908-0833
Sarah Repucci
Senior Director, Fitch Wire
+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.
Summary
The U.S. Department of the Treasury (Treasury Department) announced the launch of the Coronavirus State and Local Fiscal Recovery Funds Program, which will provide $350 billion in emergency funds to eligible entities including state, local, territorial, and tribal governments. Eligible entities may use Coronavirus State and Local Fiscal Recovery Funds to stabilize revenue downturns and address budget shortfalls.
The Upshot
The Coronavirus State and Local Fiscal Recovery Funds Program allocates up to $350 billion to eligible government entities. Of the $350 billion, $306 billion is available to states, counties, and metropolitan cities for COVID-19 mitigation efforts, post-pandemic recovery, and capital investments in public facilities.
Funds may be used to support public health expenditures and address negative economic impacts; replace lost public sector revenue; provide premium pay for essential workers; and invest in water, sewer, and broadband infrastructure.
Funds may not be used to fund directly or indirectly a reduction in tax revenue, and funds may not be deposited into any pension fund.
The Bottom Line
Eligible government entities are encouraged to request funding from the Treasury Department for their allocation of Coronavirus State and Local Fiscal Recovery Funds to help support and resolve economic difficulties arising from the COVID-19 pandemic.
On May 10, 2021, the U.S. Department of the Treasury (Treasury Department) launched the Coronavirus State and Local Fiscal Recovery Funds Program (the Fiscal Recovery Funds Program) authorized pursuant to the American Rescue Plan Act. The American Rescue Plan Act (ARPA) was signed into law by President Biden on March 11, 2021. Section 9901 of the ARPA amended Title VI of the Social Security Act, to add provisions that collectively established the Fiscal Recovery Funds Program.
This $350 billion initiative will provide economic relief in an effort to ameliorate some of the deleterious economic effects further exacerbated by the COVID-19 pandemic to eligible government entities. Government entities eligible to receive emergency funds provided under the Fiscal Recovery Funds Program include states, counties, metropolitan cities, territories, non-entitlement units, tribal governments and the District of Columbia.
The Fiscal Recovery Funds Program provides eligible government entities the flexibility to determine the appropriate form of eligible uses. Eligible uses provided under the Fiscal Recovery Funds Program include vaccination programs, contract tracing, purchasing of personal protective equipment, and capital investments in public facilities to address existing operational concerns. Additionally, eligible businesses and non-profits are allowed to use dispersed funds to provide loans or grants to mitigate financial hardship including declines in revenue, payroll, rent, or other costs related to retaining employees, including providing funds to offer additional payments to essential works. Further, local governments and municipalities are permitted to use funds to make necessary investments in water, sewer, and broadband infrastructure, including wastewater-owned treatment works and develop water reuse projects. The Fiscal Recovery Fund Program does not permit any funds received by an eligible government entity to be deposited into existing pension funds.
In conjunction with announcing the launch of the Fiscal Recovery Fund Program, the Treasury Department issued an Interim Final Rule (IFR) outlining the requirements of the Fiscal Recovery Fund Program. The IFR explains that state and local governments have experienced substantial increases in costs to provide government services to their community members and as a result have experienced substantial budget challenges, including a reduction in workforce. The Fiscal Recovery Fund Program seeks to provide support to state and local governments to help rebuild economies and strengthen efforts related to mitigating and preventing the spread of COVID-19 and to meet Congress’s intent that Fiscal Recovery Funds be spent within four eligible uses: (1) to respond to the public health emergency and its negative economic impacts, (2) to provide premium pay to essential workers, (3) to provide government services to the extent of eligible governments’ revenue losses, and (4) to make necessary water, sewer, and broadband infrastructure investments. The Fiscal Recovery Fund Program generally restricts the use of funds from being used to directly or indirectly offset a reduction in the net tax revenue of a State or territory resulting from a change in law, regulation, or administrative interpretation from March 3, 2021 through the last day of the fiscal year in which the funds provided have been spent, although that restriction is being challenged by the Attorneys General of several states.
The Treasury Department will distribute funds to eligible entities based on government type. States and the District of Columbia are eligible to receive up to $195.3 billion in economic relief, collectively. Counties and metropolitan cities across the United States are allocated to receive $65.1 billion and $45.6 billion, respectively. Beginning May 10, 2021, eligible entities can submit their allocation request through the Treasury Submission Portal here. Local governments, counties, and metropolitan cities should expect to begin to receive funds in two tranches beginning in May 2021 with the remainder of funds to be disbursed next year. States that have experienced an increase in unemployment by more than 2% as of February 2020 pursuant to requirements outlined by the Treasury Department will receive their full allocation in a single payment, while other states will receive their full allocation in two equal tranches. The Coronavirus State and Local Fiscal Recovery Funds Program provides eligible entities with necessary flexibility to utilize emergency funds to strengthen the needs of their local communities.
Ballard Spahr LLP
May 19, 2021
Federal and policy experts told city officials Thursday that governments that lost revenue during the pandemic have greater flexibility for using the American Rescue Plan money.
State and local governments that lost revenue as a result of the coronavirus pandemic have greater flexibility in how they can spend Covid-19 relief money than governments whose budgets withstood economic downturn, according to federal officials.
Treasury Department rules outline specific ways that state and local governments can spend $350 billion in federal aid appropriated through the America Rescue Plan Act. But governments that experience a decline in revenue can offset those losses with the federal dollars—and use the offset amount to pay for any number of government services that would not otherwise be considered eligible expenses.
“The revenue loss category provides the greatest flexibility,” said Jacob Leibenluft, a counselor to Treasury Secretary Janet Yellen.
Route Fifty
By Andrea Noble,
MAY 20, 2021
SUMMARY
Submission for the Record by the Securities Industry and Financial Markets Association before the Senate Finance Committee in the hearing: “Funding and Financing Options to Bolster American Infrastructure”
SIFMA and its member firms strongly support increased investment in this country’s infrastructure, which will help spur job creation and economic growth. To that end, we believe it is critical to support the great work states and localities do in building and maintaining our infrastructure. A partnership among federal, state, and local governments and private investors will ease the burden on the cash-strapped federal government by leveraging our capital markets to create expanded financing options. We believe that this partnership is especially important during this difficult fiscal environment as states and local governments seek to lower their costs and also finance much-needed infrastructure such as schools, roads, and hospitals.
At SIFMA, we believe it is critical to close the infrastructure financing gap by restoring and creating additional vehicles to assist in resolving these needs. We hope that you agree that increased investment in our infrastructure has a critical role to play as our nation will continue to grapple with the economic impact of the COVID-19 pandemic for years to come. Further, the provisions outlined in this testimony will facilitate the more efficient leveraging of our capital markets for the benefit all Americans.
The federal government plays a small but significant role in funding public school operations and programs designed to even out disparities in student opportunity based on income, race, and ethnicity, and those facing students with disabilities. But no comparable federal program addresses the disparities in financing school construction and maintenance, leaving these significant costs to states and localities and tying schools’ condition directly to the wealth of the surrounding community. Estimates suggest that American schools have hundreds of billions of dollars of unmet capital construction needs that local districts cannot make up. In recovery legislation Congress will soon consider, it should include a significant infusion of federal funds — at a minimum, the $50 billion in grants proposed in President Biden’s American Jobs Plan — to build and repair K-12 schools.
As a nation, we have not kept up with school maintenance. The COVID-19 pandemic has highlighted the need to prevent the spread of virus by, for example, improving school ventilation systems and creating ways for students to be socially distanced, but these are only some of many significant repairs facing schools. Due in part to longstanding federal inaction, the estimated cost of bringing all schools to good condition had reached nearly $200 billion by 2013, according to the U.S. Department of Education,[1] and is likely even higher today as a result of disinvestment since the Great Recession. One estimate puts the cost of needed ventilation system improvements alone at $72 billion.[2] The need for improvements is particularly acute in schools with high populations of students from low-income families and of Black, Indigenous, Latino, and other children of color.
Fixing school buildings can improve both health and student learning, research shows, while also creating jobs. Better lighting, acoustics, and accessibility all help students learn. And modern heating, ventilation, and cooling systems can slow the spread of airborne diseases such as COVID-19. While the federal government has provided significant support for schools’ increased operating costs during the pandemic — and to help children recover unfinished learning — support for school construction and other infrastructure needs is long overdue.
CENTER ON BUDGET AND POLICY PRIORITIES
MAY 17, 2021 | BY VICTORIA JACKSON AND NICHOLAS JOHNSON
One tweak to municipal finance could get more money where it belongs.
President Joe Biden wants to transform America’s infrastructure. While he’s at it, he should also consider transforming the way state and local governments pay for it.
Washington has long provided incentives for municipalities to invest in public goods. This makes perfect sense, because some of the benefits of things such as roads, bridges and schools accrue to the whole country — in the form of better transportation, a more educated populace, greater productivity.
One big federal subsidy comes in the form of a tax exemption: Investors in municipal debt don’t have to pay income tax on the interest they receive. This has made municipal bonds very popular among tax-sensitive people and organizations, giving rise to a multi-trillion-dollar market. It also allows state and local governments to borrow at lower interest rates, saving them billions of dollars a year.
Yet the tax exemption has some serious flaws. For one, it’s worthless for investors not subject to federal income tax — such as pension funds and foreigners — whose demand could otherwise push borrowing costs down further. Also, because the exemption is worth more to higher-rate taxpayers, some of the subsidy flows to them rather than to the state and local issuers. (An investor in the top income-tax bracket, for example, gets the full 37% break compared with a taxable bond, while an issuer might get an overall discount of only 22% on interest costs.) This “leakage” can amount to several billion dollars a year.
There’s a proven alternative. As part of its efforts to support the recovery from the 2008 financial crisis, the federal government introduced something called Build America Bonds. Instead of offering a tax exemption, the federal government simply paid issuers a portion of the interest, and collected tax from investors as with any other bonds. The program was a success: It eliminated leakage, lowered borrowing costs by expanding the investor base, and coexisted perfectly well with traditional municipal securities. State and local governments raised more than $180 billion over less than two years, for projects ranging from sewers to firehouses.
Unfortunately, politics stalled the program. First, a Republican-controlled legislature declined to extend it beyond 2010, more as a partisan rebuke to the Democratic administration than for any particular failure. Then, a 2011 battle over the federal debt ceiling led to sharp and indiscriminate budget cuts — including to the share of interest that the federal government had promised to pay the issuers. This dealt a blow to confidence that hasn’t been forgotten.
Now, though, some lawmakers are proposing a revival. This is a welcome development, provided it incorporates the lessons of the past. In particular, Congress — which is holding hearings this week on financing infrastructure — would need to guarantee funds for the subsidy, to avoid a repeat of the budget sequestration debacle. Beyond that, keeping the overall cost of support for municipal borrowing steady implies a subsidy of around 28% of interest payments, as opposed to the 35% of the original Build America Bonds.
One might ask why the government should introduce a new financing option now, at a time when the Biden administration is promising trillions of dollars in investment, and when ample demand for municipal debt is pushing yields to extreme lows. The answer is simple. The purpose is not to remedy a shortage of borrowing and investment, but to ensure that federal support for those productive outlays is as cost-effective as possible.
Bloomberg Opinion
By Editorial Board
May 18, 2021, 6:00 AM MDT
Infrastructure is a high priority of the Biden administration and one of the very few areas of public policy where the prospects for bipartisanship are favorable. After all, who doesn’t want to improve our highways, bridges and broadband access?
While the president’s mantra for infrastructure improvement is “Build Back Better,” we must also ensure that we rebuild and revitalize responsibly. And that means engagement and partnership with the private sector to guarantee that infrastructure projects are carried out efficiently, effectively, transparently and in a socially and environmentally responsible manner.
The optimal means of doing so is through a public-private partnership (PPP), the very same vehicle that helped build Silicon Valley, launched the U.S. space program (and lunar landing) and developed and distributed COVID-19 vaccines under the Trump and Biden administrations.
In a sense, we are where we are today courtesy of public-private partnerships. While Spanish regents Ferdinand and Isabella may have financed Columbus’s first voyage to the New World, Juan Niño, the Quintero brothers and Juan de la Cosa were, respectively, the owner-operators of the Niña, Pinta and the Santa Maria.
The fact is that public-private partnerships built much of the early infrastructure of the United States, including the Philadelphia and Lancaster Turnpike road in Pennsylvania, which was initiated in 1792, and an early steamboat line between New York and New Jersey in 1808.
PPPs are slated to experience a renaissance in light of the $1.9 trillion proposed by the Biden administration to create 2.7 million jobs over the next 10 years and add over $5.7 trillion to the economy by 2024, making up for the COVID-19 recession job losses by a factor of 10.
So, what exactly are PPPs, how do they work and what are their benefits? PPPs are contractual agreements between government agencies – federal, state or local – and private companies. Collaboratively, they provide a public service, typically infrastructure-related utilities such as water, sewer, transportation, bridges, highways or light rail. Most public works projects in the U.S. are designed by the government and put out for bidding.
The lowest responsible bidder is awarded the contract. Then if there is an operational component, the facility will typically be operated by government employees. The major benefit of a public-private partnership is in getting the private entities involved to deliver a product more efficiently, more cost effectively and with improved service. The private entity has the expertise to provide the service; it is their focus, as it is what they were created for. With PPPs the financial risk is transferred from taxpayers to investors; the undertaking is “bundled” (the private partner designs, builds, finances and operates); and PPPs offer expanded capital opportunities — financing that uses a combination of equity and debt. One should note that a municipal government might be so heavily indebted that it cannot undertake a capital-intensive building project; but a private enterprise may be interested in funding its construction in exchange for operating profits once the project is complete.
The financing of PPPs is generally sourced by the government through surpluses or borrowing or by the private sector through debt and equity finance. The funding, however, is typically sourced from taxes or user charges, depending upon whether it is a government-pays or user-pays scheme.
Examples of PPPs abound. For instance, the California Fuel Cell Partnership, a public-private partnership to promote hydrogen vehicles (including cars and buses) in California, is notable as one of the first initiatives for that purpose undertaken in the United States. The challenge is which comes first, hydrogen cars or filling stations?
Another public-private partnership example is Challenge Seattle, a coalition that has been exploring an ultra-high-speed rail corridor from Portland to Seattle to Vancouver, along with broadband internet access and strategic land zoning.
PPPs surely have their limitations, however. The Cross City Tunnel project in Sydney is a good example. When a concessionaire fails to fulfill its contractual obligations, the state is forced to take over project delivery, and this can entail substantial delays and cost overruns. Failure to complete a project can have other downsides. In the first instance, the intended facility is not built at all, so residents and businesses must continue to deal with the problems impacting the existing system. Second, a PPP failure that results in significant losses for bondholders could damage the prospects for future project financing.
For PPPs to succeed, a shared vision and mutual respect are paramount. Both parties must be as committed to achieving the others’ goals as they are to their own. Contracts alone cannot achieve this. Incentives (as opposed to penalties) and the involvement of a government champion/politically influential advocate are essential. Other requisites are the presence of political will and quality of institutions and governance. At the management level, measurable objectives, proper monitoring, clear accountability and consultative decisionmaking are essential.
To say U.S. infrastructure is in a sorry state of disrepair is an understatement. The American Society of Civil Engineers’ report card on the nation’s infrastructure grades it a “D+,” meaning mostly below standard, while the latest Global Competitiveness Report of the World Economic Forum finds the U.S. has declined from fifth place in 2002 to 13th in 2021 in terms of the quality of its infrastructure.
The challenge is great and immediate. Harnessing and combining government investment, financing, oversight and accountability with private sector acumen in designing, planning and executing of projects will enable our infrastructure reform efforts to succeed.
THE HILL
BY JERRY HAAR, OPINION CONTRIBUTOR
Jerry Haar is a business professor at Florida International University and a global fellow of the Woodrow Wilson Center in Washington, D.C. He is also a working group member on Work and Entrepreneurship of the Council on Competitiveness.
The draft legislation includes new grant funding for areas like electric vehicle infrastructure and rural projects. It comes as the White House struggles to win over Republican support for a much broader infrastructure package.
Lawmakers on a Senate committee that deals with infrastructure on Saturday released a bipartisan, $303.5 billion draft proposal to reauthorize the main federal program that provides funding for highways, roads and bridges.
In addition to supplying bedrock federal dollars for roads, the legislation would provide new grant funding in a number of areas—including for electric vehicle infrastructure, efforts to make the nation’s infrastructure more “resilient” to extreme weather, climate change and natural disasters, and for projects in rural regions.
“Not only will this comprehensive, bipartisan legislation help us rebuild and repair America’s surface transportation system, but it will also help us build new transportation infrastructure,” said U.S. Sen. Shelley Moore Capito, of West Virginia, who is the top Republican on the Environment and Public Works Committee.
Route Fifty
by Bill Lucia
MAY 22, 2021
Key Findings
Tax Foundation
by Ulrik Boesen
August 25, 2020
What You Need to Know
Republicans and Democrats are working together on a bill that could encourage life insurers to invest in efforts to build and maintain bridges, tunnels, subways and renewable energy programs.
Sen. Michael Bennet, D-Colo., talked about S1308, the “American Infrastructure Bonds Act of 2021″ bill, at a hearing on infrastructure financing Tuesday that was organized by the Senate Finance Committee.
The bill could help state and local governments issue taxable municipal bonds, to attract cash from life insurers, pension plans and IRA holders for infrastructure projects.
Senators and witnesses spent much of their time at the hearing discussing options for increasing and using federal revenue.
But Sen. Ron Wyden, D-Ore., the committee chairman, did talk about the Build America Bond program in his opening remarks. Congress created that taxable infrastructure bond program in 2009, in response to the 2007-2009 Great Recession. The goal was to rush money to “shovel ready” construction projects.
“It was completely bipartisan,” Wyden said.
He recalled estimating that the program might succeed at issuing about $3 billion to $5 billion worth of bonds.
“In a year and a half, it sold $182 billion worth of bonds,” Wyden said. “That’s an example of a public-private partnership coming together.”
Taxable Bonds vs. Tax-Exempt Bonds
Today, state and local governments borrow money mainly by issuing tax-exempt municipal bonds.
Investors who normally do have to pay income taxes on investment earnings buy the bonds to earn a steady income while holding down their tax bills.
Corporations and some other buyers issue taxable bonds. Those bonds typical pay higher interest rates than tax-exempt bonds, because investors subject to income taxes must pay taxes on their bond income. Life insurers, pension plans and IRA holders typically focus on investing in taxable bonds because they like getting higher yields, and they need not pay taxes on the earnings while they hold the bonds in their portfolios.
U.S. municipal bond issuers have about $3.9 trillion in municipal bond value outstanding, according to the Municipal Securities Rulemaking Board.
Figures from the Securities Industry and Financial Markets Association (SIFMA) show U.S. corporate bond issuers have about $46 trillion in corporate bond value outstanding.
U.S. life insurers ended 2021 with $2.1 trillion trillion in corporate bond holdings and just $208 billion in municipal bond holdings.
Life insurers are hungry for new investment ideas that regulators can live with, because typical yields on investment-grade corporate bonds are under 4%.
Higher yields on bonds could make it easier for offer richer life insurance, annuity, long-term disability insurance and long-term care insurance products at lower prices.
The American Infrastructure Bonds Act
Bennet has introduced S1308 together with Sen. Roger Wicker, R-Miss. The bill has a total of four Republican sponsors and cosponsors and five Democratic backers.
The bill would let state and local governments issue taxable bonds for any public purpose that the same governments could fund with traditional tax-exempt municipal bonds, according to an S1308 summary.
Because buyers of the taxable bonds would have to pay income taxes on the bond income, issuers would have to pay higher rates than issuers of comparable tax-exempt municipal bonds.
The bill would compensate the issuers for the extra interest payment costs by having the U.S. treasury secretary and the defense secretary send the issuers direct subsidy payments.
The bonds “have the potential to attract investment in local communities from a wider range of investors than are typically interested in tax-exempt municipal bonds,” according to the bill summary.
The list of supporting organizations includes the American Council of Life Insurers, the Insured Retirement Institute and the SIFMA.
The Hearing
Bennet noted at the infrastructure hearing that S1308 is bipartisan.
“The bill would create a new class of direct-pay, taxable bonds, to help state and local governments finance critical public projects, ” Bennet said. “ These bonds would be similar to Build America Bonds.”
Bennet asked a witness, Heather Buch, the transportation steering committee chair at the National Association of Counties, whether the bonds would be helpful.
“It will greatly improve our ability to invest in the critical infrastructure projects and improve the resiliency of our many county-owned infrastructure assets,” Buch said. “We believe that the direct-pay bonds, like the Build America Bonds, are an excellent complement to municipal bonds.”
ThinkAdvisor
by Allison Bell
May 19, 2021
United States city budgets are tighter than ever due to COVID-19. The American Rescue Plan Act, recently passed by Congress and signed into law by President Joe Biden, will provide some relief in the near term, while the proposed American Jobs Plan offers a tantalizing vision of federal infrastructure investments that could drive local climate action and equity nationwide.
Yet there remains an immutable reality that U.S. cities without dedicated revenue streams to fund climate change mitigation, resilience and environmental justice will continue to face fiscal constraints. Simply put, these social and environmental causes are at risk of being deprioritized when they stand side-by-side with other essential services.
But even in our economically challenging times, the light of leadership remains bright at the city level. Mayors, community coalitions, advocacy groups and city councils have maintained focus on climate change and the need for aggressive action to protect and improve their communities’ futures.
greenbiz.com
By Alexander Dane & Alisa Petersen
May 19, 2021
State and local governments, helped by the arrival of federal stimulus money, are in no rush to issue debt as they wait for Congress to consider sending them infrastructure funding.
Municipal bond issuers are anticipated to sell $7.3 billion in bonds over the next month, the lowest visible supply mark since late March and well below the average pace of about $10 billion this year, according to data compiled by Bloomberg. The 30-day supply projection usually accounts for about half of what is actually sold, since deals can be priced with less than a month’s notice.
The drop in visible supply comes at a time of year where issuance has been historically strong. A combination of an economic rebound and the $350 billion American Rescue Plan, of which $105.3 billion has already been disbursed, has left the nation’s municipalities less dependent on borrowing, said Barclays Plc municipal strategist Mikhail Foux.
“Going into the year a lot of people were thinking municipalities would have to issue bonds to fund deficits. The economic recovery was stronger than people believed,” Foux said. “Clearly we’re not going to have that much issuance over the course of the summer.”
Issuers may also be waiting for federal infrastructure plans, which could serve as the catalyst for billions of dollars of debt sales. This week, Democrats in both the House and Senate advocated for leaning on the state and local government debt market in any infrastructure package and the revival of a technique to refinance debt that was rolled back during the Trump administration.
For now, the lull in sales has yet to scare off participants in a muni market that has become historically expensive by some metrics. Money has continued to pour into the market unabated, with investors adding an additional $725 million to municipal-focused mutual funds, marking the 11th straight week of inflows.
Those funds have been sitting on more cash than ever before, perhaps waiting for the right time to deploy. The 10 biggest mutual fund families all have higher cash holdings than 2016 levels, with some holding nearly 10% more, according to Barclays. If there’s rate volatility during the summer it could be an opportunity to put that money to work, Foux said.
“If rates move higher, munis will outperform somewhat,” Foux said. “Everyone understands valuations and how rich they are and people don’t want to chase at current levels.”
Bloomberg Markets
By Fola Akinnibi
May 21, 2021, 11:34 AM MDT
Investors betting that state and local governments would get a boost from federal stimulus were right
The municipal bond market is on a tear this year.
Concerns about rising taxes, a search for even a little bit more yield than what’s offered by Treasurys, and a bet that states and local entities would benefit from the Biden administration’s stimulus plans have boosted investor interest in the sector.
Data from Refinitiv Lipper (as shown in the chart above) shows that through mid-May, investors had plowed $41.7 billion into muni-bond funds. That’s nearly the same amount as in all of last year, putting 2021 on track to be one of the best years in history.
MarketWatch
By Andrea Riquier
May 24, 2021
Municipal bonds have long been a safe-haven asset class for fixed income investors, but it’s also the most susceptible to the whims of politics.
For instance, the tax-advantaged nature of municipal bonds means that tax rates have a big impact on their valuations. Government spending also plays a key role in the supply of muni bonds over time.
Let’s take a look at how President Biden’s spending and tax plans could impact the municipal bond market over the coming years – and what it means for investors.
municipalbonds.com
by Justin Kuepper
May 20, 2021
What You Need to Know
The municipal bond market is having a very good year, and its outperformance will likely continue.
Year-to-date through May 17, the Bloomberg Barclays Municipal Bond Index is up 0.51%.
This may not seem that great, but it far outpaces the performance of the Bloomberg Barclays Aggregate Bond Index, down 2.7% so far in 2021, and the Bloomberg Barclays Investment Grade Bond Index, off 3.55%, according to Cooper Howard, director of fixed income strategy for the Schwab Center for Financial Research.
Howard spoke with ThinkAdvisor Wednesday about the muni market’s outperformance and why it could continue despite their recent price gains over Treasuries thanks to trends in three areas.
1. Economic Factors
The Biden administration’s $1.9 trillion American Rescue Plan provides $350 billion to state, local and tribal governments to ease the economic impact of the COVID-19 pandemic, although the impact of the pandemic on state and local governments was not as bad as originally expected.
Though many workers, especially in lower-income jobs, lost employment benefits or pay, those with higher incomes were far less affected, according to Howard.
The better-than-expected rollout of COVID-19 vaccines in the U.S. is also supporting state and local economies.
All these developments support the credit quality of municipal bonds. State and local governments haven’t had to implement deep spending cuts, and the credit quality of munis has improved, Howard said.
There have been a number of upgrades of muni bonds. Most recently, Moody’s Investors Service’s upgraded outlook for $38.7 billion worth of New York City general obligation bonds, from negative to stable.
Moody’s also affirmed its Aa2 rating for the bonds. S&P revised its issuer outlook to stable across the board in the U.S. public infrastructure sector (including 185 debt ratings for 126 issuers), according to Goldman Sachs.
State and local governments still face fiscal challenges, such as unfunded pension plans, which were apparent well before the pandemic began. The dire forecasts anticipated for municipal debt in March 2020, though, never materialized, according to Howard.
2. Technical Factors
Supply and demand factors are also supportive of the muni bond market.
Demand for munis by mutual funds and ETFs has risen in 51 of the past 53 weeks, said Howard, noting that “strong demand has not kept pace with supply.”
Morningstar reported this week that April fund flows — which include mutual funds and ETFs — marked the 12th consecutive week of inflows, totaling $122 billion, including $11 billion in April, of which $3.5 billion were in high-yield munis.
Municipal fund inflows totaled $42 billion through April 30, marking “a record to start” for a year, according to Goldman Sachs.
“The prospect of higher income taxes along with greater confidence in issuer financial health may be contributing to the strong demand,” according to Morningstar.
Adding to the supply/demand imbalance is the expectation of the usual net negative muni supply in the summer, when principal and coupon payments for many muni bonds come due, prompting funds to reinvest proceeds into other muni bonds.
3. Tax-Related Factors
Higher taxes are another major factor in the growing demand for municipal bonds, whose interest payments are exempt from federal, state and local taxes.
President Joe Biden’s American Families Plan — estimated to cost $1.8 trillion over 10 years to increase funding for education, child tax credits and child and dependent care tax credits — would be funded with higher taxes on wealthy Americans, including a higher marginal income tax rate and higher capital gains tax rate.
“It’s clear the administration wants to raise taxes on higher earners, but there are questions about how high they will go,” Howard said.
Higher marginal tax rates on wealthy investors, who are major investors in municipal debt, would have the bigger impact on municipal bond demand since most muni investors purchase the bonds for income, not capital appreciation.
The White House has proposed raising the minimum marginal income tax rate on individuals earning more than $452,700 and married couples earning more than $509,300 from 37% to 39.6% starting in 2022.
The 39.6% rate was the top marginal income tax rate before it was reduced by the 2017 tax cut plan in the last administration.
ThinkAdvisor
by Bernice Napach
May 18, 2021
Investors who feared muni-bond defaults when the pandemic first hit created unusual opportunity for those willing to buck the tide. One of the winners was Doug Behnfield, a Boulder-based financial adviser at Morgan Stanley whose ideas have been featured here many times over the years. Doug is not only one of the savviest investors I know, he is one of the savviest guys. Now, he is quite bullish on municipal bonds for reasons spelled out in a report that went out to clients in April. He also thinks Fed Chairman Jerome Powell’s confidence that the inflationary effects of stimulus and fiscal spending will be “transitory” is well founded and that their effects have already been mostly discounted by stocks and bonds.
Doug and his clients enjoyed an exceptional year in munis because he started buying when others were dumping them. Prices subsequently recovered and then some, yielding excellent gains for anyone who’d faded the panic. Doug is a canny contrarian who shares your editor’s view that deflation poses a greater threat to the U.S. economy than inflation. More immediately, he expects pent-up demand to produce a subdued recovery rather than boom times. It will take years for growth to recover, he says, in part because consumers have learned beneficial lessons of frugality.
A Limited Supply
There are additional factors that have made Doug especially bullish on municipal bonds. For one, they are exempt from federal income tax. Substantial tax hikes planned by the Democrats will therefore make municipal bonds even more attractive. Munis also are exempt from a tax that affects mainly the wealthy: the 3.8% levy on investment income under the Affordable Care Act. Limited supply is another reason muni bonds stand to do well over the next couple of years or longer, says Doug. Cities will not have to raise as much money with bonds because the states have received hundreds of billions of dollars in stimulus grants.
FXSTREET.COM
ANALYSIS | 5/24/2021 12:23:25 AM GMT
The most quoted reason for investing in companies that are socially, environmentally, and ethically responsible, a practice known as ESG investing, is that it is the right thing to do. There is, however, another reason that even the most cynical investor should consider it: It is profitable and is destined to become more so over the next few decades.
The reason is obvious to anyone who has children. Our children’s generation have been consistently taught from an early age that some kind of environmental awareness is normal and that discrimination on the basis of race, gender, sexual identity or anything else is not acceptable. They typically have a wonderful attitude to those things, not aggressively pro or anti inclusion and equality, just indifferent to them as issues. It is hard to hate something when you don’t see it as anything but perfectly normal. And when acting in an environmentally responsible manner is simply what you do rather than a product of a campaign or protest, it becomes a lot more sustainable and just about universal.
As millennials and subsequent generations take over the reins of power, both politically and financially, that is becoming the predominant attitude, with those who retain some form of bigotry viewed with a powerful pity or a withering, somewhat comical disdain. Investing in companies that are ahead of a game that powerful, destined to dominate, is a good idea, whatever your own attitude may be.
Nasdaq
by Martin Tillier
MAY 24, 2021 9:55AM EDT
With its tax advantages and relative stability, municipal bonds should continue to outperform in the tricky fixed income environment, all to the benefit of the VanEck Vectors CEF Municipal Income ETF (XMPT).
With its 0.40% expense ratio, XMPT seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the S-Network Municipal Bond Closed-End Fund Index. The fund normally invests at least 80% of its total assets in investments from which the income is exempt from U.S. federal income tax (other than federal alternative minimum tax).
It normally invests at least 80% of its total assets in securities of issuers that comprise the fund’s benchmark index. The CEFMX Index is comprised of shares of U.S.-listed closed-end funds.
“XMPT features impressive diversity of exposure, and also offers investors a way to gain access to some of the world’s most successful muni bond managers through a single ticker,” an ETF Database analysis said. “Moreover, because the methodology is designed to overweight CEFs trading at a discount to their NAV, this product may be able to deliver attractive current returns.”
ETF TRENDS
by BEN HERNANDEZ
MAY 21, 2021
Managing Your Community’s Assets: Capital Planning & Debt explores managing resources that power the development and upkeep of valuable physical assets. Capital improvement plans, debt issuance, accessing financial markets and more are covered to equip policy leaders for building strong communities.
Key Takeaways
12 May, 2021
Here are links to coronavirus-related activity in U.S. public finance. This file will be updated regularly.
May 6, 2021
Experts worry that some federal disaster aid is actually creating perverse incentives for cities and states — and deterring them from making better climate policies.
What makes a disaster? When we think of calamity, most of us think of flood waters that submerge towns, or hurricane winds that shred buildings. The U.S. federal government uses another kind of measure to decide whether an act of nature becomes an official disaster: its cost.
In deciding when to dole out federal assistance, the Federal Emergency Management Agency looks to see if per capita damage to uninsured assets exceeds a certain threshold; for 2021, that would be $1.55 per person in a state. The agency has a proposed rule to update that number to $2.33 per person and then index it to the consumer price index going forward.
Why should anyone care about that 80 cents? The answer is climate change.
A warming climate is contributing to more and bigger disasters. But human beings are stubborn. We continue to live and build in risky areas just like nothing is happening. Proverbial frogs in the boiling pot.
One of the best ways to make the costs of climate change more transparent is to price the rising risk into insurance policies. Private insurers and reinsurers are very sophisticated at guessing when things will go wrong and charging customers accordingly. Customers can refuse to pay the higher price, but if a disaster strikes they will bear the cost. Eventually the true cost of living by the ocean or in a wildfire zone becomes apparent.
It is an effective feedback loop, but brutal — which is where the federal government comes in. To greatly simplify the history here: As disasters have increased in certain areas, private insurers found flood insurance in particular too risky, and sent premiums sky-high. The federal government stepped in to provide subsidized flood insurance, racking up tens of billions of dollars in debt for covering claims.
But the government hasn’t just covered the claims of individuals; it’s also covered the claims of cities, states and some nonprofits through the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
Helping local governments recover from a public disaster might seem like an unalloyed good, but for a long time federal officials have argued that it creates perverse incentives for the localities to under-insure, knowing that in the end they’ll never have to pick up the cost.
There are some areas, like debris clean-up and utility repair, where this argument doesn’t really apply because localities would have a hard time getting insurance. But there is one category assistance in the Stafford Act that is particularly controversial because private insurers are downright eager to cover these areas: Category E applies to buildings, their contents, vehicles and equipment (BCVE). Think of school buses, court buildings and even churches.
A January analysis by the Homeland Security Operational Analysis Center looked specifically at whether states and localities were under-insuring for Category E. It found that while most of the states and localities did have some insurance, the proportion of overall building repair costs covered by insurance has only been 28% over the last decade or so. In other words, Uncle Sam has been on the hook for 72% of repairs. And according to an analysis by Hagerty, an emergency management consulting firm, Category E has historically accounted for the largest chunk of FEMA’s assistance obligations.
Craig Fugate, who ran FEMA under the Obama administration, sees in these numbers not just under-insurance “but rather a wholesale risk transfer.”
The concern is that this risk transfer will beget even bigger bills down the line. Without an incentive to purchase expensive insurance, states, cities, and tribes are largely shielded from the most immediate costs of a warming Earth. If towns had to pay for real risks, they would have a financial incentive to place new buildings and bridges out of harm’s way. Instead, towns, eager to return to normal after a disaster, rebuild again in the same spots. (By law, FEMA can make them elevate the new properties, but not move them.)
There are endless examples of FEMA money that’s been used to rebuild in an area that’s very likely to flood in the future, from prisons and airports in Louisiana to public schools in New York City. This is important not just because of the expense of immediate replacement, but also because town planning and infrastructure often dictate where private residences and businesses are built. “If the state locals aren’t internalizing the costs of these risks, you totally get the wrong incentives to encourage development in certain areas,” said Lloyd Dixon, a co-author of the Homeland Security report and a senior economist at the RAND Corporation.
Within FEMA, there is relatively broad agreement that something needs to change about the current federal regime. The White House’s fiscal year 2021 budget proposed ending Category E funding altogether.
Such a position was, understandably, very unpopular with states and the proposal didn’t make it very far. That’s where the current rule comes in. It won’t eliminate Category E, but it does raise the threshold for state assistance. Not only does it raise the per capita minimum by 80 cents; it also raises the total minimum storm damage from $1 million to $1.5 million, a number that will also be indexed to inflation going forward.
In theory, over time as the thresholds increased, the number of storms covered would decrease and states and localities would be forced to have a more robust insurance practice. “They can either use their own budgets, or increase their use of insurances to cover risk,” Fugate said.
But former FEMA administrator Brock Long is skeptical. He argues that raising the threshold for disaster assistance might just force states to look for even more uninsured assets. He says FEMA can’t fix the problem with just rule-making.
“The Stafford Act was innovative when it was introduced in 1979 but it did not encompass climate change,” he said. “It is time for Congress to consider legislative changes that reward communities for doing the right thing,” he continued, “things like proper building codes and reinsurance capabilities need to be incentivized not penalized.”
Colin Foard, who studies this issue for the Pew Charitable Trust, has a similar view. He says cities and states desperately need the money from the federal government to prepare for the future. If they want to reform the current problem, they shouldn’t spend less, he says. They should just spend differently, perhaps mandating that Category E funds go toward buildings that are disaster resistant. “Every dollar spent on mitigation can save 6 in recovery,” he said. “So if the federal government wants to do something about this, there is a more strategic way to lower everyone’s costs.”
Bloomberg CityLab
By Leslie Kaufman
May 15, 2021, 4:31 AM MDT
“Public Finance Note” is the inaugural newsletter of the Milken Institute’s new Program for Excellence and Equity in Public Finance (P-FIN). Facing the unprecedented twin health and economic crises from COVID-19, the nearly $4 trillion state-local-municipal finance space, employing over 20 million Americans, faces an uphill battle to recover. Helping this critical sector of our economy rebound strongly and equitably is the goal P-FIN.
Future deficits in the state and local sector are estimated to be as high as $1 trillion in the next several years, about four times the hole created by the 2008 Great Recession. As a result, traditional financing for essential services, let alone new investments in equitable community development and post-COVID needs like community broadband, could be impeded without innovation and intention by policymakers and investors.
Housed at the Center for Financial Markets at the Milken Institute, P-FIN will aim to serve as a networked center of gravity and a solutions resource for policymakers, market-makers, academics, and innovators committed to (1) building best practices and innovation on the public side, (2) reducing market fragmentation on the private side, and (3) engaging investors and policymakers to ensure a strong, equitable, and resilient COVID-19 recovery.
In this Issue
The Milken Institute
May 10, 2021
Colleges all across America are betting big on the resurrection of American campus life. So are bondholders.
After a year of declining enrollment, online classes and vacant quads, schools have started selling bonds again for new dormitories, signaling optimism that the impact of the pandemic will be short-lived.
Tufts University, a private school near Boston, took on $250 million of debt to build a new residence hall to allow more students to live on campus. Stockton University raised money to build apartments for its Atlantic City campus. Even a company that has seen several of its dorm projects fall into financial distress during the pandemic was easily able to sell bonds to build another at a college in Boca Raton, Florida.
They are joining other industries upended by Covid-19 — like airports and convention centers — that are seizing on low interest rates and investors’ confidence in the economic recovery to refinance debt or borrow for new projects. Investors have been anticipating a comeback even for schools struggling before the pandemic: Junk-rated education debt has returned more than 5%, some of the municipal market’s biggest gains.
“The higher-education sector has been far more resilient than people had thought back when the pandemic first broke in March and April,” said Eric Friedland, director of municipal research for Lord Abbett, which has been buying higher-education bonds.
Virtually Unscathed
The impact of the pandemic, which cut undergraduate enrollment nationwide by about 6% this spring, was softened by stimulus money from the federal government. That’s left bondholders virtually unscathed: debt issues for just 18 student-housing projects have showed signs of distress in 2020 and so far in 2021, either by defaulting or taking steps such as drawing down reserve funds to cover bond payments, according to Municipal Market Analytics.
The steady vaccination rollout is now promising a return to normal, with colleges poised to reopen classrooms and some confident enough to start borrowing again to build new facilities to draw in students. About $600 million of municipal bonds have been issued so far this year for student housing projects, nearly three times as much as was sold in the same period a year ago, according to data compiled by Bloomberg. A California agency this month will sell $275 million of bonds for a 613-unit student housing facility at the University of California, Davis.
Rhodes College, a liberal-arts school in Memphis, Tennessee, is among the schools financing new residences. The college of more than 1,800 students saw applications for the 2021-22 academic year surge to 20% over its previous record. It sold about $19 million of bonds in April for a new dormitory with a lounge for student groups to gather.
President Marjorie Hass said the pandemic has underscored the value of on-campus community. Rhodes has started requiring students to live on campus for three years — instead of the previous two — a step that will increase revenue by about $500,000 a year starting in fiscal 2023.
“We certainly have had to spend more time thinking about the campus experience,” she said in an interview. “It was really a moment to reflect on the value of the face-to-face residential experience.”
Encouraging Signs
There are other encouraging signs for schools. Students on average applied to 9% more colleges as of March 1 compared with last year, according to data from the Common Application, a nonprofit that lets individuals apply to multiple schools. Some of that may be driven by students sending more applications after many schools dropped requirements for students to submit SAT and ACT scores. Nationally, in April the amount of student housing pre-leased for the coming school year grew by 10 percentage points to about 58%, the biggest jump since prior to the pandemic, according to data on off-campus properties tracked by RealPage.
Tufts, a selective school in Massachusetts, saw undergraduate applications surge 35% for the fall 2021 semester. Last month, it sold $250 million of taxable bonds as part of a long-running plan to build a new residence hall on campus.
Michael Howard, an executive vice president at Tufts, said in a statement the school has been looking to add a new residence hall for years. “Although the proposed new dorm is unrelated to the pandemic, the challenges of the past year have given students an even greater appreciation for the sense of community that is fostered by residential campus life,” he said.
With investors pouring into high-yield bonds, even speculative projects are easily financed in the debt market. A private company affiliated with Provident Resources Group, a national company that finances dorms, sold bonds for a new 342-bed dorm at Lynn University, a private college in Boca Raton, Florida, with over 3,200 students. Other Provident properties have struggled during the pandemic, with two bond-financed projects in New Jersey disclosing in April that they would begin discussions with their bond trustee to avoid a technical default.
Investors demanded higher yields to be compensated for the risks associated with the Lynn sale. The bonds priced to yield 5% in 2057, about 3.4 percentage points above AAA borrowers.
Stockton University, a public college in Galloway Township, New Jersey, is expecting its campus to fill with students again. The number of residential students tumbled by 39% in fall 2020 as classes went online. This month, it sold bonds to finance a $69 million apartment-style complex that will house more than 400 students at its beach-front campus in Atlantic City that opened in 2018.
“Students are very interested in returning to a sense of normalcy,” said Jennifer Potter, chief financial officer at the university, in an emailed statement.
Bloomberg Markets
By Amanda Albright and Peyton Forte
May 12, 2021, 7:30 AM MDT
— With assistance by Janet Lorin, Natalia Lenkiewicz, and Danielle Moran
If they spend wisely, states and localities can put their budgets and economies in a better position—now and in the future, according to The Pew Charitable Trusts.
The American Rescue Plan Act is expected to provide $195 billion in flexible funding to states as well as $130 billion to local governments, which may cause a challenge to keep spending levels once the relief expires in 2024. The Pew Charitable Trusts suggests ways governments can effectively use federal funds.
The organization advises governments to take lessons learned from the Great Recession to inform strategic decisions for allocating stimulus dollars from the federal government. Its research draws on the problems states faced in 2009, when states had problems sustaining programs created with money from the American Reinvestment and Recovery Act under President Obama.
Many cities will face issues, too, because they are receiving such large sums of aid. For instance, Dayton, Ohio, with about 140,000 residents and a general fund of about $180 million, will receive around $147 million in direct federal aid, according to estimates compiled by the National League of Cities.
The federal stimulus package also contains $10 billion for states to boost the capital available to new businesses, which is another opportunity to improve the economy.
Pew says states should conduct analyses of what their budgets will look like after the federal funds expire to avoid the “fiscal cliff” they faced after getting stimulus money under the Obama administration. States also should take into account multiple factors, including lingering effects of the pandemic, according to the organization.
There are issues exacerbated by the pandemic like extreme demographic changes and the loss of tax dollars that states will have to consider in their budget forecasts. The commentary highlights Hawaii and Nevada as states that may want to consider the heavy losses of tourism dollars and the potential of regaining those funds once the pandemic subsides.
Some challenges governments will come across are how to balance using funds for continuing costs like hiring state employees and one-time expenses such as infrastructure projects and essential worker benefits, the commentary says. However, states can use funds from the act to reduce long-term costs.
Using the money to reduce the backlog of needed infrastructure maintenance, including expanding access to broadband for residents, could also offer long-term budget relief, according to Pew. It also advised that states use the stimulus funds to pay unemployment claims, which are usually paid from taxes on employers with interests.
“By acting responsibly now while maintaining a long-term perspective, states can ensure that future crises and challenges—whenever they occur and whatever their causes—will be markedly less painful,” writes Josh Goodman, a senior officer at The Pew Charitable Trusts.
While Pew advises against using the money to start new programs, it says “if ongoing spending is below what a state is likely to be able to sustain, then using some of the federal dollars for ongoing expenses is a reasonable choice.”
The Treasury Department is providing guidance that will better inform states and localities of how they can use the relief money.
To read more on the Pew analysis click here.
ROUTE FIFTY
by BRENT WOODIE
MAY 14, 2021
The U.S. Treasury Department on Monday began accepting applications from states and municipalities for $350 billion in relief funds, laying out rules to ensure the money quickly flows toward Covid-19 relief and other programs that will support the economy.
The step will trigger the release of money to governments potentially within days, with the funds being a key part of the $1.9 trillion American Rescue Plan law signed by President Joe Biden in March. Generally, the funds are intended to help states and local governments combat the pandemic and stoke their economic recoveries.
Treasury’s guidelines spell out the range of potential uses by governments — such as rehiring workers or supporting industries that were hit hard by Covid-19 — as well as prohibited uses. States and territories can’t use the funds to pay for tax cuts, a provision of the law that has sparked lawsuits from Republican state officials. Recipients are also barred from using aid to fund debt payments, legal settlements, or deposits to rainy-day funds or financial reserves, according to a Treasury fact sheet.
Bloomberg Politics
By Amanda Albright
May 10, 2021, 11:00 AM MDT Updated on May 10, 2021, 12:54 PM MDT
New Data from the National League of Cities Reveals Cities Concerned About Funding, Developing and Providing Essential Infrastructure Services for their Residents
As the Congress and the Administration debate the details of a new comprehensive infrastructure package, new survey data released today from the National League of Cities (NLC) shows 91% of cities, towns and villages surveyed identified that insufficient funding for infrastructure is a top priority.
“Local governments have led the way on infrastructure for decades. The latest data and stories from America’s cities, towns and villages highlight the incredibly urgent need for support and partnership from the federal government to pass comprehensive infrastructure legislation,” said Kathy Maness, President, National League of Cities and Councilmember, Lexington, South Carolina. “It is well beyond time to rebuild our nation’s roads, water systems, broadband and workforce. Our communities can’t keep doing it alone.”
The 596 local leaders surveyed in March and April 2021 identified top factors impacting their infrastructure decision-making including insufficient funding (91%), lack of pre-development funds (56%), essential services (31%) and hiring workers skilled for infrastructure (27%). Local leaders have also identified the need for making infrastructure decisions through an equity lens—with nearly 20% of those surveyed identifying equity as a top factor in their decision making. With an estimated $660 billion in local infrastructure needs according to the Kinder Institute for Urban Research at Rice University, the survey results reflect that infrastructure demands far exceed city resources.
Offices are not going back to the way they were pre-pandemic, and neither are the downtown neighborhoods that house them.
Just last spring, a chorus of pundits loudly proclaimed a sweeping urban exodus and the impending death of cities. Now, just slightly more than a year later, our cities are springing back to life. Sidewalks are starting to bustle; restaurants, which have spilled onto the streets, are teeming with patrons; museums and galleries are reopening; and fans are heading back to baseball parks, basketball arenas and even outdoor concert venues.
But one area of urban life where the pandemic is poised to leave a far bigger mark is on the places where we do business. The ongoing shift to remote work challenges the historic role of the Central Business Districts — neighborhoods like New York’s Midtown and Wall Street, Chicago’s Loop, or San Francisco’s Financial District — as the dominant centers for urban work.
These signature skyscraper and corporate tower districts that define the skylines of great cities, and are often synonymous with downtowns, will have to adapt. But far from killing them off, the shift to remote work will ultimately change their form and function in more subtle ways. Given their strategic locations at the very center of major metro areas, Central Business Districts are perfectly positioned to be remade as more vibrant neighborhoods where people can live and play as well as work — a leading-edge example of what many urbanists are now calling 15-minute neighborhoods. And with conscious and intentional action on the part of urban leaders and assistance from the federal government, these CBDs can be rebuilt in ways that are more inclusive and affordable.
Bloomberg CityLab
By Richard Florida
May 14, 2021
Fitch Ratings-New York-12 May 2021: The pace of job recoveries gained substantial ground in March, though Fitch Ratings’ latest U.S. Metros Tracker shows some notable laggards as well.
The median jobs recovery rate among major MSAs jumped to 61% from 56% between March and February of this year with 52 out of 53 major metros seeing employment growth. “Job growth picked up substantially in March as pandemic restrictions eased and mobility-to-work data exhibited strong growth relative to other major metros,” said Senior Director Olu Sonola.
The median jobs recovery rate in major Northeastern MSAs rose to 60% in March from 56% in February. That said, all Northeastern metros were still off their mobility pandemic peeks, chief among them New York City. The country’s largest employment center, New York City remains the only Northeastern metro to have recovered less than 50% of jobs lost during the pandemic.
There was a surge of job growth in Texas metros with Dallas, San Antonio, Houston and Austin. Austin remains the second-fastest recovering metro, recovering 86% of employment lost during the pandemic. Though still lagging national trends, Houston saw a large pick-up in growth was related to its improving leisure and hospitality sector, which benefitted from reopening and has recovered approximately 70% of jobs lost during the pandemic.
Leisure and hospitality job recovery in major metros has languished between 50% to 57% since August, though fortunes could change for the better in the coming months with pandemic restrictions easing. This could be particularly good news for Las Vegas, which has the highest concentration of leisure and hospitality employment among major metros and has been hiring at a slower pace during the recovery.
‘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
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com
Additional information is available on www.fitchratings.com
A sprawling shopping mall in Syracuse, New York, may be driven into one of the biggest municipal-bond defaults since the onset of the pandemic.
Already struggling before the lockdowns hammered retailers, Destiny USA, the state’s largest mall, said it doesn’t know if it will generate enough cash to keep running and pay its debts this year, raising doubts about whether it can continue as a business. Its owner, Pyramid Management Group, hired restructuring advisers and has sought a meeting with investors who hold about $285 million of municipal bonds that financed the project, according to a filing last month.
Nuveen LLC and MFS Investment Management were the biggest holders of the debt as of March 31, according to data compiled by Bloomberg.
If Destiny can’t pay what it owes, it would be the second-largest default in the state and local government bond market since Covid-19 began racing through the nation in early 2020. It would also mark the first ever on debt backed by payments developers agree to make instead of property taxes, making it a potential precedent for a $7.5 billion corner of the market that financed New York’s Hudson Yards development, the Mets’ baseball stadium and the new American Dream mall in New Jersey, whose grand opening was delayed by the pandemic.
“There isn’t much precedent for PILOT bonds used to finance shopping centers in bankruptcy,” said David Hammer, head of municipal bonds at Pacific Investment Management Co., referring to securities backed by payments in lieu of taxes. “Valuations on many of these assets were already facing headwinds prior to Covid due to changing consumer behavior.”
Aiden McGuire, a Pyramid spokesman, didn’t return calls seeking comment.
Defaults have remained relatively rare in the $3.9 trillion municipal market since the pandemic, with the economic rebound and last year’s stock-market rally boosting tax revenue. President Joe Biden’s rescue plan will also extend federal aid toward borrowers, like public transit systems, that have seen revenue tumble.
But some businesses that have raised money by selling debt through government agencies have struggled to repay what they owe. About $2.1 billion of bonds defaulted in 2020, up from $1.4 billion in 2019, according to data compiled by Bloomberg Intelligence. Among them was a company that’s building a California factory to recycle rice waste, a fuel plant in Oregon and a Tennessee cancer center.
Destiny sold its PILOT bonds in 2007 and 2016 through the Syracuse Industrial Development Agency to expand into a super-regional shopping and entertainment complex. Instead of paying real estate taxes to Syracuse, the city agreed to subsidize the project by allowing the company to direct the money to debt repayment.
But it struggled as Americans increasingly shifted to online shopping. Then Covid hit, causing sales to drop 40% and rent revenue to fall by more than 30% to $32 million last year, when the mall closed for four months.
Occupancy at the older portion of the mall that backs the municipal bonds, formerly known as the Carousel Center, fell to 57.7% in December and anchors including JC Penney Corp Inc. and Best Buy Co. Inc. shuttered stores. The estimated value of that segment fell to $118 million, less than half of the $285 million of PILOT debt outstanding.
Less Incentive
Destiny also has $430 million of subordinate commercial-backed securities, of which $300 million is on the Carousel portion. The loan servicer has granted a moratorium on loan payments until the loans mature in June 2022.
With the valuation so far below what is owed, the company has less incentive to keep paying on the debt, Fitch Ratings said in March when it downgraded the PILOT bonds deeper into junk. About $22 million in PILOT payments are due this year, $14 million more than the mall’s operating revenue in 2020.
Pyramid hasn’t asked Syracuse to reduce the PILOT payment, said Greg Loh, the city’s chief policy officer. The next payment is due in July.
The company said in a bond filing that it’s seeking to cut costs and renegotiate its debts.
“The company plans to continue to implement cost control procedures, negotiate revised terms on its debt service requirements, and rely on capital contributions from the partners, which are at the discretion of the partners and uncertain in nature, to cover any cash flow deficiencies,” according to Carousel’s financial statement.
Nuveen and its parent TIAA held about $110 million of Carousel’s municipal bonds as of March 31, according to data compiled by Bloomberg. MFS was the second-biggest holder with $96.6 million as of March 31. Jessica Greaney, a Nuveen spokeswoman, didn’t provide immediate comment. Dan Flaherty, a spokesman for MFS, declined to comment.
Some $94.3 million of the bonds issued in 2007 are insured against default. A $5 million block of the insured bonds traded at 101.5 cents on the dollar on May 6. Uninsured debt last traded at around 100 cents on the dollar in March, before the company released its financial statements.
Bloomberg Markets
By Martin Z Braun
May 13, 2021, 11:01 AM MDT
Texas moved closer to enacting a law that would ban government work with Wall Street banks whose policies restrict the firearms industry, marking a pushback from Republicans in the gun-friendly state against corporations taking sides in America’s political fights.
After a fiery debate on Thursday, the Texas House of Representatives passed a bill that would block the state and local governments from contracting with banks and other financial-services companies that have policies that limit their work for the firearms or ammunition industries. The approval sends it back to the Senate, where a different version of the bill has already passed, making it likely to head to Governor Greg Abbott for his approval.
The law would crimp business for Bank of America Corp. and Citigroup Inc., both of which enacted policies targeting certain types of firearms in the wake of the 2018 mass shooting at a school in Parkland, Florida, that left 17 dead.
Citigroup said it would prohibit its retailer-store customers from offering bump stocks or selling guns to those who haven’t passed a background check or are younger than 21. Bank of America announced it would stop extending new loans to companies that make military-style rifles for civilian use.
The legislation reflects ire among Republicans as corporations are drawn into politically divisive policies of America’s culture wars. That angst has been building since corporations and executives opposed Georgia’s move to make it more difficult to vote after Democrats carried the state in the most recent U.S. presidential and senate elections.
Gene Wu, a House Democrat, said the bill could trigger costly legal fights, saying it creates First Amendment issues. “We don’t need a thought police,” he said during the floor debate before the vote. “We don’t need speech police. Let Texans be.”
If enacted, the Texas legislation could hurt the banks municipal underwriting business in Texas, a fast-growing state that’s a major source of debt issues in the $3.9 trillion municipal-bond market. Texas-based issuers accounted for $58 billion of debt sales in 2020, the second-most of any state behind California, according to data compiled by Bloomberg.
Spokespeople for Bank of America and Citigroup declined to comment.
The House version of the bill provides an exemption that would allow banks to still participate in certain short-term note sales issued by the Texas Comptroller of Public Accounts, a type of short-term debt issued that can cover revenue shortfalls.
The legislation would affect governmental entities, which Texas law defines as state agencies, as well as political subdivisions like counties, municipalities and school districts. An amendment proposed on Thursday that would have exempted municipalities’ bond sales failed.
The bill will have “a severe impact on city operations,” said Vikki Goodwin, the Democratic state lawmaker who proposed the amendment. She said the main concern she’s hearing is that the bill could impact bond issuances.
The bill would take effect Sept. 1.
“If I’m limited in who I can do business with and talk to and engage with, that’s going to raise my costs and increase the cost to the taxpayers,” Elizabeth Reich, chief financial officer for the city of Dallas, said in an interview about the bill in April.
Bloomberg Markets
By Danielle Moran and Amanda Albright
May 13, 2021, 11:18 AM MDT Updated on May 13, 2021, 12:11 PM MDT
— With assistance by Paul Stinson
Corporate Issuance Up 23%, Municipal Volumes Up 4% in April
NEW YORK, May 17, 2021 /PRNewswire/ — CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for April 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 increase 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 rose 23.2% in April from last month. The monthly increase was driven largely by U.S. corporate debt identifier requests, which increased by 20.1%. On a year-over-year basis, corporate CUSIP requests were down 11.6%, reflecting a significant year-over-year decline in January of 2021.
Monthly municipal volume also increased in April. The aggregate total of all municipal securities – including municipal bonds, long-term and short-term notes, and commercial paper – rose 4.3% versus March totals. On an annualized basis, municipal CUSIP identifier request volumes were up 17.2% through April. Texas led state-level municipal request volume with a total of 179 new CUSIP requests in April, followed by California with 129 and New York with 102.
“Now into our third straight month of steadily increasing CUSIP request volume, we’re seeing a trend toward increased debt and capital markets activity in U.S. markets,” said Gerard Faulkner, Director of Operations for CGS. “Issuers of corporate and municipal debt continue to take advantage of a combination of low interest rates and an improving economic outlook.”
Requests for international equity and debt CUSIPs both declined in April. International equity CUSIP requests were down 35.5% versus March.
To view the full CUSIP Issuance Trends report for March, click here.
Summary
Seeking Alpha
May 11, 2021
Summary
Seeking Alpha
May 11, 2021
The widely followed S&P National AMT-Free Municipal Bond Index, a broad gauge of municipal debt, is modestly higher over the past month.
Generally speaking, municipal bonds don’t deliver big gains in short time frames, but the index’s recent uptick confirms investors are returning to an asset class many retirees lean on for reducing risk and generating income.
“Investors have poured a net $39 billion into municipal-bond mutual funds this year through Thursday, according to data compiled by Municipal Market Analytics, the most over the same period since 2008,” reports Sebastian Pellejero for the Wall Street Journal. “Returns on the debt, which local governments use to fund public works such as sewers or bridges, have beaten those of corporate bonds and Treasurys.”
Yields are still considered low on muni bonds, but between anemic yields on cash instruments and slack performances elsewhere in the fixed income market, investors are ratcheting up their appetite for munis.
“Demand is so intense that Illinois, the only state to tap the Federal Reserve’s pandemic emergency-lending facility, recently sold three-year bonds at yields near 1%,” according to the Journal.
Fervor for municipal debt may not be done. In fact, it may just be getting started. President Biden’s proposed capital gains tax hike is motivating advisors and investors to seek more tax-advantaged vehicles, and muni bonds check that box.
“Another boost is coming from the Biden administration’s proposed tax changes, which potentially can make municipal debt more attractive to investors. Considered almost as safe as Treasurys because they are backed by taxes or payments on essential services like water, municipal bonds typically offer interest payments that are tax-free,” adds the Wall Street Journal.
Another reason to consider munis is that credit risk is low. As noted above, only Illinois borrowed money from the Fed, and tax receipts are exceeding expectations, even in some financially challenged states, indicating muni default risk remains benign.
ETF TRENDS
by TOM LYDON
MAY 11, 2021
With higher yields and more stability to offer fixed income investors, municipal bonds are all the rage in the debt market. A pair of active funds to consider are the IQ MacKay Municipal Intermediate ETF (MMIT) and the IQ MacKay Municipal Insured ETF (MMIN).
With its active management strategy, MMIT seeks current income exempt from federal income tax. The fund, under normal circumstances, invests at least 80% of its assets in debt securities whose interest is, in the opinion of bond counsel for the issuer at the time of issuance, exempt from federal income tax (“municipal bonds”).
It does not intend to invest in municipal bonds whose interest is subject to the federal alternative minimum tax.
MMIN seeks current income exempt from federal income tax. Like MMIT, the fund is an actively managed ETF and thus does not seek to replicate the performance of a specific index.
Instead, it uses an active management strategy to meet its investment objective. The fund, under normal circumstances, invests at least 80% of its assets (net assets plus borrowings for investment purposes) in: (i) debt securities whose interest is, in the opinion of bond counsel for the issuer at the time of issuance, exempt from federal Income tax (“municipal bonds”); and (ii) debt securities covered by an insurance policy guaranteeing the payment of principal and interest.
“A New Golden Decade”
Demand for municipal bonds have been intensifying as of late. With a stability that’s as close to Treasury notes as possible, munis are the perfect option for the risk-averse bond investor.
Additionally, muni ETFs offer the advantage of holding tax-free debt as part of its portfolio. Proposed tax changes under U.S. president Joe Biden are another reason why municipal bonds been seeing strong demand as of late.
At the height of the pandemic, bond investors were selling off municipal bonds due to fear of defaults. However, the tide is changing, in what could be a “golden decade” for municipal bonds, according to Bank of America.
“Bank of America analysts in a recent note said the municipal market is entering ‘a new golden decade of strong growth and strengthening credit quality,’” a Wall Street Journal article said. “Moody’s Investors Service raised its outlook for state and local governments to ‘stable’ from ‘negative’ after the passage of the $1.9 trillion pandemic relief bill in March, saying the funds would stabilize state finances and help avoid funding cuts for local governments.”
ETF TRENDS
by BEN HERNANDEZ
MAY 13, 2021
Between the Biden administration’s ambitious plans—driven in large part by climate change concerns—to bolster the nation’s infrastructure, the looming specter of tax hikes, and the growing desire among many investors to “make a difference” with their investment dollars, it’s an ideal time to explore opportunities in the market for “green” municipal bonds. Good old-fashioned munis, after all, will be supplying much of the capital as communities build out their infrastructure and deal with the effects of climate change.
Not all credits or issuers should be viewed in the same light, though. Some issues marketed as green bonds, for example, may not achieve the environmental benefits investors had hoped for, whether due to inefficient use of proceeds, a lack of proper oversight, or because proceeds were deployed to insufficiently green projects.
Similarly, investors should bear in mind that green bonds may be issued for very different reasons, with some intended to drive proactive environmental benefits while others fund more “defensive” projects that bolster communities’ resilience to the negative impacts of climate change.
FINANCIAL ADVISOR
by JEFF LIPTON
MAY 13, 2021
Eric Kazatsky, Senior U.S. Municipals Strategist for Bloomberg Intelligence, discusses the latest on muni markets. Hosted by Paul Sweeney and Matt Miller. (Taylor Riggs fills in for Matt Miller)
Bloomberg Radio
May 14, 2021
U.S. states and cities are turning to the municipal-bond market to raise money for new projects at the fastest pace in at least a decade, a sign of optimism as tax revenue improves with the reviving economy and as federal aid pours in.
Localities issued about $65 billion in long-term municipal debt in the first four months of 2021 solely for new projects, a 31% jump from the same period of last year, according to data compiled by Bloomberg. The tally marks the most bond sales for new endeavors, known as new-money issuance, to begin a year since 2010.
The borrowing burst speaks to localities’ improving confidence as business activity recovers with the vaccination campaign and as localities ponder how to spend the money they’re getting from the $350 billion of aid in President Joe Biden’s American Rescue Plan.
Get Your Shovels Ready
Cities are borrowing for new projects at the fastest pace since 2010
In just two examples of deals for infrastructure projects that are about to hit the market, West Virginia is selling more than $200 million of general-obligation bonds to fund highway, bridge and secondary road construction; and Colorado is set to issue $500 million of certificates of participation for highway and transit projects in rural areas.
“Many issuers delayed projects or scaled them back because of the pandemic,” said Peter Block, head of municipal strategy at Ramirez & Co. “We’re seeing a natural increase in new money as the economy picks up.”
Sales Boomlet
Local officials are seizing on low interest rates and robust demand for municipal debt to borrow for projects or refinance for savings. That’s causing sales boomlets in some parts of the $3.9 trillion state and local bond market — transportation-related issuance reached a record in the first quarter, surpassing the previous peak in 2008, data compiled by Bloomberg show.
Maine Governor Janet Mills, a Democrat, is proposing to sell bonds that will complement her plan to invest the nearly $1 billion the state is set to receive from the American Rescue Plan.
Tom Kozlik, head of municipal strategy and credit at Hilltop Securities Inc., estimates that about $650 billion in federal aid will be spread across different municipal sectors, possibly bringing about a “golden age” of opportunities in public finance.
“If public finance issuers were on the fence about selling debt this year, they are probably leaning toward doing it,” he said.
With muni sales overall expected to increase heading into the next few months, the project boom could extend through 2021.
“This year is on track to equal or exceed last year,” Natalie Cohen, founder of National Municipal Research, Inc., said of new-money issuance. “There is some light at the end of the tunnel.”
Bloomberg Markets
By Peyton Forte
May 12, 2021, 12:40 PM MDT
— With assistance by Natalia Lenkiewicz, and Amanda Albright
People invest in municipal bond ladders for several reasons, the obvious being they can benefit investors seeking tax-efficient income. Also, by buying bonds with varied maturity dates, investors can increase liquidity and avoid getting locked into a single interest rate, which can ease the impact of rising rates. And, because bond ladders hold several issues, they offer investors some diversification through type of issuer and credit quality.
But what happens when the market shifts, like what’s happening right now? Fragmentation makes it harder to find what you’re looking for. Almost 70% of the municipal bond market (as represented by the Bloomberg Barclays Municipal Bond Index) used to be rated AAA, whereas at the end of last year, it was less than 16%, based on our team’s analysis of the index from 2004 through 2020 using Bloomberg data. On top of that, the bull market for bonds is subsiding and the world is working toward putting a global pandemic in the rearview mirror. It’s clear the market doesn’t look the same as it did when many existing bond ladders were initiated. By virtue of their design, ladders don’t automatically shift to stay current with rapidly changing market trends — they are manually adjusted. So in 2021, I believe it may be time to consider ways to enhance traditional ladder strategies, perhaps by complementing them with passive multi-sector strategies that are built to exploit the broader credit opportunities. Cost efficiency becomes even more important in low-rate environments.
What’s In A Bond Ladder, Anyway?
The typical municipal bond ladder is comprised of 10 to 15 bonds, usually general obligation (GO) bonds, with one-, three-, five-, 10- and 20-year maturities. A GO bond is a municipal bond that is secured by a state or local government’s pledge to repay bondholders using available revenue. Investors might choose state GO bonds for the tax benefits and security of repayments, and they may ask their advisors to layer in certain bonds that are near and dear to their heart — those that support their home state or causes they care about, such as education or preserving parks and green space.
But how diversified are they really? How many sectors does the typical bond ladder provide access to? The reality is, the municipal bond market is picked over, particularly in smaller states. Investors’ and advisors’ options are limited. There are many non-GO sectors investors can consider, which are tied to specific projects or revenue streams, each with its own yield profile. Also, not all investors benefit equally from state municipals; depending on their tax bracket and domicile, after-tax returns may differ. So some investors in bond ladders aren’t necessarily getting the broad yield opportunity they might think they’re getting, much less sector diversification.
Ladders Don’t Move With The Market
If an investor is in a 10-year bond ladder, they chose bonds in that ladder within the context of a market that no longer exists. Not only has the U.S. Treasury bond bull market likely ended its run, but the global pandemic has dramatically changed the world and has had a profound impact on many industries.
As Covid-19 vaccinations continue to roll out and individual states’ economies open up, certain sectors are poised to reap the benefits. For example, as people begin traveling again, airports and toll roads are likely to generate more revenue. President Biden’s proposed $2 trillion package of investments for infrastructure and domestic needs, including a large proportion going toward the construction of roads, bridges and rail lines, would further open opportunities in the municipal bond market. And by virtue of their limited exposure, investors in traditional bond ladders may be missing out on sectors that are on the verge of strong performance.
Using A National Municipal Bond Strategy As An Alternative Approach
While bond ladders put the onus on the advisor or individual to diversify holdings, a nationally diversified municipal bond strategy typically provides exposure to 200 to 400 bonds, automatically delivering both geographical and sector diversification. As the market shifts, such a diversified strategy is in a stronger position to capitalize on outperforming sectors in the marketplace.
Professionally designed municipal bond strategies, including those accessed through strategic beta exchange-traded funds (ETFs), choose sectors and investments they believe will boost yield, regardless of where they’re located.
As for the disadvantages of a nationally diversified municipal bond strategy, income is exempt from federal but not state taxes. As such, this product might not appeal to or fit the needs of residents living in high-tax states such as New York.
Bottom Line
In a higher-rate environment, bond ladders can be a cost-effective strategy to balance the need for recurring income and reinvestment risk. In a low-rate environment, however, strict laddering can be limiting. An investor’s need for real income is usually constant and does not adjust as rates rise and fall — making it difficult for those who use ladders, which consequently limits their investment universe. By adding a national municipal strategy to the laddered portfolio, investors and advisors may be able to increase income while maintaining cost efficiency and transparency. Sometimes, the decision to widen the opportunity set is as important as deciding where on the curve to land.
Forbes
by Marc Zeitoun
May 13, 2021
Infrastructure spending is back in vogue, and we’ve got a chance to grab a piece of it tax-free, asserts Michael Foster, fund expert and investment strategist at CEF Insider.
That would be through municipal bonds, investments most people see as sleepy (though I have no idea why) but are poised to roll as President Biden’s $2-trillion infrastructure package (or some version of it) becomes law.
That’s because the law will usher in an explosion of new “muni” bonds — and there are select actively managed closed-end funds (CEFs) ready to pick up the best ones. By buying them now, we can nicely front run this muni-bond wave.
The best part of buying muni bonds (which are issued by states, cities and some non-profit entities, like hospitals, to fund infrastructure) is that the income they generate is 100% tax-free. This boosts the yield these funds offer considerably, especially if you’re in a higher tax bracket.
For instance, a municipal-bond yield of 3.8% may not sound like a lot (although in today’s market, 3.8% is still generous, since it’s over twice what you’d get from the S&P 500), but it’s the same as getting a 5.1% yield from dividend stocks if you earn $100,000 per year, thanks to their tax-free status.
Plus, municipal bonds are less volatile than almost all other assets, making them a great wealth protector, in addition to an income generator. The good news is that there are still bargains to be had in muni-fund land; here are three worth your attention now.
The BlackRock California Municipal Income Trust (BFZ) is an ideal way to get a 3.6% tax-free yield and capital gains over the long haul, thanks to its 9.7% discount and the fact that it focuses on California muni bonds.
Since Californians have one of the highest tax burdens in the country, a lot of them look for funds like BFZ. (And yes, you can still get tax-free income from BFZ if you don’t live in California.)
And if you’re worried an exodus from the highly taxed Golden State will hurt the value of California’s bonds, don’t be. Just 135,600 people left California in 2020, on a total population of 39.5 million. There are millions of Californians who can benefit from the tax-advantaged nature of California municipal bonds, leaving a big pool of buyers within the state itself for BFZ.
Our second fund boasts a slightly bigger discount (10.6%) and a slightly higher yield (3.7%) that BFZ: the Nuveen Ohio Quality Municipal Income Fund (NUO), so named because it invests 80% of its portfolio in highly rated muni bonds issued by organizations ranging from the Ohio Turnpike to the Cincinnati water system.
That makes it safer than your average muni-bond fund (which is already pretty steady) and therefore ideal for adding stability to your portfolio. But you’re not sacrificing performance to get this ultra-stable fund: it still easily beat the benchmark muni-bond ETF, the iShares National Muni Bond ETF (MUB), in the last decade.
NUO’s prudent portfolio management and market outperformance make it a nice choice for stability, gains and income – whether you live in Ohio or not.
Our final pick is the best: the Nuveen New Jersey Quality Municipal Income Fund (NXJ), which, like NUO, invests 80% of its assets in high-quality bonds while also trading at a whopping discount to NAV: 11.7%, in this case. But that isn’t even the best thing about NXJ; its dividend is — its 4.7% yield is large for a tax-free muni-bond fund.
Nuveen New Jersey Quality Municipal Income has been on my radar for a long time — since back in 2018. Back then, muni-bonds were out of favor, due to rising interest rates. But the fund has outperformed the broader muni-bond market, giving investors an outsized 8.9% total annualized return since then, with tax advantages to boot. That’s a sign that this quality fund is mispriced at an 11.7% discount.
moneyshow.com
by Michael Foster
05/12/2021
Fixed income exchange traded fund investors seeking steady yields and lower tax rates can turn to municipal bond strategies.
According to Municipal Market Analytics, investors have already funneled a net $39 billion into muni bond mutual funds this year through last Thursday, the most over the same period since 2008, the Wall Street Journal reports. So far this year, the munis market has outperformed corporate debt and Treasuries.
Bolstering the muni play, the Biden administration recently proposed tax hikes on the wealthy, which would make tax free municipal debt more attractive to these high net worth investors.
The sudden interest in munis marks a stark contrast to the same period of 2020 when cash-starved investors dumped everything, including the relatively safe municipal bonds. Furthermore, many warned that tax collections would plummet in the coronavirus pandemic-induced recession, fueling mounting debt and triggering a wave of defaults from the ensuing financial distress.
While defaults rose, the doomsday scenario never manifested, and investors eventually returned, especially after the Federal Reserve buoyed debt markets. Tax collections even overshot expectations, with states and local governments raising revenue expectations in response to the stimulus money coming in.
“We have money raining out of the sky,” Ben Watkins, director of bond finance for the state of Florida, told the WSJ, referring to the favorable market conditions and stimulus aid. “We’re in a much better position now than if Covid hadn’t hit at all.”
The municipal market is entering “a new golden decade of strong growth and strengthening credit quality,” according to Bank of America analysts.
Moody’s Investors Service also upgraded its outlook for state and local governments to “stable” from “negative.”
“We made it through a tough year with very minor problems,” Dan Solender, director of tax free fixed income investments at Lord Abbett & Co., told the WSJ.
As a way to focus on the muni bond market, fixed income investors can look to the American Century Diversified Municipal Bond ETF (NYSEArca: TAXF). The American Century Diversified Municipal Bond ETF is an actively managed municipal bond fund that combines investments in thoroughly researched high yield and investment grade municipal bonds. Designed for investors seeking current income, the fund dynamically adjusts investment grade and high yield exposures based on prevailing market conditions.
Additionally, the more recently launched Avantis Core Municipal Fixed Income ETF (AVMU) invests primarily in investment grade quality municipal debt obligations from a diverse group of issuers. The actively managed fund’s investment process uses an analytical framework, including assessing securities’ expected income and capital appreciation, to seek securities with high expected returns.
ETF TRENDS
by MAX CHEN
MAY 12, 2021
With the tax deadline around the corner, it’s not too late to start thinking about next year by adding tax-free municipal bonds through assets like the Vanguard Tax-Exempt Bond ETF (VTEB).
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 IndexTM, 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 in order to replicate the yield, duration, and credit quality of the debt. This method allows the funds to avoid trading expensive bonds that could harm performance and, in addition, minimize tracking errors.
“Under normal circumstances, at least 80% of the fund’s assets will be invested in securities whose income will be exempt from federal income taxes and the federal alternative minimum tax,” the Vanguard website noted. “Risks of the fund include the fact that changes in interest rates can affect the fund by resulting in lower bond prices (when interest rates go up) or an eventual decrease in income for the fund (when rates decline). Investors who are looking for a fund that may provide federal tax-exempt income and can tolerate moderate price and income fluctuations may wish to consider this fund.”
Soaring Demand for Municipal Bonds
Despite economic progress, many fixed income investors may still be hesitant to add more risk with corporate bonds. As such, demand for municipal debt has been high.
Whether investors are searching for more yield, debt that has a lesser likelihood of default, or diversification in their fixed income, they’re obviously seeing something they like in municipal bonds.
“Investors in search of higher returns and lower taxes are scooping up debt sold by state and local governments, pushing borrowing costs to near-record lows and boosting coffers from California to Connecticut,” a Wall Street Journal report said.
“Investors have poured a net $39 billion into municipal-bond mutual funds this year through Thursday (May 6), according to data compiled by Municipal Market Analytics, the most over the same period since 2008,” the article added. “Returns on the debt, which local governments use to fund public works such as sewers or bridges, have beaten those of corporate bonds and Treasurys.”
ETF TRENDS
by BEN HERNANDEZ
MAY 12, 2021
The opioid crisis has a profound effect on municipal finance, according to a new study from U.S. researchers.
The study found that municipalities with higher levels of opioid abuse also saw lower credit ratings, reduces bond issuances and reduces access to capital.
The paper, titled Opioid Crisis Effects On Municipal Finance, can be read here.
From the paper:
Using nationwide data at the level of every U.S. individual death certificate, every prescribed opioid pill, the totality of municipal bond issuance, and county-level socio-economic variables, we find that opioid abuse results in higher offer yields, lower credit ratings, and reduced bond issuance. Specifically, highly affected counties face offer yields that are 16.74 bps higher compared to less affected counties and reduce total issuance amount by nearly 9%. Given the average annual issuance of $167 million per county, our results imply a reduction of about $15 million in annual funding that could have otherwise been raised, an amount roughly equivalent to twice the average price of a new elementary school (see Cornaggia et al., 2018). Because there is significant within-state dispersion in the severity of the crisis, our county-level study links local opioid abuse to credit risk and capital
market outcomes at a granular level.Overall, we conclude that opioid abuse has significant adverse effects on local government access to finance. We further conclude that the effects manifest more strongly through the issuance quantity channel (sizable reduction in funding amounts raised) than the issuance price channel (economically smaller impact on municipal bond offer yields). Credit supply reduction can further amplify the negative effects of opioid abuse on local communities, as lower and more expensive credit reduces the provision of municipal services and infrastructure. Our results commend policies such as federal (or state) subsidized bond insurance for highly affected counties in order to alleviate credit constraints and mitigate the potential for such negative cycles.
by CivMetrics Staff | Apr 29, 2021
Fitch Ratings-Chicago/New York-04 May 2021: Provisions in the American Rescue Plan (ARP) and President Joseph Biden’s proposed American Jobs Plan (AJP) and American Families Plan (AFP) that aim to help higher education are supportive of credit for the institutions targeted by these plans, including public and minority-serving institutions, Fitch Ratings says. Federal aid as a percent of total revenues has increased for public universities over the last five years, which has partially compensated for reduced state appropriations.
Estimates for state support for higher education in fiscal 2021 show an overall decline of 2.7% yoy. However, when federal aid under the Coronavirus Aid, Relief, and Economic Security (CARES) Act is factored in, total support increases to 0.3% yoy. This is still the lowest level since 2012.
Fitch Ratings-New York-06 May 2021: The American Jobs Plan (AJP) would require accelerated changes to electricity generation and transmission that would have varied effects on renewable energy projects, public power utilities and states, Fitch Ratings says. President Joseph Biden’s proposed infrastructure plan includes significant clean energy goals that would contribute to a carbon-free electricity grid by 2035. The credit implications of reducing fossil fuel reliance are limited for these sectors in the near-to-medium term, as we discuss in our new report Biden’s Clean Energy Plans Accelerate Shifts for Public Entities and Power Projects.
While Congressional action on certain tenets of the AJP remain uncertain, we expect tax credits for clean energy projects to be a part of any final plan, spurring investment in renewables, energy storage and transmission infrastructure. Direct-pay tax credits for renewable generation are significant for project funding, as the refundable credits preclude the need for a tax-equity partner, making capital formation more efficient.
The costs of transitioning to renewable energy could be significant for utilities and other issuers in the near-to-medium term, but we expect that transaction structures and financial flexibility assumed in the rating will be able to absorb these costs until the longer-term efficiencies and savings are realized. Stranded-asset risk could be more material for issuers with significant fossil fuel exposure. States whose economies rely on the oil and gas sector will face transition risks such as lost jobs and lower economic output, but financial impacts are expected to be more modest for state governments with tax regimes that are not directly linked to this sector.
Progress toward increased renewable power use depends upon better storage and transmission technologies to meet variable demand periods. Fossil fuels will continue to play a part in meeting dispatchable capacity needs and ensuring energy in reserve until longer-duration battery storage capabilities improve.
Contact:
Marcy Block
Senior Director, Sustainable Finance
+1 212 908-0239
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019
Dennis Pidherny
Managing Director, US Public Finance
+1 212 908-0738
Andrew Joynt
Senior Director, Infrastructure and Project Finance
+1 212 908-0594
Eric Kim
Senior Director, US Public Finance
+1 212 908-0241
Sarah Repucci
Senior Director, Fitch Wire
+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-Milan/New York-04 May 2021: Fitch Ratings has made minor updates to its “Public-Sector Counterparty Obligations in PPP Transactions Rating Criteria” as part of the routine criteria review process.
Revisions involve editorial changes, including clarifications in the guidelines for notching factors, such as the “budgetary process” and the “legal status and enforcement” with swapped wording in the “midrange” and “weaker” attributes.
There is no impact on existing ratings from this update.
This report replaces the criteria report of the same name dated July 10, 2020.
Contact:
Raffaele Carnevale
Senior Director
+39 02 879087 203
Fitch Ratings Ireland Limited Sede Secondaria Italiana
Via Morigi, 6 Ingresso Via Privata Maria Teresa, 8
Milan 20123
Eric Kim
Senior Director
+1 212 908 0241
Raj Sanghvi
Associate Director
+1 212 908 0746
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com
Additional information is available on www.fitchratings.com
The Department of Homeland Security is funding a grant for researchers to study vulnerabilities in critical infrastructure in the U.S.
The funding comes on the heels of a cyber attack on a Florida water treatment plant, and the looming specter of hackers taking critical infrastructure offline.
From Grants.gov:
The nature of the cybersecurity threat to America is growing, and our nation’s cyber adversaries move with speed and stealth. To keep pace, SLTT agencies need to be able to identify, categorize, and prioritize their HVAs in order to protect these assets from compromise, subsequently protecting HVAs that are so critical to an organization that the loss of access or corruption of these assets would have serious impact to the organization’s ability to perform its mission or conduct business.
Key to this effort, SLTT jurisdictions require guidelines, templates, and tools to facilitate implementation of these processes within the context of their own risk management framework, available resources, and authorities.
The purpose of this Cooperative Agreement is to establish a HVA pilot that aligns with the Federal Government’s HVA programs and is flexible enough to be implemented by SLTT jurisdictions based on their individual requirements. The outcomes of this cooperative agreement will provide standardized methods for the identification, categorization, and prioritization of high value assets, and provide guidance, templates, and tools to mitigate risk associated with identified vulnerabilities.
by CivMetrics Staff | Apr 28, 2021
The topic of infrastructure has been front and center in recent weeks, following the Biden Administration’s unveiling of the American Jobs Plan, a massive investment plan to “Build Back Better” the country’s infrastructure. A critical infrastructure component is water systems—drinking water, wastewater, and stormwater—many of which have deteriorated with age and lack of funding. The renewed focus on infrastructure proposes to funnel massive investment into upgrading the nation’s water systems, under the American Jobs Plan and a slate of bills now before Congress. We take a look at what the new infrastructure developments could mean for water systems.
Much of the network of water systems across the United States is old—some decades, others more than a century. And noncompliance with drinking water standards at many community water systems has led the U.S. Environmental Protection Agency (EPA) to designate a National Compliance Initiative—a priority area for enforcement and compliance efforts—to help ensure safe drinking water supplies. Maintaining water systems, expanding them to serve ever-growing populations, and upgrading them to achieve modern regulatory standards protective of public health and the environment all takes significant funding. Despite efforts of water systems and regulators, chronic underfunding has hampered attempts to provide efficient treatment and robust access to safe water—sometimes to catastrophic effect, like in the case of Flint, Michigan. Such issues could be further compounded as some areas face novel challenges related to limited water shortages.
Against this backdrop, several steps by the Biden Administration and Congress aim to fortify the nation’s water infrastructure. A substantial portion of the American Jobs Plan, the government-wide infrastructure plan that calls for Congress to appropriate $2 trillion in federal funding, would go toward overhauling water systems. In particular, the plan calls for approximately $111 billion to be devoted to water infrastructure, with $45 billion in federal funding going to replace all remaining lead pipes and service lines still in service. Another $56 billion would provide grants and low-cost loans to state and local governments, particularly in disadvantaged communities. And an additional $10 billion would help address PFAS contamination in drinking water. Although these goals will require congressional action to fund them, the administration is already taking steps to provide greater funding immediately. For instance, earlier this month, EPA announced a $67 million stormwater grant funding opportunity to assist states and cities address stormwater management issues, such as sewer overflows from heavy precipitation.
On the legislative side, several bills addressing water infrastructure are already making their way through Congress. For example, yesterday, the Senate passed the Drinking Water and Wastewater Infrastructure Act of 2021 to provide $30 billion in water infrastructure investment. The bipartisan legislation reauthorizes a program to provide long-term, low-cost loans for regionally and nationally significant projects; reauthorizes state and EPA revolving funds for water systems; and initiates a pilot program geared toward helping rural and low-income households afford water services. Among other things, the bill’s loan provisions address loan eligibility for projects that involve federal partners, allowing them to retain access to greater leverage ratios for project loans under the program. This measure appears to address concerns previously raised by water utility associations about the existing loan program that could otherwise limit available funding for loans. Despite the Congressional Budget Office calling into question the legality of this provision, the bill passed the chamber with broad bipartisan support.
Meanwhile, in the House, the Water Quality Protection and Job Creation Act of 2021 would authorize a $50 billion investment in wastewater infrastructure and local water quality projects. Specifically, $40 billion over five years would be available via loans and grants for communities to undertake wastewater infrastructure projects. Additional funding would target municipalities stormwater treatment needs, state water pollution control programs, and tribal water infrastructure needs, among other things.
These funding measures come amidst a call from a coalition of groups representing state officials responsible for stormwater, wastewater, and drinking water, urging Congress to allocate funding where it is most needed for their systems, in particular by expanding current programs and affording flexibility for projects to use the funding. Earlier this year, some of these organizations representing municipally owned wastewater and drinking water utilities launched a campaign to advocate for increased water infrastructure investment, to allow them to make necessary upgrades without driving up rates and creating severe affordability issues for consumers. As this campaign notes, federal funding for water infrastructure has dropped precipitously over time, from approximately 63 percent of overall cost in 1977 to less than 5 percent last year.
The fate of the bills now under consideration, as well as the additional legislation called for in the American Jobs Plan, are still uncertain. In particular, it remains to be seen whether the chambers will use the conference negotiation process or enact multiple packages to account for the different House and Senate bills. Ultimately, however, enacting any combination of the measures would make available a massive amount of investment to address water infrastructure needs.
Hunton Andrews Kurth LLP – Samuel L. Brown and Alexandra Hamilton
April 30 2021
Fitch Ratings-New York-10 May 2021: Fitch Ratings provides insight into the credit relevance and materiality of environmental, social and governance (ESG) factors for each US Public Finance sector, highlighting the rating effect of ESG factors in case studies, in its new report Where ESG Matters for U.S. Public Finance. Fitch uses ESG Relevance Scores (ESG.RS) to communicate the effect of these factors on both US tax-supported and revenue-supported issuer ratings.
Governance is the most influential ESG factor for US Public Finance (USPF) as a whole, given the importance of management strategy, internal controls, quality of service provision and financial transparency to every sector. Cybersecurity risks, a governance and social consideration, continue to raise significant governance and social issues that may pose harm to consumers or residents and reveal management weakness, potentially negatively affecting ratings. Governance factors are expected to remain highly relevant to ratings beyond issuer navigation of the pandemic recovery.
Environmental factors have gained more importance in USPF rating decisions since the ESG.RS were introduced in May 2019. Recent events bring this issue into sharp focus, resulting in elevated ESG.RS for Exposure to Environmental Impacts for 19 public power issuers following severe weather events in Texas in February 2021 and for some military housing projects due to moisture remediation issues. Environmental factors continue to have a more modest influence in the tax-supported portfolio, with elevated scores largely recorded in Biodiversity and Natural Resource Management, as well as Natural Disasters and Climate Change.
Social factors such as Labor Relations, Customer Access and Customer Welfare have negative rating effects for a number of USPF sectors and credits. Conversely, social factors have an overwhelmingly positive influence on community development and social lending credits.
ESG.RS incorporate 15 general ESG issues for tax-supported issuers and 14 general ESG issues for revenue issuers, and are expressed on a ‘1’ to ‘5’ scale, with ‘1’ indicating irrelevance and ‘5’ being highly relevant for the rating. An ESG.RS of ‘4’ or ‘5’ can be positive or negative to a rating decision, although the majority of assigned scores reflect a negative impact.
Contact:
Marcy Block
Senior Director
+1 212 908-0239
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019
Sarah Repucci
Senior Director, Fitch Wire
+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.
With the historic low interest rates and more pre-qualified buyers with attractive offers, houses are virtually flying off the market in almost every state in the United States.
The recent data by Realtor.com shows that between April 2020 to April 2021, the median home price has risen by an average of 17.2%. This frenzy has led more and more buyers & sellers to question whether this growth is sustainable for the near future. However, this rapid uptick in the housing market comes as a positive trend for local and state governments struggling with some of their revenue streams impaired by COVID-19.
In this article, we will take a closer look at the current housing market trends, the outlook and how it will likely impact both local and state governments.
municipalbonds.com
by Jayden Sangha
May 05, 2021
A firm in the Pacific Northwest is trying to take blockchain-based municipal borrowing mainstream, and has announced its first loan in Oregon after launching with issuers in its home Washington state.
Small issuers in particular stand to benefit from, say the founders of Alpha Ledger Technologies, which just recorded a $1.345 million loan for the Port of Astoria, Oregon, its second such loan and first in Oregon.
“This is a historic event in the democratization of municipal finance,” Alpha Ledger CEO and co-founder Manish Dutta said in a LinkedIn post Tuesday.
In a deal that builds on municipal loans done by Alpha Ledger since 2019 in Washington state, the Special District Association of Oregon Advisory Services was municipal advisor to the Port of Astoria for the taxable loan financing.
The municipal market can be divided into two lending sectors – municipal bonds and municipal loans. Muni loans are often focused on smaller, less liquid issuers, such as small towns and villages with buyers such as community banks.
Blockchain is technology that uses computing power to generate a distributive ledger for transactions. It is often associated with cryptocurrencies, but it can be used for any type of financial payments or actions that need to be recorded. It is both decentralized and transparent, boosters say.
Blockchain allows a smaller muni loan to be digitized and placed up for sale. Auctioning off the loans directly can be good for issuers because they will see lower costs and it also fosters market competition while providing a liquidity for community banks that wasn’t there before.
While blockchain is often associated with Bitcoin, these muni transactions – while they are tokenized digital assets – are denominated in dollars and not crypto-currency. Its aim is efficient custody and clearing combined with blockchain to make the loans cheaper to issue and easier to transact.
SDAOAS, an organization that represents several hundred special district issuers in Oregon, has informed them they will now be able to issue debt though this system and that banks all over the Western United States will be able to bid on the loans.
SDAOAS invited 31 banks to bid on the Port of Astoria loan last month and the winning bid on the platform was from Kitsap Bank in Port Orchard, Washington.
The port was trying to refinance an outstanding loan to lower interest rates and avoid a balloon payment, according to port commission agenda packets that make little or no mention of the word blockchain.
The Kitsap Bank term letter to the commission simply states that “The Bank is prepared to close via either scanned documents or the Alpha Ledger Platform.”
Dutta, Tammie Arnold, head of business strategy, and Chris Wade, president and CTO, founded Alpha Ledger in 2019.
Dutta and Arnold had previously worked for PIMCO and crossed paths when working on exchange traded funds. They decided their new firm would develop and build a space for blockchain fixed-income infrastructure and applied for their broker/dealer license and built that business from the ground up.
“We recorded our first municipal loan transaction in 2019, making us the first one to do it,” Dutta told The Bond Buyer Tuesday. “We were making sure that we could put together an infrastructure that allowed the issuers to connect to the community banks.”
Dutta said as the firm built its business it was introduced in May 2020 to the Riverview School District in Washington, which was having challenges raising capital during the height of the COVID-19 pandemic.
“We then helped the district raise capital through our platform,” Dutta said, adding this was also through community banks.
“The amazing thing about this story is that this school district was looking to raise some capital and they called the banks and got some bids that they weren’t happy with,” he said. “So we brought the school district onto our platform, they created an RFP and they were able to get a winning bid.”
Arnold said it was a natural fit for the firm.
“We’re based in Poulsbo, Washington, just outside of Seattle,” Arnold told The Bond Buyer. “So it was very natural for us to work with individual issuers in the state of Washington and develop relationships in the state as we built our business.”
Arnold said the firm has plans to expand in the United States.
“We are already working on building relationships across states – mostly in the Western part of the U.S., but we have aspirations to do our work across the country,” she said, adding that as a young firm it is starting off in the part of the country that they already know well.
She noted that the firm “is a company that is built from a first principles level. We have thought through the implications of digitization throughout the life of fixed-income instruments. We have worked to build a platform that is open, direct and transparent.”
“And we are starting here in the municipal loan market and we?re super excited about our work in that particular part of the market today,” Arnold added.
Dutta said it is satisfying to “innovate in a market that is of great importance to our country and infrastructure.”
Arnold said it is important to look at the process of bringing institutional economics to smaller transactions.
“Through a combination of modern technology and process change related to the municipal market, we have really though through and addressed the economics around small transaction size,” she said.
This new system is seen not only as an upgrade in providing added market efficiency, it’s a total change in the way of doing business in the muni loan space from moving from paper to cyberspace.
Alan Konevsky, the chief legal officer at tZERO, a financial technology firm, says that digital technology is the wave of the future and that local governments are starting to ride it.
“The United States has reached an inflection point of secular acceptance of digital infrastructure and blockchain technology, and recognition that it is a far superior way of recording, tracking, exchanging and storing value than legacy systems, whether it’s in the realm of payments or securities flow in the capital markets or other use cases,” Konevsky told The Bond Buyer.
He said the COVID-19 pandemic probably had something to do with accelerating that recognition because of the increased use of digital payments while people were at home.
“It’s another step on the journey of integrating this technology into everyday society,” Konevsky said. “What digital technology did for data and voice for the internet, it’s going to do the same thing to value and money.”
By Chip Barnett
BY SOURCEMEDIA | MUNICIPAL | 05/05/21 03:41 PM EDT
Some U.S. airlines might still be a risky bet as domestic travel recovers, but the picture is brightening for municipal airports and their bonds. Moody’s upgraded its outlook for the sector’s credit to positive on Tuesday.
The ratings firm said that domestic travel is on track to rebound faster than it initially projected. Passenger screenings at U.S. airports have picked up substantially over the past few months, and in April there were 60% as many passengers screened as there were for the same period in 2019, compared with 38% at the end of last year, the analysts found. Even in its forecasts for a “faster recovery,” Moody’s had estimated passenger screenings would average just 44% of prepandemic levels.
“Constraints on travel and activities have been loosened recently in the US, despite some fluctuation in case counts in recent weeks. Given these positive developments, we expect [air travel] to continue to either meet or exceed our fast recovery case,” the credit analysts wrote in a May 4 note. “We expect the recovery to reach another peak as the summer season starts, with an advanced vaccination rollout and pent-up demand driving strong domestic travel activity.”
That should mean good things for municipal bonds issued by airports. While that market was temporarily hit by the pandemic, losing 5.7% in March of last year, it has rebounded since then, according to ICE Indices. The sector offers a tax-exempt effective yield of 1.7% and an effective duration of 6.8 years, according to ICE. While that may not sound great, it still measures up pretty well against the taxable 2.2% effective yield of the U.S. corporate bond market, with its 8.2-year effective duration.
“The resilient demand is also driven by stimulus funding and overall strong economic recovery. We expect that the economic momentum will accelerate over the course of this year and the next because of the improved pandemic control, fiscal support and more predictable policy environment,” wrote Moody’s. “With the new stimulus, not only for airports and airlines, but also for households and businesses, further boosting the pent-up demand, we expect economic activity to considerably pick up in the second half of the year.”
The downside is that markets already reflect some of this optimism. Airport bonds have returned 1.3% so far this year, outperforming the broader muni market’s 0.8% return, according to ICE Indices. And transportation and airport bonds have posted the best year-to-date performance of any muni-bond sector, according to CreditSights.
Even so, last month BlackRock stood by a bullish call on airport bonds, saying they still had a “preference for lower-rated credits and sectors that have been more impacted by the pandemic such as transportation, travel-related (hotel tax, airport, etc.), and health care.”
Investors who want to be selective may want to look at airports that have less exposure to international and business travel, and more exposure to domestic and vacation travel.
“Although some airports have significant exposure to international and business travel, others are focused on domestic and leisure travel and are likely to show a faster recovery in enplanements,” Moody’s said. Airports in New York, Los Angeles, and San Francisco are some of the biggest international gateways in the U.S., according to government data.
Across the whole sector, however, a slow rebound in domestic and business travel may not significantly hamper the recovery. International travel made up only 13% of total travel in 2019, so even international-flight hubs may fare better than some investors might fear.
“We expect the strong domestic recovery to offset the slower pick up in international travel,” Moody’s wrote.
Barron’s
By Alexandra Scaggs
May 5, 2021 10:30 am ET
The U.S. Economic Development Administration received an influx of Covid relief dollars over the past year that is more than 10 times the size of its usual budget. That money is now flowing as grants.
The U.S. Economic Development Administration is flush with cash these days. In fiscal 2020, the federal grant-maker had a budget of about $330 million. Now, two rounds of coronavirus relief passed by Congress have pumped more than $4 billion dollars its way, money that is destined for grant recipients that include state and local governments and certain nonprofit groups.
“It’s been both a challenge and a tremendous opportunity for the agency,” Dennis Alvord, EDA’s deputy assistant secretary for economic development and chief operating officer, said of the funding surge during an interview with Route Fifty last week.
“We definitely have had to think differently about our business model and how we undertake our grant-making mission to aid the nation’s most economically distressed communities,” he added.
Route Fifty
by Bill Lucia
May 6, 2021
Most of all, it’s important for state and local entities to have a reasonable plan and to stick with it
State pension systems dropped the rate of return they assume for their investment portfolios again, continuing a two-decade long trend that public-finance experts say is necessary, even as it presents some challenges for the entities that participate in such plans.
The median assumed return in 2021 is 7.20%, according to a report published early in May by the National Association of State Retirement Administrators, down roughly 1 percentage point since 2000, as the investment managers charged with managing trillions of dollars for municipal retirees have adapted to a more challenging market environment.
“Long-term growth projections have come down pretty significantly from the rates of growth we saw going back to the 1990s,” said Greg Mennis, director of the public sector retirement systems project at the Pew Charitable Trusts.
MarketWatch
By Andrea Riquier
May 10, 2021
US city budgets are tighter than ever due to COVID-19. The American Rescue Plan Act, recently passed by Congress and signed into law by President Biden, will provide some relief in the near term, while the proposed American Jobs Plan offers a tantalizing vision of federal infrastructure investments that could drive local climate action and equity nationwide.
Yet there remains an immutable reality that US cities without dedicated revenue streams to fund climate change mitigation, resilience, and environmental justice will continue to face fiscal constraints. Simply put, these social and environmental causes are at risk of being deprioritized when they stand side-by-side with other essential services.
But even in our economically challenging times, the light of leadership remains bright at the city level. Mayors, community coalitions, advocacy groups, and city councils have maintained focus on climate change and the need for aggressive action to protect and improve their communities’ futures.
cleantechnica.com
By Alexander Dane & Alisa Petersen
When he first started managing money in 1996, Michael Plaiss wanted nothing more than to be the next Peter Lynch—the famous stock jockey of Fidelity’s Magellan Fund. “Just the thought of being able to analyze a portfolio of stocks, and you’re the one that gets to make the call that ‘this one’s overvalued, and this one’s undervalued’—that really appealed to me,” says the manager of the Performance Trust Municipal Bond fund.
Obviously, things turned out differently.
“I fell in love with bonds,” Plaiss, 56, admits. “Everything I said about what I like to do—‘this thing’s undervalued, this is overvalued’—that sounds good, but it’s very difficult in stocks to actually do that. Bonds are much more mathematical instruments.”
Barron’s
By Lewis Braham
May 5, 2021 6:00 am ET
Investors have put $39 billion into municipal-debt funds so far this year, the most over that period since 2008
Investors in search of higher returns and lower taxes are scooping up debt sold by state and local governments, pushing borrowing costs to near-record lows and boosting coffers from California to Connecticut.
Investors have poured a net $39 billion into municipal-bond mutual funds this year through Thursday, according to data compiled by Municipal Market Analytics, the most over the same period since 2008. Returns on the debt, which local governments use to fund public works such as sewers or bridges, have beaten those of corporate bonds and Treasurys.
Demand is so intense that Illinois, the only state to tap the Federal Reserve’s pandemic emergency-lending facility, recently sold three-year bonds at yields near 1%. Another boost is coming from the Biden administration’s proposed tax changes, which potentially can make municipal debt more attractive to investors. Considered almost as safe as Treasurys because they are backed by taxes or payments on essential services like water, municipal bonds typically offer interest payments that are tax-free.
The Wall Street Journal
By Sebastian Pellejero
May 9, 2021 11:03 am ET
Municipal bonds have long been a favorite spot for investors looking to score tax-free income. Issued by states and local governments to fund their daily activities or special projects, munis are generally free from federal taxes. They’re also free from state taxes from the issuing state. As a result, upper income individuals have prized muni bonds as a portfolio position.
But there’s more to the muni market than just general revenue obligation bonds.
In fact, there’s a whole sector of taxable municipal bonds out there. The best part is that these taxable munis could offer a host of benefits to investors looking to boost their income and get a dose of safety for their portfolios. And in many cases, taxable munis could be a better buy than corporate bonds with similar durations. For investors, taxable munis are one fixed income sector to keep on your list.
dividend.com
by Aaron Levitt
May 06, 2021
Wells Fargo Asset Management Senior Portfolio Manager Nick Venditti reacts to municipal bonds staging their longest winning streak against Treasuries in seven years. He speaks with Bloomberg’s Taylor Riggs on “Bloomberg Markets: The Close.”
Bloomberg Radio
May 5th, 2021
America’s municipal bonds are staging their longest winning streak against Treasuries in seven years.
State and local debt has benefited from a surge of cash in 2021 that’s showed no signs of letting up, with President Joe Biden’s plans for higher taxes on the wealthy catalyzing demand for the bonds that pay tax-free interest. That flood of money has helped municipal returns’ beat Treasuries for seven straight months through April, with state and local debt posting a gain of 0.8% last month, according to Bloomberg Barclays indexes.
But with debt sales by states and cities poised to pick up and investor resistance to the historically rich levels rising, May could snap the winning streak. Already, benchmark muni yields have ticked up about five basis points since the start of last week. John Miller, head of municipals at Nuveen, noted in a May 3 note that selloff brought the securities closer to fair value.
Still, analysts say they’re still expecting the market’s overall strength to continue as inflows into municipal-bond mutual funds shows no signs of abating. Bank of America Corp. strategists said there’s the potential for another market rally in May.
Barclays Plc strategists said the demand will help avoid a summertime correction in bond prices, even with valuations near record highs. They noted that municipals may outperform if interest rates rise again, which hurt Treasuries earlier this year. Municipals tend to outperform in rising-rate environments.
“Even if rates sell off further, tax-exempts will likely follow, but should outperform, supported by a combination of low supply, strong inflows, heavy bond redemptions over the course of the summer; large cash cushions of mutual funds; and improving credit quality of municipal bonds,” the Barclays strategists said.
James Iselin, a managing director at Neuberger Berman Group LLC, said it’s unclear what could “dislodge” market conditions, given demand has stayed strong and new issuance of bonds has remained manageable.
“So far, the technicals are really driving the show right now,” he said.
Bloomberg Markets
By Amanda Albright and Peyton Forte
May 4, 2021, 10:30 AM PDT
Joe Mysak, Munis Editor for Bloomberg Briefs, talks municipal market flows and yields. Hosted by Paul Sweeney and Matt Miller.
Bloomberg Radio
May 7, 2021
Stifel Financial Corp. is being urged to pull out of a controversial municipal bond financing for two privately owned prisons in Alabama that activists have described as “toxic.”
The funding plan has not moved forward after two other banks serving as underwriters on the $634 million publicly offered bond issue — Barclays Plc and KeyBanc Capital Markets — dropped out of the transaction last month after facing pressure from activists and investors. The agency issuing the bonds on behalf of a CoreCivic Inc.-owned entity also left the transaction, and so did the bond trustee.
The St. Louis-based bank said it acknowledged the concerns and that there were “many sides” to the issue, according to a letter sent Thursday to activists that was provided to Bloomberg News by a bank spokesperson. The financing would build new prisons that are publicly run but owned by prison giant CoreCivic as part of an effort to address poor infrastructure in the state’s prison system.
Justice Capital, an impact investing firm, said in a statement on Thursday that Stifel “has yet to pull out of the deal, concerning clients and the larger investment industry.” The firm, along with representatives firms like Basso Capital and Candide Group, and local activist groups like Alabama Students Against Prisons signed a letter to Stifel CEO Ronald Kruszewski about the transaction. A separate group of activists also sent a letter to the bank about the financing.
Veronica R. Johnson, deputy director of the Alabama Justice Initiative, sent a letter to Kruszewski on behalf of different activist groups this week. The letter asked him to suspend the firm’s involvement in the project. “At present, Stifel is standing alone in financing a project that has been deemed toxic and unethical by peer financial institutions,” the letter said.
“Although there are many sides to this issue and little common ground, we believe that there is a general acknowledgment that the State of Alabama faces challenges in the current and historical operation of its correctional systems,” Stifel’s Joel Jeffrey, senior vice president for investor relations, wrote Thursday in response.
Jeffrey invited Johnson to contact him to discuss the issue in more detail. The Stifel letter added that the bank doesn’t comment on potential transactions and that it’s not party to the state’s political process to figure out potential solutions.
A spokesperson for the bank declined to comment further.
Alabama Governor Kay Ivey has said the prison projects will move forward, but a spokesperson for her office earlier this week declined to provide additional details on the plan for the financing.
Barclays’ decision to drop the financing last month is a sign of the growing power of investors focused on financing projects that advance social and environmental causes. With billions of dollars flowing into so-called ESG funds, that’s created a lucrative new line of business that banks are eager to court.
The prison business has long been targeted by activists who say the profit-motive gives an incentive to cut costs, hurting rehabilitation efforts.
“We call on Stifel and all investors and financial institutions to stop the financing of mass incarceration and urge them to join us in making investments in community-led public health, safety, and infrastructure to become a part of the solution,” Christina Hollenback, founding partner Justice Capital, said in the statement.
A client of Stifel, hedge fund Basso Capital, had concerns about the bond deal, the statement added.
“As a long-standing trading client of Stifel, we are halting our business with them as long as their policy to finance mass incarceration stands, and we urge other Stifel clients and partners to do the same,” Howard Fischer, chief executive officer of Basso Capital, said in a statement.
Bloomberg Markets
By Amanda Albright and Danielle Moran
May 6, 2021, 11:43 AM PDT
A former Citigroup Inc. executive called Nuveen LLC’s alleged demand that the bank stop doing business with the bond giant’s smaller rival Preston Hollow Capital “outrageous” and “anticompetitive,” according to a new court filing citing tapes of phone calls in a long-running legal battle.
“The idea that you can say don’t do business with X, I find to be incredibly illegal … I’m not a lawyer, but that just sounds wrong to me,” Peter Bartlett, Citigroup’s former co-head of capital markets for municipal securities, said in a call that included Jamie Doffermyre, the bank’s head of municipal sales, and John Heppolette, head of municipal markets, according to the May 3 filing by Preston Hollow.
Transcripts of calls between top executives in Citigroup’s municipal bond department show that Nuveen’s head of municipal investment, John Miller, demanded Citi stop doing business with Preston Hollow on multiple occasions and that Citigroup employees recognized the antitrust implications of the demands, according to the filing. Nuveen oversees more than $140 billion of municipal bonds and generates millions of dollars in revenue for Wall Street trading desks.
Delaware Chancery Court Judge Sam Glasscock III concluded last year that Nuveen had wrongfully interfered with Preston Hollow’s business. Preston Hollow has asked Glasscock to penalize Nuveen for allegedly offering false testimony about the demands and to sanction Citigroup for failing to hand over evidence. It said the tapes show that John Leahy, director of Citigroup’s institutional municipal bond sales, lied when he testified in a July 2019 trial that Miller hadn’t demanded the bank cut off business with Preston Hollow.
The Dallas-based firm is also suing Nuveen in Delaware Superior Court for defamation over what it says was its intimidation campaign.
Citigroup has denied wrongdoing and called Preston Hollow’s most recent allegations, like its prior ones, meritless and irresponsible.
“At the appropriate time, and in the appropriate forum, Citi will set the record straight, and looks forward to doing so,” spokeswoman Danielle Romero-Apsilos said.
Nuveen has said Preston Hollow “continues to make false and misleading statements seeking to assign blame to Nuveen and others.” Spokeswoman Jessica Greaney said Nuveen had no further comment.
Bartlett left Citi in 2019 after a 40-year career.
The current case is Preston Hollow Capital LLC v. Nuveen LLC, N19C-10-107-MMJ, CCLD, Delaware Superior Court (Wilmington).
Bloomberg Business
By Martin Z Braun and Jef Feeley
May 4, 2021, 1:40 PM PDT Updated on May 4, 2021, 3:43 PM PDT
Hilltop Securities Inc., the third-biggest adviser on bonds issued by U.S. states and local governments, sued a former employee for allegedly stealing confidential files before leaving for competitor RBC Capital Markets.
Hilltop claims Alex Bugallo, a former managing director in its Orlando, Florida, office, downloaded client debt analyses, spreadsheets and client contacts to a flash drive and emailed other documents to a personal account in the two months before resigning in April.
Bugallo also deleted hundreds of files, including requests for proposals and client debt profiles known as debt maps, from Hilltop’s network, the firm said in its lawsuit, filed on May 3 in federal court in Orlando. The aim was to sabotage Hilltop’s service so clients would follow Bugallo to RBC, according to the suit.
A call to Bugallo’s cellphone seeking comment on the suit was immediately disconnected.
RBC isn’t named as a defendant in the complaint. Cody Pan, an RBC spokesman, had no immediate comment on the suit.
“The manner and timing in which Bugallo retained particular Hilltop information while obscuring it from Hilltop plainly shows that Bugallo engaged in a concerted and coordinated effort to cause immediate, ongoing, and lasting harm to Hilltop, damage its business operations in the greater Orlando market and beyond and eliminate lawful competition,” according to the suit.
Dallas-based Hilltop advised on $30.5 billion in long-term fixed-rate municipal bond sales last year, according to data compiled by Bloomberg.
Hilltop demanded that Bugallo give the information back, but he didn’t respond, the firm said in the complaint. He breached nondisclosure and nonsolicitation agreements and should be compelled to return the materials and prevented from disclosing them, Hilltop said. It is also seeking unspecified damages.
The case is Hilltop Securities Inc. v. Alejandro Mariano Bugallo, 21-cv-00776, U.S. District Court, Middle District of Florida (Orlando).
Bloomberg Markets
By Martin Z Braun
May 6, 2021, 11:24 AM PDT
Director of Municipal Bond Research at Franklin Templeton, Jennifer Johnston, joined Yahoo Finance Live to break down what Biden’s infrastructure plan means for municipal bonds
ADAM SHAPIRO: We want to get a pulse on small business. We’re going to do that with small business and rural towns and invite into the program right now Jennifer Johnston, Director of Municipal Bond Research– not small business, but actually talking about what’s going on in the muni market. Good to have you here, Jennifer. You know, with interest rates where they are, they’re not climbing too fast, why would munis be a good option?
JENNIFER JOHNSTON: Sure. Well, munis are often part of a strategy to handle people’s tax liability. And when Biden was campaigning, he made it clear taxes were going to be on his radar screen. And with all the stimulus that has come through the packages up to now, as well as the potential infrastructure package, taxes are likely to go up. And munis make a great investment opportunity to help manage your tax strategy.
SEANA SMITH: Demand that’s out there right now– what’s fueling the optimism around munis?
JENNIFER JOHNSTON: So a lot of it is just really strong performance through the pandemic– much better than expected. It still wasn’t great. But if you think back to where we were a year ago, I can’t believe where we are today. We’ve seen budgets perform better, which means state and local governments, as well as transit authorities, and any type of municipal entity have more cash than they thought they were going to have.
They thought things would be worse, and they made strong cuts in their budget, and they’ve actually seen an outperformance. And then the most recent federal stimulus package that was passed in March is finally going to deliver to state and local governments the hopefully the kind of direct money that they can utilize for pretty much anything. So instead of just using it for COVID cost reimbursement, which had been previous aid, they’ll actually be able to use it more for revenue replacement purposes.
ADAM SHAPIRO: What danger is there if you do purchase munis right now if we do get what we’re being told is going to be a big bout of inflation coming our way?
JENNIFER JOHNSTON: Well, we’ll have to see what happens on that. I mean, I think at this point, having municipal bonds in a portfolio to manage your tax strategy, if that’s your goal for how you want to use them, they’re going to continue to make sense regardless.
SEANA SMITH: Jennifer, when we take a look at the impact that the infrastructure plan is going to potentially have on the muni market, and we talk about ways that the state and local governments should use the increase in funding– from your view, what should state and local governments prioritize?
JENNIFER JOHNSTON: Sure. So this funding, whether through the infrastructure plan or through the traditional federal stimulus packages, is one-time in nature. This isn’t the type of revenue source that’s going to recur year after year after year. So it’s critical that state and local governments, governors, legislators, whoever your decision makers are spend it in a one-time way.
You want to match one-time revenues with one-time expenditures. You don’t want to start some new program that has to be funded annually going forward, because all you’re going to do is create a revenue imbalance the next fiscal year when you have to find additional spending. The point is to stimulate economies and to help get communities back on its feet, not to create future funding challenges down the road.
ADAM SHAPIRO: Correct me, because I always get confused on this– municipalities used to roll over existing debt into new muni bond issuance. Do they still do that? Are they allowed to do that? And is that something you should be leery of if they do do that?
JENNIFER JOHNSTON: Yes. So, much like we would want to refinance our homes as interest rates change, local governments want to do the same thing. There’s something interesting that’s going on right now where if a local government wants to advance refund their debt, they have to use taxable debt to do it, as opposed to previous to the TCGA, they could actually use tax-exempt debt. But because rates are so low right now, even issuing taxable bonds still provides state and local governments with additional savings.
So many of them are able to actually refinance, still have lower interest rates issued through the taxable market, and utilize that to either save costs, as we were going through this unknown era of COVID, as well as maybe restructure when payments were going to be just to get them through this period. A lot of people have taken advantage of that. And from the perspective of an issuer, it’s very smart to do that.
ADAM SHAPIRO: You know, as director of municipal bond research, which municipalities are being rewarded– those that pay down debt or those which are taking on debt to build out infrastructure?
JENNIFER JOHNSTON: Sure. So that’s actually an excellent question, because it has to be a little bit of both. Because at the end of the day, municipal bonds are largely paid, especially from state and local governments, paid back through property taxes. And property taxes are going to be higher on communities that have good infrastructure, robust communities, and strong services.
And so you really need to see both things. You need to see an appropriate level of debt, but smart infrastructure build-out so that the community is still a place that’s desirable and can continue to thrive. And I think the infrastructure plan that Biden has proposed is going to really target a lot of those.
ADAM SHAPIRO: All right. We appreciate you joining us with your insight, Jennifer Johnston, the Director of Municipal Bond Research at Franklin Templeton.
Yahoo Finance
April 26, 2021