• The PFA in Wisconsin has issued debt for businesses nationwide
• After jet-engine leasing deal, company owner accused of fraud

Long before federal regulators would accuse him of fraud for running a Ponzi-like scheme, Victor Farias decided to raise some cash in the municipal bond market.

Farias, 47, couldn’t tap the market without help. His startup jet-engine-leasing business based in the San Antonio, Texas suburbs wasn’t exactly the kind of venture normally financed in the safe and stodgy world of state and local government debt. But there was an agency that could do it for him: the Public Finance Authority of Madison, Wisconsin. The PFA was set up a decade ago with the sole purpose of renting out its power to issue municipal debt to businesses all over the country — from real-estate developers and colleges to nursing homes.

It was June 2015 when Farias’s business moved to borrow through the PFA, submitting a five-page application that mostly provided contact information. The PFA didn’t review Integrity Aviation’s financial statements, revenue projections or demand a feasibility study, according to a bond offering statement. Farias, a former bond salesman, had almost zero experience in the aviation business, bond offering documents would later show. A month later, the PFA approved his proposal, and his business issued about $11 million of taxable debt, broken into $5,000 lots, small enough for mom-and-pop investors to buy them.

Today, Integrity Aviation is in shambles. Bondholders have accused Farias of siphoning about $275,000, and a company that leased five of its engines filed for bankruptcy. And the muni bonds are trading for just 10.5 cents on the dollar in secondary markets, a price that indicates traders believe Integrity won’t be able to repay the debt when due next year.

Such market blowups are becoming a familiar tale for investors who have flocked to riskier debt in search of increasingly elusive yields. The economic fallout from the pandemic has exposed the risks from bonds that, like Integrity’s, are backed only by a project’s revenue.

This has pushed up the number of defaults even in the municipal-bond market, a haven marketed overwhelmingly toward Americans seeking safe and steady returns. There have been 70 so far this year, the most since 2012, according to Municipal Market Analytics.

No issuer has had more of those than than the PFA. Twelve entities that borrowed through the agency have defaulted, according to data compiled by Bloomberg, 10 of them tied to a nursing home chain in the U.S. Southeast. In all, about $180 million in defaulted PFA debt represents 9% of payment defaults by dollar value this year, the fourth-highest by issuer, according to data compiled by Bloomberg.

Farias’s saga also puts a spotlight on the practices of local government agencies that generate fees by selling bonds that they aren’t on the hook to pay back. Such conduits — and PFA is the most active of those that sell bonds for corporations nationwide — allow borrowers and local governments to avoid the more burdensome federal regulations imposed on those who issue debt in the corporate bond market.

Since 2010, PFA has issued more than $11 billion of bonds for projects in 44 states that qualify because they’re deemed to promote social good or economic growth. The agency, which has no staff, generated nearly $30 million in fees between 2014 and 2019, almost all of it for the financial advisory firm that effectively runs it, Walnut Creek, California-based GPM Municipal Advisors, LLC.

“These deals get done because the PFA sells itself, saying you pay our fee and you could use us as an issuer,” said Tom Metzold, former co-head of municipal investments at Eaton Vance Corp. who now serves as an expert witness in municipal bond securities cases.

Wisconsin law doesn’t require the PFA to perform due diligence on proposed projects, but the agency reserves the right to require an independent study, according to its policies.

In a statement, the PFA said its bond deals finance projects that create jobs, build affordable housing and improve communities, all with no risk to taxpayers. It said it relies on the underwriters and lawyers engaged in the proposed projects to evaluate their financial viability. The fees it generated in 2019 amounted to 21 cents per $100 of bonds issued, the agency said.

“The underwriters, underwriters’ counsel, tax counsel, bond counsel, bond purchasers’ counsel, and other professionals with whom PFA works on each transaction conduct significant due diligence to determine if a particular transaction is credit-worthy — i.e., the bonds backed solely by the revenues generated on a transaction are highly likely to be repaid,” PFA said.

“To the extent there are questions surrounding any specific project,” it said, the professionals “involved with the project are in the best position to provide information.” PFA’s bond issues are subject to rules set by the Municipal Securities Rulemaking Board, the market’s self regulatory organization, the agency said.

Mike LaPierre, the general manager of GPM, the advisory firm that works for the PFA, didn’t return phone calls and emails seeking further comment. Farias didn’t respond to emails and a letter sent to the home address where he was served a court summons in August.

While some conduit issuers perform their own underwriting and due diligence for projects to see if they’re viable, others avoid it. A passive approach permits issuers to disclaim future responsibility for the project’s performance, according to a 2017 pamphlet by Orrick, Herrington & Sutcliffe LLP, which helped local government officials in Wisconsin draft the legislation that created the PFA. That approach, which requires less work and staff time, also generates more fees. A spokesperson for Orrick declined to comment.

Two years before Farias turned to the PFA to issue muni-bonds, he began funding his business by selling promissory notes to individual investors in the San Antonio area, many of them retired police officers and other emergency workers, according to a U.S. Securities and Exchange Commission complaint.

Of the $14 million he raised, the SEC said he diverted more than $11.6 million from the company — $6.5 million to pay investors Ponzi-like returns, $2.7 million to invest in a friend’s convenience store, $1.6 million into his own bank account and another $800,000 on travel, jewelry, golf and country club expenses. Integrity never purchased jet engines with the money raised from the promissory notes, said the SEC, which sued Farias in July for fraud.

Farias has asked a federal judge in San Antonio for more time to respond to the SEC’s complaint and is currently in talks aimed at settling the case, according to a Nov. 4 filing by the SEC. Farias is representing himself in the case.

When Farias pitched the muni-bond deal in 2015, a PFA board made up largely of Wisconsin mayors and county officials approved the application after reviewing a roughly two-page summary from board advisory firm GPM.

According to GPM’s report, “affiliates and principals” of Integrity had substantial experience in the manufacturing, overhaul, repair and leasing of aviation assets. The bonds, GPM said, would be guaranteed by a company called Turbine Engine Center Inc., which operated a 70,000 square-foot engine repair station in Miami.

By the time the bonds were marketed to investors, however, prospective buyers were given a somewhat different picture.

According to an offering memorandum, Farias’s Integrity Aviation would guarantee the bonds, not Turbine Engine Center. Farias’s extensive experience in the business was limited to the purchase and leasing of one engine. Three other employees — two of whom were former securities brokers — had no experience in the industry, the documents show.

Integrity used proceeds of the PFA bond offering to buy at least four engines
from a company registered to Matthew Marsenison. Marsenison also served as Turbine Engine Center’s chief executive officer and was characterized as a member of Integrity’s management team in a document sent to promissory note investors.

Neither Marsenison nor Turbine Engine Center have been accused of any wrongdoing. Marsenison, who no longer owns the company, didn’t respond to a letter sent to his address.

Farias also formed a company with the banker who led the deal, Patrick Dertien of National Alliance Securities LLC, three months after the bonds were sold, according to public records. Dertien was fired in September 2018 for unauthorized and undisclosed outside business activities and for failing to respond to inquiries from regulators, according to broker registration records.

The broker records didn’t specify the outside business.

Dertien didn’t return calls seeking comment. National Alliance received $800,000 to underwrite the bonds, almost 5 times the average for high-yield muni issues in 2015, data compiled by Bloomberg show.

Fred Bush, National Alliance’s chief financial officer, didn’t respond to calls and emails seeking comment. Alysse Hollis, who previously worked at Cincinnati law firm Jones Walker and served as both bond counsel and underwriters’ counsel on the bond issue, didn’t return calls seeking comment.

Farias leased five engines to Odyssey Engines LLC, the parent of Turbine Engine Center. Odyssey filed for bankruptcy in June, allowing it to stay lawsuits from two banks that said the company defaulted on more than $60 million in loans.

In a 2019 lawsuit, Integrity alleged Odyssey hadn’t made lease payments and refused to return the engines — two of which were in storage in Ethiopia. Another, the suit alleged, was in pieces in one of Odyssey’s facilities.

Odyssey’s chief executive officer, David Alan Boyer didn’t respond to emails seeking comment. No one answered the phone at Odyssey Engines. In a response to the lawsuit, Odyssey denied Integrity’s allegations and said the case should be dismissed because it concerns transactions in Florida that were beyond the Texas court’s jurisdiction.

As for the buyers of Integrity’s muni bonds, those acting on their behalf filed a secured claim in Odyssey’s bankruptcy case for $6.8 million and have also sued to recover $275,000 that Farias allegedly stole from the bond account.

In the five years since the debt was issued, Integrity has never filed audited financial statements, a reflection of the loose disclosure regulations in the muni market. But Integrity did say in a regulatory filing in Feb. 2018 that it generated $1.25 million in revenue in 2017, $2.3 million less than was projected to investors in bond marketing documents.

In April 2018, bondholders including Barnett & Company Inc., a Chattanooga, Tennessee-based wealth management firm, hired National Alliance to examine Integrity’s books.

Rob Halder, head of research and special situations at National Alliance, was granted “view only” access to an Integrity bank account set up to receive lease payments and quickly saw there was no money, according to a lawsuit filed on behalf of bondholders that accused Farias of siphoning between $25,000 and $35,000 a month from the business between April and December 2018. Halder didn’t return phone calls seeking comment. Christopher Hopkins, a vice president at Barnett & Company who represented bondholders, declined to comment.

In an Oct. 2018 email, Halder asked Farias where the money was, according to the bondholders’ lawsuit.

“Now that we have confirmed that all the monies have been moved out of the revenue account despite direction otherwise, can you tell me where the money has been transferred to? When will it be returned?”

Farias never responded, according to the lawsuit.

Bloomberg Markets

By Martin Z Braun

December 8, 2020, 5:00 AM PST

— With assistance by Laurel Brubaker Calkins, and Danielle Moran

• Local agency selling $225 million of bonds for soccer stadium
• 10-year debt early offer at 130 basis points over Treasuries

America’s country-music capital is making a bet on the world’s most popular sport.

A Nashville, Tennessee agency is selling $225 million of bonds to finance the construction of a 30,000-seat Major League Soccer stadium in Music City, anticipating it could be a boon once spectator sports emerge from the pandemic. Local officials have faith that it will: the Metropolitan Government of Nashville and Davidson County agreed to step in if revenue from the stadium isn’t enough to cover the debt payments, insulating bondholders from risk.

The project marks the latest twist in what has been a long-running stadium-building arms race among cities seeking to lure professional sports teams or prevent them from moving away. It will represent a test of whether Americans will embrace soccer, a sport that dominates much of the world but lags football, baseball, and basketball in the U.S.

Eric Kazatsky, municipal-bond strategist for Bloomberg Intelligence, said soccer has proven popular in cities such as Philadelphia and he speculated that the Nashville opening in 2022 may benefit from pent-up desire to return to mass gatherings after the pandemic ends.

“I think that people might be surprised at the attendance that they’ll get,” he said.

Citigroup is offering the taxable bonds to investors at a top spread of 185 basis points over Treasuries, according to a preliminary pricing wire seen by Bloomberg. Ten-year debt is offered with a 130 basis-point spread.

The pricing is “definitely wide” compared to yields on similar rated securities, said Gabriel Diederich, a portfolio manager at Robert W. Baird & Co. “That’s often the case for appropriation bonds for non-essential projects.”

The MLS, the men’s professional soccer league for the U.S. and Canada, has been expanding its footprint. Since 1999, 20 stadiums have been built or renovated for MLS teams and at least seven more will debut in the coming years, according to league spokesman Dan Courtemanche.

“These soccer stadiums provide a terrific environment for fans of MLS clubs and are an important component of the overall growth of the league,” he said in an email. Some of them are privately financed and others feature a mix of public and private funding.

Nashville was awarded an MLS team in 2017 in an effort spearhead by John Ingram, the team’s majority owner. But getting the planned stadium off the ground has been mired in controversies, including a dispute this year between the team and Nashville Mayor John Cooper over changes to the terms of the deal. In February, they said the team would cover the full cost of the construction of the stadium through a cash investment, lease payments, and revenues generated at the stadium, something Cooper said would be a good deal for taxpayers.

The Metropolitan Government of Nashville and Davidson County, however, agreed to backstop the bonds, allowing them to get an investment-grade rating that will reduce the costs of financing. The city-county is pledging non-tax revenues like licenses and fees if the other revenue sources backing the debt, such as the $1.75 ticket tax during the initial years of the project, aren’t enough to cover debt-service costs.

Nashville isn’t the first city to extend such support. Bridgeview, Illinois, lent its backing to bonds issued for a stadium for the MLS’ Chicago Fire Football Club, only to see its own credit rating slashed into junk when the venture fell short of expectations.

The sport has since made inroads, helped by the strength of the U.S. Women’s National Team. Nielsen found in a 2019 report that 47% of adults in the U.S. were interested in the MLS, which is up from 37% in 2012.

The Nashville Soccer Club, which is sharing a stadium with the Tennessee Titans football team, played its first home game in February right before the pandemic shuttered activity in the U.S. It attracted more than 59,000 people, marking “the largest crowd for a soccer match ever in the state of Tennessee,” according to the club.

Ian Ayre, the chief executive officer of the team, said it “had a very successful year considering everything we have all endured.”

“Our fan base continues to grow significantly and the excitement for our club is palpable throughout the city and region,” he said. “Our new home stadium is a key part of our growth.”

Monica Fawknotson, executive director of the Metropolitan Sports Authority, the agency that’s selling the bonds, said in an email that the stadium will be an economic development opportunity for the city. She said interest in soccer is rising in the region.

“Soccer fans tell us they can’t wait for opening day,” she said in an email.

But the pandemic has cast uncertainty over the future of spectator sports. Anthony Fauci, the U.S. government’s top infectious-disease specialist, told Yahoo! Sports that full stadiums are unlikely until at least the summer of next year.

Nashville’s bond-offering documents note the risk that Covid-19 may change attitudes toward attending large gatherings.

“The great unknown is how the public will respond after the pandemic, especially in regards to sports that are not ingrained in the American psyche,” said Michael Leeds, a sports economist at Temple University.

Bloomberg Markets

By Amanda Albright and Danielle Moran

December 7, 2020, 7:00 AM PST Updated on December 7, 2020, 10:00 AM PST

In August I wrote a Forbes column titled, The Lunacy of Using City Streets To Collateralize New Municipal Bond Deals. I received quite a lot of feedback confirming the stupidity of these bonds. I cited two California cities—Torrance and West Covina. Both issued taxable Pension Obligation Bonds (POBs) to plug their unfunded pension liabilities. The bonds were collateralized by the city’s streets. I still can’t determine how these streets could produce any revenue to make interest payments and maturity redemptions if the city’s finances go south.

Fast forward to the present. The city of West Covina, California that issued $204 million of such bonds recently received an audit report from the state of California pointing out significant “deteriorating financial risks that threatens its fiscal stability.” In other words, the city is in financial trouble.

The West Covina bonds were rated A+ by Standard & Poor’s just five months ago. What changed? Nothing significant as far as I can tell. The rating was simply inaccurate. It is clear S&P failed in their financial diligence. Also, be aware of who pays the rating agencies for their evaluation—the bond issuers themselves.

Look at the ratings of the bonds you own as they appear on your monthly brokerage statement. Find out when the rating agency last looked at the issuer. Many small- to medium-sized municipal bond deals are rated as of the issue date and never again until the municipality issues new bonds. Don’t think that AA rated municipal bond you purchased five years ago still has the same credit metrics to warrant that rating today.

You can chose to look at the issuer’s financials yourself. Determine if revenues exceed expenses annually. How much cash do they have on hand? Is it enough to cover any shortfall in revenues until maturity? Find out if the rating agency has recently updated their report on the issuer. These can quickly tell you what has changed and why.

If you are investing in municipal bonds yourself, use EMMA as your go-to source for municipal bond financials.

The large general obligation issuers from fiscally responsible states like Virginia and Maryland or hospital revenue bonds like Cedars-Sinai in Los Angeles and Kaiser Permanente, all have readily available current financials.

If your municipal bonds made it out of the pandemic unscathed, then congratulate yourself. If several of your municipal bond positions were downgraded, you just might want to find out why. Maybe whatever happened is survivable but maybe it’s time to get out while you still can.

Stay as far away from hinky deals like Torrance and West Covina as possible. Wrap your arms around your municipal bond holdings—it may save you heartache down the road.

Forbes

by Marilyn Cohen

Dec 10, 2020

Summary

• With hundreds of open-end and closed-end funds in the tax-exempt sector figuring out the best allocation is a daunting task.
• Funds-of-funds, or funds that hold other municipal funds, are attractive in providing a way to quickly gain exposure to a basket of funds and eliminate an element of bad luck.
• Overall, however, the performance of municipal FOFs has been underwhelming nearly across the board, though for different reasons, depending on the FOF.
• XMPT does provide some advantages such as a low fee, broad exposure to the tax-exempt CEF sector, a tilt away from high-premium CEFs at the cost of mild long-term underperformance.

Continue reading.

Seeking Alpha

Dec. 8, 2020

• Pace of new muni-bond sales poised to surpass 2016 peak
• Refinancing wave a boon for BofA, Citigroup, JPMorgan

Wall Street’s muni-bond underwriters are having a banner year.

Driven by waves of refinancing, state and local governments have already sold $424 billion of bonds this year, leaving the pace poised to easily exceed the previous peak of about $426 billion in 2016, according to data compiled by Bloomberg.

This surge reflects the steep drop in interest rates this year and shows how steady the $3.9 trillion municipal market has held up despite the pandemic-triggered recession, which dealt a financial hit to governments, airports and public transportation operators. While debt sales dried up after the virus’ first wave triggered a mass exodus from state and local government bonds, that proved short-lived as prices rallied back from a record-setting drop in March as the Federal Reserve promised to step in and lend if needed.

“It is a testament to the resiliency of the market,” said Eric Kazatsky, a Bloomberg Intelligence municipal strategist. “Issuers still need to sell bonds to keep the lights on in their towns and cities. That still needs to get done whether the virus has impacted tax collections or not.”

The debt-selling spree has been a boon for big banks including Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., which together underwrote more than one third of this year’s municipal-bond issues.

With interest rates so low, over $130 billion of the borrowing was done through taxable bonds, roughly twice as much as was sold in 2019, allowing governments to avoid federal restrictions that come with traditional tax-exempt bonds. That helped ease the pressure on the market by expanding the base of buyers to those who don’t typically buy tax-exempt securities, like investors overseas who are seeing near zero or negative yields in their home countries.

Citigroup Inc. municipal-bond analyst Vikram Rai anticipates that issuance will continue to be high next year as governments contend with the financial fallout of the coronavirus shutdowns. State and local governments are projected to face large budget shortfalls, and so far there has been no new aid to emerge from Congress since March.

There will be borrowing to paper over some of those deficits as a result, Rai said. At the same time, interest rates are expected to remain favorable for issuers, and the U.S. continues to have massive infrastructure needs.

“If you see what’s happening over the last 10 years, the municipal supply has been on an upward trend,” Rai said. “We’re expecting that next year supply will be even more.”

Bloomberg Markets

By Fola Akinnibi and Danielle Moran

December 1, 2020, 10:55 AM PST

• Supply forecasts range from $375 billion to $550 billion
• States and local government budgets pressured by pandemic

Wall Street banks don’t have a consensus on how much municipal bond business they’ll have next year.

Strategists that cover the $3.9 trillion state and local government debt market have 2021 supply forecasts that range from $375 billion to $550 billion. Low borrowing rates and issuance to bolster pandemic-induced deficits will lead to a record year of sales, according to some firms, while others believe that states and cities whose budgets were hammered by the coronavirus pandemic will refrain from selling bonds for new projects. State and local governments have sold $421 billion of long-term bonds so far this year.

Citigroup Inc. analysts led by Vikram Rai had the highest forecast, projecting governments will sell $550 billion in municipal bonds next year. “We are convinced of extremely robust municipal supply next year,” the group wrote in a Nov. 2 note. “Municipal issuance will be utilized by public agencies and state and local governments to rebuild their respective budgets and economies (and infrastructure) as the nation recovers from the pandemic.”

Tom Kozlik, head of municipal strategy and credit at Hilltop Securities, said he expects issuance to fall to about $375 billion next year, the smallest among the nine firms which provided forecasts. He said many deals were pulled ahead into this year and that governments will issue less for infrastructure projects because of revenue uncertainty and balance sheet concerns.

“State and local governments and other municipal bond issuers are likely going to approach 2021 cautiously,” Kozlik wrote in a note dated Nov. 19. “We think there is still a significant amount of uncertainty about what revenues could look like for the rest of FY21 and for the beginning of FY22.”

The range in forecasts illustrates the uncertainty that grips the state and local government debt market amid political debates over additional stimulus aid and the longevity of the coronavirus pandemic.

“It’s a mixed bag at the state and local level which makes it hard to make a macro prediction,” said Natalie Cohen, president at National Municipal Research Inc., a consulting firm. While some local governments are contracting and may be cautious of taking on new debt, others are seeing a population surge and will need to sell bonds to finance infrastructure, she said. “You can’t just look at one side of the contraction and not look at the growth that is going on in a lot of communities,” Cohen said in an interview.

The market would need about $440 billion of supply to meet current demand, according to Bloomberg Intelligence analyst Eric Kazatsky. His outlook is based on the latest muni-fund flows and bondholder reinvestment data.

Bankers have already seen a surge of sales this fall as governments rushed to market in October, selling a record $71 billion worth of debt as they sought to get in the market ahead of any election-related volatility.

Nearly a third of the $421 billion of long-term muni sales so far this year were subject to federal income taxes, a 130% increase from the same period last year. Rates held near record lows for much of 2020, allowing governments to realize savings by refinancing outstanding debt with taxable securities.

Analysts at UBS said that taxable munis are likely to maintain a “meaningful market share” in the coming year as issuers are “likely to continue to take advantage of refinancing opportunities through the taxable muni market.”

Key Insights

• State and local financial conditions in 2021 are likely to be closer to those seen in the second half of this year compared to 2019 leading to a “similar performance in the primary market calendar,” wrote Matt Fabian and Lisa Washburn at Municipal Market Analytics in a research note published Nov. 16. They forecast about $500 billion in total sales with about 30% taxable.
• Bank of America’s Yingchen Li and Ian Rogow expect sales to reach $470 billion next year, $170 billion of which will be federally taxable. Even with the expected uptick in sales, they said market demand will outweigh supply. The group expects overall municipal returns to be 3.5% in 2021.
• Morgan Stanley strategists project $520 billion in gross-supply in 2021, driven by taxable advanced refundings that will shift net issuance from the tax-exempt market, the team led by Michael Zezas wrote in a note. “We expect the impact of supply to be muted relative to macro drivers,” the group wrote, saying the supply uptick is unlikely to pressure performance.
• Analysts at Oppenheimer and Barclays both forecast a range of $420 billion to $440 billion in total sales. Supply will be lower than 2020 as municipalities “will likely be cautious about funding new projects in an uncertain economic environment, as well as issuers’ having pulled deals forward into this year,” Barclays analysts led by Mayur Patel wrote in a Nov. 10 research note.
• UBS analysts led by Thomas McLoughlin said that new issuance is expected to move lower as issuers are cautious about financing new projects in an uncertain economic environment. Bond ballot proposals were “relatively light” in November, which could depress future issuance, he said. The outlook could increase by a “meaningful amount” if Congress approves an infrastructure bill in the first half of 2021.
• RBC estimates total sales to reach $425 billion next year, below the firm’s 2020 projection, according to a research note by Christopher Mauro, the bank’s municipal desk analyst. “We anticipate that refunding activity will decline next year because we estimate that the pool of eligible refunding candidates in 2021 will be smaller than it was this year,” he wrote. Still, taxable advanced refundings will continue at a “brisk pace.”

Bloomberg Markets

By Danielle Moran

November 24, 2020, 10:56 AM PST Updated on November 24, 2020, 12:51 PM PST

— With assistance by Amanda Albright

The Public Finance Network, a coalition of bipartisan organizations, has released a new report, the Advance Refunding Myth Buster, an FAQ on advance refunding municipal bonds.

Among other things, the document says the following: “All segments of the municipal bond market in rural and urban areas, including but not limited to: school districts, nonprofits, hospitals, higher education, transportation authorities, water and electric systems, airports and other core infrastructure providers used advance refunding as a tool to reduce interest costs. Despite the limitation to only advance refund bonds one time on a tax-exempt basis, state and local governments have generated hundreds of billions of dollars of interest cost savings over time. The savings derived from the advance refunding structure have directly funded infrastructure and governmental activities by reducing the interest payments state and local government issuers make to bond owners.”

If you are having conversations with members of Congress or their staff over the holiday season, we would encourage you to discuss the merits of reinstating this very important tool as a component of any future infrastructure package when Congress convenes in 2021.

NSAA recently sent a letter to the U.S. Office of Management and Budget requesting extension on single audits for fiscal year 2020.

The Pandemic Response Accountability Committee has released a toolkit established to help agency management and other key stakeholders increase transparency around emergent concerns, such as the disbursement of federal funds.

Agile products highlight issues requiring immediate action for oversight officials or Congressional stakeholders and others who have requested reviews of high risk areas. The toolkit is designed to aid federal Offices of Inspectors General (OIGs), state, and local agencies that conduct quick reviews as part of their duties to provide expeditious oversight of federal funds.

The guidelines in the toolkit pertain to reviews related not only to the effects of COVID-19 on federal operations (e.g., Coronavirus Aid, Relief, and Economic Security Act expenditures), but also to reviews of other emergent or ongoing challenges external to COVID-19, such as threats to health, safety, and the environment.

Learn more about the toolkit.

As a standoff over federal aid persists, state and local governments are making deep budget cuts. “Everything’s going to slow down,” one official said.

The coronavirus pandemic has inflicted an economic battering on state and local governments, shrinking tax receipts by hundreds of billions of dollars. Now devastating budget cuts loom, threatening to cripple public services and pare work forces far beyond the 1.3 million jobs lost in eight months.

Governors, mayors and county executives have pleaded for federal aid before the end of the year. Congressional Republicans have scorned such assistance, with the Senate majority leader, Mitch McConnell of Kentucky, calling it a “blue-state bailout.”

But it turns out this budget crisis is colorblind. Six of the seven states that are expected to suffer the biggest revenue declines over the next two years are red — states led by Republican governors and won by President Trump this year, according to a report from Moody’s Analytics.

Continue reading.

The New York Times

By Patricia Cohen

Dec. 4, 2020

The pandemic is intensifying the competition among cities, which are rushing to build bigger, more alluring event spaces.

After 20 years of trying, Indianapolis finally landed the American Dental Association convention. Last December, the group agreed to gather there in 2026, promising Indianapolis tens of thousands of visitors and tens of millions of dollars for the local economy.

But there’s a catch: The dentists can back out if the convention center complex does not complete a $550 million expansion: 143,500 square feet of new event and ballroom space as well as two privately financed hotels.

That helps explain why, in the depths of a pandemic that has left many convention centers empty or repurposed into field hospitals or homeless shelters, a 25-member board in Indianapolis voted unanimously in September to add up to $155 million to the public debt.

“We see convention tourism racing back in 2023,” said Chris Gahl, senior vice president of Visit Indy, the nonprofit that markets the Indiana Convention Center and attractions like the Indianapolis Motor Speedway. “When the green flag drops, we’re going to be on the competitive edge.”

For decades, cities large and small have turned to gleaming convention centers and cavernous expo halls to revitalize downtown neighborhoods and perk up local economies. The pitch sounds like a win-win: Conventioneers — often traveling on the company dime — will fill hotels, pack restaurants and spend in stores. And the debt taken out to finance construction can be repaid with taxes targeted at the travelers, so locals don’t have to foot the bill.

Normally, there are more than a quarter-million conventions and trade shows in the United States each year, ranging from the huge CES technology trade show in Las Vegas to smaller expos for janitorial supplies or antique-toy enthusiasts. In 2016, those events drew 84.7 million people, who spent a total of $110.4 billion, according to the latest survey by the Events Industry Council. The economic impact of these events can vary widely, however, depending on their size and whether they draw big-spending international visitors.

To keep its slate of shows — and steal others from rival cites — a convention center must frequently upgrade, expand or remodel. And the arms race keeps accelerating, even with most experts predicting that it could be at least two more years before attendance fully bounces back from the coronavirus pandemic.

“This is a perverse world, where market realities do not affect city decision-making,” said Heywood T. Sanders, a professor at the University of Texas at San Antonio who studies the use of convention centers as urban-renewal tools.

The financial wounds caused by the pandemic have been grievous. In Irving, Texas, the public finance authority behind a year-old convention-center hotel has already defaulted on $37 million of municipal bonds. In Seattle, one plan to finance an expansion failed to meet a legal requirement because hotel-tax revenues have dried up. And in Milwaukee, the pandemic threatened to throw the downtown Wisconsin Center into insolvency.

The convention center in Savannah, Ga., plans to double the size of its exhibition hall.Credit…Getty Images
But none of that has slowed a building spree meant to attract hordes of middle managers, car aficionados and coin collectors.

Georgia budgeted $70 million in July to help Savannah double its convention center’s exhibition hall. In Cleveland, officials are seeking $30 million to upgrade an underused health technology center and add it onto the Huntington Convention Center. And in Terre Haute, Ind., where the foundation for a $32 million convention center is half poured, the county Capital Improvement Board just began working on a plan for a $20 million hotel nearby.

If anything, fewer events have made the competition more intense: The Indianapolis center upgraded its cleaning and air filtration systems this year and poached six basketball tournaments and a candy trade show — the Snacks & Sweets Expo — away from Chicago, where conventions remain forbidden.

“It’s all about putting heads in beds,” said Marty Brooks, the chief executive of the Wisconsin Center, which borrowed $270 million this summer for work intended to meet the demands of the discerning conventioneer: open spaces, pop-up meeting rooms and panoramic windows. Without those improvements, Mr. Brooks said, Milwaukee would lose ground to cities like St. Louis, Nashville, Louisville and Indianapolis.

At the time, the Wisconsin Center was a few months from defaulting on $150 million in debt. But here, the economic destruction of the coronavirus actually helped. The Federal Reserve has cut already low interest rates to rock-bottom levels, so the center could not only stave off a default by refinancing but could borrow even more.

Low borrowing costs have been a lifeline for the Greater Columbus Convention Center in Ohio, which lost events like the North American Bridge Championships and “The Arnold” — the Arnold Fitness Expo, a trade show for bodybuilding equipment, workout clothing and vitamin supplements. The event, named for Arnold Schwarzenegger, is the center’s biggest of the year. With an associated bodybuilding competition, which went on this year but barred most spectators, the event normally draws 200,000 people and fills 18,000 hotel rooms.

In September, the center refinanced roughly $202 million of debt, including for a 28-story hotel tower now under construction and a 2014 overhaul that expanded the center’s event space, upgraded its furnishings and added a glass atrium.

“We were trying to take advantage of lower interest rates,” said Don Brown, the chief executive of the Franklin County Convention Facilities Authority, which owns the Columbus center. “Second, we were trying to deal with the impact of the pandemic on our primary revenue streams, which are hotel occupancy taxes.”

Right now, the center is hosting events that don’t produce much revenue: ad hoc traffic and eviction courts, along with a smattering of events like mock tailgate parties for Ohio State University home football games and a socially distanced screening of “The Rocky Horror Picture Show” on Halloween.

“We’ve also had yoga and exercise classes, and dance competitions,” Mr. Brown said.

The loss of hotel-tax revenue has caused “a crisis” in Seattle, said Matt Griffin, a principal of the Pine Street Group, which is the developer of a $1.8 billion expansion underway at the Washington State Convention Center there. The center’s borrowing capacity is limited, by law, to the value of recent hotel-tax revenues. That meant the last round of borrowing to complete the work couldn’t go through.

“We need another $300 million of financing to finish this project, and if we don’t have a plan by the end of the year, we’re going to have to shut it down,” Mr. Griffin said. The assistance could come from the county or the city, he said, but more likely the state government.

“There’s various ways they could do it,” he said. “It’s not straightforward.”

Even in the best of times, convention centers are loss leaders, said Mr. Sanders, the Texas professor. But the convention business has faced severe boom-bust cycles over the past two decades, with steep downturns after the terrorist attacks of 2001, the financial meltdown of 2008 and now the pandemic.

On Tuesday, the organizer of BookExpo, the country’s largest publishing trade show, canceled the 2021 event and said it would rethink its format for the future, suggesting that it would include both “in-person and virtual offerings.” In recent years, BookExpo was held at the Jacob K. Javits Convention Center in Manhattan.

If enough events go away, local taxpayers could end up paying back debt that centers took on to expand, Mr. Sanders said. “You’ve made a very large bet in an environment of enormous risk and uncertainty,” he said. “And once you place it, you can’t undo it.”

And that drives cities to keep building. Consider the chain reaction caused when the National FFA Organization sought greener pastures.

The group, once known as the Future Farmers of America, is prized for the tens of thousands of conscientious teenagers it brings to town. After 1998, it spurned Kansas City, Mo., its host city for 70 years, despite offers of cash, a free building and other incentives. The FFA was growing fast, and Kansas City wasn’t keeping up: Event space was tight, and local hotels sold out, forcing some teenagers to sleep 60 miles away in Topeka, Kan.

The group decamped to Louisville, Ky., where the fairgrounds were expansive. But soon the hotel crunch was even worse: Some attendees were booking rooms 90 miles away. That was when Indianapolis pounced, landing the 2006 convention with the promise of more hotel rooms and donations from local businesses to hold down registration fees.

But no sooner did Indianapolis bag the future farmers than it lost the Performance Racing Industry Trade Show, which took its business to Orlando, Fla. — where there was more space.

“This isn’t Chicken Little,” Fred Glass, then the president of Indianapolis’s Capital Improvement Board, said at the time. “The sky really is falling. We’re in danger of losing all of our large convention customers.”

So Indianapolis set to work on its fifth expansion since the center opened in 1972. When it was done in 2011, Performance Racing came back. But by 2017, another big client, Gen Con, was bursting at the seams. Up to 70,000 tabletop gaming enthusiasts descend on Indianapolis for four days of Dungeons and Dragons, Magic: The Gathering, cosplay and more.

“We take over the convention center itself, the vast majority of hotel ballrooms downtown, and we’ve been moving into the football stadium as well,” said David Hoppe, Gen Con’s chief executive.

He told Visit Indy that the gamers might have to leave, and asked what the city could do to make them stay.

Now, expansion No. 6 is coming — and, if all goes according to plan, so are all those dentists in 2026.

The New York Times

By Mary Williams Walsh

Dec. 2, 2020

Most ESG investors would agree that climate change risk is at or near the top of their list of sustainability issues. Ac­cording to the US SIF Foundation’s biennial ESG “Trends Report” released Monday, climate change remains the top ESG issue for money managers, who incorporate cli­mate change risk factors to $4.2 trillion in assets.

The long-term economic consequences of climate change span the financial, housing and infrastruc­ture, agriculture, and geopolitical security sectors, to name a few. A 2018 report from the Intergovernmen­tal Panel on Climate Change (IPCC) estimated that with just a 1.5°C warming of the planet, by the year 2100 economic losses globally would total $54 trillion – the combined total annual GDP of the U.S., European Union, and China.

As with most forms of extreme event risk, it is impossible to predict the exact timing, magnitude, and cost of the next catastrophe. Unlike black swan events, however, which are completely unexpected, climate risk is more of a “known unknown.” While no individual natural ca­tastrophe can be directly attributed to climate change, increasing temperatures globally create conditions that are more conducive to a higher frequency or severity (or both) of a multitude of perils, including hurricanes, severe storms, floods, wildfires, and droughts.

Continue reading.

ETF Trends

By Nick Erickson & John Sama, Sage Advisory

NOVEMBER 19, 2020

REDWOOD CITY, Calif., Nov. 25, 2020 /PRNewswire/ — Today OpenGov, the leader in modern cloud ERP software for our nation’s cities, counties, and state agencies, launched the annual “State of Local Government Survey”.

Questions cover a broad range of pandemic-era topics, from revenue impact to technology and training needs. The 501 respondents include 113 elected officials and administrators, 238 public finance leaders, and 149 public finance staff.

Results show how governments are making needed investments in the face of significant revenue impact. A third anticipate a 4-8% decrease in revenue and another third foresee an over 8% hit. In response, over 60% are using grants (e.g., CARES Act funding) or considering this approach to upgrade their technology and better serve their community and workforce.

Over half of respondents are modernizing processes and technology to enable remote work and virtual meetings. A third are also adopting cloud-based workflows in areas like permitting, licensing, code enforcement, and grant management to protect revenue streams and keep their local economies open for business. Despite all this activity, gaps persist between local government needs and initiatives.

Analysis of responses to the report’s 44 questions show that while demand is strong for technology that enables access to data, process automation, and integrations to enable cross-functional collaboration, few are looking to close these gaps with investments in digital infrastructure. Additionally, the survey reveals significant training and recruitment gaps required to upskill and backfill key talent.

Based on feedback from local government leaders on the success of the survey, OpenGov plans to launch this report annually. The report can be downloaded here.

“OpenGov customers have taught me about the kinship among public servants in local government. Their work is critical to residents across the U.S., but also unique to their profession. We’re humbled and honored to publish this report in hopes of fostering candid conversation and even greater strategic alignment within local governments about how best to navigate the challenges of our communities,” says Matt Singer, OpenGov CMO.

Methodology: On behalf of OpenGov, independent polling and research firm Zogby Analytics conducted an online survey of 501 local government finance leaders across the US. Titles ranged from elected officials, administrators, and managers to finance directors, managers and accountants. Each answered 44 questions about their needs, as well as their government’s initiatives and investments.

About OpenGov
OpenGov is the leader in modern cloud ERP software for our nation’s cities, counties, and state agencies. On a mission to power more effective and accountable government, OpenGov serves more than 1,000 agencies across the U.S. Built exclusively for the unique budgeting, financial management, and citizen services needs of the public sector, the OpenGov ERP Cloud makes organizations more collaborative, digitizes mission-critical processes, and enables best-in-class communication with stakeholders.

OpenGov

Nov 25, 2020

• Junk-bonds backed by airlines see month’s biggest gains
• New Jersey deficit bonds jump after debt sale last week

Some of the $3.7 billion of bonds New Jersey sold last week to plug the budget shortfalls caused by the economic slowdown have gained in secondary trading, driving the yields on 12-year securities to as little as 1.75%. Bonds issued by New York’s Metropolitan Transportation Authority have been little changed despite the escalating cash squeeze caused by the drop in subway and bus ridership. Even junk debt backed by airlines has surged, delivering bigger gains this month than any other high-yield sector, according to Bloomberg Barclays indexes.

The shift has been driven by encouraging news around three Covid-19 vaccines and signs that states and local governments’ tax collections haven’t been hit as badly as anticipated, in part because of federal aid.

“The best news muni credit has heard in a long time is this vaccine news the last couple of weeks,” said Thomas Graff, head of fixed-income for Brown Advisory, which oversees $4 billion of municipal debt and has bought bonds sold by the MTA and airports.

The shift in sentiment shows that investors are starting to focus more on the long term even with the virus currently raging and uncertainty about whether Congress will enact an economic stimulus bill before President-elect Joe Biden takes office on Jan. 20.

High-yield municipals, which finance everything from malls to senior living spaces, could be big winners from the vaccine. Bank of America Corp. strategists said in a report Friday that they’re moving to a “market weight” on high-yield municipals, forecasting returns of 7% because of the more optimistic outlook.

Lind Capital Partners, which invests in high-yield debt, said in a note to clients that parts of the market, like higher education, had fallen more since March than was justified.

With the promising news about vaccines, junk-rated municipal bonds backed by airlines have rallied, driving an index of them to a gain of 3.28% this month, more than any other segment of the high-yield market. The yield on some Delta Air Lines Inc. muni debt due in 2045 has dropped to 3.5%, down from 4.55% when the debt was sold in September.

Burton Mulford, a portfolio manager at Eagle Asset Management, said his firm is buying bonds issued by large airports and large, multi-site hospital systems that were stung during the pandemic.

“There certainly is light at the end of the tunnel,” he said.

Not all segments of the muni market will be completely out of the woods with a vaccine or an economic recovery. For state and local governments, the financial pain from Covid-19 may not be over yet given that tax collections tend to remain depressed well after recessions end.

UBS Global Wealth Management cautioned clients on being too exuberant about the vaccine, noting that they expect more credit-rating downgrades than upgrades in the muni market next year. And Morgan Stanley strategists said in a report last week that the firm is more cautious on local governments even if Congress delivers aid to cover their budget shortfalls.

Yet even after a credit-rating downgrade and as Covid-19 cases spike in the Garden State, New Jersey had little trouble borrowing. Its bonds priced at lower yields than initially marketed to investors, with those due in 2032 yielding 2.25%. It fell as low as 1.82% Monday.

Graff, the investor with Brown Advisory, said he’s more cautious on financially-teetering local governments given it could take time to recover from the impact of public health shutdowns. There are also longer-term concerns facing the continuing-care retirement sector, which also raises funds in the muni market and has been hard hit by the virus.

But more broadly, he’s upbeat and says more buyers in the market are, too.

“People are inching their way in,” he said. “There’s still a lot of hesitancy, but it’s turning around.”

Bloomberg Markets

By Amanda Albright

November 23, 2020, 10:38 AM PST

Summary

• With the odds against the Democrats winning both Senate seats in the Georgia runoff, the Biden administration will likely have to work with a Republican Senate majority to navigate various tax policy issues in the coming year.
• Infrastructure seems to be the one topic that a potentially divided government may be able to agree on.
• While Biden will likely not be able to enact the entirety of his tax plan with a divided Congress, he could use the power of the executive order to raise taxes in specific areas or to reinterpret regulations tied to the 2017 Tax Cuts & Jobs Act.

Continue reading.

Seeking Alpha

Dec. 4, 2020

Fitch Ratings-New York-03 December 2020: The slowing labor market recovery, significantly reduced pandemic-related state and federal government transfers, and a resurging wave of coronavirus infections and hospitalizations will slow the pace and challenge the durability of economic recovery of many U.S. states according to Fitch Ratings. Fitch anticipates the vast majority of states are well positioned to manage budget pressures at current rating levels.

The continued withdrawal of direct fiscal support to individuals may further slow state economic recovery in the coming quarters. ‘The expiration of significant levels of pandemic-related government transfers has occurred while employment losses from the pandemic are still significant in many states and may take several years to return to pre-pandemic levels,’ said Fitch Senior Director Olu Sonola.

Concerns around weakened economic activity and an employment recovery that continues to level off, has led most states to forecast revenues to underperform not only in fiscal year 2021, but also in fiscal year 2022. In response, states have already made budget adjustments, with more belt tightening likely. While revenue collections data indicate more positive results in recent months than initially anticipated, significant uncertainty remains.

Making matters worse are coronavirus cases and hospitalizations, which are surging again and appear to have a broader geographical scope than the spring and summer waves with all regions significantly affected. Governors across the country have announced new restrictions on activity in an effort to control the spread of the virus and protect healthcare system capacity.

‘This will likely further slow the pace of labor market recovery in the fourth quarter and well into 2021, particularly if lockdowns are re-imposed by state governments,’ said Sonola.

Read the Fitch Special Report.

Following Treasury’s announcement of the closure of serval emergency lending facilities at years end including the Municipal Liquidity Facility (MLF), Fed Chairman Jay Powell has continued to publically rebuke the action.

Yesterday, testifying alongside Treasury Secretary Mnuchin during a Senate Banking Committee hearing, Powell stated:

“The risk of overdoing it is less than the risk of underdoing it,” he said. “People are always worried about doing too much, and you look back in hindsight and say, ‘Well, we didn’t do too much. We might’ve done a little more and a little sooner.”

While Mnuchin defended his action stating that he was following the CARES Act guidelines, the two agreed that the economy needed further Congressional action to stave off another downturn, including Powell urging additional funding for state and local governments.

Congressional Leaders Discuss Stimulus

Following news of a bipartisan stimulus package emerging from a group of lawmakers over the Thanksgiving holiday, both House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell expressed their desire to pass additional funding prior to year’s end.

However, both parties are still miles away from an agreement and McConnell immediately shot down the prospects of passing the $900 billion compromise package.

The Senate remains focused on a narrowly tailored package, while the House is adamant that the package needs to be larger and include some funding for state and local governments.

It appears that Majority Leader McConnell plans to attach the narrow stimulus measures to the must-pass government funding measure in the coming days in an effort to force Speaker Pelosi to accept the package or accept blame for a government shutdown.

The BDA will continue to provide updates as they become available.

Bond Dealers of America

December 2, 2020

Local governments are using stimulus funds for safety-net needs like rental and food aid. With demand surging, they’re scrambling to spend it before the deadline.

States and municipalities are calling for an extension of a year-end deadline to spend federal pandemic aid as demand surges for government assistance amid the worsening pandemic.

As part of the Cares Act in March, Congress sent $150 billion to states, large cities and counties for unbudgeted costs related to the pandemic. Those funds must be used for expenses incurred by Dec. 30, according to the Treasury Department. But state and local officials are lobbying for an extension to give government agencies and nonprofits that received the money more time to spend it, a step they say is crucial with the outlook for additional aid uncertain.

An extension would ease pressure on organizations like the Miami Valley Community Action Partnership, a Dayton, Ohio-based non-profit, which received 76 applications for assistance in a single morning this week. It’s already paid out close to $6 million in rental aid in 2020, compared with $138,000 in 2019, and its 130-member staff is working nonstop to process claims and dole out the group’s share of Ohio’s federal stimulus aid in the next four weeks, said CEO Lisa Stempler.

“We’re really terrified,” Stempler said, adding that the Miami Valley partnership saw its budget more than double to $22 million this year thanks to the Cares Act. “We know we’re going to be looking at an eviction crisis if this money is not extended. That’s our biggest fear. Somebody sitting in our queue waiting for assistance and they get evicted before we can do anything to help them.”

A coalition of attorneys general from 43 states, Washington, D.C. and five U.S. territories, sent a letter this week to congressional leaders urging an extension of the deadline to at least Dec. 31, 2021. Setting up standards and procedures to distribute the money takes time and the need for such aid has only grown, the attorneys said. When the deadline was set in March, the outlook for the pandemic looked much different than it does today, the attorneys argued.

“The pandemic will continue to challenge communities well beyond December 30, 2020 — a deadline that now seems unreasonable,” according to the letter dated Nov. 30 and signed by Democratic and Republican attorneys general across the country. The National Association of Attorneys General, which sent the letter, said it hadn’t yet received a response from congressional leadership.

The request comes as a bipartisan group of lawmakers from the House and Senate proposed a $908 billion package this week. State and local aid has been a major point of contention between Republicans and Democrats during the negotiations over Covid-19 relief.

A full accounting of how much of the state and local aid has been spent won’t be publicly available until January, according to a newly created U.S. Department of Treasury tracker. Despite the bill’s March passage, the U.S. Department of Treasury did not clarify guidelines on spending until late April, and smaller governments did not receive direct payments at all, leaving them waiting for pass-through allocations from states.

In Alaska, $1.04 billion of the total $1.25 billion the state received from the Cares Act has been distributed, but not all of those funds have been spent, according to Neil Steininger, director of the state’s Office of Management and Budget.

Grant programs like rental assistance, food assistance and others had to be created to give out some of the funds, and the smaller municipalities facing budget pressure couldn’t plan programs until the funds were received from the state, said Nils Andreassen, the executive director of the Alaska Municipal League.

“The pressure is on for sure,” Andreassen said. “Everybody would have liked to have more time. An extra six or 12 months would’ve lent itself to a more measured approach.”

In Iowa, about $325 million of the state’s $1.25 billion Cares Act allocation hasn’t been spent yet, though some of those funds have been allocated to agencies, according to a summary provided by Iowa Attorney General Tom Miller’s office. Another $75 million remains unallocated. Miller signed the letter requesting an extension. A spokesperson for Governor Kim Reynolds, who has called for more aid, said the funds will be spent by the deadline.

Like Iowa, municipalities that still have funds to use will find a way to spend the funds before the deadline, said Emily Swenson Brock, director of the federal liaison center at the Government Finance Officers Association.

The need for aid has not abated. The U.S. posted an all-time daily high in reported Covid-19 deaths of 2,836 on Wednesday, according to Johns Hopkins University. As cases climb, governors and mayors are enacting restrictions and economic shutdowns again. State and local governments’ finances face $480 billion to $620 billion in shortfalls through fiscal 2022, according to the Center on Budget and Policy Priorities.

But federal stimulus money from the Cares Act can’t be used for budget holes, another reason that governors and local officials are asking Congress for more aid in 2021.

Wisconsin will need at least $466 million in the first quarter of 2021 to pay for ongoing expenses related to the Covid-19 pandemic, money the state doesn’t have, Governor Tony Evers said Thursday.

Evers, a Democrat, sent a letter Thursday to his state’s congressional delegation, urging its members to push for an additional federal Covid-19 relief bill. Evers said his state simply doesn’t have the money to pay for the ongoing disruptions to the state’s economy caused by the pandemic after Dec. 31.

Wisconsin received $2.26 billion in Cares Act funds, which it has used for grants to farmers, small businesses and for rental and mortgage assistance. Additional Cares Act money will be spent on grants to 663 hospitality operators, Evers said.

“Having aid that helps states and localities fight the virus end when the virus is spreading is a terrible idea,” said Michael Leachman, vice president for state fiscal policy at the CBPP. “It’s kind of a no-brainer to help states and localities avoid the additional layoffs and cuts that would make that double dip recession more likely.”

Bloomberg CityLab

By Fola Akinnibi

December 4, 2020, 8:51 AM PST

— With assistance by Stephen Joyce

• Powell says small businesses at risk in virus second wave
• Fed chair provides no hint of policy action later this month

Federal Reserve Chair Jerome Powell and U.S. Treasury Secretary Steven Mnuchin both backed more fiscal stimulus to bridge the economy through the next few months of the pandemic as the promise of Covid-19 vaccines looms.

“Some fiscal support now would really help move the economy along” and guard against downside risks, particularly to small businesses, Powell told the Senate Banking Committee Tuesday during a joint appearance with the Treasury chief. “The risk of overdoing it is less than the risk of under doing it.”

Mnuchin said he is speaking with the Republican leadership including President Donald Trump, about further stimulus, adding “I urge Congress to pass something quickly.”

Washington has gridlocked for months over providing additional fiscal aid, though a bipartisan group of lawmakers unveiled a new proposal Tuesday to break the stalemate. Rising virus cases threaten to restrain economic activity and slow the recovery at a time when millions of Americans are out of work and businesses struggle to hang on.

Powell gave no indication how the central bank may respond to the risk of fading economic momentum when it meets Dec. 15-16, though he reiterated that it would use all of its tools to help the economy recover.

“We do have a long way to go,” Powell said, pointing out that about 10 million people remain out of work. “We will use our tools until the danger has well and truly passed, but it may require help from other parts of the government as well, including Congress.”

The bipartisan group of senators proposed $908 billion of support, including $300 billion of forgivable loans for small businesses, $240 billion for state and local government and $180 billion to extend unemployment benefits. Neither Republican nor Democratic leadership has signed on to the plan.

Fed Programs

Powell and Mnuchin’s joint hearing was their first since they disagreed last month over the expiration of several emergency loan programs set up after the pandemic hit in March.

Fed officials including Powell had pushed for the extension of all the central bank’s lending facilities, saying they served as critical backstops and restored market confidence. Most of the funds are scheduled to expire Dec. 31.

Some of the programs have been sparsely used. These include the Main Street Lending Program, which supports bank lending to mid-sized companies, as well as facilities to aid the corporate bond market and the debt of cash-strapped municipalities.

Powell said no central banker would want to remove backstops in the midst of an emergency. He said facilities could be re-established with the Treasury’s Exchange Stabilization Fund serving as backstop against loss if necessary.

He was echoed later on Tuesday by Mary Daly, president of the San Francisco Fed.

“Those lending powers can’t be overlooked as being valuable to the economy,” Daly told reporters on a conference call. “ “Even when take-up of our facilities is low, it doesn’t mean that our facilities aren’t effective. They provide effective insurance.”

Mnuchin announced last month that those Fed programs must sunset at the end of December, and asked the central bank to return unused funding authorized for the programs by Congress.

The Fed responded — in a rare public fracture between the two institutions — that it “would prefer that the full suite of emergency facilities” remain as a backstop “for our still-strained and vulnerable economy.”

Even with the disagreement, Mnuchin praised Powell during the hearing and said the two had been speaking “constantly.”

Powell noted that the lowest paid were experiencing double-digit unemployment.

“These are not people with a lot of savings, or a lot of resources, or a lot of opportunities right now,” he said. “There are parts of the economy that really will need help, or that might need help, to get that last span of the bridge in place to get to the other side of the pandemic.”

Bloomberg Economics

By Craig Torres and Christopher Condon

December 1, 2020, 11:03 AM PST Updated on December 1, 2020, 12:21 PM PST

— With assistance by Steven T. Dennis, Erik Wasson, Steve Matthews, Saleha Mohsin, and Catarina Saraiva

S&P Global Ratings’ key median indicators for U.S. not-for-profit private colleges and universities in fiscal 2019 saw credit quality deteriorate, reflecting the sector’s increasing challenges and vulnerability to a changing higher education landscape. A variety of stresses, including increased competition for a shrinking pool of students and a heightened focus on affordability, contributed to the declining metrics. Generally, most demand metrics, such as retention and graduation rates, declined year over year, which is consistent with overall industry trends. The only exception was student quality as measured by SAT scores, which improved slightly. Full-time equivalent (FTE) enrollment saw an overall decline in medians for our rated universe, although the ‘AA’ rating category increased due to certain rating movement in the category. Similarly, operating margins remained compressed year over year, although the sectorwide median operating margin remained positive along with a decline in median available resource ratios.

Although the fiscal 2019 medians do not reflect financial stress from COVID-19, we expect that the repercussions associated with the pandemic, which have contributed to a trend of unfavorable rating and outlook actions throughout the sector this year, will be evident in the medians based on fiscal 2020 results and even more so in fiscal 2021.

Continue reading.

24 Nov, 2020

The key median indicators for U.S. not-for-profit public colleges and universities were generally stable in fiscal 2019. The trend of mounting pressure on lower-rated entities continued; however, higher-rated institutions mostly maintained their overall enrollment, demand, and financial profiles. The fiscal 2019 metrics were recorded before the unprecedented disruption that the COVID-19 pandemic has caused in the sector. We expect to see the effects of operational and financial challenges related to the pandemic reflected beginning with the fiscal 2020 median credit metrics, with more pronounced changes likely in fiscal 2021. Although U.S. not-for-profit higher education entities faced increasing operational and financial challenges even before the pandemic, we believe fallout related to COVID-19 will both accelerate and amplify these pressures.

Due to the duration of COVID-19 and the gradual, uneven economic recovery, public colleges and universities face increasing challenges in many, if not all of their revenue streams. When colleges and universities sent students home in spring 2020, refunds were for services such as housing, dining, and parking. In addition, some states responded to budget pressures with end-of-year cuts to operating appropriations. This operating pressure was offset by management teams cutting discretionary spending, pausing or reevaluating capital projects, instituting layoffs or furloughs, and the receipt of federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) funding. While fiscal 2020 budgets were undoubtedly affected, we expect to see an even more pronounced effect on operating margins in fiscal 2021, with many institutions forecasting pressured net tuition revenue (due to lower enrollments, limited tuition increases in fall 2020, more financial aid, and a higher number of in-state students), a lower level of state support (as states grapple to balance budgets as a result of suppressed economic activity due to the pandemic), lower auxiliary revenues (due to de-densified campuses and deferral or cancellation of athletic and campus events), and potential for sluggish fundraising in light of economic uncertainty. In recognition of this pressure, we revised our rating outlooks on a number of higher education institutions (both public and private) to negative in April 2020 (see “Outlooks Revised On Certain U.S. Not-For-Profit Higher Education Institutions Due To COVID-19 Impact,” published April 30, 2020, on RatingsDirect). We also recently published a mid-year update that reflects our view of the pressures the sector faces (“Not-For-Profit Higher Education Mid-Year Sector View: Fall 2020 Enrollments will Drive Credit,” Aug. 18, 2020).

Continue reading.

24 Nov, 2020

Fitch Ratings-New York-03 December 2020: Centers for Disease Control (CDC) guidance that skilled nursing facility (SNF) residents and employees should receive the coronavirus vaccine in the initial rollout is a credit positive for the sector, Fitch Rating says. The 14-member CDC advisory panel recommended to prioritize workers and the elderly in nursing homes to receive the first batches as part of Phase 1a of vaccine distribution. The CDC director, Dr. Robert Redfield, still needs to approve the recommendation, which is expected to be broadly followed by state governors.

The federal government expects 40 million doses of the coronavirus vaccine, enough for 20 million people, to be available by the end of the year. According to a report recently released by the American Health Care Association and the National Center for Assisted Living, coronavirus cases and deaths are rising in nursing homes, reaching levels not seen since reporting began in May.

The availability and distribution of the vaccine would be an immediate stabilizing factor for SNFs, which experienced a decline in occupancy since March, pressuring operating budgets. Lower occupancy is driven by a number of factors, including a reduction in post-acute care referrals from hospitals, beds being kept offline for the isolating or quarantining of coronavirus positive residents, and patients avoiding SNFs due to concerns such as family members not being able to visit.

The vast majority of SNFs that Fitch rates are part of the larger Life Plan Communities (LPCs) that offer a continuum of care that includes independent living (IL), assisted living/memory care and skilled nursing. Fitch rates approximately 160 LPCs. We revised our Outlook on the LPC sector to Negative in March and since then downgraded two LPCs and moved five Outlooks to Negative as a direct result of the effects of the coronavirus. This compares with YTD total rating actions of 20 downgrades, 11 Outlook revisions to Negative, and two credits placed on Rating Watch Negative. There have been no upgrades during this time.

Despite the stress on skilled nursing occupancy, the overall financial performance for LPCs remained largely stable due to steady levels of IL occupancy and a marked increase in IL sales in third-quarter 2020. The Coronavirus Aid, Relief and Economic Security Act funding directed at SNFs helped offset the effects of lower SNF occupancy on revenues. Skilled nursing occupancy has shown signs of recovering as referrals increased for post-acute care services as hospitals resumed elective surgeries, although this may subside somewhat with the surge in coronavirus cases. The vaccinations for SNF residents and staff should provide further velocity to financial recovery by increasing safety and confidence, and therefore admissions, in SNFs, as well as by reducing employee expenses related to quarantining or coronavirus-positive employees.

Contact:

Gary Sokolow
Director, US Public Finance Healthcare
+1 212 908-9186
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019

Margaret Johnson
Director, US Public Finance Healthcare
+1 212 908-0545

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

Fitch Ratings-Chicago/New York-04 December 2020: Reimplementation of the Centers for Disease Control and Prevention’s (CDC) No Sail Order would not result in immediate credit profile pressure on cruise operators and ports with sizable cruise operations, given we currently assume cruise operations will not meaningfully resume until 2H21, says Fitch Ratings. However, cruise operator and port credit profiles will become vulnerable to further deterioration if delays extend beyond this period and liquidity becomes an issue.

The CDC’s previous No Sail Order that suspended cruise operations in the US from March 14 to Oct. 20 has expired. However, lawmakers reportedly began urging the CDC to reinstate the expired No Sail Order after several people on a Seadream Yacht Club cruise to the Caribbean tested positive for coronavirus last month.

A Framework for Conditional Sailing Order, which includes phases and milestones cruise lines must reach to resume operations in a way that mitigates the risk of spreading the coronavirus, replaced the No Sail Order at the end of October. This framework remains in effect until the earliest of a government declaration that the coronavirus is no longer a public health emergency, a CDC recension or modification of the order, or Nov. 1, 2021.

Major operators, including Norwegian and Royal Caribbean, voluntarily extended their suspension on some or all cruises this week, in part to provide time to comply with the conditional sailing order. Norwegian suspended nearly all voyages through March 2021. Royal Caribbean’s extensions vary by geography and date with some into April 2021. Carnival announced extensions on certain cruises last month, suspending some seven-day or longer cruises until November 2021.

We believe the cruise industry revenue recovery to the 2019 base line level will be among the slowest in the hard-hit travel and leisure sector, due in large part to the health-related risks of occupying close quarters. Global and domestic travel restrictions will also have an impact, as most cruise passengers travel to reach the cruise port. We do not envision a secular decline in demand for cruising, as the industry has successfully navigated prior, more localized health-related incidents, but anticipate the time to return to pre-pandemic profitability levels will be lengthy.

Credit profiles for Fitch’s universe of cruise operators and ports with significant exposure to the cruise industry have deteriorated due to the virtual standstill of cruising. Our forecasts for cruise operators and ports assume cruise travel does not begin to meaningfully pick up until 3Q21. Credit profiles are currently supported in part by liquidity positions but reinstatement of the No Sail Order that extends beyond our expectations and leads to cash burn could add pressure.

Cruise operators have minimal liquidity headroom, even after significant capital access and some delaying of the delivery of new ships to conserve cash. We estimate roughly 10 to 17 months of cash on hand for the three major cruise operators, after servicing upcoming debt maturities. Two of the three have become fallen angels due to the effects of the pandemic, with operators’ revenue projected to be down 84% in 2021 over 2019.

Fitch-rated ports have strong liquidity and most have cargo operations that provide an offset to declines in cruise revenue. However, given uncertainty for the industry, minimal cruise activity is assumed through 2Q21 and we are forecasting 2021 revenue at only 34% of 2019 levels. Downside risk from coronavirus-related disruptions has resulted in multiple negative rating actions. Canaveral Port Authority’s Outlook was revised to Negative from Stable in April and ratings subsequently downgraded to ‘A-’/Negative from ‘A’/Negative on Nov. 10 due to the severe deterioration of cruise revenues and resulting decline in financial performance. Port Miami’s (A/Negative) and Broward County’s (A/Negative) Outlooks were also revised to Negative.

Contacts:

Colin Mansfield, CFA
Director, US Corporates
+1 212 908-0899
Fitch Ratings
33 Whitehall Street
New York 10004

Stacey Mawson
Director, Infrastructure & Project Finance
+1 212 908-0678

Carla Norfleet Taylor, CFA
Senior Director, Fitch Wire
+1 312 368-3195

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com
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.

In a letter to President-elect Joe Biden last week, the American Water Works Association (AWWA) urged the incoming administration to prioritize COVID-19 relief for water utilities and investment for the overall water infrastructure sector.

The letter, authored by association president Melissa Elliott, cites AWWA research that revenue shortfalls at U.S. drinking water utilities may reduce economic activity by $32.7 billion and cost 75,000 to 90,000 private-sector jobs. Drinking water utilities are expected to see revenues from customer payments drop by nearly $14 billion, according to AWWA estimates. This is the result of the elimination of water shutoffs for non-payment, increased late payments due to high unemployment, reductions in non-residential water demands, and the addition of fewer new customers due to economic stagnation.

The letter explains that while the CARES Act passed earlier this year did provide funding relief to state and local governments, the act also carried a provision prohibiting the use of those funds to offset lost local utility revenues. AWWA says many utilities, particularly those serving small to medium-sized communities, are at risk resulting from diminished operating revenues. Not only do these lost revenues mean local communities are less able to renew, repair, and sustain aging infrastructure and treatment facilities, but some are feeling the effects in their ongoing operating finances, which may result in the loss of operators who are needed to ensure the utility is in regulatory compliance, the association says.

The letter calls on the president-elect and Congress to work together on the next COVID-19 relief package and urges that it include:

1. Funding to help low-income customers pay their water bills during the current pandemic
   emergency;
2. Funding to help those local water utilities that have suffered significant revenue losses due
   to the pandemic, so that they can continue to operate and provide safe water services; and
3. A definitive limitation to any mandated moratorium on disconnection of water service for
   non-payment, if such as moratorium is included in a legislative package.

Finally, the letter from AWWA also urged President-elect Biden to take up water infrastructure investment as a priority in his administration, recommending the following:

1. In the 2021 budget, seek fully authorized funding for the WIFIA and SRF programs.
2. Work with Congress to strengthen the effectiveness of WIFIA in this manner
3. Reauthorize WIFIA and increase authorized funding.
4. Authorize an increase in WIFIA staff to help get loans out the door more quickly.
5. In negotiating changes to the tax code, ensure that the tax-exempt status of municipal bonds is protected, and that the tax advantages of advanced refunding of these bonds is restored.Water Sector Calls on Congress to Assist Low-Income Customers Amid Pandemic

Meanwhile, as the COVID-19 pandemic persists in the United States, AWWA and other water sector groups including the Water Environment Federation (WEF), the Association of Metropolitan Water Agencies (AMWA), National Association of Clean Water Agencies (NACWA), National Rural Water Association and WateReuse Association, are calling on Congress for increased funding. Similar to the recommendations to the incoming Biden administration, the groups say utilities need more help to rebound from the pandemic and invest in critical infrastructure, as well as to assist low-income customers pay bills. The organizations’ goals were laid out in a joint letter to Congressional leaders.

On the subject of assistance to low-income customers, the letter notes two versions of the HEROES Act approved by the House of Representatives this year (H.R. 6800 and H.R. 925) contained language to establish a $1.5 billion Low-Income Household Drinking Water and Wastewater Assistance program, which would provide funds to local water and wastewater utilities to offset water rates charged to low-income customers during the pandemic.

Water systems report that delinquent residential water accounts have increased dramatically over the past several months – especially among low-income customers – so this type of targeted assistance is vital to getting these vulnerable customers back on track while also providing a needed stream of operational funds to water and wastewater systems. The associations request that this or a similar low-income customer assistance program is maintained in any pandemic relief package.

Click here to read more from the full joint statement from the water sector to House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Mitch McConnell (R-Ky.).

WATER AND FINANCE MANAGEMENT

BY WFM STAFF

NOVEMBER 23, 2020

As Congress debates proposals to give public transit half of what was sought, officials warn of cuts that would gut regional economies.

Officials at some of the largest public transit systems in the U.S. say that sweeping cuts to service and staffing are in store if a second federal pandemic relief package does not arrive soon. And the transit aid proposals currently being considered in Congress may not be enough to prevent drastic changes that would be difficult to reverse in several big cities, leaders and advocates say.

That includes in Congress’s own backyard, where staffers, interns, Capitol Hill service workers and a tiny handful of lawmakers are normally some of the most reliable users of the Washington, D.C., Metro. Now rail ridership on the second-most-used rail transit network in the U.S. is down nearly 90%, and WMATA faces an approximate $500 million budget gap starting in FY 2022.

To close it, WMATA general manager and chief executive officer Paul Wiedefeld laid out a plan on Monday that would transform the system from metropolitan lifeblood to anemic last resort. It includes eliminating weekend rail service, reducing weekday rail service to 30-minute headways, closing the rail system at 9 p.m. and shuttering 19 stations entirely, and eliminating more than 30% of the bus routes that existed before the pandemic. This would be on top of 1,400 positions that are already in the process of being eliminated, in order to close a $167 million budget hole in FY 2021, Wiedefeld said.

D.C.’s proposed changes are not inevitable. A swift vaccine distribution and accompanying economic recovery could be cause for dialing back some of the cuts, Wiedefeld said, as would the prompt arrival of a second relief package from Congress.

On Tuesday, a bipartisan group of senators outlined a $908 billion stimulus that includes $15 billion for public transit — less than half of what public transit advocates say is needed. That amount may be the best-case scenario for federal transit funding. In a major concession, Democratic leaders have backed the bipartisan proposal, but Senate Majority leader Mitch McConnell rejected it and is pushing instead a version of a bill he previously failed to pass that includes no funding at all for transit.

Transit leaders say that $15 billion in aid would be better than nothing. Chad Chitwood, a spokesperson for the American Public Transportation Association, which is calling for $32 billion in transit funding, called it a “promising step in the right direction.”

But officials stressed that it would not be enough to return to full service levels, or even to avoid some of the harshest cuts currently taking shape. Assuming that his agency received the same portion from a $15 billion relief fund as it did from the CARES Act in March, San Francisco Municipal Transportation Agency director Jeffrey Tumlin said it would fail to prevent the nearly 22% reduction in workforce and dramatic service cuts that the agency projects will be necessary to close the $600 million in losses it faces over the next two years.

“It’s good but it’s worse than our worst-case scenario that is leading us to 1,200 layoffs,” he said of the possible relief funding, explaining that $15 billion would not put the agency over the threshold for aid that it says it requires to avoid those cuts.

In an SFMTA board meeting on Tuesday, Jonathan Rewers, a senior budget manager at the agency, clarified what would be necessary. “Only at the highest amount — the amount in the HEROES Act — do we have a chance at closing the deficits we project over the next two years,” he said. That earlier more robust HEROES Act proposal would have funded transit at the requested $32 billion.

The $15 billion figure in the stimulus agreement represents a middle ground between proposals from both sides, according to a spokesperson for Senator Mark Warner, a Virginia Democrat who represents areas served by WMATA and is one of the authors of the compromise. WMATA’s proposed cuts “will have a dramatic effect on the functions of the federal government as well as for constituents across the tristate area,” Warner said at a press conference Tuesday. “So we made, I think, the right kind of investment in public transit.”

The distribution of those funds will also be important, advocates said. The CARES Act distributed $25 billion to public transit agencies and has enabled many systems to continue operating this far. But those resources were never designed to last forever, and for big-city agencies with budgets that rely heavily on passenger revenues, they dwindled faster.

For example, New York City’s Metropolitan Transportation Authority — far and away the largest transit operator in the U.S.— received $3.9 billion in CARES relief, or slightly more than 15% of the available aid. Yet it carries 34% of the nation’s metro rail and bus trips, according to APTA data, and the money lasted just four months. The agency now warns it will need to cut subway and bus service by 40% and commuter rail by 50% and lay off more than 9,000 workers if the federal government fails to allocate $12 billion.

“We need to get the size of the pot right and the distribution right to save America’s cities,” said Danny Pearlstein, the policy and communications director at Riders Alliance, an advocacy group in New York City. To highlight what he called the inadequacy of the $15 billion figure, he added: “There would only be $3 billion left once MTA gets its twelve.”

In Washington, D.C., Wiedefeld said that his agency would need more than $700 million to return to normal levels of operation and reverse all staffing and service cuts. In addition to the exact amount, timing matters, too, with more than 10% of the agency’s workforce already hanging in the balance, Wiedefeld said.

“If we don’t get a significant amount from Congress, or it doesn’t come until late in the first or second quarter of the year, it will be hard to pull this back,” he said. “If money came immediately to pull back 1,400 jobs, I’d do that. But if that does not occur until April or May, they’re already gone. Then I’m trying to save jobs for the next fiscal year.”

At the current trajectory, the agency projects ridership to return to 34% of its 2019 levels by June 2022 and to take years to fully rebound.

Until then, “we have to live under a balanced budget with no other resources to turn to,” Wiedefeld said. “This is the reality of what we’re up against.”

The impact of the proposed cuts on the D.C. economy would be difficult to overstate. The transit system outlines the region’s future, with one 2015 study estimating that 78% of the next 15 years in planned commercial, residential and retail construction would occur within a half-mile of a Metro station. It’s not clear what would become of those blueprints if service was gutted. In addition to weekday commuters, the D.C. rail system is also a mode of choice for millions of annual visitors to the region’s monuments and museums; cuts to weekend service would stymie the return of that tourism.

“Anyone who comes here from around the globe uses our system, so it does reflect at a national level,” Wiedefeld said. “What does this reflect when the nation’s capital can’t provide a fundamental service that major metropolitan areas provide worldwide?”

Yet these challenges reflect similarly grim forecasts in other U.S. cities. In the New York City region, the MTA’s proposed cuts would result in an estimated loss of $65 billion in gross domestic product annually and cost 450,000 jobs in the area by 2022, according to a report by the NYU Rudin Center for Transportation Policy and Management and New York-based consulting firm Appleseed.

The changes will make it difficult for the MTA to bring back riders to its network of subways, buses and commuter trains as other transportation options will become more attractive, Pat Foye, the agency’s chief executive officer, said in an interview last month with Bloomberg TV.

“Cutting it back also will cause some of our customers to say, ‘you know what, it’s not worth it,’” he said. “We won’t get their revenue. We won’t get their service and that’s just a terrible place for any transit agency to be.”

Meanwhile, D.C. buses have continued to serve roughly 200,000 daily riders, or about 40% of normal ridership, which is a much larger portion than the rail system has seen. Ron J. Thompson Jr., a transit equity organizer at the advocacy group Greater Greater Washington, said that cuts could strand low-income bus riders from jobs, school, groceries and healthcare. As the region pulls itself out of the Covid-19 recession, he said, “you’re setting us up for one of the most uneven recoveries, ever, in our nation’s history.”

Bloomberg CityLab

By Laura Bliss

December 3, 2020, 3:24 PM PST Updated on December 4, 2020, 2:21 PM PST

— With assistance by Michelle Kaske

New York’s Metropolitan Transportation Authority is on track to grab one last slug of federal pandemic aid before it and other public authorities lose a key source of relief at year’s end: the Federal Reserve’s municipal lending program.

The MTA said it plans to sell nearly $3 billion in bonds by the end of the year to the Fed’s Municipal Liquidity Facility, a move that will help the agency cope with a plunge in ridership and close a $1.1 billion budget deficit this year, according to a presentation from CFO Robert Foran at a Nov. 18 board meeting.

Five Fed programs will expire at the end of this year, even as Covid-19 cases soar and some state governments impose partial shutdowns to control the virus’ spread. The programs were created or revived earlier this year to provide a financial bridge for a wide range of institutions affected by the pandemic.

Several facilities were designed for the large banks, bank trading desks, and money-market funds that were squeezed during the short-term rush for cash in the early stages of the pandemic. Yet the programs that are closing mostly cover borrowers that could face financial pressure over a span of years, such as large corporations, midsize businesses, nonprofits, and state and local governments.

Municipal-market and Wall Street strategists have argued that the MLF in particular should be extended, because it can take months or even years for state and local governments to experience the full impact of recessions on their budgets from trends such as declines in property values. Municipalities are required to file 30 days in advance before they tap the facility, meaning that any other eligible state or local government that wants to borrow from the Fed has until Nov. 30 to file their own notice of interest.

“We still don’t know what the next three, four, five, or even six months will look like. It makes sense to me that they extend it just in case there are high levels of shutdowns or something unexpected happens,” said Tom Kozlik, head of municipal strategy and credit with Hilltop Securities. “I think [the municipal lending] program was set up for such an event. And it should be extended.”

It wasn’t. In a letter last week calling to Fed Chairman Jerome Powell to let the programs expire and return unused funds, Treasury Secretary Steven Mnuchin said that he believes the Fed’s programs were successful, citing declines in yields on highly rated municipal bonds. And in a response published Friday, Powell said that the Treasury does have the option of using existing funds for “any Federal Reserve lending facilities that are needed to maintain financial stability and support the economy.”

Still, muni bonds haven’t rebounded to prepandemic levels, unlike corporate debt markets. The iShares National Muni Bond exchange-traded fund (ticker: MUB) has climbed about 15% since the end of March, compared to the iShares iBoxx $ Investment Grade Corporate Bond ETF’s (LQD) roughly 30% rally.

Citigroup strategist Vikram Rai, another vocal supporter of extending the MLF, said in a Nov. 23 note that he thinks the Treasury made the wrong call. “For now, the markets have largely brushed off the announcement, which is expected. But it would be easier to trigger weakness and volatility. For [example], say a high-profile deal faces weak demand,” he wrote. “It could be enough to have a ripple effect and fan investor fears—this in turn could cause volatility spikes.”

Mnuchin also pointed out that only two state and local governments had used the facility as of Oct. 31: The MTA and the state of Illinois. Their borrowing combined adds up to a combined $1.7 billion, though that sum will rise to $4.6 billion after the MTA’s next planned use of the facility. That is indeed small compared to the broader market, which totals $3.9 trillion.

But strategists say that the MLF didn’t need to be used extensively to provide a backstop to the market.

“The importance of the MLF was always the fact that it was there, even if it wasn’t going to be used,” said Tom McLoughlin, fixed-income strategist at UBS. “As a consequence, it calmed a lot of nervous investors that there was this opportunity to borrow as a last resort.”

Barron’s

By Alexandra Scaggs

Nov. 24, 2020 6:30 am ET

With a continued historic decline in ridership numbers and no additional federal help in sight, American transportation agencies are facing some serious fiscal challenges.

These transit agencies, once considered the backbone of metropolitan economies and moving a large number of passengers to and from work, are now running virtually empty with no real solution in sight for the foreseeable future. Although the recent news about a COVID-19 vaccine provided a glimmer of hope for many local and state economies, transportation agencies still have a long way to go before reaching their pre-pandemic ridership numbers and getting back to some state of normalcy. Furthermore, given the vital role transportation agencies play in metropolitan mobility, shutting down isn’t an option for any of them.

In this article, we will take a closer look at the current challenges for American transportation agencies and what the future holds.

Continue reading.

municipalbonds.com

by Jayden Sangha

Nov 25, 2020

Reeling from the pandemic, transit agencies are grappling with drastic reductions in ridership and pleading for help from Washington.

In Boston, transit officials warned of ending weekend service on the commuter rail and shutting down the city’s ferries. In Washington, weekend and late-night metro service would be eliminated and 19 of the system’s 91 stations would close. In Atlanta, 70 of the city’s 110 bus routes have already been suspended, a move that could become permanent.

And in New York City, home to the largest mass transportation system in North America, transit officials have unveiled a plan that could slash subway service by 40 percent and cut commuter rail service in half.

Across the United States, public transportation systems are confronting an extraordinary financial crisis set off by the pandemic, which has starved transit agencies of huge amounts of revenue and threatens to cripple service for years.

The profound cuts agencies are contemplating could hobble the recoveries of major cities from New York to Los Angeles and San Francisco, where reliable transit is a lifeblood of the local economies.

Trains and buses carry the office workers, shoppers and tourists who will help revive stores, restaurants, cultural attractions, hotels and other key businesses that have been battered by the outbreak.

The financial collapse of transportation agencies would especially hurt minority and low-income riders who tend to be among the biggest users of subways and buses.

For months, transit officials around the country have pleaded for help from the federal government, but with no new lifeline forthcoming and many systems facing December deadlines to balance their budgets, agencies have started to outline doomsday service plans that would take effect next year.

A glimmer of hope emerged in recent days, when a bipartisan group of lawmakers in Congress proposed $15 billion for public transit agencies as part of a $908 billion framework for a pandemic-relief package.

The plan, which President-elect Joseph R. Biden Jr. has said he supports, would provide nearly half of the $32 billion that transit leaders have lobbied for in recent months and that is intended to provide short-term relief.

But it has yet to be endorsed by Senator Mitch McConnell of Kentucky, the Republican majority leader, who has proposed a smaller stimulus plan that contains no financing for public transit. On Friday, Nancy Pelosi, the House speaker and a Democrat, expressed optimism that a compromise deal could be achieved before the end of the year.

Even if they receive some aid, transit agencies in some large cities have experienced such severe financial losses that officials say they will be forced to pare back service to save operating funds while serving riderships that are far below normal levels.

It is unclear whether ridership will ever fully return to pre-pandemic levels even after effective vaccines become widely available. Some commuters may end up working from home permanently; others may abandon public transit if cuts cause service to deteriorate.

“This is existential peril,” said Ben Fried, a spokesman for TransitCenter, an advocacy group.

“The economic rationale for cities is that people are in close proximity and can do a lot of things without spending a lot of time traveling from place to place,” Mr. Fried said. “If the transit network is seriously diminished in a dozen or so cities that are a focal point for a large share of the nation’s economic output, then that’s going to have severe impacts on the national economy.”

Since the pandemic swept across America in the spring, bringing urban life to a standstill and ushering in new work-from-home norms, nearly all of the sources of money that public transit relies on have been pummeled.

Ridership, and fare revenue along with it, vanished practically overnight after lockdown orders were enacted. As the economy slid into recession, the sales and income tax revenue used to finance many transit networks plunged. And cities and states sunk into their own financial crises, threatening government subsidies for public transit systems.

New York City’s transit agency, which is grappling with the biggest losses of any system in the country, forecasts a $6.1 billion deficit next year. Officials in Boston are dealing with a $600 million budget hole, and Chicago’s agency anticipates a $500 million shortfall.

By September, nationwide ridership on mass transit had crept back to nearly 40 percent of its pre-pandemic levels from a low of 19 percent in April, according to the American Public Transportation Association, a lobbying group.

But the numbers have plateaued in recent weeks as the virus surges throughout the country, making this the longest and most severe period of suppressed ridership for any of the nation’s public transit systems.

In New York, ridership is at 30 percent of pre-pandemic levels, while on rail lines in Washington and San Francisco, it is below 15 percent of its usual levels.

“The effect on ridership in each of our agencies — subway, buses, Metro-North, Long Island Railroad — is dramatically worse than even in the Great Depression,” said Patrick J. Foye, chairman of the Metropolitan Transportation Authority, which runs New York City’s subway and buses and two commuter railroads.

Many big city systems rely on fare revenue more heavily than their counterparts in smaller cities and rural areas and have tended to get a smaller share of federal support relative to their size.

Fares contribute 70 percent of the operating budget in San Francisco, 40 percent in New York and Washington and about 33 percent in Boston.

There is no legislative text yet for the bipartisan proposal that Republican and Democratic Senators are now negotiating, nor are there specifics for how the transit aid would be divided among agencies.

“This is not limited to big, urban cities and states — lots of rural areas depend on buses that also get federal funding — so it has some degree of bipartisan support,” Senator Chuck Schumer of New York, the Democratic minority leader, said in an interview. “But there are some who have never wanted any federal help for mass transit and that’s who we are up against.”

The stimulus package that is being negotiated is likely to face opposition from some liberal lawmakers who consider it insufficient and some conservatives who are unwilling to add to the national debt.

“The real answer to the economic problems is to get rid of what causes the economic problems and they’re caused by economic dictates from governors that forbid commercial activity,” Senator Rand Paul, Republican of Kentucky, told reporters on Tuesday. “I’m not for borrowing any more money.”

When transit agencies have faced financial shortfalls in the past, they have typically turned to city and state governments or they have lobbied elected officials for new sources of revenue like dedicated taxes.

But many municipal and state governments are grappling with their own financial problems, forcing transit agencies to look to Washington.

“Unlike some other transit properties, we don’t have our own revenue source, we have two sources of revenue, it’s either the farebox or the subsidies from our local and state government,” said Paul J. Wiedefeld, the general manager of the Washington Metropolitan Area Transit Authority. “They are both under tremendous financial distress right now, so where do we turn?”

Many urban transit systems have exhausted the money they got from an earlier federal stimulus bill and have also imposed service cuts.

In New York, overnight subway service has been suspended since May. In Los Angeles, bus service has been slashed nearly 30 percent and rail service has also been cut. And the Bay Area Rapid Transit rail system in San Francisco has ended late night service and pushed wait times for trains from 15 to 30 minutes.

The cuts have helped stabilize operations and allowed them to continue providing at least limited service. But officials warn that the cutbacks could become permanent and that more could be added at the beginning of next year, a devastating prospect for the essential workers and low-wage riders who continue to rely on public transit.

Around 2.8 million American workers in essential industries like health care, grocery stores and pharmacies used public transit to get to work in 2018, according to an analysis of census data by the TransitCenter. That was 36 percent of all transit commuters in the U.S. work force that year, the group said.

“We have been the ones that have kept the economy of this country afloat because we do not have the luxury to work from home,” said Mayra Romero, 43, a restaurant worker in Boston who travels by bus from her home in nearby Chelsea, Mass. “We have been the ones who have been risking our lives and exposing ourselves.”

Margaret Dunn, who lives in Clinton, Md. and works at a hotel in Washington, used to work until midnight before she was laid off in March. Now, as she waits for a call to return to her job, she worries that service cuts could leave her with few travel options once her shift ends.

“We direly need some help.” she said, adding that she may have to rely on Uber or her husband to drive her.

In Washington, transit officials say that if the system receives sufficient federal assistance they will revive service as much as possible to help coax riders back as vaccines are distributed and the cadence of normal life begins to return.

But in other cities, additional federal aid may not guarantee the return of service. In Boston, New York and San Francisco, transit officials have said they plan to recalibrate service to match what they expect to be long-lasting, depressed levels of ridership.

“With the first tranche of money we got, we immediately put it in place to plug the budget gap because there was so much uncertainty, but as a consequence that money will run out this fiscal year,” said Steve Poftak, the general manager of the Massachusetts Bay Transportation Authority, which serves the Boston area. “We want to do as much as we can in this period of low ridership so we have a reserve in place that we can apply to fiscal year 2022.”

“That’s been our approach,” he added. “Preserve our service now, but also keep an eye toward the future.”

Transit experts worry that with more cuts public transportation agencies could plunge into a “death spiral,” where increasingly unreliable service keeps riders away, pushing systems deeper into financial distress.

With public health officials expecting the distribution of vaccines to begin early next year, agencies could wind up cutting service just as riders return to their commutes.

“Transit is not going to be there for people at the exact moment they are ready for transit again,” said Nick Sifuentes, executive director of the Tri-State Transportation Campaign, an advocacy group. “We are looking at millions of people getting ready to head back to their workplaces and the thing they relied on to get there won’t be reliable anymore.”

The New York Times

By Christina Goldbaum and Will Wright

Dec. 6, 2020

Fitch Ratings-New York-02 December 2020: U.S. transportation infrastructure faces a mixed outlook for 2021 with some segments returning to pre-pandemic levels quicker than others, according to Fitch Ratings in its 2021 outlook report for ports, toll roads and airports.

Fitch’s 2021 Sector Outlook for U.S. transportation infrastructure is Improving, while Fitch’s 2021 Rating Outlook is Negative. The Sector Outlook reflects Fitch’s expectation for improved performance in 2021 as compared to 2020 for the two largest sectors – Airports and Toll Roads. “Toll roads and cargo ports are expected to recover to 2019 levels by 2022,” said Senior Director Emma Griffith. “By contrast, airports and cruise ports face a more uphill battle with recovery not likely to materialize until 2024 or perhaps even later.” The Negative Rating reflects 57% of U.S. transportation ratings carrying Negative Outlooks or Watches.

Cargo-focused ports have outperformed Fitch’s expectations thus far, though performance will face pressure in 2021 due to a worsening economy and delays in fiscal stimulus. Conversely, the CDC’s no-sail order in place for much of this year has severely hampered performance for cruise ports with pre-pandemic recovery not likely for several years.

Another resilient sector has been toll roads with traffic levels largely returning to pre-pandemic levels before leveling off somewhat last quarter. “Whether traffic recovers or backslides depends upon the path of the virus and related lock-downs, especially regarding commuter traffic from office workers,” said Senior Director Scott Monroe.

The segment that may face the most formidable challenge over time is airports due to the unprecedented drop-off in passenger traffic. “Strong fee setting flexibility and liquidity will keep most airports numbers stable, though time will tell if that will be enough to sustain them with pre-pandemic recovery in passenger traffic to remain elusive for several years,” said Senior Director Seth Lehman.

‘Fitch Ratings 2021 Outlook: U.S. Transportation Infrastructure’ is available at ‘www.fitchratings.com’.

Contact:

Emma Griffith
Senior Director
+1 212 908 9124
Fitch Ratings, Inc.
300 W 57th St
New York, NY 10019

Seth Lehman
Senior Director
+1 212 908 0755

Scott Monroe
Senior Director
+1 415 732 5618

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

Additional information is available on www.fitchratings.com

With a Joe Biden administration looming, municipal bonds have been in play for fixed income investors. One pertinent idea is a taxable municipal bond, the focus of the Invesco Taxable Municipal Bond ETF (BAB).

BAB seeks to track the investment results of the ICE BofAML US Taxable Municipal Securities Plus Index. The underlying index is designed to track the performance of U.S. dollar-denominated taxable municipal debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. market.

According to Investopedia, taxable municipal bonds are “issued by a local government, such as a city, county, or related agency, to finance projects that the federal government will not subsidize, and it is not tax exempt.”

As its namesake suggests, the BAB ETF hearkens to Build America Bonds (BAB), which, courtesy again of Investopedia, “were created under the American Recovery and Reinvestment Act (ARRA) of 2009 and, although taxable, have special tax credits and federal subsidies for either the bond issuer or holder. Taxable municipal bonds are popular among institutional investors and mutual funds that cannot take advantage of other tax breaks.”

Continue reading.

ETF TRENDS

BEN HERNANDEZ

DECEMBER 2, 2020

MUNIS in FOCUS: Eric Kazatsky, Senior U.S. Municipals Strategist for Bloomberg Intelligence: stimulus talks revived and 2021 outlook for munis. Hosted by Paul Sweeney and Vonnie Quinn.

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Bloomberg Radio

December 4, 2020 — 10:29 AM PST

Municipal bonds and tax-exempt debt are no longer synonymous. Taxable municipal bonds are the fastest-growing sector in U.S. fixed income. This year, issuance has totaled more than $170 billion, double the $85 billion sold in all of 2019. The total market has grown to $700 billion—sizable but still below the $3.7 trillion tax-exempt muni market.

Taxable munis offer an attractive alternative to corporate bonds, with higher yields and lower historical default rates. The market’s obscurity is part of the reason for yields that can be 0.5 percentage point to 1.5 percentage points higher than those of similarly rated corporate debt.

“Issuance has exploded, and we expect that trend to continue. It’s about 35% of total municipal issuance,” says Peter Hayes, head of the municipal bond group at BlackRock. “Investor appetite is growing domestically and internationally.”

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Barron’s

By Andrew Bary

Nov. 27, 2020 11:36 am ET

Summary

• Taxable munis offer higher after-tax yields for everyone but those in the highest tax brackets, compared to tax-exempt munis.
• With markets hitting new highs, taking on less risk seems prudent. As a non-leveraged ETF, BAB offers a path to do so.
• Municipals should perform well in 2021, if states and cities get federal relief, which is more likely under a Biden administration.

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Seeking Alpha

Nov. 25, 2020

Investors have had plenty to worry about in 2020, and this is particularly true for anyone who counts on municipal bonds to generate stable and, in many cases, tax-free income for their portfolios.

Covid-19 has put pressure on a wide range of municipal bond issuers, from state and local governments, to universities, senior housing facilities, and convention centers. While there has been an uptick in defaults, it’s a long way from the doomsday scenarios that made headlines early this year.

For one thing, the initial analysis of muni defaults was done at the height of Covid-19 shutdowns in March, say Bob DiMella and John Loffredo, co-heads and co-chief investment officers of MacKay Municipal Managers. Meanwhile, not every segment of the market has been squeezed. Public utilities have held up well, while public schools should benefit from continued strength in the housing market. Pension plans, meanwhile, have gotten a lift from the surging stock market.

Still, for many investors—especially those who buy and hold individual bonds—municipal bonds with an insurance wrapper may be worth a closer look.

“It’s a bond with a belt and suspenders,” DiMella says. “You’ve got the underlying credit, plus you’ve got this financial guarantor as a second backstop.”

Bond Insurance Makes a Comeback

As the name suggests, bond insurance guarantees that principal and interest for a municipal bond will be paid in the event that the issuer defaults. Such insurance was widely used before the financial crisis, DiMella says, when a handful of companies insured roughly 60% of all new issues in the municipal bond market.

“It basically fell off a cliff after the crisis, with insurance wrappers representing a small percent of the market,” he says.

Insured municipal bonds had seen a slow resurgence over the last couple of years, but the Covid-19 pandemic has spurred new demand, with insured munis now representing about 10% of new muni bonds. More large and high-quality issuers are offering an insurance component on new bonds in order to quell investor angst about rating downgrades and defaults. Two companies, Assured Guaranty and Build America Mutual, insure most bonds today.

“Investors get the benefit of stable ratings, increased liquidity, and less volatility,” Loffredo says.

Small Price for Peace of Mind

Insurance, of course, is never free. On average, investors will give up between 10 and 20 basis points (1/10th and 1/20th of a percentage point) of yield for muni bonds wrapped with insurance. While some investors will balk at this tradeoff, especially in a low-yield environment, buy-and-hold investors may find that it’s money well spent.

“You don’t have to sacrifice a lot of yield to get the benefit of stable cash flow,” says Loffredo, who notes that high-net-worth clients and family offices have shown an increased interest in insured munis as of late.

Still Opportunity for Upside

At the same time municipal bond insurance is an inexpensive option for investors who hold bonds to maturity, active investors may also have the potential for price appreciation.

“We would make the argument that there is a lot more value today than there was at the beginning of the year,” DiMella says. “In many cases they’re wider than they’ve been in many years.”

When the market first sold off this spring, virtually every segment of the muni market was impacted. Insured munis recovered faster than equivalent bonds, but spreads—the difference in muni yields versus comparable Treasuries—for triple-B-rated insured munis are still higher today than they were at the beginning of this year.

In fact, the spread for the insured index versus 10-year Treasuries began the year at 20 basis points and rapidly widened to 190 basis points during the market crisis this spring. They have since narrowed to 99 basis points, but the gap is still higher today than before the crisis, suggesting that yields should come down—and bond prices should move up.

Barron’s

By Sarah Max

Dec. 1, 2020 12:13 pm ET

In the mid-1990s, the United States was emerging from a recession and facing unbalanced budgets, a transition of political party in the White House, and a slower-than-normal economic recovery in the wake of the Gulf War. (Sound familiar?)

I recall discussing the situation and its financial implications with my then business partner as we commuted across the Golden Gate Bridge. More than two decades later, I have a strong sense of Deja-vu as we evaluate clients’ financial strategies in light of similar circumstances today.

As fixed income and muni market rates rise, the value of bonds go down. Municipal bond investors have a heightened awareness of the inverse relationship between interest rates and bond prices, but their knowledge of bonds, prices, yields and an extra dose of patience can be an advantage; they understand interest rates eventually will rise again.

For now, the Fed is planning to hold rates at near zero until labor markets reflect more maximized employment and inflation can reach 2% for some time. In this low interest rate environment, more bonds are being issued at premiums for sound reasons, and premium bonds can be used to help stabilize municipal bond values over time – if investors take time to understand them. When purchased correctly, premium bonds can work well in a portfolio and offer reasonable income solutions.

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municipalbonds.com

by Wayne Anderman CFP® MBA

Nov 26, 2020

Key Takeaways

• Legalization of gaming and drugs continued to expand, with seven states approving new or additional taxing power from nontraditional revenue sources.
• Results from income tax increases were mixed, with the three major initiatives resulting in three different outcomes.
• Only two states had bond referendums on the ballot this year, but they all passed.
• Highlights from local government elections include some changes in property tax exemptions and police reforms in light of recent demonstrations across the country.

Voters weighed in on statewide ballot measures in 22 states on Nov. 3. Many of these were approved, with a clear preference for increasing “sin tax” revenues from gaming and legalized drugs. At S&P Global Ratings, our primary focus on ballot results is how credit quality could be affected; this generally stems from revenue increases and decreases, or a notable rise in expenditures. As more states turn to nontraditional revenue sources to support operations, we are also watching the long-term trend and stability of the new revenues.

Widespread Support Of Nontraditional Revenue Sources Including Gaming/Sports Betting, Marijuana

In recent years, various states have looked to legalization–and subsequently taxation–of retail marijuana. This seemed to continue with overwhelming support from voters, as all such measures on the ballots across the country passed. Arizona, Montana, New Jersey, and South Dakota approved the legalization of recreational marijuana, while voters in Mississippi and South Dakota approved medical marijuana programs. Colorado legalized marijuana some years ago, but this November asked voters for an increase in the nicotine tax, and Oregon increased taxes on tobacco products. We expect that more states will pass measures like this but expect their overall effect on state finances to be marginal. Additionally, as more states legislate these kinds of revenues, we expect that as legalization of marijuana becomes more widespread, the growth of revenues from these taxes will slow over time as marijuana becomes more readily accessible. (See our report, “Is Marijuana Legalization The Answer To States’ Budget Pressures?,” published Feb. 21. 2019, on RatingsDirect)

Measures to expand gaming and betting also received support, with Nebraska approving three measures including enacting taxes on racetrack activities. Maryland and South Dakota also expanded gaming activities within the states. While not a statewide measure, Louisiana’s voters approved sports betting in a majority of its parishes. All states that permit commercial casino gaming levy some form of wagering tax on adjusted gross receipts or gross gaming receipts less any payout for prizes.

Although none of these nontraditional sources make up significant components of a state’s revenue, we do view the diversity of revenue sources as a net positive.

Mixed Results For Income Tax Changes

Three states had income tax changes on the ballot (Arizona, Colorado, and Illinois). While a voter initiative to reduce income tax rates passed in Colorado (to 4.55% from 4.63%), in Arizona voters approved an initiative to increase income tax on residents with incomes above $250,000. The measure sets up a separate tax bracket for residents that would increase the top rate to 8% from 4.5% on incomes above $250,000 (or $500,000 for joint filers). The additional revenue derived from the increased tax rate will be used solely to fund education.

Additional revenues at the state level can bode well for state revenue sharing for schools and local governments, and results for state-level tax increases varied. When revenue increases at the state level either enhance—or stave off cuts—to locals, the credit impact can be net positive.

Illinois voters did not approve a legislative measure to replace the state’s flat income tax rate with a graduated income tax, which would have been significant in addressing the state’s current budget challenges. (For additional information, see our summary report for Illinois published Oct. 7, 2020.) Limited support for increased income taxes is not surprising, particularly during an economic contraction. However, if this trend continues, states will have to look to other options to balance budgets as the effects of the COVID-19 pandemic on state revenues contribute to varying degrees of budget and liquidity stress across states.

There is no immediate credit impact for local governments in Arizona, Illinois, or Colorado as a result of the electorates’ vote on income tax, but we are watching how it could affect local operations over the long term.

Few Requests For State Bond Issuances During A Tepid Economic Recovery

Two states, California and New Mexico, included new bond authorization questions this year, unlike in 2018 when six states had bond authorizations on the ballot. New Mexico was successful, as was California. Such authorizations can provide funding for various programs, taking advantage of favorable market conditions. In our view the decline of bond authorization measures could reflect the uncertainty of the recovery from the recent COVID-19 induced recession. S&P Global Ratings has noted that in the decade following the Great Recession state governments generally reduced their overall debt burden. (See “Infrastructure After COVID-19: Risk Of Another Lost Decade Of U.S. State Government Capital Investment,” Oct. 2, 2020.)

Local Government: Some Shifts In Who Bears The Property Tax Burden

Across the U.S., voters approved multiple statewide measures that resonate down to the local government level. This includes some indication of an incremental shift in property taxpayers from residents to business, such as more homestead exemptions for segments of society such as veterans and senior citizens. Measures supporting these changes passed in Florida, Virginia, Louisiana, and New Jersey. These changes also represent a shift to more support for the social ‘S’ in ESG. Exceptions to this include votes in California and Colorado where voters decided not to shift the property tax burden more heavily to businesses:

California’s property tax regime under Proposition 13 remains intact: A proposed seismic shift that would have changed the manner in which assessed valuations are determined for business properties (Proposition 15) was narrowly defeated, while amendments to Proposition 13 at the margins, such as those that benefit seniors, continue to be approved (Proposition 19).
Repeal of the Gallagher Amendment in Colorado (Amendment B) resulted in stopping residents’ property tax rollbacks which had ultimately shifted more burden to businesses.

Local Law Enforcement Reforms

Following a summer marked by police protests in the wake of the May killing of George Floyd in Minneapolis, 14 cities and counties had elections addressing policing policies and procedures. Questions were on the ballot in seven states, from California to Ohio. Initiatives designed to change police duties, limit general funds spent on police operations, establish oversight boards and improve transparency found broad support in jurisdictions across the U.S., with 15 of 20 passing. For the most part, the changes are not expected to affect credit quality. However, should they result in notable revenue or expenditure changes that affect a jurisdiction’s financial position, there could be an impact.

This report does not constitute a rating action.

Related Fitch Ratings Content: U.S. Public Finance 2019 Transition and Default Study

Fitch Ratings-New York-17 November 2020: U.S. Public Finance rating activity was largely positive in 2019, resulting in downgrades trailing upgrades by a ratio of 0.6 to 1, according to a recently published study by Fitch Ratings. However, USPF rating activity through October 2020 reversed the positive trend, with downgrades exceeding upgrades by 1.7 to 1.

U.S. Public Finance accounted for one speculative grade default in 2019, the charter school Cambridge Academy East, AZ, with debt issued by the Industrial Development Authority of Pima County, AZ. The resulting 2019 U.S. Public Finance default rate was 0.03%.

The average annual default rate remained low at 0.04%, across the historical 1999-2019 period.

This new study provides transition and default analysis on Fitch’s U.S. Public Finance ratings in 2019 and over the long-term period from 1999-2019. The report provides summary statistics on 2019’s key U.S. Public Finance rating trends.

The full ‘U.S. Public Finance 2019 Transition and Default Study’ is available at www.fitchratings.com.

Contact:

Charlotte L. Needham
Manager, Senior Director
+1 212 908-0794
charlotte.needham@fitchratings.com
Fitch Ratings, Inc.
Hearst Tower 300 57th St.
New York, NY 10019

Laura Porter
Managing Director, U.S. Public Finance
+1 212 612-7850
laura.porter@fitchratings.com

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

Additional information is available on www.fitchratings.com

Related Fitch Ratings Content:

• U.S. Public Finance State Revolving Fund and Municipal Finance Pool Program Rating Criteria
• U.S. Not-For-Profit Hospitals and Health Systems Rating Criteria

Fitch Ratings-Austin-18 November 2020: Fitch Ratings has made minor updates to its ‘U.S. Not-For-Profit Hospitals and Health Systems Rating Criteria’ as part of the routine criteria review process. This update replaces the criteria report of the same name published in November 2019.

The changes are not substantive in nature and include updates to language regarding leases and official acceptance of the Portfolio Analysis Model (PAM) to conduct portfolio sensitivity analysis.

Fitch has also made minor updates to its ‘U.S. Public Finance State Revolving Fund and Municipal Finance Pool Program Rating Criteria.’ The update replaces the Fitch Analytical Stress Test (FAST) model with PAM as the model used to conduct portfolio analysis, where appropriate.

Fitch does not expect any impact on existing ratings from the updates to either criteria.

Contact:

Kevin Holloran
Senior Director
+1 512 813 5700
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701

Major Parkhurst
Director
+1 512 215 3724

James Batterman, CFA (PAM)
Senior Director
+1 212 908-0385

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 S&P Report as of 11/17/20.

GFOA’s elected official’s series contains popular booklets providing practical and easy-to-understand explanations – in plain language – on a variety of public finance topics. Each one provides a thorough introduction to a single topic. An affordable price structure and quantity discounts make these booklets ideal for distribution to newly elected officials, government employees, citizen and taxpayer groups, the media, and others interested in local government finance.

Understanding the Fiscal Health of Your Community

Prepared leaders make effective policy. Elected officials who understand the language and concepts of public finance can better assess the fiscal health of their communities.

Purchase the guide.

Read the S&P Report.

Summary

• Many of the policies that a president will ultimately decide can be impactful. For example, tax policy, which could impact a state or local government’s ability to raise their own taxes and impact demographics. But another impact is that it can also increase the attractiveness of munis as an asset class for investors.
• Regardless of how the two Georgia Senate runoffs are decided, we really don’t expect Democrats to have the majority in the Senate that they really need to help Biden carry his policies through at the level he wanted. So we do expect there to be some gridlock, and that could hamper some of his policies.
• We’re expecting additional stimulus, which should help stabilize some of the issues at the state and local levels. And then, we did see a lot of bond measures pass in the November ballot. And so, we expect there to be more bonds.

Continue reading.

Seeking Alpha

Nov. 19, 2020

Fitch Ratings-New York-17 November 2020: US election results are neutral to the credit profiles of corporate, not-for-profit and insurance issuers in the healthcare sector but legislative uncertainty remains, says Fitch Ratings. A divided Congress, due to a presumptive Republican-controlled Senate will translate into legislative gridlock but there is potential for some compromise, given President-Elect Joseph Biden’s long career in the Senate. The fate of the Affordable Care Act (ACA) and support for Biden’s healthcare proposals in the Senate are key credit-related items to watch.

Prior to the election, Fitch’s U.S. corporates, not-for-profit and health insurance analysts studied the credit implications of three electoral outcomes. The scenarios were the status quo, reflecting a Donald Trump victory and a Republican-controlled Senate; a Democratic-party sweep, where Biden wins and Democrats control Congress; and a divided government, where the Presidency and Congress are controlled by different political parties. The Republicans currently hold a 52-48 majority in the Senate. If Democrats, which already control the House of Representatives, win the two Senate seats in the January runoff, they would also control the Senate due to Democratic Vice-President-Elect Kamala Harris’ ability to cast tiebreaking votes.

Healthcare policy proposals outlined by Biden aim to build upon the ACA, which is being challenged before the Supreme Court of the United States (SCOTUS), but some proposals may still be viable even if the ACA does not survive. A decision on whether to strike down or uphold the law is anticipated by mid-2021.

Biden’s proposals include expanding coverage, lowering healthcare and prescription drug costs and ending surprise billing. Bipartisan support on some less controversial proposals, including curbs on surprise billing and lowering drug prices, may be possible. The addition of a public insurance option and lowering Medicare’s age eligibility seem less likely, given the pandemic’s negative impact on the federal budget.

Contact:

Megan Neuburger, CFA
Managing Director, US Corporate Finance
+1 212-908-0501
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10002

Bradley Ellis, CFA
Senior Director, North American Insurance
+1 312 368-2089
Fitch Ratings, Inc.
One North Wacker Street
Chicago, IL 60602

Kevin Holloran
Senior Director, US Public Finance
+1 512 813-5700
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701

Carla Norfleet Taylor, CFA
Senior Director, Fitch Wire
+1 312 368-3195

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 Biden administration should look to states as a laboratory for innovative climate action.

All climate policy eyes are on Washington, D.C., these days and for good reason. The fact that President-elect Joe Biden puts climate change among his top four priorities promises significant progress at the federal level, with or without the Senate. But don’t forget states as a crucial driver of climate progress.

During the four years of the Trump administration, states have served as a backstop, while federal climate action has been backsliding. Yet states’ roles go well beyond that. They often serve as a laboratory for new ideas as well as a conduit by which federal agencies make progress.

California is typically held up as the state with the most progressive climate agenda. It is, but it is hardly alone. Per the Center for Climate and Energy Solutions, 23 states plus the District of Columbia have their own greenhouse-gas reduction targets. States as diverse as New York, Montana, and Louisiana have net-zero greenhouse-gas emissions targets by midcentury. Ten Northeastern states have a power-sector emissions trading system that caps their emissions and establishes a price per metric ton of CO₂, albeit a low one. Virginia is poised to join in 2021 as the eleventh, while California has its economy-wide system plus additional ambitious sector-specific policies.

Meanwhile, 29 states and the District of Columbia have renewable portfolio standards, which require a certain portion of the state’s electricity mix to be low- or zero-carbon. These standards drive emissions reductions by as much as 10% to 25% below where they would otherwise be. Economists are quick to remind us that these reductions come at a cost. A recent analysis by University of Chicago economists Michael Greenstone and Ishan Nath concludes that costs range from between almost $60 to $300 per metric ton of CO₂ , well above California’s and even the European Union’s economy-wide carbon prices of around $17 and $32, respectively.

This only shows that the power-sector standards are significantly more ambitious than existing cap-and-trade systems and also achieve more emissions reductions. The higher prices paid may well be worth it. They are, after all, within the range of the latest cost-of-carbon estimates of $100 and often much higher.

State-level electricity sector policies are also an important part of federal climate policy. The Federal Electricity Regulatory Commission (FERC) is an independent body charged with regulating interstate electricity transmission, and with reviewing energy infrastructure projects. Its legal charge is economic regulation, which makes it an all-the-more powerful voice in the climate fight.

FERC’s power – and, thus, threat to fossil interests – was brought to the fore with the recent demotion of Neil Chatterjee, a former energy advisor to Senate Majority Leader Mitch McConnell and Trump appointee. He was replaced as chair in retaliation for supporting “state-determined carbon pricing” in wholesale electricity markets. While the Biden administration is poised to seek a more expansive role for FERC in advancing climate action, a significant part of that impact will still rest on state-level policies.

States are also an important laboratory for new ideas. California, while often out front, is far from alone. In 2018, Washington State saw a state-level carbon pricing initiative fail at the ballot box, to a large part because of stiff fossil fuel industry opposition. The oil industry spent $31 million to defeat the measure, led by $13 million from BP alone.

The campaign in Washington State is continuing, this time with a potentially important post-pandemic twist: the carbon tax is tied to green bonds focused on investing in a green economic recovery. The state has had prior experience with similar bonds, raising over $50 million in 2015 to invest in a number of energy efficiency and conservation efforts.

The additional benefit: The idea of green bonds tied to a new revenue source helps solve binding state-level fiscal constraints. It also ties nicely into Biden’s “building back better” mantra. While Washington State’s idea may not serve as a template for Washington, D.C., directly, versions of the idea may well be duplicated in other states, facing similar fiscal situations.

Most of these state-level efforts are indeed bottom-up, developed organically in municipalities and states. Yet there, too, might be a role for the Biden administration. The principle of testing large government policies in multiple local and regional pilots before a nation-wide implementation is not as ingrained in the U.S. as, for example, in China. There, the concept of shidian (试点), a focus on local entry points and testing for national policies, is indeed at least partially formalized. U.S. federalism – and the European Union’s subsidiarity principle – allow for a version of this. Learning from local experiences ought to be an important component of more centralized efforts.

Bloomberg Greeen

By Gernot Wagner

November 20, 2020, 3:00 AM PST

Covid-19 financial relief, housing help and gun violence research are among the top priorities for local governments.

Municipal leaders have a privileged position in America: We see first-hand how policies affect the 200 million people we represent in our cities, towns and villages. We are also the first to respond to the challenges our communities face, and the first to provide the resources our residents need.

While most of the last 10 months have been devoted to our immediate duty to protect our residents from the spread of Covid-19, it has also given us an important opportunity to examine the future of our hometowns, including how to address the systemic challenges that predated — and are now exacerbated by — the pandemic. Whether it’s ensuring our cities are built to meet the needs of all our residents, providing help for working families struggling to support their households, or eradicating persistent inequities in our civic institutions, the challenges before us have been thrown into sharp relief.

Building more equitable cities at a time when we are fighting an uphill battle to rebuild our economy is no easy task. To tackle the monumental challenges before us, we need more from officials at the federal level. Below are the five most urgent priorities for local governments that the National League of Cities asks the administration of President-elect Joe Biden to address in its first 100 days.

Provide Covid-19 Relief for Local Governments

Local governments are facing more than $360 billion in revenue shortfalls over the next three years due to the pandemic, forcing municipal leaders to grapple with devastating cuts to essential services and personnel — including those that have been integral to local pandemic response and economic recovery efforts.

In Ruston, Louisiana, Mayor Ronny Walker said his city “wouldn’t have had to cut a single person from our payroll if Congress had done for cities what they did for businesses” through the Paycheck Protection Program. Pittsburgh Mayor Bill Peduto said laying off 10% of city employees would only make up a quarter of his city’s budget shortfall for the next year, and that in the coming years, “what you’re going to see in cities is more cuts to essential services.”

While negotiations over a comprehensive Covid-19 relief package remain stalled in the current lame duck session of Congress, local leaders are making difficult decisions to protect families, municipal workers and America’s economic future. It’s past time for the federal government to fulfill its responsibility to our local heroes serving on the front lines of the pandemic, and we strongly urge the Biden administration to work collaboratively with both parties in Congress to secure a Covid-19 relief package that provides direct federal aid to local governments and municipalities of all sizes.

Build Sustainable Infrastructure

Even before the pandemic, much of our nation’s infrastructure was in dire need of repair, improvement and modernization to meet the demands of the 21st century. Local governments have been forced to delay or cancel projects to repair roads, water systems and other critical infrastructure due to budgetary constraints caused by the pandemic, underscoring why it is more important than ever for the federal government to support infrastructure projects that will help put Americans back to work. Just this week, New York City’s Metropolitan Transit Authority was forced to consider a plan to cut 40% of weekday subway services and lay off more than 9,000 transit workers absent support from the federal government — an “end to the New York way of life,” as one official said.

Current transportation funding sources like the Highway Trust Fund are on track to be depleted as soon as 2021, according to recent CBO projections. By providing grants, tools and resources to support local infrastructure efforts, the federal government can do more than just ensure the safety and mobility of our communities; it can help make our communities more resilient in the face of extreme weather events and natural disasters, many of which we faced this year in the midst of the global pandemic.

It is also essential that the administration make investments in broadband service. With more people working and schooling from home, the need is clearer than ever before to ensure reliable, affordable broadband access for all Americans — particularly those in small and rural communities.

Provide Support for Building a Skilled Workforce

With the nature of work rapidly evolving due to the Covid-19 pandemic and technological advancements, we need enhanced workforce training programs to ensure our residents and communities can continue to play a central role in our nation’s economic recovery. As more Americans prepare to re-enter the workforce after historic levels of unemployment, it is necessary for the Biden administration to promote apprenticeship programs, expand financial aid programs for workforce skills training and create new pathways to successful careers for unemployed and underemployed Americans.

By investing in skills training and services to support participants, such as child care and transportation, the federal government can help city leaders build upon successful workforce development programs — particularly those that help remove barriers to accessing education and improve the likelihood that students will be able to finish college. This is particularly important for postsecondary students attending college during the current Covid-19 crisis who are being forced to remain or return to homes that may lack access to the internet or who, in some cases, may have no home at all.

Cities are counting on Biden to empower local workforce solutions, streamline federal funding and drive new resources into proven solutions to ensure that all people have opportunities to thrive.

End Housing Instability and Homelessness

The Covid-19 pandemic has been a catalyst for housing instability in the U.S. The nationwide moratorium on evictions has not prevented some landlords from evicting their residents, and 8 million tenants face the prospect of evictions when it ends in January 2021.

With more Americans out of work and unable to afford their basic needs, including housing, it is critical for the new administration to address housing instability and homelessness.

Cities need new policy solutions to stabilize and stem the loss of public and affordable housing. They also need the resources to expand promising ideas like “housing first programs,” which focus on providing immediate permanent housing — regardless of circumstance — to people experiencing homelessness. Before the Covid-19 pandemic, several housing-first pilots were yielding notable progress. President-elect Biden can take meaningful steps toward ending homelessness by expanding these types of programs, as well as those that provide mental health and emergency services that residents need to stay stable and sheltered.

Reduce Gun Violence

Gun violence continues to plague our society, claiming the lives of thousands of Americans each year and tearing apart the very fabric of our communities. Our nation has seen a rise in gun violence since the onset of the pandemic, creating twin public health crises that threaten to undermine the safety that local leaders are entrusted to deliver to their residents.

The National League of Cities calls on Biden to convene a national commission on gun violence, including elected officials from all levels of government, victims’ family members, survivors, gun advocates and law enforcement to offer recommendations on ways to reduce gun violence. In recognizing gun violence as a public health issue, the Biden administration should provide funding to the Centers for Disease Control to conduct comprehensive research to identify the underlying causes that lead to gun violence and mass shootings in communities.

If we are going to truly “Build Back Better”— a central theme of Biden’s campaign — we must ensure the administration maintains a strong and close working relationship with local leaders from across the country. We know our communities best and are best positioned to help the new administration address the systemic issues that have long impacted them, only to now be exacerbated by the Covid-19 pandemic.

Bloomberg CityLab

Joe Buscaino

November 20, 2020, 7:33 AM PST

Joe Buscaino is the President of the National League of Cities and the President Pro Tempore of the Los Angeles City Council.

Cities that had barely recovered from the Great Recession face huge budget shortfalls yet again.

America’s mayors are begging for help.

Unless Congress passes a coronavirus relief package, cities and towns across the country are going to struggle “to keep the lights on” and perform basic services like responding to 911 calls, Joe Buscaino, president of the National League of Cities and president pro tempore of the Los Angeles City Council, told Axios.

In May, the National League of Cities (NLC) found that US cities are facing a $360 billion revenue shortfall over the next three years. And since then, there’s been little movement from the federal government to provide the support needed to avoid furloughs and cuts to basic, necessary services to keep cities afloat as they govern through the Covid-19 pandemic.

Continue reading.

Vox.com

By Jerusalem Demsas

Nov 19, 2020

Extend the Municipal Liquidity Facility beyond Dec. 31.

America’s state and local governments face a difficult winter. Already under severe financial pressure, their resources will be stretched still further by a resurgent pandemic. Congress needs to give them new fiscal aid right now, but whether that will happen is in doubt.

Given these uncertainties, this is no time to remove the one reliable lifeline they have: the Federal Reserve’s highly successful effort to ensure they can borrow what they need.

The Fed and the Treasury introduced the program, known as the Municipal Liquidity Facility, amid the Covid-induced mayhem of March and April — when markets froze and borrowing costs more than doubled for even the most highly rated cities. To restore calm, the central bank pledged to buy debt securities directly, at a closer-to-normal yield, from any creditworthy issuer that couldn’t raise money from private investors.

It worked. Simply by being in place, the backstop revived the market. It brought yields below pre-pandemic levels, and only two issuers (Illinois and New York’s Metropolitan Transportation Authority) actually had to tap it, using less than $1.7 billion of the $500 billion available. It’s hard to imagine a more effective use of taxpayer resources.

Just one problem: The program expires Dec. 31, and — as Bloomberg News has reported — Republican legislators and the Treasury have opposed an extension. This wouldn’t be so serious if the coronavirus crisis were ebbing and the economy were on a glide path to recovery. They’re not. Cases and hospitalizations are on the rise in most states, threatening renewed social-distancing measures and a slower expansion (or worse). This will reduce municipal tax revenues again – and they’re already projected to come up hundreds of billions of dollars short. Layoffs and service cuts are looming. And with Republicans likely to retain control of the Senate, it’s unclear when, if ever, legislators will support a new relief package.

To be sure, borrowing is no substitute for fiscal support. But the backstop is crucial to help municipalities weather these stresses. It should remain in place until officials are certain it’s no longer needed, as happened with emergency lending facilities after the 2008 financial crisis. The central bank should also consider expanding access — for example, by lowering the population threshold from the current 250,000, so struggling smaller cities can benefit.

Judging from the lack of jitters in municipal bond markets, investors are assuming that common sense will prevail. It’s to be hoped they’re right. The Trump administration should extend the facility immediately and, if it fails to do so, President-elect Joe Biden should pledge to set things straight after he takes office on Jan. 20. The finances of cities and states across the country depend on it.

Bloomberg Opinion

By Editorial Board

November 17, 2020, 6:30 AM PST

• Democrats criticize secretary for seeking to end the programs
• GOP Senator Pat Toomey says facilities have done their job

Lawmakers split along party lines on U.S. Treasury Secretary Steven Mnuchin’s move to shutter a number of Federal Reserve emergency-lending facilities that relied on his agency’s backing.

“Ending emergency programs specifically intended to support the economy through this crisis is irresponsible and misguided,” Democratic Representative Richard Neal of Massachusetts, chairman of the powerful House Ways and Means Committee, said in a statement. “The Covid recession is not over. Millions of workers remain without jobs, and the futures of businesses across the country continue to hang in the balance.”

By contrast, Republican Senator Pat Toomey of Pennsylvania, a member of the congressional panel monitoring pandemic relief funds at the Treasury and Fed, said in a Bloomberg TV interview that the facilities have served their purpose to stabilize markets and are no longer needed.

“These were always meant to be very temporary facilities,” he said Friday. “I’m not surprised that a central bank would like to keep more power and more tools, but that doesn’t make it right.”

Mnuchin, in a letter to Fed Chairman Jerome Powell released by the Treasury on Thursday, ordered the sunsetting of five of the central bank’s facilities designed to buffer the impact of the coronavirus pandemic, while asking for four others to be extended for 90 days. The Fed then released a statement underlining its preference for the “full suite” of measures to be maintained into 2021.

Senate Majority Leader Mitch McConnell said the “obvious use” for the hundreds of billions of unspent dollars is to re-purpose the funds for small business relief and vaccine efforts. Congressional leaders have been deadlocked for months over how much to spend on additional stimulus and where to allocate the money.

“American workers should not lose their jobs needlessly when a second round of the job-saving Paycheck Protection Program for the hardest-hit small businesses would make a huge difference,” McConnell said in a statement.

Democratic Representative James Clyburn of South Carolina, chairman of the House Select Subcommittee on the Coronavirus Crisis, said the facilities that will no longer be able to purchase new assets beyond December were “part of a comprehensive set of tools Congress gave the Federal Reserve to combat the pandemic-related economic crisis.”

Clyburn asked Mnuchin to rescind his request, and suggested congressional Democrats may encourage President-elect Joe Biden’s Treasury chief to reestablish the programs next year.

Toomey said that he doesn’t believe a Biden administration would have the legal power to extend the facilities on its own, but that Congress could re-authorize the lending programs if economic conditions worsened.

House Speaker Nancy Pelosi accused Mnuchin of trying to hobble the next administration’s ability to deal with the economic fallout of the continuing pandemic.

“Why? — Because they want to impede the ability of the administration to have everything available to them?” Pelosi said Friday at her weekly news conference.

The congressional watchdog monitoring the Fed and Treasury’s relief efforts divided last month over whether one of the programs Mnuchin has ordered to be ended — which supports the municipal-debt market — should continue.

The panel’s two Democrats wanted the Municipal Liquidity Facility not only extended, but its terms adjusted to make it more favorable for bond issuers. State and local governments also lobbied to expand the program.

But Republicans on the oversight commission said the program, which had made only two loans at that point, had served its purpose to restore liquidity to the municipal bond market.

Bloomberg Politics

By Laura Davison

November 20, 2020, 9:05 AM PST Updated on November 20, 2020, 11:47 AM PST

Pressure is growing on the ability and willingness of officials to maintain the scale and scope of their initial responses to Covid-19.

Global markets woke up Friday morning to indications that exceptional and lasting policy support may be less certain than widely assumed. While short-term political considerations may well be playing a role — a view that most investors will be quick to grasp, dismissing the news as “noise” and reversible — a bigger phenomenon may well be in play: What was first designed as a huge “one-round” policy intervention has turned out to be much more than that, and the longer this “multiround” process persists, the greater the pressure on the ability and willingness of policy makers to deliver, especially in parts of the developing world.

Having eagerly supported the Federal Reserve’s massive intervention in financial markets in March and April, outgoing Treasury Secretary Steven Mnuchin seems to have surprised even the central bank late Thursday by refusing to extend backing for some emergency lending programs into next year and asking for the return of money for them. This immediately triggered an unusually public response from the Fed lamenting the decision and stressing that the “full suite of emergency facilities” plays a key role as “a backstop for our still strained and vulnerable economy.”

Some economists and market participants initially interpreted this as yet another indication of a problematic transition from the Trump administration to the incoming Biden team — one that is already complicating the country’s response to the surge in Covid infections and hospitalizations and may well play out in foreign policy and military affairs. Having said that, the implications are overwhelmingly viewed as both temporary and reversible under the new administration that will take office on Jan. 20.

The Treasury’s action came in the context of a general under-utilization of the Fed’s programs. Some see this as a signal of low need, bolstered by Mnuchin’s comment that “banks have the lending capacity to meet the borrowing needs of their corporate, municipal and nonprofit clients.” Others feel that this under-utilization is due to the markets doing the work for the Fed, thereby increasing moral hazard and excessive risk-taking. Yet others are arguing the move is motivated by the desire to reallocate money to other programs such as the Paycheck Protection Program, effectively enhancing public sector support for the economy.

The U.S. is not alone in its policy support difficulties. In the U.K., the Treasury is facing a large increase in its fiscal imbalance, with the latest data from the Office for National Statistics showing that the deficit for the first six months of this fiscal year (April-October) amounted to a record 261 billion pounds. This is leading some to expect a public sector pay freeze to be announced as early as next week when the latest round of Covid-related lockdowns could well send Britain into a double-dip recession. Politics is also seen as playing a role as Prime Minister Boris Johnson is trying to gather Conservative Party support for his pivot toward greater military expenditure as part of the redefinition of the country’s role on the world stage after Brexit.

Although short-term political considerations may well be playing a role, and these two countries can reverse course should policy makers so desire, a greater phenomenon exists that could well become more important the longer it takes to develop and distribute vaccines to counter the threat of Covid-19.

The initial global reaction to the economic “sudden stop” caused by Covid-19 was highly influenced by what worked for the global financial crisis: that is, a large-scale multifaceted intervention underpinned by the three notions of “whatever it takes,” “all in” and “whole of government.” At its essence, this is what in game theory terms would be labeled a “one round” policy response. Yet Covid is requiring several rounds of responses as illustrated by the new infection wave in many countries and the realization that vaccines will not be widely available until sometime next year.

As time has passed, a small but growing number of countries are finding it hard to maintain the scale and scope of their initial policy interventions. Well before these latest twists, the U.S. faced political resistance to renew one element after another of its initial fiscal relief, and the U.K. reduced support for those facing job challenges before having to reverse course.

Markets will be quick to dismiss the latest developments, especially in the U.S., where a new administration is likely to restore funding and the Fed can in the interim augment the quantitative easing program already at its discretion. But they should not ignore the warning signs. Particularly in the developing world, policy makers’ willingness to continue to carry out a multiround policy response will increasingly face a harsh reality: that of declining ability.

Bloomberg Opinion

By Mohamed A. El-Erian

November 20, 2020, 7:15 AM PST

Issuers will lose a financial, if not psychological, backstop from the Federal Reserve at the end of the year and some participants fear the municipal market will become more fragile, less resilient and more prone to shocks amid another wave of coronavirus cases.

Following Treasury Secretary Steve Mnuchin’s move on Thursday telling the Fed to sunset emergency lending facilities created in response to the coronavirus Thursday, including the Federal Reserve’s Municipal Liquidity Facility, the news struck some municipal stakeholders as poorly timed and made them wary of the muni market’s future.

“As a country and a financial market, we’re not out of this yet,” said Matt Fabian, partner at Municipal Market Analytics. “So theoretically we should be layering on more tools, not removing them.”

Fabian called the MLF an insurance policy for both borrowers and investors.

“Now, without the MLF, the market becomes more fragile and more susceptible to setbacks, illiquidity and maybe selling if things turn negative,” Fabian said. “If credit trends turn even more negative, if fears of a major issuer defaulting or having trouble paying begin to grow,” those trends could weigh on the industry.

As COVID-19 deaths continue to climb, the Treasury’s timing “is poor,” Fabian said.

More than 2,000 American deaths were recorded by John Hopkins University in one day on Thursday, the highest since May. There are now over 11 million recorded COVID-19 cases in the U.S.

Mnuchin asked in a letter sent to the Fed to return unused funds to the Treasury from the MLF and four other lending programs created under the CARES Act.

And while some sources said the move was not unexpected given how well the municipal market has performed since the sell-off in the spring, the withdrawal of the MLF means that next year, investors will become more concerned about issuers’ ability to pay debt because of renewed economic shutdowns, Fabian said.

“It just makes us more fragile,” Fabian said. “If there is a shock to the system, like we have multiple states shutting down their local economy or say tax collections are postponed again to make it easier on taxpayers, that is a challenge that the MLF would help us get through, but lacking it, it means that states and cities are more on their own so investors will have to be more careful.”

On CNBC Friday morning, U.S. Treasury Secretary Steven Mnuchin explained his reasoning for ending the CARES Act programs.

“It was very clear that Congressional intent is it expires on December of this year,” Mnuchin said. “It is very clear in the law.”

Lawmakers could legislate extending the MLF and sources expects appeals from lawmakers before the end of the year on the interpretation of Congressional intent.

The Fed had the authority under the CARES Act to lend up to $500 billion for state and city issuers through the MLF. The U.S. Treasury provided $35 billion from the Exchange Stabilization Fund, using funds appropriated under the CARES Act, for the program. The rest of the funding comes from the Fed.

So far, Illinois and the New York Metropolitan Transportation Authority have been the only issuers to use the MLF. Both issuers this week said they intended to tap the facility before it expires and Mnuchin’s announcement will not change those plans as both were allocated a portion of the money in the law.

Mnuchin also dug into the MTA on CNBC Thursday, saying the authority has a revenue problem and the MTA can currently borrow from the traditional market without the Fed.

“Let me just say, there is a big difference between grants and loans, and the areas of the economy right now that are really hard hit like the MTA, they need to work with the state and federal governments on how they’re going to get grants to go forward,” Mnuchin said.

MTA Chairman and CEO Pat Foye responded to Mnuchin’s comments.

“We’re glad Secretary Mnuchin has acknowledged the MTA has a serious and substantial revenue problem, that we have been devastated by the pandemic and that we are the economic lifeblood of New York and the nation,” Foye said.

“We have been clear since the beginning of the crisis: Borrowing or cutting our way out of this is not an option. We need federal relief and we simply can’t afford to wait any longer,” Foye added.

But that is not stopping the MTA from using the MLF before it expires. The MTA’s Board on Wednesday approved to borrow up to $2.9 billion, its maximum available.

Many state and local governments have said they need direct aid from the federal government to get them through the pandemic. House Democrats passed a relief bill in May that would give $915 billion in state and local aid, but Senate Republicans are not in agreement.

On Thursday, the Fed responded to Mnuchin?s letter saying it, “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”

The Fed is in the best position to say if facilities should be extended, Fabian said, adding that “if the Fed believes [the programs] should be continued, it’s very likely that they should be continued.”

Lawmakers have also weighed in, saying the facilities should be extended.

“The COVID recession is not over,” said Rep. Richard Neal, D-Mass., chair of the House Ways and Means Committee. “Millions of workers remain without jobs, and the futures of businesses across the country continue to hang in the balance. Ending emergency programs specifically intended to support the economy through this crisis is irresponsible and misguided.”

Sen. Bob Menendez, D- N.J., a member of both the Senate Banking, Housing and Urban Affairs and Senate Finance Committees called Mnuchin?s decision “short-sighted.”

Other market participants expect the worst is yet to come for municipal credit, so the MLF should be extended.

“The MLF exists in case the market does freeze like it did in March and April,” said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities. “It would be prudent for the Treasury and Fed to continue with that program for at least the next year, if not longer.”

Others said the short-term effects of the Treasury’s announcement won’t have an immediate effect on the market, given high inflows and investors are not questioning what municipal credit will look like in the near future.

Patrick Luby, municipal strategist at CreditSights, said the end of the MLF will not have a material, adverse effect on the municipal market.

“Its function of being the backup source of liquidity of the market has been demonstrated by the abundant liquidity available in the marketplace that it’s not needed right now,” Luby said.

The Fed and Treasury did a good job of moving quickly and providing comfort to the markets, Luby said.

Mnuchin also announced Thursday that the Money Market Mutual Fund Liquidity Facility would be extended by 90 days. The money market facility includes short-term municipal debt, including municipal securities, with maturities of 12 months or less. Market participants have said that facility has been more beneficial to more issuers than the MLF.

“Because the Fed opened up the MMMLF and accepted municipal VRDOs as collateral, that unlocked a lot of the dealer balance sheets to be able to take risks and provide liquidity to the rest of the muni market,” Luby said.

Meanwhile, Fabian doesn’t think volatility like the market saw in March is likely, but said the future is unpredictable.

“We are losing resilience, removing the MLF deprives the muni market of some resilience,” Fabian said.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 11/20/20 03:37 PM EST

NEW YORK (Reuters) – The credit and municipal bond markets held fast on Friday morning after U.S. Treasury Secretary Steven Mnuchin defended his decision, first announced Thursday evening, to let several of the Federal Reserve’s key pandemic lending programs end on Dec. 31.

Mnuchin said on Thursday that some of the Fed’s stimulus programs, which have established the central bank as a lender of last resort to U.S. corporations and municipalities, should be allowed to expire and that the unused funds should be given to Congress to reallocate. The announcement was not expected by Fed officials, who had said this week that the programs should be extended, and told Mnuchin so immediately after his decision was made public.

The Fed programs were essential to restoring liquidity in financial markets in March, when nervous lenders seized up and both the credit and municipal bond markets reached levels not seen since the last financial crisis. But both markets were steady on Friday morning, as investors bet that the liquidity established by the Fed’s programs would not soon dissipate.

“Markets seem to be acting as if this may be an overblown event,” said Kevin Giddis, head of fixed income at Raymond James.

“While the market “righted” itself in March at the idea that these facilities were available so quickly, funding away from the Fed became cheaper and easier for most companies in the capital markets versus Fed-assisted financing.”

The iShares exchange-traded funds tracking the high-yield HYG.P and investment-grade LQD.P markets both inched lower on Friday, with a slightly bigger move seen in LQD, last down 0.22%. The Fed’s Primary and Secondary Market Corporate Credit Facilities chiefly targeted investment-grade debt.

The $3.9 trillion U.S. municipal bond market opened steady on Friday with Municipal Market Data’s initial read of its benchmark triple-A yield scale largely unchanged. The iShares National Muni Bond ETF MUB.N was up slightly.

The Fed’s $500 billion Municipal Liquidity Facility (MLF) has so far only attracted two users – Illinois, the lowest-rated state, and New York’s Metropolitan Transportation Authority (MTA), which was hit exceptionally hard by a sharp drop in mass transit ridership due to the pandemic.

Greg Saulnier, managing analyst at Municipal Market Data, said Illinois and MTA bonds are trading inside the rates offered through the MLF and that muni market fundamentals are strong.

“Perhaps there is some marginal effect in terms of mentality without the safety blanket there, but I’m not sure how much of that will play out in terms of trading and spreads, if at all,” he said.

But Emily Swenson Brock, director of the Government Finance Officers Association’s Federal Liaison Center, said the loan program’s end comes as the resurgence of the virus threatens already weakened state and local government revenue.

“This is a pivotal time for states and local governments and to receive this news is extremely frustrating,” she said.

By Kate Duguid, Karen Pierog

Reporting by Kate Duguid; Editing by Alden Bentley, Chizu Nomiyama, Kirsten Donovan

NOVEMBER 20, 2020

(Reuters) – A surprise move on Thursday by the U.S. Treasury Department to withdraw hundreds of billions of dollars used to support corporate, municipal and other bonds ravaged by the COVID-19 pandemic has injected some new uncertainty in global markets, investors said.

While the support wasn’t widely used, even its presence served to bolster investor confidence, said Andy Richman, director of fixed income strategies for Sterling Capital Management.

“They were there as a backstop and even the thought of them was seen as a safety net. If something did go wrong the Fed was there,” he said.

Richman said he expected slightly lower equity prices and higher bids for U.S. Treasuries as a safety play on Friday, though the impact could be dulled by other developments in Washington such as a possible deal on relief spending.

Treasury Secretary Steven Mnuchin on Thursday told the Federal Reserve to return money earmarked for pandemic lending to businesses, nonprofits and local governments, ending on Dec. 31 some crisis programs that allowed the Fed to buy corporate bonds and make loans to small businesses and local governments.

The surprise announcement sent benchmark U.S. Treasury yields and equity index futures lower. The 10-year Treasury note yield US10YT=RR slid 2 basis points and was the lowest in 10 days at 0.83%.

Several investors said they were still trying to grasp the full implications of losing access to programs like the Municipal Liquidity Facility, which bought short-term notes directly from U.S. cities, counties and states.

“Without the MLF, the market won’t collapse, but it will lack some resilience if its tested by a selloff or more pronounced credit fears,” said Matt Fabian, partner at Municipal Market Analytics.

Isaac Boltansky, director of policy research for Compass Point Research and Trading, called the diminished role of the Fed “nonsensical” at a time when the U.S. economic recovery still seems shaky.

“This is a distressing development that injects uncertainty and instability into markets completely unnecessarily,” he said. He added that “How many times will Washington trip on its shoelaces in response to this crisis?”

By Ross Kerber

Reporting by Ross Kerber in Boston. Additional reporting by Karen Pierog in Chicago; Editing by Lincoln Feast.

NOVEMBER 19, 2020

• Treasury Secretary doesn’t intend to extend credit programs
• Backstop improved investor confidence, though few loans made

In March and April, the Federal Reserve’s interventions in the municipal-bond market helped reverse a record-setting crash that erupted when panicked investors fled over concern about the financial impact of the coronavirus pandemic.

The central bank’s commitment to lend to states and local governments if needed helped the price of their bonds to rally and has left yields hovering around the lowest levels in decades, even though only two borrowers tapped the $500 billion program.

Now, even with the coronavirus raging anew and states and cities still struggling to gauge the scale of the financial hits they’re facing, that support is poised to end. Treasury Secretary Steven Mnuchin late Thursday announced a decision to allow some of the Fed’s novel lending programs to lapse at the end of the year as scheduled, raising the risk that if the market seizes up again there won’t be anywhere for governments to turn as a lender of last resort.

“It doesn’t make sense to pull away this kind of support at this stage,” Thomas Graff, head of fixed income and portfolio manager at Brown Advisory. “This is like taking off your seatbelt as you pull into your neighborhood. It is probably fine. But it is all risk, no reward.”

The nation’s $3.9 trillion municipal-bond market currently seems at little risk and prices edged up slightly Friday. Even as governments unleashed a record flood of debt sales last month, yields held not far from the record lows hit in August. New Jersey and Suffolk County, New York, which considered borrowing from the Fed, were able to borrow easily in the public markets at a lower interest rate this week. New Jersey paid yields of about 1% for three-year debt. Those securities have rallied and traded at a 0.5% yield Friday.

“That was a resounding affirmation that the market feels healthy enough,” said Christopher Brigati, head of municipal trading for Advisors Asset Management Inc.

The market has also benefited from optimism about the initial results of two coronavirus vaccines. That’s eased worries about the financial outlooks for a broad swath of borrowers, including airports and colleges, that have been heavily affected as the pandemic upended daily life.

Yet a turnaround is far from completely assured for states and cities whose tax collections tend to remain depressed long after the end of recessions, and the individual investors who dominate the market have frequently fled en masse in the face of bad news — a phenomenon that analysts call headline risk.

Agencies such as New York’s Metropolitan Transportation Authority, the operator of the city’s subway and bus system, are also pleading for help from Washington, where talks about a stimulus bill have made little headway since President Donald Trump’s electoral defeat this month. It’s not clear how much opposition Joe Biden may face once he takes office in January, since the political control of the Senate hinges on runoff elections in Georgia.

The MTA and Illinois were the only two to borrow from the Fed because they faced such large penalties in the public market, though other governments eyed it as a potential backstop that they didn’t want to see withdrawn.

Before the Fed program lapses, the MTA has said it could sell $2.9 billion in debt to the Fed. Illinois has also raised the possibility of borrowing from the Fed again.

Barclays Plc strategist Mikhail Foux said cash-strapped borrowers who are the target audience for the Fed’s loans could be negatively affected by the end of the program, though he noted there may be little impact for the broader market. Bank of America Corp. analysts said in a report the end of the Fed program could be a “small negative.”

“This is very disappointing, especially for weaker credits which are still facing the financial impact from the pandemic,” said Gary Pollack, head of fixed income for private wealth management at Deutsche Bank. “On the other hand, the muni lending facility was not utilized that much because its interest rate was too onerous. But still it is a back-stop for those who need it.”

Bloomberg Markets

By Amanda Albright

November 20, 2020, 10:39 AM PST

— With assistance by Joseph Mysak Jr, and Elise Young

• Powell letter follows public rift that arose a day earlier
• Mnuchin argues money should be put to better use elsewhere

The Federal Reserve said Friday it would comply with a Treasury Department request to return unused funds meant to backstop five emergency lending programs, moving to tamp down a public rift that arose a day earlier.

“We will work out arrangements with you for returning the unused portions of the funds allocated to the Cares Act facilities in connection with their year-end termination,” Fed Chairman Jerome Powell said in a letter to Treasury Secretary Steven Mnuchin posted on the central bank’s website.

Mnuchin on Thursday sparked a conflict between his agency and the central bank when he said he wouldn’t agree to extend the facilities enabled by the Cares Act, passed by Congress in March. The law appropriated funds to act as loss-absorbing buffers that enabled the Fed to stabilize financial markets and make loans to companies and municipal debt issuers.

Mnuchin says the programs are no longer needed, and the money should be returned to Congress and put to better use elsewhere.

The Fed had responded on Thursday with its own statement, saying it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”

‘Deeply Irresponsible’

The move drew swift criticism from Democrats. President-elect Joe Biden’s transition team spokeswoman, Kate Bedingfield, on Friday blasted Mnuchin’s move as “deeply irresponsible.”

The S&P 500 Index extended a weekly decline as traders weighed the dispute over the emergency lending programs. The credit markets seemed to hold up amid the uncertainty. Corporate bond investors continued to flood Carnival Corp.’s bankers with orders for debt.

On Friday, Powell conceded the Treasury’s authority in the matter, saying in the letter that the Cares Act “assigns the Treasury secretary sole authority to make certain investments in Federal Reserve emergency lending facilities, subject to limits specified in the statute.”

Some officials, including a Democrat sitting on the commission supervising spending under the Cares Act, have said the Fed wasn’t legally required to return funds already transferred to it by the Treasury. But the Fed made clear it would not escalate the spat and would return the funds.

Other Funds

Powell, in his letter, also appeared to urge the Treasury to consider using other funds held by Treasury to reauthorize at least some of the programs that will now be unable to make new loans after Dec. 31.

“As you noted in your letter, non-Cares Act funds remain in the Exchange Stabilization Fund and are, as always, available, to the extent permitted by law, to capitalize any Federal Reserve lending facilities that are needed to maintain financial stability and support the economy,” Powell wrote.

The ESF contains about $75 billion that pre-dates the Cares Act. Mnuchin has also left open the possibility of using that money to re-activate the programs, but appeared to characterize that as an emergency option.

“In the unlikely event that it becomes necessary in the future to re-establish any of these facilities, the Federal Reserve can request approval from the secretary of the Treasury,” Mnuchin said in his letter on Thursday.

The Fed, in contrast, believes the programs remain crucial. In an online event Nov. 17, Powell said the Fed would eventually shut down its emergency programs, but added, “I don’t think that time is yet or very soon, we will put those tools away.”

The programs affected include two that can purchase corporate bonds, one for municipal debt and one, the Main Street Lending Program, that makes loans to mid-sized companies through banks.

The programs will continue to hold existing assets and service loan agreements with banks. The Fed will retain about $26 billion received by the Treasury to continue to backstop the loans already made. But the programs won’t be able to extend new credits unless they receive fresh funds from Treasury.

Bloomberg Economics

By Christopher Condon

November 20, 2020, 1:50 PM PST Updated on November 20, 2020, 3:04 PM PST

The coronavirus crisis dream team of Jerome Powell and Steven Mnuchin cracks after the election.

So much for the synergy between Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin in combating the fallout from the coronavirus pandemic.

In what might be an unprecedented public spat between two of the nation’s most prominent economic leaders, Mnuchin sent a letter to Powell on Thursday that said he would let certain emergency lending facilities created by the Coronavirus Aid, Relief, and Economic Security Act expire on Dec. 31, citing what he saw as “congressional intent.” Moreover, he requested that the Fed return almost $200 billion of unused funds to the Treasury, which would “allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds.”

The Fed responded almost immediately with a short statement: “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” Shots fired.

At stake is the future of the Municipal Liquidity Facility, the Main Street Lending Program, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility and the Term Asset-Backed Securities Loan Facility. By contrast, Mnuchin requested a 90-day extension of the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Liquidity Facility and the Paycheck Protection Program Liquidity Facility.

I argued last week that it would be a mistake in particular to let the facilities for municipal bonds and small businesses expire, not just because their finances are the most imperiled by the pandemic but also because these programs are hardly used in the first place — a backstop in every sense. Those for corporate debt, on the other hand, don’t seem quite as necessary given that junk-bond yields are near a record low and the investment-grade markets are wide open.

Mnuchin argues in his letter is that the facilities “have clearly achieved their objective,” rattling off municipal-debt issuance figures, corporate-bond spreads and rates on asset-backed securities. Still, the announcement flies in the face of Powell’s long-held position — which was thought to be shared by Mnuchin — that “when this crisis is behind us, we will put these emergency tools away.” The Covid-19 pandemic is only worsening across America, from rural counties to New York City.

What happens now is something of an open question. Bharat Ramamurti, a member of the Congressional Oversight Commission, says the Fed can retain the $195 billion that’s already been committed to the lending programs established by the Cares Act. “That’s why (I imagine) the Mnuchin letter is a ‘request’ to return the funds, not just asserting his authority to take the money back,” he said on Twitter.

It would be a remarkable move by Powell, who has repeatedly talked about the importance of elected leaders directing public funds, to deny Mnuchin’s request outright. But at the same time, he said just this week that “I don’t think the time is yet, or very soon,” to wind down the emergency facilities. Handing back the money would severely constrain the Fed and President-elect Joe Biden’s pick for Treasury Secretary from easily firing them back up should the need arise. If the Fed no longer had the Cares Act money, it could only back the facilities with “Core ESF funds, to the extent permitted by law, or additional funds appropriated by Congress,” according to the letter.

Mnuchin, for his part, argued in an interview with Bloomberg News late Thursday that companies hurting from the pandemic need grants, not debt, and that he hopes the leftover funds are used to help the economy. Presumably, it would be significantly easier to sell Congress on appropriating these funds rather than working toward a bipartisan fiscal aid package, which has remained elusive for months and which President Donald Trump might not support anyway.

Tony Fratto, former assistant secretary for public affairs at the Treasury during the George W. Bush administration, said on Twitter that he’s “never seen Treasury and the Fed in a public break. This is disturbing.”

Whether the markets interpret it as similarly unnerving remains to be seen. Early indications suggest S&P 500 futures didn’t take kindly to a public spat between Mnuchin and Powell, a duo that investors have relied upon to remain above politics and keep the economy on the right track. That dream team is now infighting.

Bloomberg Opinion

By Brian Chappatta

November 19, 2020, 4:06 PM PST

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

• Fed prefers programs ‘continue to serve their important role’
• Treasury wants Congress to re-appropriate $455 billion

The Trump administration moved Thursday to end several emergency pandemic lending programs at the Federal Reserve, triggering a rare public rift when the central bank objected to the Treasury Department’s instruction.

Treasury Secretary Steven Mnuchin, in a letter to Fed Chair Jerome Powell, sought a 90-day extension for four of the central bank’s emergency lending programs, while requesting five other programs expire on schedule on Dec. 31 and the Fed return unused funds, allowing Congress to re-appropriate $455 billion and spend the money elsewhere.

The Fed responded in a short statement that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”

The conflict — a rare public rift between the Fed and the Treasury — comes as the U.S. recovery faces increasing pressure from a resurgent coronavirus pandemic and follows months of deadlock between Republicans and Democrats over the size and type of additional fiscal stimulus. Removing some of the emergency programs has the potential to leave the economy more vulnerable as President-elect Joe Biden prepares to take office in January.

“I am befuddled. It adds insult to injury to an economy that is about to be flooded by the surge in Covid cases, hospitalizations and deaths,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “If anything, Treasury should be shoring up the storm wall of these facilities.”

Yields on 10-year Treasuries dropped about two basis points amid the news to end Thursday at 0.83%. U.S. stock futures pared gains into the close, and S&P 500 emini contracts were down about 0.9% early in the Asia session Friday. The Bloomberg Dollar Spot Index rose 0.2% Friday after five straight days of declines.

The emergency programs created by the Cares Act, the stimulus President Donald Trump signed earlier this year, were set to expire at year-end. Mnuchin is seeking to end the primary and secondary market corporate credit facilities, the Municipal Liquidity Facility, the Main Street Lending Program and the Term Asset-Backed Securities Loan Facility.

“The economy has responded very strongly, but there are still areas of the economy that need more support,” Mnuchin said in an interview. “That’s why I’m encouraging Congress to reallocate this money.”

The secretary sought a 90-day extension for the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility and the Paycheck Protection Program Liquidity Facility.

Demand for Main Street loans has picked up in the last few weeks
The Fed programs were launched this spring to stabilize markets and extend credit to U.S. companies as the Covid-19 pandemic took hold. They helped quell the panic but take-up has been relatively low — which the Fed says is a sign that they’ve worked.

Republicans in Congress have used that to argue that they are no longer needed and the billions of dollars sent to the central bank to set them up can be deployed better elsewhere. Democrats, as well as the central bank, say that removing the safety net of these programs as the virus surges again through the country is not a good idea.

“I do think it’s critical that the 13(3) programs, the public market backstop programs and programs that support Main Street and the PPP, that they continue beyond year-end. I think that’s very important,” Dallas Fed President Robert Kaplan said earlier Thursday in an interview on Bloomberg Television, referring to the section of the Federal Reserve Act providing the authority for emergency lending.

Republican Senator Pat Toomey, of Pennsylvania, praised Mnuchin’s move. “With liquidity restored,” the programs should expire, “as Congress intended and the law requires,” Toomey said in a statement Thursday.

The Fed’s intervention into corporate bond markets was particularly effective, staving off a massive wave of bankruptcies. But the government support also stoked record amount of issuance and ultra-low rates, resulting in worries that credit markets were overheating and taking too much risk.

While investors had expected the buying program to continue well into next year, market watchers were relatively sanguine about the demise — for now.

Bloomberg Economics

By Saleha Mohsin and Catarina Saraiva

November 19, 2020, 1:29 PM PST Updated on November 19, 2020, 4:00 PM PST

— With assistance by Steve Matthews, Christopher Condon, Lisa Lee, and Joanna Ossinger

The Federal Reserve will likely be forced to close five pandemic facilities on Dec. 31 and return unused funds unless Congress acts. And while Wall Street watchers say the move could undermine confidence, markets had a muted response Friday.

Treasury Secretary Steven Mnuchin declined to extend the facilities in a late Thursday letter to Fed Chairman Jerome Powell, saying that they had done their job and highlighting that much of their capacity remains unused. What’s more, he said, the only facilities slated to close are those financed with Treasury funding appropriated by Congress in the Cares Act. Mnuchin asked the Fed to return unused funds and extend the four programs that don’t have that funding.

The Fed, for its part, came out with a statement saying that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”

Markets’ responses were muted on Friday. The S&P 500 was down 0.3%, while the iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund was down 0.3% and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) was down 0.2%. And the iShares National Muni Bond ETF (MUB) gained 0.1%.

Still, many Wall Street strategists appear to agree with the Fed.

“While the amount of debt purchased so far isn’t necessarily significant relative to the size of the market, we view the signaling of the purchases as important as the purchases themselves,” strategists at CreditSights wrote in a Nov. 20 note.

They were writing on investment-grade debt, but strategists in other markets have echoed the sentiment.

“US credit markets will have to get through the winter months in which the surging new wave of the virus and exhaustion of savings from prior fiscal stimulus threaten a loss of economic momentum without a Fed backstop, though with support from vaccine prospects,” Evercore ISA economists Krishna Guha and Ernie Tedeschi wrote in a Nov. 19 note. “Mnuchin’s move will tighten financial conditions and removes a safety net for markets at the wrong moment.”

Vikram Rai, a municipal-market strategist with Citigroup, wrote in a late October note that the “Municipal Liquidity Facility (MLF) MUST be extended beyond year-end 2020.”

To get a more detailed idea of the implications of the facilities’ closings, it may help to run down what specific facilities are expiring, the markets they were created to support, and their uptake:

The Primary- and Secondary-Market Corporate Credit Facilities:

These two vehicles were created to buy up to $750 billion in corporations’ bonds, either directly or indirectly through exchange-traded funds. In the primary market facility, the Fed could buy four-year bonds directly from companies. In the secondary market facility it bought up to five-year maturity bonds that companies have already issued, with their selections based on a broad-based investment-grade market index. The secondary-market facility also bought corporate bond ETFs.

While the Fed hadn’t bought any bonds in the primary-market facility, it owned $4.8 billion of bonds and $8.6 billion of ETFs in its secondary-market facility, totaling more than $13 billion.

That is a relatively small sum compared to the maximum $750 billion purchase amount, not to mention the overall size of the $9.6 trillion corporate bond market. Yet corporate bond markets across the quality scale have recovered to their pre-pandemic levels. According to ICE Indexes data, investment-grade bonds are yielding 1.9%, down from 4.7% at the height of March’s selloff, and high-yield bonds are yielding slightly less than 5%, down from their 11% pandemic peak.

The Term Asset-Backed Securities Loan Facility, or TALF:

This facility was created to support the market for securities backed by loans, specifically: credit-card loans, automobile loans, student loans, certain types of business and insurance loans, and leveraged loans.

As of Oct. 31, the Fed had lent out $3.7 billion of cash with the TALF, in the form of three-year loans with AAA-rated asset-backed securities as collateral. The asset-backed securities market is about $1.7 trillion, according to the Securities Industry and Financial Markets Association, or Sifma, though a significant amount of those loans are backed by commercial mortgage-backed securities, which are included in the $10.3 trillion mortgage market.

In his letter to the Fed, Mnuchin highlighted steep declines in consumer-loan-backed security yields since the pandemic, indicating a rebound in prices—for both AAA- and A-rated securities. Credit-card asset-backed security yields are only slightly higher than pre-pandemic levels, as are auto loans.

The Main Street Lending Program:

This bundle of facilities was meant to help small-to-midsize businesses and nonprofits access cash. The program—five facilities all managed under a common umbrella—was created to purchase a large proportion of new or expanded loans of at least $100,000 from these entities’ lenders. The facilities were created to purchase five-year loans with deferred principal and interest payments.

As of Oct. 31, the MSLP had purchased $4.2 billion of loans, from 419 businesses across the U.S. and one nonprofit. In his letter to the Fed, Mnuchin said that the financial system can now provide credit to businesses, citing a National Federation of Independent Business survey that found only 2% of small and medium-sized firms reported that they had unsatisfied borrowing needs.

The Municipal Liquidity Facility:

This facility was created to lend directly to state and local governments, but was one of the most controversial programs in the Fed’s stable, as market participants said its costs were prohibitively high—even after a reduction—and strategists said the Fed didn’t want to get too involved with a market that it saw as more Congress’s area of focus.

The Metropolitan Transportation Authority and the state of Illinois have used the facility, as the MTA grapples with cratering revenues and Illinois’ recent budget trouble threatens the state’s credit rating. The MTA has borrowed $450.7 million from the MLF and plans to borrow an additional $2.9 billion by the end of this year, while Illinois has borrowed $1.2 billion.

Even so, the broader municipal market hasn’t taken the coming expiration too hard yet, as mentioned above. The worst of the pandemic-related trouble has so far been experienced by regions with high population densities and/or tourism revenues, such as New York and Hawaii, or among issuers that were struggling already with structural deficits. And many of the most embattled issuers say they would rather have grants than than loans.

Still, with a divided government likely after January’s runoff elections the question of federal aid is still up in the air. And UBS strategist Tom McLoughlin told Barron’s in an interview last week that he believes there could be an uptick in the number of municipalities using the MLF in coming weeks if they believe it will soon expire.

In his letter, Mnuchin cited recent months’ declines in municipal bond yields as evidence of the facility’s success, even though that market hasn’t recovered as strongly as corporate debt markets have.

And broadly, the programs’ success appear to be a major reason that Mnuchin feels comfortable shutting them down.

But it is not yet clear how markets will fare this winter, with surging coronavirus case counts and a divided government that looks likely to persist into the new administration in January.

Even so, there is another reason that investors don’t seem pessimistic about the facilities’ closing at the moment: The possibility that the closing of the facilities will prompt more fiscal support from Congress. In an interview with CNBC on Friday morning, Mnuchin said that fiscal support is a more important factor in coming months, and said he would be working with Congress on Friday to attempt to push forward a deal.

“With lockdowns increasing, though hopefully mitigated by COVID vaccines in the coming months, now is a perfect time to get at least a [small] deal done,” wrote Academy Securities strategist Peter Tchir in a Friday note. “So maybe Mnuchin has figured out a way to get the money out directly or is betting that this forces the hand of Congress. I think this might be what the economists who are harshly criticizing this move are missing.”

Barron’s

By Alexandra Scaggs

Nov. 20, 2020 12:31 pm ET

The president-elect must safeguard the Fed’s lifeline for companies and municipalities.

U.S. Treasury Secretary Steven Mnuchin has just put the country’s financial stability at unnecessary risk, by refusing to extend programs that’ve kept credit flowing to companies and municipalities amid a severe economic crisis. It’s now up to President-elect Joe Biden and the Federal Reserve to correct what could prove to be a costly mistake.

At issue are several emergency lending facilities, set up to address a severe credit freeze that accompanied the onset of the coronavirus pandemic in March and April. With $195 billion in backing from the Treasury, the Federal Reserve made about $2 trillion available to small businesses, corporations, and state and local governments, ensuring that they’d have access to the funds they needed to meet their obligations. The mere presence of such a formidable backstop emboldened lenders, making private credit widely available on excellent terms. As a result, the Fed’s facilities have gone largely unused. For the most part, this is a sign that they’re doing their job, providing the confidence needed for markets to operate on their own.

Now, however, Mnuchin wants to shut them down. In a letter to Fed Chairman Jerome Powell, he said he intends to withhold the approval needed to extend the programs beyond Dec. 31, and asked the Fed to return the capital that the Treasury has committed. His rationale is that he’s acting according to the requirements of the Cares Act, that markets’ thorough recovery makes removing the backstop completely safe, and that the money could better be used for direct grants.

He’s wrong on all counts. When the programs were created, the clear intent was to extend them as long as necessary, just as the Fed did with its emergency lending facilities during the 2008 financial crisis. They remain necessary: With Covid-19 resurgent across the country, the economic outlook darkening, and Congress making no progress on added fiscal relief, it would be profoundly irresponsible to remove the one remaining lifeline that companies and municipalities have. And while direct grants are undoubtedly needed, that’s a separate subject: The Treasury’s capital is a commitment that it will eventually recoup, and it in no way prevents Congress from allocating funds for grants. It’s hard not to see Mnuchin’s decision as politically motivated, designed to undermine the incoming administration.

Together, Biden and the Fed can set things straight. The president-elect should affirm that after taking office in January, he’ll direct his Treasury secretary to grant the approval that Mnuchin has refused. As long as the central bank doesn’t return the Treasury’s capital, the Fed should be able to revive the facilities. It’s less than ideal, but the knowledge that help is on the way should be enough to get markets through what’s turning out to be a difficult presidential transition.

Bloomberg Opinion

By Editorial Board

November 20, 2020, 7:30 AM PST

The Treasury chief decides to end Fed emergency programs as Congress intended.

The late, great Milton Friedman used to say that nothing is so permanent as a temporary government program. That’s one of many reasons taxpayers should thank Treasury Secretary Steven Mnuchin for moving to end most of the Federal Reserve’s special pandemic lending facilities on Dec. 31 as Congress intended.

This isn’t popular at the Fed, which likes its growing ability to allocate credit and please politicians with loans to their allies. It also won’t go down well on most of Wall Street, which loves the Fed backstops. And Democrats are unhappy because they want a long-term call on the Fed for their own political ends.

But Mr. Mnuchin has acted in the best interests of the economy and the federal fisc, and the facts of the financial markets and politics explain why. Specifically, Mr. Mnuchin asked Mr. Powell in a letter Thursday to end the facilities that the Fed stood up with money under the March Cares Act. This includes the state and municipal lending program, primary and secondary corporate credit facilities, the Main Street facility for businesses, and the program for asset-backed securities.

All of these programs were created in an emergency at the onset of the pandemic when the financial markets were in danger of melting down. The Fed also stood up facilities, without Cares Act money, for commercial paper, money-market funds, and primary dealer credit.

The programs worked. Even as the pandemic and government shutdowns have waxed and waned, financial markets have healed. Lending spreads have fallen, and liquidity is ample in nearly all markets.

The facilities worked even without the Fed doing much lending. Their existence alone helped restore confidence. Treasury provided some $195 billion in Cares Act cash to backstop the facilities. But the Fed has made only $25 billion in loans or funding for other assets. Small and large businesses have ample access to credit, and so do cities and states.

Democrats are squawking about the Municipal Liquidity Facility going away, but so far it has made only two loans: one to the sorry state of Illinois for $1.2 billion and one to New York’s Metropolitan Transportation Authority for $450 million. New Jersey considered the Fed facility, but this week it floated $3.7 billion in bonds paying 1.95% in the private markets and the offer was oversubscribed. If even a deadbeat like Trenton can tap the private markets, there’s no need for the Fed to do the lending.

Mr. Mnuchin has also asked the Fed to return $455 billion in unused Cares Act funding to the Treasury. That money will sit in the general fund and Congress can reappropriate it for other uses. It could pay for a new Covid relief bill if Speaker Nancy Pelosi ever agrees to compromise. Or it could be used to reduce the deficit (we can dream).

None of this means the Fed is out of ammo. Mr. Mnuchin has extended for 90 days four Fed facilities that were set up with pre-Cares Act money in Treasury’s Exchange Stabilization Fund (ESF). That includes the commercial paper and money-market programs. The ESF also retains some $80 billion, and $50 billion of that could quickly be used to leverage as much as $500 billion in lending if need be. The Fed will also retain $25 billion in its facilities that it could use to leverage another $250 billion.

The Fed issued a statement on Thursday griping about Mr. Mnuchin’s decision, which proves the secretary’s point. Chairman Powell is behaving like a politician these days, opining on fiscal policy that is not part of his mandate. But it would be an abuse of his authority and a rejection of Congressional intent if he refuses to return the $455 billion to Treasury.

He’d essentially be saying that any money handed to the Fed in an emergency is the Fed’s to use for whatever purpose and for as long as the central bank wants. This would be an unprecedented intrusion into fiscal policy. And it would make Congress understandably reluctant to hand more money to the Fed in the future. Senators Mike Crapo and Pat Toomey, who negotiated the Cares Act language in detail, issued statements Thursday supporting Congress’s intent to terminate the emergency programs on Dec. 31. Late Friday Mr. Powell replied in a letter to Mr. Mnuchin that the Fed will work with the Treasury to return the money.

The termination is also important to limit the demands by politicians to use the Fed for policies they can’t get through Congress. Four Senators, including Minority Leader Chuck Schumer, wrote Messrs. Powell and Mnuchin this month urging that the Fed programs be expanded. Democrats want the Fed to bail out states, invest in public works, add climate mandates and promote racial justice. The U.S. economy doesn’t need more politicized credit.

Political actors rarely cede power or money they’ve received in emergencies, and thus do temporary programs become permanent. Mr. Mnuchin has done a public service in breaking that pattern, and Mr. Powell will as well if he follows that good example.

The Wall Street Journal

By The Editorial Board

Updated Nov. 20, 2020 6:08 pm ET

Dear Mr. Secretary,

Like you, I am pleased with all that we have accomplished together this year. We rapidly put in place emergency lending facilities to support state and local governments, small and medium-sized businesses, and large employers. These were novel and complex programs that required us to work productively together. Our efforts helped to prevent severe disruptions in the financial system and unlocked trillions of dollars of private lending to households, businesses, and municipalities at a moment when the economy needed it most.

The CARES Act assigns the Treasury Secretary sole authority to make certain investments in Federal Reserve emergency lending facilities, subject to limits specified in the statute. You have indicated that the limits on your authority do not permit the CARES Act facilities to make new loans or purchase new assets after December 31, 2020, and you have requested that we return Treasury’s excess capital in the CARES Act facilities. We will work out arrangements with you for returning the unused portions of the funds allocated to the CARES Act facilities in connection with their year-end termination.

As you noted in your letter, non-CARES Act funds remain in the Exchange Stabilization Fund and are, as always, available, to the extent permitted by law, to capitalize any Federal Reserve lending facilities that are needed to maintain financial stability and support the economy.

November 20, 2020

• Treasury secretary, Fed chair typically work in lockstep
• Investors will look to whether Mnuchin successor renews

The top two U.S. economic policymakers clashed over whether to preserve emergency lending programs designed to shore up the economy — a rare moment of discord as the nation confronts the risk of a renewed downturn spurred by the resurgent coronavirus.

The disagreement erupted late Thursday when outgoing Treasury Secretary Steven Mnuchin released a letter to Federal Reserve Chair Jerome Powell demanding the return of money the government provides the central bank so it can lend to certain markets in times of stress. Minutes later, the Fed issued a statement urging that “the full suite” of measures be maintained into 2021.

“This is a significant and disturbing breach at a critical time for the economy,” said Tony Fratto, who worked at the Treasury and the White House during the George W. Bush administration. “We need all the arms of government working together and instead we’re seeing a complete breakdown,” he said, noting that Washington remains at an impasse on fiscal stimulus as well.

Investor reaction to the split was swift amid fears the decision will unsettle markets and impede the economic recovery: futures on the S&P 500 Index were down 0.5% in early Friday trading in Europe, with haven demand sending Treasuries higher and pulling down yields.

Treasury chiefs and Fed chairs typically coordinate closely at times of crisis, appearing jointly before Congress and working in lockstep to ensure funding markets run smoothly. The two agencies were tightly linked in the bailouts of the financial and auto industry more than a decade ago. And they united again in the March 2020 Cares Act economic rescue package, which appropriated cash for the government to finance Fed backstops for everything from municipal to corporate finance after markets buckled when the pandemic hit.

Now, Mnuchin wants some of the money back, arguing many markets are no longer at risk of seizing up and so don’t need further aid beyond next month. In his sights are facilities which sought to ease corporate credit and municipal-borrowing and also offered loans to small and medium-sized businesses. He asked that four other programs be kept in place for an additional 90 days.

“Financial conditions are quite strong,” Mnuchin said in an interview. “The good news is, the markets have recovered significantly,” he said. Companies don’t need more loans, and instead require more grant money, which requires action from Congress, he said.

The Fed has argued that the lack of take-up for some of the programs is a sign they’ve worked.

Mnuchin said that the purpose of his announcement was not to put the Treasury against the Fed, and that he was merely carrying out the law prescribed by the Cares Act. The facilities could be re-activated if needed with either congressional support or with other funds available to the Treasury, he said.

“It appears the Fed may be reading the legislation differently,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

The risk is that divisions between the key economic players undermines confidence at a time when growth is flagging. Fed Bank of Dallas President Robert Kaplan said on Bloomberg TV Thursday that there’s the potential for gross domestic product to shrink this quarter and even next.

The economy is also set to go without fiscal stimulus: Republicans and Democrats remain deadlocked on a new package, and measures including extended unemployment benefits are set to expire next month.

“I was a bit surprised” at the Treasury’s statement, Raphael Bostic, president of the Fed Bank of Atlanta, told Bloomberg TV. “Given where the economy is — and there’s so much uncertainty still out there — it’s prudent to keep those things open so that when people, if they do have stress, they can draw upon it.”

Among the initiatives that will now no longer be able to extend new credit are two Fed facilities that allowed it to buy corporate bonds for the first time. They helped to unfreeze that market, even before the effort was up and running, and businesses have since logged record amounts of debt issuance.

Another, the Main Street Lending Program, has had a slow start, and the Fed recently loosened its terms to help encourage banks and smaller businesses to participate.

Powell himself said at a virtual conference on Tuesday that the time to discontinue the lending facilities was “not soon,” highlighting that typically the central bank keeps its backstops in place for some time after a crisis hits. He has repeatedly praised the Cares Act for what he’s described as “essential” support amid the historic collapse in GDP in the spring.

The U.S. Chamber of Commerce called for a reconsideration of Mnuchin’s decision.

“We strongly urge these programs be extended for the foreseeable future and call on Congress to pass additional pandemic relief targeted at the American businesses, workers and industries that continue to suffer,” the chamber said in a statement.

The sunsetting of some of the facilities may now build expectations for the Fed to take some other policy action when it wraps its next meeting on Dec. 16. Feroli was among those already anticipating that the central bank could tweak its main asset-purchase program by skewing it toward longer-dated securities.

President-elect Joe Biden’s administration could seek to renew the facilities, or press Congress to authorize fresh funding for them, when it takes office in January. Biden said Thursday that he’s made a decision on who he will nominate as Treasury secretary. Republicans in Congress have said the billions of dollars sent to the central bank can be deployed better elsewhere.

Biden’s Treasury could agree to restart the facilities, as Mnuchin pointed to, using the Exchange Stabilization Fund.

That could be one reason why credit markets may not immediately respond to the Treasury’s move, said Ellen Zentner, chief U.S. economist at Morgan Stanley. Plans by cruise operator Carnival Corp. to sell debt without collateral will test the strength of the market in the meantime.

“If the only implication is you’re going to have a three-to-four week disruption until a new Treasury secretary is confirmed, then credit investors won’t look to sell” for now, Zentner said on Bloomberg TV. The key will be to see whether that renewal will be forthcoming, she said.

Bloomberg Politics

By Chris Anstey and Saleha Mohsin

November 19, 2020, 8:04 PM PST Updated on November 20, 2020, 5:14 AM PST

— With assistance by Kathleen Hays

NEW YORK, Nov. 16, 2020 /PRNewswire/ — CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for October 2020. 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 surge in municipal request volume for the second straight month, while corporate volumes declined throughout the U.S. and Canada.

CUSIP identifier requests for U.S. corporate debt declined 9.2% in October, while requests for new U.S. equity identifiers fell 4.9% and Canadian requests were down 8.7% versus last month’s totals. On a year-over-year basis, corporate CUSIP requests are up 12.2%.

Municipal requests climbed in October. The aggregate total of all municipal securities – including municipal bonds, long-term and short-term notes, and commercial paper – surged 31.8% versus September totals. On an annualized basis, municipal CUSIP identifier request volumes were up 15.4% through October. On a state-by-state basis, issuers in Texas requested 300 new municipal identifiers in October, followed by California with 175 and New York with 148.

“The real story in this month’s data comes from the municipal market, where issuers have really ramped up access to debt markets,” said Gerard Faulkner, Director of Operations for CGS. “In Texas alone we saw 300 identifier requests for new municipal debt issues this month. It’s clear that the combination of low rates and increasing funding needs is creating a recipe for increased municipal market activity.”

Requests for international equity and debt CUSIPs were mixed in October. International equity CUSIP requests were down 13.8% versus September. International debt CUSIPs increased 5.9% on a monthly basis. Syndicated loan requests were up 38.0% on a monthly basis and down 28.2% year over year.

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

The federal bank regulatory agencies on Friday announced an interim final rule that provides temporary relief for certain community banking organizations related to certain regulations and reporting requirements as a result, in large part, of their growth in size from the coronavirus response.

Community banking organizations are subject to different rules and requirements based on their risk profile and asset size. Due to participating in federal coronavirus response programs—such as the Paycheck Protection Program—and other lending that supports the U.S. economy, many community banking organizations have experienced rapid and unexpected increases in their sizes, which are generally expected to be temporary. The temporary increase in size could subject community banking organizations to new regulations or reporting requirements.

With regard to the requirements covered by the interim final rule, community banking organizations that have crossed a relevant threshold generally will have until 2022 to either reduce their size, or to prepare for new regulatory and reporting standards. The rule applies to community banking organizations financial institutions with less than $10 billion in total assets as of December 31, 2019. Community banking organizations with under $10 billion in assets may have fewer resources available to prepare and comply with previously unanticipated regulatory requirements, especially during a time of economic disruption.

The rule will be effective immediately upon publication in the Federal Register, and comments will be accepted for 60 days after publication in the Federal Register.

Federal Register notice: Temporary Asset Thresholds (PDF)

November 20, 2020

Municipal bond market participants want the next U.S. Secretary of Transportation to have more issuer experience and understand the inner workings of the muni bond market.

Many candidates on the table for the next Secretary of Transportation have experience as issuer officials or as legislators dealing with tax issues, which gives localities some comfort.

“When you look at a potential new transportation secretary who has issued general obligation debt or any other creative structures to make infrastructure, rail and roads happen in their region, it?s satisfying because we won’t have to start from square one when talking about the market and instead you?re starting from square three and you?re moving forward and beyond,” said Emily Brock, director of the Government Finance Officers Association’s federal liaison center.

Multiple media outlets have reported Los Angeles Mayor Eric Garcetti, Rep. Earl Blumenauer, D-Ore., and former Chicago Mayor Rahm Emanuel as top contenders for the post.

They bring something new to the table, Brock said.

Biden could announce his pick in the next few weeks. President Trump has not conceded electoral defeat, though the Associated Press and other organizations have declared Biden the presumptive winner.

Current Secretary Elaine Chao was appointed by President Trump in 2016 and was the U.S. Secretary of Labor from 2001 to 2009. Though she does have a significant transportation background, the potential for local leaders to have experience in issuing general obligations is helpful, Brock said.

Blumenauer can be a strong advocate for municipal bonds if picked by President-elect Joe Biden. He was a county commissioner and member of the Portland City Council before being elected as a congressman in 1996. He is currently a member of the House Ways and Means Committee. He also was on the House Transportation and Infrastructure Committee for almost 10 years.

“(Blumenauer) has been a longtime supporter of bonds, from Plain Jane vanilla bonds to private activity bonds,” Brock said. “So he understands the different tools in the tool kit. That would be incredibly useful. On the other hand, someone like Garcetti or Rahm could understand conceivably the GO and how it?s used and specifically with regards to transportation.”

Biden plans to invest $1.3 trillion dollars over the next 10 years in infrastructure, with a heavy stated focus on resiliency.

“Every federal dollar spent on rebuilding our infrastructure during the Biden Administration will be used to prevent, reduce, and withstand the impacts of this climate crisis,? according to Biden’s plan. ?If we transform our modes of transportation and the sources of energy that power them, we can make real progress toward reducing our greenhouse gas emissions.”

Brock expects partnerships between local and federal governments to achieve those climate initiative goals.

Marion Gee, finance director at the Metropolitan St. Louis Sewer District and GFOA president, wants to see proposals for grant funding to help localities build resilient infrastructure.

“It will be difficult from a municipalities’ stance to do these projects on a standalone basis, so they’re going to need federal support to build those kinds of projects,” Gee said.

Gee hopes that the next transportation secretary will be an advocate for reinstating tax-exempt advance refunding to help fund future infrastructure projects. Tax-exempt advance refunding was taken away during the 2017 Tax Cuts and Jobs Act.

Last week, the Public Finance Network released a report on the benefits of tax-exempt advance refunding. The National Association of Counties, a PFN member, said pandemic effects on counties? finances would be helped by bringing back advance refunding. NACo plans to work with the next Congress on that issue.

“As described in this new resource, reinstating advance refunding of municipal bonds would improve state and local governments’ ability to invest in critical infrastructure projects, such as hospitals and other health facilities, schools, roads, bridges, water and sewer systems ports, airports and other public works,” NACo said on Monday.

NACo Associate Legislative Director Jessica Jennings wants the next transportation secretary to understand the role counties play in national transportation, adding that counties directly support 78% of public transit and 45% of public roads.

“That’s obviously a huge stake in the national system so having a secretary that understands that and realizes how important the local level is and what we?re doing is really what we need,” Jennings said. Jennings wants direct funding from the U.S. DOT instead of state DOTs.

Jennings also wants to see a fix to the depleted Highway Trust Fund. Biden has said he plans to stabilize it and ensure new revenues, according to his infrastructure plan.

The HTF is in need of funds as it runs mostly on gas taxes while also receiving money from Treasury general funds under existing legislation. Shortfalls in the funds have been filled by transfers totaling $144 billion since 2008, according to the Peter G. Peterson Foundation, a non-partisan research organization.

Highway, transit and airport grant programs run by the U.S. DOT is often used as seed money for issuers and can be leveraged with bond proceeds in order to raise money for infrastructure projects, said Michael Decker senior vice president of policy and research at Bond Dealers of America.

“It’s important that the secretary is committed to those programs, that they are committed to the success and proliferation of those programs and there are going to be opportunities under the next administration to expand some of the transportation-related initiatives that already exist,” Decker said.

One of those programs is the Transportation Infrastructure Finance and Innovation Act, which provides long-term, low-interest loans and other types of credit assistance for constructing surface transportation projects.

In July, Rep. John Garamendi, D-Calif., introduced the TIFIA for Airports Act. In 2019, Sens. Tammy Duckworth, D-Ill., and David Perdue, R-Ga., released a similar bill.

The next secretary could be a leader in expanding TIFIA, Decker said.

Other initiatives on the table are municipal provisions in the House’s Moving Forward Act. The House passed its infrastructure bill, which was folded into the larger Moving Forward Act in July 2020. That bill includes a series of taxable direct-pay bonds and a restoration of tax-exempt advance refunding.

“There are a lot of initiatives on the table in the context of the transportation bill where Congress’ action could be really helpful and I hope that the next Secretary of Transportation would be an advocate for those kinds of changes,” Decker said.

The National Association of State Treasurers is also hopeful the next secretary will be a strong federal partner.

“States need the tried and true tools to continue financing the lion’s share of America’s infrastructure, but we also need a stronger federal partner and additional federal funding in the mix if we are ever truly going to tackle our infrastructure deficit,” said Brian Egan, NAST’s policy director.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 11/17/20 01:44 PM EST

The emerging model presents a scalable option for communities that lack the expertise or interest to operate networks or act as ISPs themselves but want to own and control the core communications assets in their communities as a means of securing the benefits of broadband internet. Here’s a look at the model’s business case, technical elements and risks.

Broadband networks rank among the most important infrastructure assets of our time – for purposes of economic development and competitiveness, innovation, workforce preparedness, health care, education, and environmental sustainability. The criticality of broadband was illustrated when the COVID-19 pandemic shut down the U.S. economy. Households with fast connections were able to continue working and attending classes online. Unconnected households found themselves more cut off than ever.

If there was ever any doubt about the centrality of broadband to the national interest, the devastating pandemic erased this doubt. Yet the United States faces persistent gaps in broadband availability and affordability – as well as a troublingly noncompetitive broadband ecosystem in which most communities are served by only one or, at best, two high-speed broadband providers.

Continue reading.

Broadband Communities

By Joanne Hovis, Jim Baller, David Talbot and Cat Blake

November/December 2020

This year’s requests – totaling over $9 billion – are the largest ever for the program.

The U.S. Environmental Protection Agency (EPA) has received 67 letters of interest in response to the agency’s 2020 Water Infrastructure Finance and Innovation Act (WIFIA) Notice of Funding Availability. A total of $9.2 billion was requested this year—the largest amount ever requested through the WIFIA program.

“These letters show the incredible interest in the financial support that the WIFIA program provides to communities that are upgrading their water infrastructure,” said EPA Administrator Andrew Wheeler.

Consistent with the agency’s 2020 appropriation, EPA is offering approximately $5 billion in WIFIA loans to help finance more than $10 billion in water infrastructure projects. The agency received letters of interest from prospective borrowers located in 24 states, including six states that are seeking WIFIA loans for the first time. With these letters of interest, borrowers in 41 states, plus the District of Columbia and Guam, have requested WIFIA loans. Since the program began in 2017, EPA has received requests totaling over $30 billion. Since closing the first loan in 2018, EPA has closed 40 WIFIA loans that are providing $7.7 billion in credit assistance to help finance $16.6 billion for water infrastructure while creating more than 38,200 jobs and saving ratepayers $3.6 billion.

The 2020 letters of interest cover a wide variety of water infrastructure needs, including reducing lead and emerging contaminants and supporting wastewater management, drinking water quality, desalination, stormwater management, and combined approaches. Prospective borrowers include municipal government agencies—such as four small communities—corporations, and public-private partnerships. As the next step in this competitive process, EPA will evaluate the letters for project eligibility, creditworthiness, engineering feasibility, and alignment with WIFIA’s statutory and regulatory selection criteria. This winter, the agency will identify projects it intends to finance and invite those selected entities to submit formal applications.

EPA’s WIFIA program continues to provide financial support at a critical time as the federal government, EPA, and the water sector work to help mitigate the public health and financial impacts of COVID-19. Since March 2020, WIFIA has announced 24 loans and updated seven existing loans with lower interest rates. These recent announcements will save ratepayers over $1.5 billion.

WaterWorld

Nov 19th, 2020

5G will revolutionize government operations. State and local governments must start preparing for it now to ensure they can maximize its benefits.

The implementation of 5G wireless and broadband protocol technology around the world is well underway. Before the coronavirus pandemic, approximately 45% of the world’s population was slated to have access to 5G-enabled technology by 2024. While the pandemic has decelerated the rate of 5G growth, leading developers of 5G technological equipment, backed by the federal government, are ramping up spending and deployment to meet a sharply increased demand for faster and better internet speed connections.

5G is enterprise-focused, technologically unmatched and geared toward empowering businesses, consumers and governments in ways unimaginable. It will bring enormous benefits to local governments to expand and leverage digital connectivity. For example, 5G will deliver wireless broadband speeds of up 100 times faster than 4G LTE, meaning that governments adequately prepared for it can expect 5G to make their digital operations run much more smoothly and efficiently.

Similarly, energy providers will be able to analyze consumer energy use to make it more efficient, internet of things devices can identify issues with home appliances, vehicles, traffic flow, weather, flight patterns and so on. By some estimates, 5G could spur $13.2 trillion in economic activity by 2035. For local governments, that could lead to major increases in revenue, both from the application and renewal fees for 5G infrastructure devices (30,000 5G units for a 100,000 population city could mean up to more than $8 million in new, annual renewed right-of-way fees alone) and from the tax revenue generated by new industries and businesses.

But it won’t be easy for governments to get the most out of 5G without proper understanding and compliance with federal law. If they don’t start preparing now to adopt, place, deploy and monitor compliance with federal laws they will find themselves quickly and easily overwhelmed by the significant policy and operational challenges required to build for the 5G future.

The stakes of successfully making the switch to 5G are monumental. State and local governments can’t afford to be passive. The problem, however, is that reaping the benefits of 5G will require local governments to tackle several difficult policy and operational challenges.

First, 5G will substantially increase the administrative and management workload for local governments. Most of America’s 5G hardware has yet to be built and deployed (despite the commercial ads). With the coronavirus pandemic already elevating the workload and stretching the public sector labor force and localities’ tax bases to the breaking point, cities and counties could easily be overwhelmed by the influx of administrative work generated by 5G implementation and possibly miss out on the revenues.

Governments can start preparing for the massive workload and administrative demands from 5G by streamlining their operations, automating their internal processes and upgrading their technology infrastructure to manage renewal fee revenues for system upgrades for regulatory compliance. With the right internal systems in place, governments will find they have the flexibility and efficiency to handle whatever 5G will throw at them. Public-private partnerships could certainly help with this, and governments may want to consider bringing in private sector vendors to help them.

Another challenge related to 5G is the enormous amounts of data that will be created. Governments will have to make hard decisions about how much data they will collect and how they will maintain and protect it. Retaining large amounts of data will dramatically increase the potential harms associated with a data breach. It doesn’t matter whether that data is stored on a device or in the cloud, larger data stores present a more attractive target for data thieves. But thieves cannot steal data that has either been deleted after serving its purpose, properly secured or not even collected in the first place. That’s why governments need to plan how they will prioritize, organize and potentially minimize the data they collect from their 5G-enabled jurisdictions and cities.

5G has the potential to usher in a new era of tech-savvy, data-driven governance. Governments should take the initiative to capitalize on these innovations and lean into the challenges so that they are best positioned to benefit from the impending 5G transformation. 5G is coming, and in many instances, already here. It’s up to state and local governments to be ready for it.

Route Fifty

By Jonathan Gerth

NOVEMBER 20, 2020

Jonathan Gerth is vice president of tax and audit services at Avenu Insights & Analytics.

MUNIS in FOCUS: Eric Kazatsky, Senior U.S. Municipals Strategist for Bloomberg Intelligence, on the health of the muni market. Hosted by Paul Sweeney and Vonnie Quinn.

Listen to audio.

Bloomberg Radio

November 20, 2020 — 10:26 AM PST

Summary

• “High-yield” tends to be associated with corporate credit in investor income portfolios. However, the high-yield/unrated municipal sector is also worth a look.
• We discuss some benefits of HY muni bond CEFs over their corporate analogues such as relative valuation, higher-quality fund portfolios, resilient leverage structures and more.
• We also highlight a number of funds that allocate to the space such as OIA, NMZ and NMCO.

Continue reading.

Seeking Alpha

Nov. 21, 2020

Summary

• The media has been rife with headlines foretelling revenue shortfalls and a cash crisis for battered state budgets.
• We look under the hood to better assess the status of the headline-grabbing states with the largest debt burdens.
• Bond investors are right to be concerned.

As COVID-19 continues to slow the economy, the media has been rife with headlines foretelling revenue shortfalls and a cash crisis for battered state budgets. We look under the hood to better assess the status of the headline-grabbing states with the largest debt burdens.

Continue reading.

Seeking Alpha

Nov. 11, 2020

Municipal bonds and exchange traded funds, including the iShares National Muni Bond ETF (NYSEArca: MUB), are proving sturdy in the face of a raft of new issuance in the space.

MUB, the largest municipal bond ETF by assets, seeks to track the investment results of the S&P National AMT-Free Municipal Bond IndexTM. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index measures the performance of the investment-grade segment of the U.S. municipal bond market.

MUB YTD Performance

“Municipals posted modestly negative total returns in October, with the S&P Municipal Bond Index finishing the month down -0.14%,” according to BlackRock research. “Interest rates moved higher as economic data remained firm and the market began to price in an increased likelihood of a Democratic sweep, which, at the time of this writing, appears unlikely. (Bond prices fall when rates rise.) Credit sectors fared better than the more rate-sensitive segments. Muni-to-Treasury ratios in the intermediate and long end of the yield curve declined, but remain high versus the historical average.”

Municipal Bonds Are Resilient

Yields on munis have been steadily falling with bond prices rising even before the coronavirus hubbub. After the 2017 tax law changes, demand for tax-exempt munis became more attractive in response to caps in the federal deduction for state and local taxes, especially among higher-tax states. The tax law also diminished supply due to new limits on when governments can issue tax-exempt debt.

Due to the economic shutdown, which led to a spike in unemployment rates across the country, plenty of states are facing budget woes. Some of those with the worst shortfalls are among the largest issuers of municipal bonds, meaning they’re also among the biggest weights in this category’s ETFs. However, to this point, the muni market is proving resilient.

“October posted the largest monthly issuance on record at $71 billion. Municipalities pulled forward deals ahead of anticipated election uncertainty. Despite the acceleration, supply was well absorbed given the expectation for a corresponding dearth of issuance in November and December. On average, new deals were oversubscribed by 4.6 times, up from 4.2 in September,” according to BlackRock.

ETF TRENDS

by TOM LYDON on NOVEMBER 12, 2020

Prices on risky bonds have climbed even as repayment troubles have mounted

Covid-19 is wreaking havoc on the market for risky municipal bonds. Investors desperate for tax-exempt yield are still piling in.

Fixed-income returns that come with a tax break have become so precious to affluent American households that they are willing to overlook a spike in defaults, growing reports of repayment trouble and contagion risks of communal living projects.

The S&P Municipal Bond High Yield Index is now only about 1% lower than its pre-coronavirus pandemic level, despite falling 15% in March as global shutdowns roiled the market.

The Federal Reserve stepped in at that time to backstop a variety of assets including municipal bonds, resetting investor expectations about how much risk the pandemic poses to a range of markets from stocks to commodities to corporate and muni debt.

Continue reading.

The Wall Street Journal

By Heather Gillers

Nov. 13, 2020 8:00 am ET

The Treasury has resisted extending the Fed’s lending programs past year-end. Political pressure will only complicate the decision.

Throughout the U.S. coronavirus crisis, investors have viewed Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin as steady leaders who are capable of steering the world’s largest economy through uncharted waters. They have appeared together before Congress to give updates on their joint emergency lending programs, which helped restore smooth functioning to corporate-bond and municipal-debt markets. Even when elected officials in both parties dragged their feet on another round of fiscal aid, traders could seemingly rest easy knowing that the Mnuchin-Powell duo would remain above politics and keep markets and the economy on the right track.

That was before last week’s U.S. elections, which showed Joe Biden winning the presidency while Republicans appear likely to retain control of the Senate. Now it seems Democrats and Republicans are jockeying for power, and Mnuchin risks being thrown into the fray as well, given that his time as Treasury Secretary is presumably drawing to a close.

The most pressing issue on the table is whether to extend some or all of the Fed’s emergency lending programs, which are set to expire on Dec. 31. The Municipal Liquidity Facility, for instance, which offers a backstop to state and local governments, will only accept notices of interest for loans at least 30 days before year-end, according to a central bank statement last month. So as it stands, three weeks from now, no state or city will be able to turn to the Fed to issue bonds at a known interest rate if Covid-19 outbreaks threaten their residents and economies.

Continue reading.

Bloomberg Opinion

By Brian Chappatta

November 12, 2020, 3:30 AM PST

In more ways than one, the 2020 American presidential election was a historic one: Joseph R. Biden, the 46th president of the U.S., will be the oldest president to take office and his VP will be the first female to hold the office of vice president in American history.

Aside from these historical measures, many investors are trying to decipher the president-elect Joe Biden’s fiscal policies and their impact on the fixed income markets. Furthermore, given the rapid increase in COVID-19 cases throughout the world, how is he going to prioritize his efforts for local governments to ease their financial strains and revive the impaired revenue sources?

In this article, we will take a closer look at President-elect Biden’s election promises and how they will likely materialize in the upcoming years.

Financially Strapped Local and State Governments

It is no secret that all local and state governments are faced with some serious liquidity challenges due to their impaired revenue sources due to COVID-19. These challenges are also worsened by the additional expenditures required by these government bodies to combat COVID-19 and provide testing in their respective jurisdictions – which they may not have been prepared or budgeted for.

President-elect Joe Biden will likely get the next stimulus bill passed; this bill has already gone through the House of Representatives, and the Senate has shown some interest in prioritizing this bill post-election. This will not only be a victory for President-elect Biden’s camp, but also a piece of legislation that can provide over $436 million in funding for local and state governments. This bill mirrors the earlier tranches of COVID-19 financial help from the federal government, where the local governments submitted their respective claims for funding based on the lost revenues due to COVID-19.

Furthermore, the transportation agencies throughout the U.S. have been one the hardest hit local government agencies. This is strictly because these agencies rely heavily on the ridership volumes for the revenues. Since March, 2020, all – from small and midsize to large – transportation agencies have been severely impacted by the Coronavirus shutdowns and companies allowing their employees to work remotely. The inevitable shelter-in-place orders throughout the U.S. have delivered the hardest blow for these agencies. If passed, this new stimulus bill can be a life saver particularly for transportation agencies including light rail and bus systems.

Be sure to check out our previous article here on how the local government’s fiscal resilience is going to be tested long after the COVID-19.

Infrastructure Push and Green Energy Promises

Almost every president in recent history has highlighted the dire need to fix and revamp America’s infrastructure, including bridges, highways, airports and much more. President-elect Biden is no different in his promises.

The federal funding required to undertake these projects will be great for the municipal debt market, and local and state labor markets. It’s also important to note that many of the infrastructure projects will require Public-Private Partnerships (PPPs) that will help infuse private and public capital into the markets. For example: airports, hospitals, water and sewerage systems and transportation projects, etc., are often built with a PPP, where the local government utilizes their ability to issue municipal debt and partner with a corporation to complete the project.

President-elect Biden also talked about the need to limit our dependency on oil and spend more on developing greener alternatives of energy. These efforts can potentially reignite the conversation about Green Debt issued by municipalities in order to fund projects that may include renewable and energy efficiency projects, pollution prevention and control, clean public transportation conservation, green buildings, and sustainable water and wastewater management.

Potential Changes to the Marginal Tax Rates

Although tough without the democratic control of the Senate, President-elect Joe Biden promised some sweeping changes to the tax-code structure based on the income levels where the marginal tax rates is likely to see a hike for the wealthiest Americans; in-turn, increasing the demand for municipal debt investments to capitalize on the tax-exempt income from local, state and federal taxes.

Under Biden’s tax plan, individual taxpayers earning more than $400,000 annually would be taxed at 39.6%, up from 37% currently, and subject to an additional 12.4% Social Security tax on wages split equally with their employer. These changes to the marginal tax rates will make tax-exempt income more lucrative for individuals in higher tax brackets, in turn, driving up demand for local government debt.

President-elect Biden has also promised to restore the earlier corporate tax rates for corporations.

The Bottom Line

Although many things are still unclear about the control of the American Senate, which is the key for President-elect Biden to fulfil many of his campaign promises, American voters have chosen a leader who can work with both sides of the aisle on issues that transcend party lines – American infrastructure and reviving the American economy post COVID-19.

It’s clear that the American economy has some challenging times ahead; but, with bi-partisan decision-making, these challenges can be overcome for the betterment of America.

dividend.com

Nov 11, 2020

The municipal and state bond markets are not being hurt as badly as expected prior to the election and before progress was made on a Covid-19 vaccine, according to Adam Stern, senior vice president and director of municipal research at Breckinridge Capital Advisors, a Boston-based financial services firm with $42 billion in assets under management.

Because Democrats did not take control of the Senate (pending run-off elections in Georgia), there is less likelihood of tax increases in the near future, which should lessen the upward pressure on prices and downward pressure on yields that had been predicted before the election, Stern said in an interview today.

At the same time, a vaccine that could begin distribution sooner rather than later will lessen the need for more stimulus money for municipalities and states, he added. Senate Majority Leader Mitch McConnell has indicated he would like to pass a new stimulus package in the lame duck session of Congress that would be less than the $1.5 trillion discussed before the election.

“More fiscal support is likely necessary to maintain the current recovery,” according to a Breckinridge research report. “For munis, additional federal aid would reduce fiscal pressure.” At the same time, “state and local issuers have significantly reduced their payrolls. Service cuts of this sort are beneficial to credit quality in the near-term. However, maintaining these cuts indefinitely will prove challenging.”

Tax-free municipal bonds should still be readily available in the near future, Stern said. “But we find that ratings downgrades are likely regardless of the federal response. Mass transportation issuers would unquestionably benefit from increased federal aid.”

Financial advisors should be on the alert for municipalities and states, such as Chicago and Illinois, that are in dire financial circumstances, he added. Illinois’ credit rating has been downgraded to junk bond status in recent days. Although that is not typical of all states, Illinois presents the type of circumstances advisors should be aware of.

On the plus side, essential service municipal bond issuers have managed through the Covid-19 pandemic better than expected. Loose fiscal and monetary policy, coupled with better management of the virus, has helped limit the worst case outcomes, Stern said in a Breckinridge report. “We anticipate a challenging, but manageable, next several months” for bond investors.”

Breckinridge said a combination of factors has contributed to a less dire outlook than was predicted a few weeks ago. For starters, fiscal stimulus provided under the CARES Act has been effective as transfer payments averaged 8% of U.S. personal income between April and August 2020, and these payments likely produced higher-than-expected sales and income tax collections.

In addition, very low interest rates likely allowed some borrowers to refinance maturing obligations to avoid credit mishaps, as well as enabling a significant amount of debt refinancing.

Finally, people have done a better job of managing and adapting to the coronavirus.

ETF TRENDS

NOVEMBER 11, 2020 | KAREN DEMASTERS

Public finance sector officials are optimistic a Joe Biden presidency will mean strong financial support for state and local governments as well as robust infrastructure legislation.

They also are hopeful the negative impacts of a federal tax overhaul enacted in 2017 will be reversed.

The Associated Press called the presidential race in favor of Biden Saturday based on the vote count in Pennsylvania, where mail-in votes pushed him into a lead projected to be insurmountable. Pennsylvania’s 20 electoral votes would be more than enough to push Biden past the 270 electoral votes needed to claim victory.

President Trump, however, has not conceded and his campaign has filed lawsuits in several battleground states contesting the results.

“If Biden is ultimately determined to be president, and even with a Republican Senate, there will be tremendous opportunities for infrastructure, bond, and other legislation and regulatory actions,” said Charles Samuels, of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities.

His organization represents includes smaller nonprofit hospitals and colleges that would benefit from proposed legislation to would increase to $30 million from the current $10 million, the limit on small borrowers to use bank-qualified bonds. That provision is part of the House-passed Moving America Forward Act that has been blocked by the Senate.

In the next Congress that takes office Jan. 3, the House bill would need to be reintroduced and most likely modified to include provisions favored by the new administration.

Biden “has a deep understanding of municipal finance and the roles that tax-exempt bonds play to build American infrastructure,” said former President of the U.S. Conference of Mayors Steve Benjamin, who is the mayor of Columbia, S.C., and president of Municipal Bonds for America.

Benjamin dealt with Biden when the former vice president was spearheading the Obama administration’s implementation of the 2009 American Recovery and Reinvestment Act.

“I know from conversations with him and all his senior policy folks that infrastructure is at the very top of his list,” Benjamin said. “We will have the preservation of the tax exemption and a number of creative looks at delivering infrastructure all across the country.”

Pension funds, institutional investors, and sovereign wealth funds are eager to invest in American infrastructure that will create millions of jobs, Benjamin said.

Emily Brock, director of the federal liaison center at the Government Finance Officers Association who founded the Public Finance network as the voice of issuer groups on Washington policy issues, said her organization looks forward to meeting with Biden.

“We’re thrilled to talk with him with our coalition?s efforts to enhance the municipal bond market,” Brock said.

Brock said members are encouraged by Biden’s support of municipal finance in the past, but wary whether Biden will pursue placing a 28% limit on personal tax deductions.

Benjamin said he had discussions with Biden when he was vice president explaining to him the municipal bond industry’s opposition to the 28% limit on deductions.

The Bond Dealers of America was hesitant to discuss a Biden presidency, predicting ongoing litigation will bring uncertainty for weeks.

Mike Nicholas, CEO of BDA, said no matter who is in the White House, he is optimistic for bond initiatives in 2021, including in a future infrastructure bill.

A Biden presidency will make federal infrastructure legislation more doable, said Patrick Luby, senior municipal strategist at CreditSights. The Trump administration also saw infrastructure as a priority, but more in the sense of providing seed money, he said.

“There is a philosophical difference with a Democrat administration that they would be more willing to provide a greater share of federal funding to an infrastructure project,” Luby said.

Biden’s Build Back Better infrastructure plan has many of the same elements of the $1.5 trillion muni-friendly Moving America Forward legislation passed by House Democrats. That House bill includes many municipal bond provisions such as an increase of the limit on small issuer bank-qualified bonds to $30 million and a new program of qualified school infrastructure bonds.

It also includes upgrades to smart roads, water systems, municipal transit networks, schools, airports, rail, ferries, ports, and calls for universal broadband access.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 11/07/20 12:24 PM EST

In more ways than one, the 2020 American presidential election was a historic one: Joseph R. Biden, the 46th president of the U.S., will be the oldest president to take office and his VP will be the first female to hold the office of vice president in American history.

Aside from these historical measures, many investors are trying to decipher the president-elect Joe Biden’s fiscal policies and their impact on the fixed income markets. Furthermore, given the rapid increase in COVID-19 cases throughout the world, how is he going to prioritize his efforts for local governments to ease their financial strains and revive the impaired revenue sources?

In this article, we will take a closer look at President-elect Biden’s election promises and how they will likely materialize in the upcoming years.

Continue reading.

municipalbonds.com

by Jayden Sangha

Nov 11, 2020

With a new President comes new priorities and direction, and the Biden administration will hit the ground running in January. The Federal Government makes policies that affect how goods and people move, so it is likely that changes in how this happens are afoot. Here are five ways that a Biden administration will likely affect U.S. transportation policy:

Increased Government Spending

Most presidents have liked to spend money, but a Biden presidency will likely encourage the lame duck session to pass a stimulus package that in part would help the airlines again. More importantly, a Biden administration is likely to drive a true infrastructure bill that could have positive impacts on airports and air traffic control at least. Of course highways and rail can benefit as well, and perhaps drone technology too. Our economy needs people and goods to move freely and efficiently, and thus any infrastructure spend would be focused on making this happen while improving safety for consumers.

Amtrak Stays On Track

“Amtrak Joe” has been a life-long supporter of the National Passenger Rail Service, and has spoken often of the efficiency of trains. While I wouldn’t expect a Biden administration to favor trains over airplanes for most intercity travel, I would expect major funding to Amtrak to allow the railroad to invest in its rolling stock, trackage, and fund longer haul train losses. Any talks of privatizing Amtrak will likely be squashed during this presidency, and the leadership at Amtrak will have the strongest possible supporter in the White House.

Federal Minimum Wage Standards Could Raise Local Costs

Federal efforts to raise the minimum wage, already addressed by some states, would help those at the lower end of the pay scales but also raise costs for smaller local transportation operators among others. This possibly could reduce air service to smaller cities, if an increase in the cost of servicing the plane makes the trip uneconomic. More likely, prices to travel by train, plane, and car would increase a bit to cover this higher labor cost. In a highly price elastic market, this would result in somewhat lower demand.

More Regulation

Transportation in the U.S. is highly regulated the areas of safety, licensing, and maintenance. But consumer advocacy focused regulation, active in the Obama administration but quiet for the last four years, may re-appear though airlines will push against this. This could be focused in areas of ancillary revenue charges, seating density, taxes that would be passed through to customers, refund ability, and more. In cars, improved gas efficiency standards could raise the purchase cost of automobiles and trucks. Less likely but perhaps considered would be investment by foreign companies in US airlines or for foreign airlines to fly within the US. Also, as airlines restructure due to demand losses this administration’s views on potential merger agreements will likely change from the current president. It’s hard to underestimate the creativity with which regulators will wish to control business, and transportation is ripe for this kind of approach.

Support For Organized Labor

The U.S. Airlines and Railroads are highly unionized industries, and a Biden administration with a more progressive labor agenda will be friendly to collective bargaining. This would have no immediate impact on deals currently in place, but could change the tone of future negotiations. Labor in these areas is governed not by typical U.S. Labor law, but by the Railway Labor Act. This act, meant to reduce disruptions in the national transportation networks, makes negotiations drag out at times and in extreme cases could make a Presidential Emergency Board decision requested to stop a planned work action. Thinking this could happen in four years is not realistic, and yet workers in the national U.S. transportation businesses, like the Amtrak employees, will know they have a president that backs them.

Forbes

by Ben Baldanza

Nov 9, 2020

Mitch McConnell and other Republicans are opposed to further aid for states and localities. It looks like the Senate will stay in GOP hands, so prospects for relief next year have dimmed.

President-elect Joe Biden most likely will be dealing with a Senate led by Republican Mitch McConnell. That bodes ill for a lot of Democratic hopes, including major fiscal relief for states and localities.

It takes two sides to make a deal, so perhaps there’s something Democrats can trade in exchange for more aid. But that’s been the expectation for months now and McConnell hasn’t budged.

“Sen. McConnell has put down the marker pretty strongly about why they think a bailout of the states is a bad idea,” says Jonathan Williams, chief economist at the American Legislative Exchange Council. “I tend to think that Senate Republicans will hold together and say there are more effective ways to spend money than to send it to state and local governments as a pass-through.”

Continue reading.

GOVERNING.COM

ALAN GREENBLATT, SENIOR STAFF WRITER | NOVEMBER 9, 2020

(Reuters) – The emergency lending programs the Federal Reserve set up during the coronavirus pandemic have eased distress in financial markets and are still needed, Cleveland Federal Reserve Bank President Loretta Mester said on Monday.

In addition to slashing interest rates to near zero levels in March and ramping up its asset purchases, the Fed set up a slate of emergency lending facilities to support the markets for commercial paper, municipal bonds, corporate debt and more.

While some of the programs have been lightly used, Mester said their presence serves as a backstop that helps to smooth markets that are not yet in the clear after being disrupted because of the pandemic, she said.

“I don’t think we’re out of the extraordinary situation that they’re meant to help with,” Mester told reporters. “I think they are needed at this point, given where we are.”

Fed Chair Jerome Powell will be working with the Treasury Department to determine if the programs should be extended beyond the end of the year, Mester said.

“But in my view, if it were me, I would extend all of them,” Mester said. “The fact that they exist provides confidence to the markets.”

The policymaker stressed that the Fed is not out of ammunition when it comes to stimulating the economy and that it could provide more accommodation by adjusting its asset purchase program and using other tools.

Mester also said that the economy rebounded more strongly than she expected, but gains have not been evenly spread. Despite promising news on Monday about a vaccine being developed by Pfizer PFE.N and BioNTech 22UAy.F, , Mester said she thinks economic growth will happen more slowly going forward.

The economy will need support from both fiscal and monetary policy to fully recovery, she said. “There’s still a long way to go.”

By Jonnelle Marte

NOVEMBER 9, 2020

Reporting by Jonnelle Marte; Editing by Chris Reese and Aurora Ellis

Democrats are eyeing the programs as a backup option if they can’t strike a deal to aid states and localities, and believe they may be needed to backstop markets. Republicans want them off the table.

WASHINGTON — A political fight is brewing over whether to extend critical programs that the Federal Reserve rolled out to help keep credit flowing to companies and municipalities amid the pandemic-induced recession.

The dispute has the potential to roil financial markets, which have calmed significantly since the Fed announced in March and April that it would set up backstops in response to market turmoil spurred by the coronavirus pandemic.

Those programs expire on Dec. 31, and it is unclear whether the Trump administration will agree to extend them. The Federal Reserve chair, Jerome H. Powell, and Treasury secretary, Steven Mnuchin, must together decide whether they will continue the programs — including one that buys state and local bonds, another purchasing corporate debt and another that makes loans to small and medium-size businesses. The officials will probably make that decision by early to mid-December, according to a senior Treasury Department official.

The Fed might be inclined to keep the efforts going, but Mr. Mnuchin, whose Treasury Department provides the funding backing up the programs, has signaled that he would favor ending the one that buys municipal bonds. And he is under growing pressure from Republicans to allow all five of the Treasury-backed programs to sunset.

Senator Patrick J. Toomey, a Pennsylvania Republican who could soon lead the Senate Banking Committee, is arguing that the Fed and Treasury do not have the legal authority to extend new loans or buy new securities beyond this year without congressional approval, according to a person familiar with the matter. While that view is disputed by legal experts, Mr. Toomey also believes it was Congress’s intent for the relief programs to end on Dec. 31.

The programs’s expiration could come at exactly the wrong moment, as the U.S. faces an expected surge in coronavirus cases this winter and as fiscal stimulus measures that Congress passed in the spring fade. While lawmakers have toyed with passing a new relief bill before next year during the lame-duck session of Congress, President Trump’s election loss makes the outcome highly uncertain.

“Cliffing the programs at year-end would be ill advised, opening markets up to a year-end disruption,” said Scott Minerd, the global chief investment officer at Guggenheim Partners, who expects the programs to be extended.

Mr. Mnuchin has made clear in responses to congressional questioning that he does not favor extending the municipal bond program. While Mr. Mnuchin’s comment was specific to that effort, a senior Treasury official laid out reasons for allowing the others to end, mainly centered on a belief that the worst of the economic crisis has passed and the programs should not be a replacement for support from Congress.

But the programs are mostly designed as backup options: The financial terms for buying state and local debt, for instance, are not generous enough to compete in a market functioning well, and the corporate bond program is now making only small-scale purchases. Their main purpose has been to reassure investors that the central bank is there as a last-ditch option if conditions worsen.

Economists and analysts say there is logic in keeping that option open until a vaccine is widespread and the crisis is clearly over — and there is plenty of capacity left in the Fed’s programs to buy more debt and make more loans. But the central bank cannot make material changes to the programs’ terms to keep them running into 2021 without the Treasury’s signoff.

Some Democrats had begun eyeing the municipal program as a backup option in the event that state and local government relief proved hard to pass through Congress. While the program’s terms are unattractive now, they could in theory be sweetened under a Biden administration Treasury Department. Taking that program off the table would leave Democrats with fewer options — and give Republicans another bargaining chip in stimulus negotiations.

Mr. Toomey has talked about limiting the backstop programs for months, on the basis that they are no longer needed and might discourage private investment. Politico reported last week that he would favor letting all the programs end.

Lawyers generally agree that the Fed and Treasury can extend the programs without Congress — the way they are structured means that the Treasury has already made loans to the Fed, which then uses that money to insure against risk as it buys bonds and makes loans. The law that provided the funding allows such “existing” loans made from the government appropriation to remain outstanding.

Democrats also disagree with Mr. Toomey’s take.

“It’s clear that the Fed and the Treasury have the authority to extend the facilities, and they should,” said Bharat Ramamurti, a Democratic member of the Congressional Oversight Commission, which oversees the programs. “There is continuing need for municipalities and smaller businesses, and there is a significant chance of market disruption if these facilities are not extended.”

Senators Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts, Mark Warner of Virginia and Chuck Schumer of New York — all powerful Democrats — sent Mr. Powell and Mr. Mnuchin a letter last week saying that the law “is clear that these facilities can be extended” on the Treasury and Fed’s authority and that “failing to signal the agencies intent now creates undue uncertainty and threatens the programs ability to promote economic recovery.”

If a coronavirus vaccine is rolled out in the coming weeks, the Treasury Department may be less inclined to extend the programs. Mr. Trump could also block a reauthorization by pressuring Mr. Mnuchin, leaving Mr. Biden with fewer economic stimulus tools at his disposal.

There are some signs that the programs could expire without causing a catastrophe. Markets are functioning normally now, having calmed after the Fed signaled that it would set up the backstops. It might be that investors have overcome the panic of the spring and no longer need a backup option from the Treasury and Fed.

But it is also possible that the comfort and security provided by a Fed backstop is still needed.

Millions of people remain out of work, the service sector continues to be hard hit, and state and local governments are facing budget shortfalls, albeit smaller ones than some had initially projected. Further shutdowns, even localized ones, amid rising coronavirus cases could cause a reversal in risk taking that roils markets once more.

“Some market participants have asserted that the expiration” of the municipal program “may be a nonevent since its existence is not essential for market functioning any more,” market analysts at Citigroup wrote in a recent research note. “These assertions are wrong, in our view.”

Analysts interviewed by The New York Times were divided on what ending the programs could mean for markets. Some believed they could function on their own, with the economy recovering nicely. Others pointed to risks looming ahead and suggested that removing the backstop now would be a bad idea.

“You need to see those facilities extended, particularly if you’re not going to see stimulus,” Matthew Luzzetti, the chief U.S. economist at Deutsche Bank, said in an interview last week. “Just having that backstop has been a really important signal to the market that the Fed is there.”

Asked at a news conference last week whether the programs would be extended, the Fed chair demurred.

“We are just now turning to that question,” Mr. Powell said. “We’ve had a lot of things to work our way through.”

After the news conference, Michael Feroli, an economist at JPMorgan Chase & Company, wrote in a research note that for the programs to be extended, “not only will the Fed Board have to decide that it is needed, but Treasury will also have to be convinced that it is both needed and legal.”

The New York Times

By Jeanna Smialek and Alan Rappeport

Nov. 9, 2020

Treasury Department faces pressure to allow lending backstops to expire, but some Fed officials fear the move could be premature

The success of the Federal Reserve’s emergency lending programs in stabilizing financial markets is fueling a political battle over whether the programs should be extended.

Divisions over their future are being amplified by partisan gridlock in Congress over whether to provide more economic stimulus. Democrats, looking ahead to President-elect Joe Biden’s inauguration in January, see the programs as a potential tool to deliver more aid if Congress doesn’t act, while some Republicans are worried about relying on central bank lending powers as a substitute for congressional spending decisions.

The tussle could open a divide between the Fed and the Treasury Department, which have mostly collaborated smoothly this year over providing emergency support after the coronavirus pandemic convulsed Wall Street. The Treasury launched the programs with the central bank in March and April after that turmoil threatened to freeze the flow of credit to small businesses, large companies, cities and states.

Continue reading.

The Wall Street Journal

By Nick Timiraos

Nov. 10, 2020 2:42 pm ET

Sen. Majority Leader Mitch McConnell said Congress needs to approve a coronavirus aid package before the end of the year.

Senate Majority Leader Mitch McConnell on Wednesday said approval of another coronavirus stimulus package before the end of the year would be his top priority when the Senate reconvenes next week. Funding for state and local governments, a sticking point in prior negotiations, could also be considered, he said.

“We need another rescue package,” McConnell said during a press conference in Kentucky, where he won reelection. “Hopefully the partisan passions that prevented us from doing another rescue package will subside with the election. And I think we need to do it and I think we need to do it before the end of the year.”

The Senate will be back in session Monday, and McConnell said a stimulus deal and omnibus spending bill to keep the government open will be the focus in the coming months. He had earlier suggested that a deal was not likely until early next year.

Talks over another possible coronavirus stimulus bill had stalled for months ahead of the election as Senate Republicans, House Democrats and the Trump administration were unable to come to agreement on a deal. Disagreement about a potential package continued, even as unemployment figures suggested a slow down in the economic recovery. Local and state officials also lobbied for more help, saying they are still spending money to respond to the pandemic, while tax revenues shrank during the economic downturn.

State and local governments will still need financial support even if the coronavirus pandemic subsides over the winter, said Mike Leachman, vice president of state fiscal policy at the Center for Budget and Policy Priorities. State and local governments have furloughed or laid off 1.2 million workers, and are likely to face budget shortfalls exceeding $500 billion over the next two years, he said.

“The economic decline we’ve seen this year is entirely due to the pandemic,” Leachman said. “That’s why state revenues are down and that’s why they need aid.”

But with Republicans less receptive to the idea of providing financial assistance to state and local governments, the results of the election will have implications for any future aid package.

As the vote count in battleground states continued Wednesday, Wisconsin and Michigan were called for Democratic presidential candidate Joe Biden, making it more likely he would beat President Trump. Republicans appeared likely to retain control of the Senate, while Democrats kept the House.

But exactly how those dynamics will play out remain uncertain. In the days leading up to the election, Trump expressed renewed support for more financial aid to help people and businesses affected by the pandemic. It isn’t clear what the president’s position will be if he is voted out of office and asked to consider a new package during a lame duck session.

Before the election, House Speaker Nancy Pelosi also emphasized that she remained far apart from the White House on key points, including financial aid for state and local governments.

McConnell said Wednesday he’d be open to the possibility that state and local assistance is included in a stimulus bill, but he said funding may need to be curtailed to localities that can demonstrate certain levels of need in order to qualify.

“It’s a big item for Democrats and it is not something my side is very fond of because it’s hard to figure out who really needs it and who doesn’t,” McConnell said.

One possibility for approving stimulus initiatives could be to attach measures that both sides agree on to a must-pass spending bill, said G. William Hoagland, senior vice president of the Bipartisan Policy Center. A stopgap spending bill approved in September only keeps the federal government funded through Dec. 11.

“One way or another, something will have to be done in the lame duck session just to keep the government operational,” Hoagland said.

A federal extension of unemployment benefits and funding for Covid-19 testing, tracing and vaccine distribution could all be likely measures for including in a government funding bill, he said. But because funding for state and local governments remains a controversial topic in Congress, Hoagland said it seems unlikely to be tacked on to other legislation.

ROUTE FIFTY

by ANDREA NOBLE

NOVEMBER 4, 2020

Gridlock in Washington doesn’t seem to be going away, and a divided government probably won’t be providing much more help to an economy still ailing from the coronavirus.

That’s bad news for the growth outlook. After all, the economy is still about 5% smaller than it otherwise would have been, with roughly 11.6 million Americans still unemployed or underemployed compared with February. And while roughly 20 million Americans have returned to work since April, the recovery hasn’t been enough to prevent millions of people being jobless for longer than 26 weeks. Moreover, many of those who have gotten rehired since April are nevertheless in a bad financial situation, given the low level of wages of the jobs that have been added and the depletion of household savings.

Continue reading.

Barron’s

By Matthew C. Klein

Updated November 9, 2020

As coronavirus cases surge across the country and new stay-at-home orders threaten further damage to an already fragile economic recovery, millions of Americans will lose crucial federal benefits if Congress can’t come to agreement on a new round of stimulus legislation.

Continue reading.

Forbes

by Sarah Hansen

Nov 15, 2020

The House speaker also said she has no plans to stop pressing for a big coronavirus relief deal. Meanwhile, at least one top Senate Republican also indicated it’s possible Democrat and GOP lawmakers could come together on a public works plan.

U.S. House Speaker Nancy Pelosi on Friday pointed to a large infrastructure package as an area where Democrats and Republicans might cooperate with Democrat Joe Biden in the White House, but Republicans maintaining control of the U.S. Senate.

Pelosi also rejected the idea of Democrats downsizing their ambitions for another round of coronavirus relief in order to strike a compromise with Republicans, and specifically emphasized the need for more federal financial assistance to state and local governments.

“No, it doesn’t appeal to me at all,” Pelosi replied when asked during a press conference about her openness to a scaled-down relief bill.

She noted that, since the pandemic began, there have been hundreds of thousands of jobs cut in the state and local public sector “because of the funds that have been used to address the virus and lost revenue.”

Democrats have been pushing in recent weeks for a roughy $2 trillion package. A bill they pushed through the House in October included upwards of $400 billion for states and localities.

Biden won the presidency on Saturday, clinching the lead in key battleground states, and was close to winning when Pelosi spoke on Friday.

Exactly which party will control the Senate is still up in the air. Partisan control in the closely divided Senate looks like it likely will hinge on a pair of runoff elections in Georgia in January.

In the House, Democrats are expected to maintain their majority, despite losing seats.

At least one key Republican on Friday also raised the possibility of infrastructure legislation—Sen. Lindsey Graham, of South Carolina, who after his reelection this week noted that he is in line to chair the Senate Budget Committee if the GOP keeps control of the chamber.

With Republicans in charge, Graham warned, “the agenda coming out of the House is dead on arrival in the Senate.” But he also said there’s “plenty of space to find common ground on infrastructure.”

“I think there’s a lot of bipartisanship for roads and bridges and ports,” Graham told reporters during a video call. “We need to redesign the Highway Trust Fund because there are less cars on the road using gasoline and the Highway Trust Fund is based on gas taxes.”

Pelosi characterized House Democrats “Moving America Forward” proposal from earlier this year—a $1.5 trillion package of bills—as a possible starting point for talks about infrastructure and said it was similar to plans that the Biden campaign has outlined.

“As we go forward with an infrastructure bill, that is usually not partisan,” she said.

During his time in office, President Trump repeatedly expressed an interest in a large infrastructure package and discussed this possibility with Pelosi and other Democrats at times. But a deal has proved elusive, with funding a key sticking point.

Pelosi blamed the president for a lack of leadership on the issue, saying that he talked up the idea of a sweeping public works plan only “until it came time to make the tough decisions about paying for it and the rest and then he stomped out of the room.”

Republican leaders in the Senate have generally been cool toward the idea of passing a massive new public works package during Trump’s tenure and never lined up behind a funding proposal.

The U.S. Chamber of Commerce this week highlighted infrastructure and another round of coronavirus stimulus as two of its top post-election priorities. The Chamber has backed the idea of a new federal infrastructure investment program previously.

Graham, who won reelection defeating Democratic challenger Jaime Harrison by about 10 percentage points, drew attention at the end of the week for aligning himself with Trump as the president made unfounded allegations about voter fraud.

But the South Carolina senator said Friday that he will be willing to look for ways to work with Biden on certain issues if the Democrat wins. Graham also said he wants to move ahead with another stimulus bill before January, prior to the next presidential term beginning.

“I’ve been in the camp of going big,” he said of the virus relief legislation. “We need a big package.” But he also acknowledged that some fellow Republicans don’t agree with him on this.

Republicans in recent months have been resistant to the idea of funneling large additional sums of federal aid to state and local governments as part of further coronavirus relief.

ROUTE FIFTY

by BILL LUCIA

NOVEMBER 6, 2020

Exploring the economic challenges of running a municipal water utility during a pandemic

Publicly owned and operated water utilities are increasingly running up against tight budgets, debt obligations, and other barriers to investment as user charges, municipal bonds and traditional financing tools fail to keep up with the level of need.

While governmental departments provide some financial support for municipal water infrastructure, most water investment is locally driven, and municipalities must prioritize their improvements based on a specific set of economic, political, and environmental factors—often easier said than done. A municipal utility’s ability to generate revenue is far more limited than that of an investor-owned utility and many municipalities do not have the capacity to take on additional debt. From complying with new regulatory requirements to preparing for the next major storm, municipal utilities must carefully weigh local needs when launching new investments.

Utilities must overcome several financial hurdles to address aging pipes and water mains, as well as wastewater treatment and transport concerns, including rising operating costs and unpredictable revenues that can make it difficult to maintain self-sufficiency and make long-term capital plans. Meanwhile, many municipal utilities are dealing with a heavy debt burden, and are underfunded, with many not investing sufficiently in their networks to keep up with decaying infrastructure.

The gap continues to grow between water and wastewater capital needs and historical public and private capital investment. Meanwhile, regulatory pressures over water quality increase, and environmental burdens of severe storms or severe droughts become more frequent. All of these combine to intensify the challenges facing cash-strapped municipal utilities.

With these challenges providing the backdrop, the COVID-19 pandemic is now providing additional financial performance challenges for municipal water utilities. A recent report prepared for the American Water Works Association and the Association of Metropolitan Water Agencies estimated that the aggregate financial impact of COVID-19 on drinking water utilities in the U.S. alone will likely be approximately $13.9 billion, which represents an overall 16.9% financial impact on this sector. These new pandemic-related financial impacts are the result of two unexpected impacts. First, increased costs due to operational challenges needed to handle social distancing and remote working. Second, utilities are anticipating reduced revenue due to lower non-residential water demand during lockdowns, due to some customers’ inability to pay their bills, and also the no-disconnect policy followed by many utilities during the COVID-19 crisis.

Tackle Performance Challenges With Innovation

Pandemic challenges aside, many water utilities were already struggling, focusing on yesterday’s work without the capacity to plan ahead. Few have proactive business models in place, and even fewer are able to invest for performance.

A few years ago, Global Water Intelligence (GWI) launched Leading Utilities of the World (LUOW), a global network of the world’s most successful and innovative water and wastewater utilities. The goal of the group is to drive performance across the water sector by recognizing achievement and celebrating those successes while inspiring others in the industry. For example, LUOW member Dubai Electricity & Water Authority’s AMI project helped the utility save 1.4 billion gallons of water in 40 months and increased revenue by $13.7 million USD.

It is not just economics that separates the successful utilities from those struggling to keep up. The winning combination, as evidenced by LUOW members, is leadership and innovation. San Francisco Public Utilities Commission, faced with the multiple challenges of earthquakes, aging infrastructure and droughts, diversified its water resources through four different initiatives: conservation, groundwater, recycled water, and non-potable water. As a result of these initiatives, per capita consumption is now averaging only 40 gallons of water per day per person.

Other municipal utilities are facing these challenges through integrated water resource management (IWRM), which emphasizes collaboration and information sharing to bridge the gap between different public and private shareholders while improving financial and environmental outcomes.

In some areas, there are efforts being made to encourage “utility strengthening through consolidation.” For example, California State Water Resources Control Board is encouraging “water partnerships” (local resource sharing, physical or managerial consolidation, or full regionalization) to benefit from economies of scale and to save meager resources that can then be spent on necessary improvements, funding reserves or paying down debts.

Further, municipalities and municipal associations often contract out water and wastewater services to private sector companies such as SUEZ, Veolia and Inframark. In these cases, these companies provide scalable solutions depending upon the need of the municipal utility through public-private partnerships and comprehensive asset management contracts. Through this type of contractual arrangement, municipalities can outsource the management and operation of their water and wastewater systems while retaining control, ownership of their assets, and rate-setting authority.

It is this same long-term planning and execution of innovative approaches to performance management that have positioned some municipal water utilities to weather the impacts of the COVID-19 pandemic better than others. While the impact of the pandemic will vary for individual water utilities depending upon its impact on their customers, with utilities heavily associated with C&I and institutional customers, high unemployment, or already stressed cities likely to take a greater financial hit, the water utility sector has had previous practice dealing with periods of stress due to droughts. In an American Water Works Association-sponsored webcast in mid-May focused on the financial impacts of the pandemic, Helen Cregger, Moody’s vice president and senior credit officer of public finance, noted that such periods of stress have prompted utilities to build cash reserves and increase fixed charges, and these will help them ride out this unexpected storm.

Embrace Electric Utility Strategies to Improve Water Utility Performance

The COVID-19 crisis has utilities across the board looking at ways in which to conserve capital, and it is here that water utilities can look to the electric utility industry for inspiration. For a municipal water utility with economic challenges, the key first step is to focus on making more of what is on hand: by operating and maintaining existing assets by and taking a more analytical approach. This can unlock new capacity to do new work. By better managing existing assets utilities can alleviate or postpone massive capital expenditures on new infrastructure.

As a second step, municipal water utilities can also embrace the asset and network management techniques being adopted by electric utilities.

Through network sensors, IoT, and real-time analysis of the data provided, water utilities can increase their understanding of their network assets. Adding sensors and other IoT devices will allow the utility to access first-hand information from the field, clarify asset health, and feed that data back into planning and maintenance systems faster, to better optimize asset performance and reduce incidences of failure.

Using a network management system and its modeling capabilities (as electric utilities have been doing for years) to create a water network model will provide the utility with a better understanding of flow and potential leakage areas within the system, allowing for better maintenance planning.

As a third step, municipal water utilities need to seriously consider moving their enterprise applications for asset, metering, and billing to the cloud, either alone or in tandem with other neighboring utilities in a resource-sharing, multi-tenant arrangement.

The cloud offers flexibility and modularity, providing a scalable, reliable, and agile platform for every utility’s core business. It is a much quicker route to new features and functionality than on-premises implementations, allowing utilities to cut costs and remove the upgrade burden, allowing them to repurpose budgets and staff to focus on value creation.

WATER & WASTE DIGEST

BY KATE ROWLAND

NOV 11, 2020

As part of the nation’s COVID-19 response, federal policymakers should consider expanding and repurposing existing federal financing programs like U.S. EPA’s Water Infrastructure Finance and Innovation Act (WIFIA) Loan Program.

In many ways, the economic consequences of the COVID-19 pandemic are just beginning for state and local governments and public-sector infrastructure agencies. They will face the direct effects of the prolonged shutdown on revenues and expenditures while being responsible for economic and social recovery in their communities. These challenging conditions will likely persist for years.

Even for those governments and agencies in good long-term financial shape, financing assistance may be critical to help manage the massive budget dislocations caused by this unprecedented crisis. Such assistance is especially effective for infrastructure agencies to keep major projects from being delayed or canceled due to unexpectedly lower revenue expectations.

The federal government’s role in the pandemic’s economic recovery is well recognized. But plans for specific federal financing programs are far from finalized. Many in Congress are calling for the $500 billion Municipal Liquidity Facility (established by the Federal Reserve in the CARES Act) to be amended to offer cost-effective loans. This concept is included in several bills recently passed or proposed in the House, but full enactment is still a distant prospect in the current political environment. And even if new sources of federal credit were established, the design and implementation of large-scale lending programs is a major task. It can’t be accomplished overnight.

Continue reading.

Water World

by John Ryan

Nov 11th, 2020

At last week’s PLI annual securities regulation institute, SEC Commissioner Allison Lee gave the keynote address, Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation. She began her remarks with the pandemic as metaphor: a global crisis that, before it struck, was “understood intellectually to be a serious risk,” but not fully appreciated as something we really needed to worry about. Now, we have experience of a crisis, no longer viewed “antiseptically through our TVs or phones, but firsthand as it unfolds in our homes, families, schools, and workplaces—not to mention in our economy. Seemingly theoretical risks have become very real.” Another dramatic risk that looms even larger with potential for more dire consequences is the topic of Lee’s remarks: climate change. According to a 2018 study by scientists in the U.K. and the Netherlands, the “point of no return” for achieving the goal of two degrees Celsius by 2100 set by the Paris Accord may arrive as soon as 2035. To be sure, the lesson from the pandemic is “not to wait in the face of a known threat. We should not wait for climate change to make its way from scientific journals, economic models, and news coverage of climate events directly into our daily lives, and those of our children and theirs. We can come together now to focus on solutions.” And while this is hardly Lee’s first rodeo when it comes to advocating that the SEC mandate climate risk disclosure, it seems much more likely now, with the imminent change in the administration in D.C., that the SEC may actually take steps toward implementing a regulatory solution.

Acknowledging that the SEC does not make policy to address climate change, Lee highlights the role the SEC does play—protecting investors, facilitating capital formation and maintaining fair, orderly and efficient markets—and how they all intersect with climate change. At a high level, financial regulators, including the SEC, must understand and, “where appropriate, address systemic risks to our economy posed by climate change. To assess systemic risk, we need complete, accurate, and reliable information about those risks. That starts with public company disclosure and financial firm reporting, and extends into our oversight of various fiduciaries and others. Investors also need this information so they can protect their investments and drive capital toward meeting their goals of a sustainable economy.”

According to Lee, there is a “growing consensus that climate change may present a systemic risk to financial markets,” a view shared by, for example, the Task Force on Climate-Related Financial Disclosure (TCFD) (see this PubCo post), and the Market Risk Advisory Committee to the Commodity Futures Trading Commission (see this PubCo post), among others. (Lee views “systemic risk” as risk “characterized by the following features: (1) ‘shock amplification’ or the notion that a given shock to the financial system may be magnified by certain forces and propagate widely throughout; (2) that propagation causes an impairment to all or major parts of the financial system; and (3) that impairment in turn causes spillover affects to the real economy.”) To the extent that asset prices fail to fully incorporate risks, systemic shock becomes more likely; there is clearly evidence, in her view, that climate risks have not been priced in, especially for “long-dated assets, utilities, commercial mortgage-backed securities, and potentially municipal bonds, among others.” In the event of major climate-related events, markets may discover these anomalies, leading to “abrupt and disruptive re-pricing.” For example, some have highlighted the “risks of extreme weather events to the creditworthiness of state and local issuers in the municipal bond market, risks of hurricane and flooding to the commercial real estate market, and risks of aging infrastructure in conjunction with hurricanes and wildfires to the electric utility sector.”

But these disruptions will not necessarily be cabined within those sectors; rather they can spread throughout the financial system in expected and unexpected ways. The Bank for International Settlements, she observes, has identified climate risk as a “green swan” event—“a colossal and potentially irreversible risk of staggering complexity.” Climate risk differs from the better-known “black swan” in the level of its complexity—“a new type of systemic risk that involves interacting, nonlinear, fundamentally unpredictable, environmental, social, economic and geopolitical dynamics, which are irreversibly transformed by the growing concentration of greenhouse gases in the atmosphere.”

These disruptive effects compound each other, potentially affecting non-climate related vulnerabilities, such as “historically high levels of corporate leverage, and the effects of the COVID-19 pandemic which has depleted household wealth and bank balance sheets, and created more debt. Climate related shocks could further magnify these vulnerabilities.” And these effects may well be irreversible. Because of the potential for a climate-induced “overall shock to the global economy with systemic implications,” it is “imperative for the SEC to focus on climate risk as systemic risk, and coordinate with domestic regulators through the Financial Stability Oversight Council, and with international regulators through the Financial Stability Board’s Standing Committee on Assessment of Vulnerabilities, to monitor and address this risk.”

The starting point, she maintains, must be a “clear-eyed analysis of accurate, reliable data,” and there has been an unprecedented demand by investors for climate-related and ESG-related disclosure. Beyond so-called “impact” investing, she observes, climate and other ESG risks and metrics have become significant, decision-making drivers in a variety of sustainable investment strategies, as well as in “traditional investment analyses designed to maximize risk-adjusted returns on investments of all types. They represent a core risk management strategy for portfolio construction….The bottom line is that businesses now actively compete for capital based on ESG performance, and that competition needs to be open, fair, and transparent.”

How do we get there? Through “uniform, consistent, and reliable disclosure.” Some disclosure has resulted from private ordering, but, as she has contended previously (see, e.g., this PubCo post, this PubCo post and this PubCo post), “some level of regulatory involvement [is needed] to bring consensus, standardization, comparability, and reliability.”

To illustrate, Lee looks to the role of banks, both in financing fossil fuel industries and in the opportunity to finance a shift toward a lower carbon economy, considered by all accounts as “a heavy lift.” She advocates that the SEC work with “market participants toward a disclosure regime specifically tailored to ensure that financial institutions produce standardized, comparable, and reliable disclosure of their exposure to climate risks, including not just direct, but also indirect, greenhouse gas emissions associated with the financing they provide, referred to as Scope 3 emissions. There is a concentration of risk in the financial sector that is not readily ascertainable except through Scope 3 emission disclosures.” With appropriate resources, the SEC should take on the challenge of implementing appropriate regulatory action as it relates to standardized disclosure requirements.

The SEC must also address climate risk in the context of oversight of funds and their advisers, credit rating agencies and accounting standards. Clear disclosure is also necessary, in Lee’s view, in connection with funds marketed as “green” or “sustainable.” What does the fund mean by these terms and is the fund implementing a strategy that is consistent with that disclosure? Standardized company ESG disclosure would help, she believes. In addition, she suggests that the SEC consider requiring advisers to maintain and implement policies and procedures governing their approach to ESG investment. She also advocates that the SEC encourage increased transparency at credit rating agencies regarding how climate and other ESG factors are weighted when incorporated into credit ratings.

Lee also asks whether the FASB should look at climate risk in the application of GAAP as the IASB has done in issuing guidance addressing how existing IFRS requirements interact with climate-related risks, and identifying how climate-related risks may need to be reflected in financial statements, including in connection with asset impairments, asset valuations and useful life, contingent liabilities and expected credit losses.

In conclusion, she again alludes to the pandemic as an example of what not to do, advocating that we not wait until the crisis is upon us to respond, but instead “move forward with considered, informed rule-making and other initiatives in this space.”

by Cydney Posner

November 10, 2020

Cooley LLP

The US Supreme Court recently granted certiorari in an important climate change lawsuit, BP P.L.C. v. Mayor and City Council of Baltimore. The lawsuit pits the Mayor and City of Baltimore against twenty-six multinational oil and gas companies that Baltimore claims are responsible for climate change. Baltimore alleges that the companies contributed to climate change by producing, promoting, and (misleadingly) marketing fossil fuel products long after learning of the climate-related dangers associated with them. Specifically, Baltimore argues that the companies engaged in a “coordinated, multi-front effort” to conceal their collective knowledge of climate change. Also that the companies discredited the “growing body of publicly available scientific evidence,” and worked to “undermine public support for regulations of their business practices.” Baltimore seeks relief for “climate change-related injuries.”

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By Brent Owen on November 11, 2020

Squire Patton Boggs

Fixed-income investors can consider an opportunity to access tax-exempt income while actively managing credit and duration exposures through a short duration municipal bond exchange traded fund strategy.

In the recent webcast, No Time for Passive: The Case for Active Muni Bonds, Samantha Azzarello, Executive Director, Global Market Strategist; J.P. Morgan Asset Management, outlined the current markets we find ourselves in with both daily increases in coronavirus cases and fatalities. Meanwhile, the economy is still trying to recover its former glory prior to the Covid-19 pandemic, with 11.4 million regained employees on total nonfarm payrolls after the economy suffered a loss of 22.2 million. We see that the leisure and hospitality sector has been one of the worst hit areas, followed by transportation, utilities, education, health services, business services, and other services industries.

Looking ahead, Azzarello argued that we are still on a path to recovery as supportive monetary and fiscal policies help lift the economy. Consensus analyst estimates reveal a return to positive earnings growth ahead for the S&P 500.

Richard Taormina, Managing Director, Head of the Tax Aware Strategies Team, J.P. Morgan Asset Management, also highlighted the strong demand and record supply in the fixed-income market as more investors look to diversify their bond portfolios in a quickly changing environment. Taxable supply continues to be strong with issuance up 200% year-over-year. Tax-exempt issuance, though, is slightly lower than last year. Fund inflows have reversed the $45 billion in outflows across the March and April months and now show a positive $20.2 billion year-to-date positive inflows.

Taormina noted that short rates will remain low as the yield-curve steepens ahead. The curve on 2 to 10 year bonds are at their steepest since 2018 after hovering near record lows earlier around March.

Meanwhile, Taormina argued that munis are still an attractive segment of the market for fixed-income investors when comparing the triple A-rated munis to U.S. Treasuries.

As a way to help better control their fixed-income duration exposure, investors can look to the actively managed JPMorgan Ultra-Short Municipal ETF (Cboe: JMST) to go down the yield curve and better manage risk. The JPMorgan Ultra-Short Municipal ETF tries to generate a high level of current income exempt from federal income tax as is consistent with the relative stability of principal. The portfolio primarily consists of investment-grade fixed, variable, and floating-rate municipal securities exempt from federal income taxes.

JMST comes with a 0.51% 30-day SEC yield or a 0.86% tax-equivalent 30-day SEC yield for those in the highest income bracket. The fund also has a 0.74 year effective duration and a 0.18% expense ratio.

The JPMorgan Ultra-Short Municipal ETF focuses on 0 to 1 year debt maturities, which make up about 74% of the portfolio. Compared to the benchmark Bloomberg Barclays 1-year Municipal Bond Index, it is slightly underweight to the top-rated muni debt securities since it holds a 16% position in non-rated debt, which may help the fund better generate yield opportunities. The ETF is also more heavily focused on local general obligation debt, hospital bonds, and housing-related bonds, as compared to the benchmark.

ETF TRENDS

by MAX CHEN on NOVEMBER 11, 2020

Read the Moody’s Report.

Amicus Issue:

Whether the security or property interest of bondholders and the monolines in excise tax revenues and toll revenues levied or collected by the Commonwealth specifically to repay the bond debt issued by the Commonwealth’s independent instrumentalities does not attach until after those revenues are deposited with the fiscal agent.

Counsel of Record:

Faegre Drinker Biddle & Reath LLP

Laura E. Appleby
Kyle R. Hosmer

Read the brief.

Some city and state retirement programs swap in health stipends for medical plans or cut back benefits

America’s retired workers are getting squeezed on their health care.

Cities and states can’t afford to keep the same medical benefits they promised government retirees.

For all 50 states combined, revenue declines for 2020 and 2021 could reach 13% cumulatively, according to Moody’s Analytics projections, while the average cost of an employer health-care plan for an individual increased 4% in 2020 to $7,470, according to the Kaiser Family Foundation nonprofit.

“With Covid, revenue coming into governments is diminished, making it even more difficult for cities and states to fund retiree health care,” said Marianne Steger, director of public sector and labor strategy for Willis Towers Watson, a multinational insurance brokerage and adviser.

The pandemic has crushed sales-tax income and tourism dollars, leaving local governments struggling to find ways to cut costs.

Over the past decade, New Jersey, Michigan, Connecticut, Kentucky and Texas reduced benefits, tightened eligibility requirements or increased premiums and fees, according to the National Association of State Retirement Administrators.

While state governments have legal protections for their workers’ pension plans, not all have protections for retiree health plans.

Most states rely on a pay-as-you-go basis for these benefits, said David Draine, senior officer of the public-sector retirement systems project for the Pew Charitable Trusts. This means money isn’t set aside to pay for these benefits in the future.

“We are seeing a greater divergence into places who are trying to prefund these benefits and those who aren’t,” he said.

Only three states—Alaska, Arizona and Oregon—have funded ratios for retiree benefits above 75%, according to a study published by S&P Global in December 2019. There were 17 states as of December 2019 that haven’t accumulated any assets to prefund benefits such as health care.

For those prospective retirees who have yet to qualify for Medicare, medical-benefit cuts can mean working longer hours for more years, or even picking up another job.

“It’s causing guys to have to work longer into their 60s and 70s, which could further impact injuries and health,” said Steve Teolis, 64 years old, a retired firefighter who lives in Canton, Ohio, and is a member of the Ohio Police and Fire Pension Fund.

“I was still able to retire, but I knew the consequences when I left, that I had to eventually pay for my own health care,” Mr. Teolis said.

The Ohio Police and Fire Pension Fund sponsored a self-insured health-care plan for its retirees from 1975 to 2018, said fund spokesman David Graham.

“With no dedicated funding source for this plan, it eventually became unsustainable,” Mr. Graham said in a written statement, adding that retirees would have had to increase their contributions to keep the health-care fund solvent.

When Mr. Teolis retired, he was eligible to receive health services through a broker who contracted the services for the fund. Because none of the hospitals or doctors near him were covered by the insurance, he decided to purchase a plan on the market.

Now the Ohio fund offers a health stipend in place of medical benefits.

The health plan “still costs me roughly $1,000 out of my pocket a month, and the stipend pays for about half of that,” Mr. Teolis said.

Health stipends are a less-expensive option for retirement funds. When people under 65 are able to choose their own health-insurance plans on the marketplace, the state sheds the risk and liability of large claims that might come with old age, Ms. Steger said.

Mr. Teolis said he is looking forward to when his Medicare benefits kick in next year, when he turns 65.

Medicare allows retirees 65 or older extra coverage for medical expenses if they already have a group health plan from a former employer.

Generally, Medicare pays for a retiree’s health-care bills first, and the group health-care plan coverage pays second.

Some funds such as the State Teachers Retirement System of Ohio, or STRS, are comparatively well-positioned to continue paying health-care benefits to retirees.

The net amount for STRS’s health-care fund reached $3.9 billion in 2019, according to the fund’s annual financial report, with a 182% funded ratio as of last month.

“What we had to do is look at what we could afford to offer and we had to rely on premiums and reimbursements, as well as our investment earnings,” said Nick Treneff, spokesman for the fund that serves about 160,000 benefit recipients.

This means if all goes as planned in the years to come, the fund is projected to be able to fully pay these benefits to retirees.

“If the fund didn’t offer health care, I would work longer than I planned to, and I would probably work until I was 65 and could qualify for Medicare, and that’s a very old age for teachers,” said Dale Price, a high-school math teacher for Toledo public schools and an STRS board member.

The Wall Street Journal

By Logan Moore

Nov. 7, 2020 5:30 am ET

Read the Current List.

Generous aid to state and local governments is less likely if Democrats fail to control both White House and Congress

The prospect of a divided government in Washington has been received rapturously in the stock market this week, but it hasn’t made municipal-bond investors happy.

“It’s probably one of the more negative outcomes for the asset class,” said Mikhail Foux, head of municipal strategy at Barclays PLC.

Prices on bonds issued by states and local governments fell relative to Treasurys in the immediate aftermath of the election and then rebounded, but didn’t receive the big bump many analysts had expected would follow in the event of a sweep by Democrats.

Yields on 10-year AAA, tax-exempt municipal bonds were 109.1% of 10-year Treasury rates Wednesday, up 2.4 percentage points from Tuesday, according to Municipal Market Data, reflecting an increase in investor concern about the risk of munis relative to U.S. government bonds. Yields fall when prices rise.

The importance of the Senate to muni prices was made clear as the week wore on. By Friday yields had slipped to 99% of 10-year Treasury rates as results in Georgia pointed to potentially two runoffs that could hand the Senate majority to Democrats come January.

For muni-bond investors, a divided government diminishes the probability of two scenarios that would have likely driven a rush into the asset class.

A Democratic sweep could greatly increase the prospects for a large state and local-government aid package meant to solidify the finances of many of the municipalities that have been crushed by the impact of the coronavirus pandemic. In addition, a Democratic House and Senate could raise the likelihood of large income-tax increases that would make tax-exempt munis more desirable to investors.

Also weighing on munis was the possibility that the bonds of Illinois could be rated as junk after voters there rejected a plan for a statewide tax increase on affluent residents.

Analysts and investors said muni bonds tied to sectors most affected by the pandemic such as tourism and mass transit were most likely to be hit by election developments.

Over the past several months, coronavirus budget shortfalls have dragged down the trading price of some municipal bonds, and October data from Municipal Market Analytics show new defaults in the roughly $4 trillion municipal market are at an eight-year high since the start of the pandemic.

Heading into this week, investors had said that muni bonds would rally if former Vice President Joe Biden defeated President Trump and the Democrats got clear victories in the House and Senate. Under that scenario, the White House and Congress might push for more aid to state and local governments or champion an infrastructure plan or income-tax increases.

But as of Friday morning, closer races and the reduced likelihood of Democratic control of Congress and the White House mean there are likely to be more limits on such moves. Senate Majority Leader Mitch McConnell has said he doesn’t favor using federal-assistance money borrowed “from future generations” to fill in state budget gaps.

Moreover, should Republicans maintain control of the upper chamber of Congress, a state and local-government aid package that the Senate might support could drive up the supply of tax-exempt debt, pushing down prices, analysts said. That is because even fairly stable governments might rely more on borrowing to manage through coronavirus-induced shortfalls. About $45 billion in local borrowing measures was on the ballot Tuesday, according to IHS Markit.

One source of new debt would remain limited under a divided Congress, however.

If Republicans stay in control of the Senate, Democrats are less likely to be able to end the ban added by Republicans in late 2017 on tax-exempt refinancing of municipal debt before the agreed-upon refinancing date. That would keep closed one longtime avenue for tax-exempt debt to enter the municipal market, helping to stabilize prices.

Before the ban, state and local governments could reap more savings from early refinancing as rates dropped. Hennepin County, Minn., for example, saved more than $30 million in 2017 by refinancing debt used to help build Target Field, where the Minnesota Twins play.

Many in the market were surprised by an outcome of the Illinois election.

Yields rose by about a third of a percentage point Wednesday on 10-year Illinois general obligation bonds relative to AAA rates and remained at about that same level Thursday, according to Municipal Market Data, after Illinois voters rejected the ballot measure proposing to increase taxes on incomes over $250,000.

A February poll of 1,000 Illinois registered voters by the Paul Simon Public Policy Institute at Southern Illinois University, Carbondale, found that they favored the tax by 2-1. During a state bond sale two weeks ago, investors agreed to prices significantly higher than where the state’s debt was trading Wednesday, Thursday and Friday, according to Municipal Market Data and the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access platform.

The state tax plan would have brought in more than $1 billion in yearly revenue, according to an estimate by Fitch Ratings. The refusal to approve the tax increases the chances that Illinois, currently rated one notch above speculative grade by multiple credit-rating firms, will become the only U.S. state in junk-bond territory.

“Unless there’s a surprisingly large federal stimulus bill or state lawmakers very quickly come up with another solution to raise a lot of new revenue, Illinois is likely to suffer a downgrade from at least one of the rating agencies in the next several months,” said Adam Stern, co-head of research at Breckinridge Capital Advisors.

Higher-grade bonds are expected to fare better and could even experience a longer-term bump as investors look to quality credits. The state of Florida, despite a tourism industry suffering from the pandemic, has benefited substantially from aid sent in the spring, said Ben Watkins, director of the Florida Division of Bond Finance.

“It’s been a godsend,” Mr. Watkins said. If cities and states don’t get much more aid, the resulting market distress “will be much more isolated than a widespread problem,” he added.

The Wall Street Journal

By Heather Gillers

Nov. 6, 2020 8:00 am ET

• Divided government promises less aid, obstacle to tax hikes
• UBS sees ‘headwind’ for credit quality of muni market

After Tuesday’s election, state and local government bonds staged their biggest rally in more than six months as traders wagered a divided federal government would spend less aggressively — a positive shift for investors worried about long-term inflation.

But municipal analysts say such an outcome, with Democrat Joe Biden in the White House and a Republican-led Senate, is less welcome to the $3.9 trillion market than a clean Democratic sweep.

That’s because a political gridlock would likely reduce the scope of the aid state and local governments will get to bridge budget gaps created by the coronavirus shutdowns. It would also reduce the odds of tax increases on the wealthiest Americans, which would make tax-exempt bonds more alluring.

Analysts from UBS AG said Thursday that a divided government increases the credit risk on the bonds, since any aid package is likely to be “less generous.” Citigroup Inc. analysts led by Vikram Rai said ahead of the vote that a Biden presidency with GOP control of the Senate was the “least bullish” scenario for the municipal-securities market.

A party split between a Blue White House and a Red Senate would likely mean “legislation for future fiscal aid packages will not flow through easily and aid will be less generous,” Citigroup’s analysts said. “This would not bode well for municipal credit.”

The outcome of the election is still in flux, with ballots being counted in several key states and President Donald Trump pushing legal challenges intended to sway it in his favor. Georgia may also need to hold a second run-off election for one of its Senate seats, which could help tip the balance of power in that chamber to the Democrats.

Treasury yields edged up slightly Thursday. But those on municipal bonds, which are far less volatile, dropped for a second day, with 10-year yields falling 2 basis points to 0.82%. That follows a 9 basis point drop Wednesday, the biggest one-day decline since mid-April.

The results are crucial for states and cities that have been battered as the pandemic cut into two major sources of revenue — income- and sales-tax collections — while the coronavirus drove the economy into the deepest downturn since World War II. That’s left states and local governments facing combined shortfalls of $450 billion through fiscal 2022, according to a September estimate by Moody’s Analytics.

Extending them federal aid was a key sticking point in negotiations over a new stimulus bill ahead of the election, with Trump mischaracterizing it as a bailout of states run by his Democratic foes. House Democrats included $1 trillion of such aid in the bill they passed.

“Fiscal stimulus to state and local governments is now expected to be less generous than under a Blue Wave scenario,” wrote analysts at UBS’s wealth management arm in a note published Thursday. “This represents a headwind for municipal credit quality.”

Biden’s campaign has reiterated that state and local government aid would be central to his economic stimulus. Jared Bernstein, a senior economic adviser to the campaign, said such aid is a high “fiscal multiplier” and would help to build “a fiscal bridge to the other side of the crisis.”

Such aid would prevent the need for large budget cuts, tax increases or layoffs that would deal a further setback to the economic recovery. It could also prevent a surge of borrowing by some states to temporarily paper over their shortfalls, which could put pressure on their credit ratings.

Kentucky Senator Mitch McConnell said on Wednesday it’s a “possibility” that he would support more aid for states and cities.

Lyle Fitterer, co-head of municipal investments at Robert W Baird & Co Inc speculates that a state and local government stimulus would be around $250 billion under a divided government.

“We would still argue that that’s plenty and that’s sufficient until we see what’s going to happen to the economy from a longer term perspective, so that gets them over the hump for the next year,” he said in an interview.

Bloomberg Markets

By Danielle Moran

November 5, 2020, 10:16 AM PST

— With assistance by Shruti Singh, and Martin Z Braun

• Market will go into ‘risk-off mode’ analogous to 2000 election
• Treasuries would likely gain, making munis look cheaper

A disputed presidential election could set off a Treasury rally that would make state and local government bond prices look cheaper — at least in comparison.

Citigroup Inc.’s municipal strategists said they foresee a “somewhat high probability” that a clear victor won’t quickly be known. If so, Treasury prices would likely rise as investors shift cash into the safest assets, widening the gap between yields on those securities and less volatile municipal bonds.

“We would expect a moderate Treasury rally as the market goes into risk-off mode as they await the adjudication of the election by SCOTUS,” Citigroup Inc. muni strategists led by Vikram Rai wrote, using the acronym for the U.S. Supreme Court.

While polls show Democrat Joe Biden leading in the polls, President Donald Trump and Republicans are poised to mount legal challenges in battleground states where a flood of mail-in ballots will continue to be tallied after Election Day.

Yet traders and fund managers may not need to gird for extreme volatility: While Treasuries would gain as the election is sorted out, muni-bond prices would likely be little changed in light trading, Rai said in a phone interview.

“If they don’t trade, the prints will remain stale and it will seem like the ratios are widening, it will seem like the spreads are widening.” he said. “That’s typical for what happens with all spread products whenever there’s a risk-off rally.”

Top-rated 10-year municipal bonds currently yield about 0.93%, or about 110% of comparable Treasury bonds, up from as little as 86% in August. That ratio — a key measure of relative value — signals that municipal bonds are growing cheaper when it rises and more pricey when it falls.

Treasuries rallied in the aftermath of the Gore versus Bush election of 2000, after a recount battle was ultimately decided by the Supreme Court. From Nov. 8, 2000 to December 12, 2000, when the Supreme Court ruled on the recount dispute, the 10-year U.S. Treasury rallied by about 0.52%, according to Citigroup. The 10-year was 5.87% on Nov. 8, 2000, so a comparable decline in percentage terms would be just 0.07 percentage point.

By contrast, if the election is decided without a dispute, Citigroup strategists expect bond markets will selloff moderately and stocks will rise “as investors breathe a sigh of relief at the thought of finally having this epic event behind us.”

Bloomberg Markets

By Martin Z Braun

November 3, 2020, 10:30 AM PST

Wall Street is betting on Joe Biden winning the presidency, Republicans controlling Congress, and a divided government. As a result, there’ll be a much smaller stimulus package in early 2021 and few, if any, tax hikes.

“Gridlock is the most likely outcome,” Brian Gardner, chief policy analyst for Stifel & Co. in New York, told clients in a report, predicting that the GOP would retain control of the Senate.

“Progressives had their wings clipped” Gardner wrote. Bad feelings between leftist Democrats and conservative Republicans “will likely prevent widespread collaboration.” He expects Congress, with the GOP in control of the upper chamber, will disappoint investors by spending less than the Democrats’ promised $2 billion to prop up the economy, though more highway spending is likely.

“The likelihood that the Senate will not flip to the Democrats gives comfort that major legislation is unlikely,” James M. Meyer, chief investment officer at West Conshohocken-based Tower Bridge Advisors, which invests over $1 billion, told clients in a note. “That leaves the economic reins in the hands of the Fed. Investors should like that.”

Meyer added that, if the Senate remains Republican, “the stock market barely reacts to social unrest, crude political speech, wars, or climate change.” It reacts, instead, to corporate profits and Federal Reserve interest rates. “No one can fault investors who want to see more of the same”: cheap borrowing rates, modest but steady growth, and “hopefully, an end to the pandemic sometime in 2021.”

In response, the Dow Jones Industrial Average jumped 367 points Wednesday to close trading at 27,847.

A divided Congress is unlikely to pass drug-pricing limits, so that’s a good outcome for pharmaceutical companies, while a Biden presidency, even without full congressional support, could bring “a more rigorous and thoughtful approach to science,” Geoffrey Porges, analyst at SVB Leerink, told investors in a note excerpted in Endpoints News, a drug industry newsletter.

The GOP majority “takes extreme scenarios off the table, including large tax hikes, major health care changes, and a huge stimulus package,” said Jeff Mills, chief investment officer of Bryn Mawr Trust Wealth.

Biden has said he would only raises taxes on the wealthy, on those who make more than $400,000 a year.

Strange as it sounds, divided governments often result in stock prices moving higher.

“Ultimately a gridlock scenario ends up being a good thing. We can start to focus on earnings, vs. handicapping major swings in policy,” Mills said.

Key takeaways for investors under this scenario include a weaker U.S. dollar, compared with other currencies.

“We see pressure on the dollar under a Biden presidency, with a reversal of tariffs and trade policy,” Mills said. Tariffs tend to tamp down growth internationally, so scrapping the Trump-era tariffs would have the opposite effect.

“If tariffs are reversed, on a net basis, that’s better for growth in international markets, but has the opposite effect on the U.S. dollar,” he said.

Interest rates: With a smaller stimulus package, that means less possibility of inflation in the U.S. economy, Mills said.

“If we get a stimulus package, it won’t happen until Congress is sworn in Jan. 3, and then likely wouldn’t pass before February,” he said.

Less inflation means less likelihood of higher interest rates, so yields on Treasury bonds have dropped early today in trading.

Health care: This sector, which includes insurers, biotechnology, and pharmaceuticals, is “the biggest winner,” Mills said, since changes to the Affordable Care Act or a so-called “public option” would be off the table.

“That was weighing on this area of the market.”

Big Technology: Should the GOP continue to control the Senate, regulatory scrutiny of Big Tech will likely fade, which prompted share prices of Facebook (FB) and Amazon (AMZN) to rise in early trading.

Marijuana legalization: Voters in New Jersey, Arizona, Montana, and South Dakota legalized recreational marijuana, and now 1 in 3 Americans live in a state where adult pot use is legal.

The results sent a mild ripple through the marijuana sector. Shares of Canadian companies were down 7 to 9 percent. Canadian cannabis companies cannot own assets in the United States and they cannot sell Canadian grown marijuana in the U.S. So they had nothing to gain from the four states legalizing.

Stocks in the American-owned multistate operators — among which Cresco Labs and Green Thumb Industries are the largest — were flat to slightly up, according to analysts.

“On the whole, it was a wash,” said Pablo Zuanic, analyst for Cantor Fitzgerald

Pot sales tax revenue will help cash-strapped New Jersey and towns that allow and tax marijuana retailers, but it could take “two to three years” to start collecting even limited revenues, and by then neighboring states will have likely cut into New Jersey sales, Baye Larsen, vice president at Moody’s Investors Service, said in a report.

More drug-related initiatives were also passed, with Oregon becoming the first in the nation to decriminalize possession of “hard drugs,” while D.C. voters approved a measure decriminalizing “magic mushrooms” and other organic psychedelics. Denver, Oakland and Santa Cruz passed similar proposals.

Muni bonds: “As the economy improves and we get to a vaccine, we should see higher [interest] rates no matter who is finally elected President,” wrote David Kotok, municipal bond and fixed income investor with Cumberland Advisors. For now, however, interest rates remain low.

“Munis should be fine,” he wrote, although these bonds “will probably not get a tax-increase boost right away, from a demand/supply standpoint they are in very good shape.”

Until a second stimulus bill passes Congress, “we may see some additional actions from the Federal Reserve to shore up markets if needed. We also expect further jawboning from the Fed to Congress on the importance of additional stimulus.”

Tax moves: Hank Smith, head of investment strategy at Haverford Trust said if Biden wins, and the Senate remains Republican, there is “no shot of any major legislation, tax increases or state tax changes” including a wealth tax passing Congress, he noted.

“We won’t see anything crazy in the cabinet because everything has to be approved by the Senate. Elizabeth Warren will not become Treasury secretary. All Biden will be able to do is issue executive orders,” Smith said.

Philadelphia Inquirer

November 5, 2020

Staff writer Sam Wood contributed to this article.

(c)2020 The Philadelphia Inquirer

Four Democratic senators, including Minority Leader Chuck Schumer, urged the Federal Reserve and the U.S. Treasury to expand emergency lending programs for businesses and states and municipalities to provide support while Congress debates additional fiscal stimulus.

In a Nov. 5 letter to Fed Chair Jerome Powell and Treasury Secretary Steven Mnuchin obtained by Bloomberg, the senators asked that the programs be extended beyond their Dec. 31 deadlines, and that changes be made to make them more broadly available. In addition to Schumer, a senator from New York, the letter was signed by Mark Warner of Virginia, Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts.

“Absent additional action, these facilities will fail to reach their full potential to support a robust economic recovery,” the senators wrote.

Both the Main Street Lending Facility, which is aimed at providing loans to small- and mid-size businesses and nonprofits, and the Municipal Liquidity Facility, for state and local governments of a certain size, have faced criticism for low participation. The Fed has argued that the muni facility has worked in that it provided a backstop for the market, which seized up in March but has functioned smoothly since then.

No Decision

Powell told a press conference Thursday that there had been no decision taken on whether to extend the facilities, which the Fed would do in coordination with the Treasury, while stressing that they had provided an important backstop during the coronavirus crisis.

“If things deteriorate, that would be the case where you’d want to maybe continue the facilities and maybe change them and maybe have new ones,” Powell said.

The Main Street program, which isn’t seen as merely a backstop, has so far only lent out $4.1 billion of a potential $600 billion. Critics say that banks won’t make loans to the companies that need it most right now, as they pose a higher risk. Without further stimulus from Congress on the immediate horizon, the Fed’s emergency programs remain one of the few life lines in an economy that continues to struggle through a sputtering recovery.

The Fed has already made several changes to the Main Street program to widen the pool of potential borrowers. Last week it lowered the minimum loan amount to $100,000 from $250,000 and increased the fees banks stand to gain from participating in it. The senators propose further lowering the minimum to $50,000, which would target small businesses who no longer have access to the shuttered Paycheck Protection Program, and further incentivize banks to lend through a more-attractive fee structure.

Muni Facility

Beyond extending the deadlines, the senators also ask for longer terms in the facility loans, beyond 3 years for the municipal program and 5 years for Main Street.

The Treasury Department said last month it opposes extending the $500 billion municipal lending program beyond the end of 2020 or easing the costly terms that have left it virtually unused. But that could change should there be a change in administrations following this week’s presidential election.

The senators also ask that the Fed and Treasury allow more localities to access the muni facility, which is limited by population size, and that they set up a program to buy muni bonds in the secondary market. The current facility buys bonds directly from the issuing entity, and some have argued that aid to the secondary market would be a better way to support local governments that have seen tax revenue plummet in the last few months.

They say that these changes would particularly help minority- and female-owned businesses, who tend to own smaller companies, and first responders, who also are also disproportionately female and Americans of color. They note that women and Americans of color have borne the brunt of the damage in the pandemic.

Bloomberg Business

By Catarina Saraiva

November 6, 2020, 8:54 AM PST

Gridlock in Washington doesn’t seem to be going away, and a divided government probably won’t be providing much more help to an economy still ailing from the coronavirus.

That’s bad news for the growth outlook. After all, the economy is still about 5% smaller than it otherwise would have been, with roughly 11.6 million Americans still unemployed or underemployed compared with February. And while roughly 20 million Americans have returned to work since April, the recovery hasn’t been enough to prevent millions of people being jobless for longer than 26 weeks. Moreover, many of those who have gotten rehired since April are nevertheless in a bad financial situation, given the low level of wages of the jobs that have been added and the depletion of household savings.

Continue reading.

Barron’s

By Matthew C. Klein

Nov. 6, 2020 4:30 pm ET

Drive-ins, weddings and dinosaur safaris help keep jobs—but can’t compete with game-day revenues

Darryl Dunn, the chief executive and general manager of the Rose Bowl Operating Co., would have been preparing to receive the biggest crowd of his year around now, had this year been normal. The 90,000-plus college football fans that usually flock to the Rose Bowl’s stadium in Pasadena, Calif., for the annual New Year’s Day game will be watching the action at home this time, in accordance with California’s social-distancing measures.

Mr. Dunn will instead be organizing the arrival of roughly 70 animatronic dinosaurs. The Rose Bowl’s parking lot in January will be transformed into a “Jurassic Quest” safari. The parking lot has already served as an outdoor concert and comedy venue, and a haunted drive-through at Halloween.

The stadium is one of many large sports venues testing new visitor experiences as the coronavirus pandemic chokes revenue from ticket sales. The venues hope to take advantage of one asset they still have: large amounts of indoor and outdoor space.

“Our revenue is based on people, and if we don’t have people, we don’t make money,” said Mr. Dunn. “But what we have got is space—so we said to ourselves, let’s use that to try and make lemonade out of this situation.”

The Rose Bowl’s foray into lockdown live experiences began in July, when a deal with the Tribeca Film Festival saw the stadium’s parking lot turned into a drive-in movie theater for 30 screenings across four weeks. Tickets cost $30 per vehicle, and attendees could purchase food and beverages from outdoor concession stands. Each screening of 500 cars sold out, Mr. Dunn said.

The Tribeca series put the Rose Bowl on the drive-in map, Mr. Dunn said, and led to other deals with entertainment companies such as Netflix Inc. and Walt Disney Co. ’s Hulu, which last month hosted an immersive “haunted drive-through forest” experience there as part of its “Huluween” horror movie screenings.

“We’ve literally transitioned our business to drive-in movies,” Mr. Dunn said. “That’s the business that we’re now marketing and selling.”

The Miami Dolphins have similarly found creative uses for their home stadium, which has reopened to spectators at a limited capacity of 13,000. Since June the National Football League team has turned the outside of Hard Rock Stadium into a makeshift theater. A 90-foot-wide screen, originally installed for the 2019 Miami Open tennis tournament, screened movies throughout the summer; attendees sat in tented pods dotted around the west and east lawns of the venue. The setup on Sept. 13 rebranded as the Gameday Theater and now shows home and away Dolphins games.

Meanwhile Gillette Stadium, best known as the home of the NFL’s New England Patriots in Foxborough, Mass., will later this month open a drive-through holiday lights display in its parking lots, allowing guests to navigate the 1.5 mile route in a car, bus or limo. The stadium in September also played host to Jurassic Quest, which “was such a huge success that two additional weeks were added to its original 10-day run to meet the demand for tickets,” a spokeswoman said.

Sports fans are longing to return to the stands, but health experts say stadiums are one of the highest-risk areas for coronavirus transmission. Dr. Peter Chin-Hong, an infectious disease specialist, walks us through how easily the virus could spread among the crowd. Photo: Associated Press (Originally Published May 17, 2020)
In the nation’s capital, soccer team D.C. United has been working with local fitness studios to host outdoor exercise classes on Audi Field. And the NFL’s Green Bay Packers last month turned home stadium Lambeau Field’s parking lot into a contact-free trick-or-treating zone for Halloween.

With no end in sight to social-distancing protocols, some stadiums plan to build dedicated venues that will let fans watch games and concerts at a social distance. The National Basketball Association’s Milwaukee Bucks earlier this year signed off on the construction of a multilevel “outdoor tailgating space” in the parking lot of their home arena, Fiserv Forum, which will let small groups of fans eat, drink and watch any action inside the arena from shipping-container pods and parking spaces overlooking new exterior screens.

The plans have been put on ice as the team awaits guidance from the municipal health department about permissible capacity, said Bucks and Fiserv Forum President Peter Feigin.

Nevertheless, Fiserv Forum from July to September held NBA Playoffs watch parties, turning the arena’s central court into a restaurant for groups of up to 10 people. Food and beverages were delivered to dining tables, a DJ provided pre-tip-off entertainment, and the games were streamed on the center hang screens. It was, Mr. Feigin said, “like the coolest basketball wedding you’ve ever been to.”

The success of the parties encouraged the Bucks’ sales and marketing team to develop Fiserv Forum’s fledgling hospitality offering, which—for now, at least—will be targeted at people looking for a space big enough to host socially-distanced parties, meetings and weddings of up to 100 people, Mr. Feigin said. Wisconsin limits public gatherings to no more than 25% of a room or building’s total occupancy.

The Bucks hope such an alternative revenue stream will at least cushion decimated ticket sales and keep staff employed if the coming basketball season goes ahead without spectators, Mr. Feigin said. Still, stadium executives are clear these new experiences will not come close to covering the losses of 2020, no matter how successful they have been.

Hard Rock Stadium does “not make much money at all” from its Gameday Theater, but its operation does create jobs for local people, said Todd Boyan, the Dolphins’ senior vice president of stadium operations. The Rose Bowl, which is owned by the city of Pasadena and operated as a nonprofit, will lose around $13 million this year, Mr. Dunn said.

That is better than the estimated $16 million loss it would have suffered without the drive-in theater and experiential events, but a far cry from its usual break-even forecast, he said.

“But this helps us keep jobs and it sends the right message to our community,” Mr. Dunn said. “We’re saying to the city: We’re still open—we’re just open a bit differently.”

The Wall Street Journal

By Katie Deighton

Nov. 3, 2020 5:23 am ET

• Results still pending on about $16 billion of proposed bonds
• About $3 billion of bond measures on ballots rejected so far

Americans approved at least $26.7 billion in state and local borrowing measures, more than half of the proposed bond sales on ballots across the country, while another $15.7 billion are still pending final results.

So far, only $2.7 billion of bond measures, or about 6% of those proposed, had been defeated as of Thursday, according to a preliminary tally based on data compiled by IHS Markit and Bloomberg. Voters rejected a $275 million measure in Amarillo, Texas that would have financed improvements to the civic center, and a $155 million school bond in Wausau, Wisconsin, also failed.

U.S. voters weighed proposals to issue an estimated $45 billion of bonds. That’s the lowest in a presidential election since 2012, according to data compiled by IHS Markit. The uncertainty over the pandemic’s impact on public finances prompted many municipalities to strike borrowing referendums from ballots. The results so far bode well for governments looking to improve schools, roads, bridges and hospitals.

Of the 10 largest bond measures on the ballot, six were approved, including a $7 billion bond proposal for the Los Angeles Unified School District and about $3.5 billion in borrowing for improvements and construction for Dallas schools. A $5.5 billion California bond offering for stem cell research was still pending results.

In California, which had the most proposed bonding on ballots across the country, voters approved about 75% of local revenue measures, including more than $12 billion of school bonds, based on preliminary results.

Bloomberg Markets

By Nic Querolo

November 5, 2020, 1:23 PM PST

— With assistance by Joseph Mysak Jr

In the long run, fundamentals matter in all financial markets.

Stocks can be overvalued for a time. But eventually a price decline or a surge in earnings reverses that condition.

Bonds can also be overvalued or undervalued. In these markets, analysts focus on cash flows instead of earnings to determine value.

Just as in the stock market, cash flow is measured with inflows and outflows.

In the municipal (muni) bond market, inflows consist of tax revenues. Outflows are expenses for government services.

A security could be undervalued, for example, if a tax increase is about to be implemented, that will ensure a state can repay its debt. If revenues decline suddenly, the bond could be overvalued.

Over the next few years, inflows for states should fall. The chart below shows that revenue is expected to drop by more than 11% in 2021.

Continue reading.

moneyandmarkets.com

Posted by Michael Carr | Nov 6, 2020

Investors are closely watching U.S. election results as expectations for a clear outcome dwindle.

As votes continue to be counted, investors are paying close attention to states such as Michigan, Pennsylvania, and Wisconsin. Market participants fear a contested election due to the potential for increased volatility amid concerns of a drawn-out count. The election has shifted attention toward mail-in ballots and final tallies, away from the groundbreaking quarter of economic growth reported last week.

On October 29, the Bureau of Economic Analysis (BEA) released U.S. GDP for the third quarter of 2020. The BEA estimates that real GDP accelerated at a record 33.1 percent annualized rate as the economy recoups lost ground from the first half of the year. The historic recovery reflects “continued efforts to reopen businesses and resume activities that were postponed or restricted due to COVID-19” the commerce department reported.

Despite the U.S. economy’s blockbuster rebound, election uncertainty and further stimulus bill delays led to a spooky October for investors as broad-based equity and fixed income markets ended the month lower.

Muni Market Performance

Municipals were not exempt from the month’s frightening performance as the broad market, measured by the Bloomberg Barclays Municipal Bond Index, concluded the month 0.30% lower. Despite tax-exempt’s lackluster month, the asset class outperformed taxable bonds with Treasuries ending the month 0.94% lower and the Bloomberg US Gov/Credit Index finishing 0.60% lower.

The AAA municipal benchmark yield curve continued its steepening trajectory, with yields in the two-year range concluding the month 4.8 basis points (bps) higher while ten and thirty-year yields ended 8.2 and 9.7 bps higher, respectively. As evidenced by the steepening yield curve, longer dated muni bonds (22+ years to maturity) lagged shorter dated peers for the month, producing a total return of negative 0.43%. Municipals with maturities in the one to five-year range led performance for the month, returning 0.15%, while intermediate term munis in the five to ten-year range ended 0.26% lower.

October marks six-straight months of high-yield (below investment grade) muni outperformance. The lower quality asset class ended the month in positive territory with a total return of 0.18%, according to the Bloomberg Barclays Muni High Yield Index. Despite the streak of positive relative performance, lower quality paper remains behind year-to-date, struggling to recoup losses from March’s drawdown. Through the October month end, the Bloomberg Barclays Municipal Bond Index has returned 3.02% for the year whereas the Bloomberg Barclays High Yield Municipal Bond Index has returned 0.54%.

Supply & Demand Situation

Municipal issuance saw a record setting month as issuers seek to capitalize on historically low interest rates. October’s almost $70 billion in new issue deals came to market against the backdrop of political uncertainty as municipalities rushed ahead of the election. Year-to-date supply was 26.6 percent higher than the same time last year, amounting to a total volume of nearly $415 billion.
Tax-exempt municipals continue to trade favorably despite the heightened political discourse. The two-year muni-to-Treasury ratio, which represents muni yields relative to Treasuries, ended October at 129 percent while the ten- and thirty-year ratios both ended the month at 107 percent.

As final tallies are counted in the U.S., municipal bonds may continue to see volatility as investors search for clarity around potential income tax changes and additional stimulus measures.

municipalbonds.com

by Corey Boller

Nov 04, 2020

Blue wave or red wave, it’s important to get bond exposure to offset equities in a portfolio, especially with market forces still tilting on the side of uncertainty. As far as where to look for special opportunities in the bond market, municipal bonds are worth a look to capitalize on short-term movements following a presidential election with the Invesco BulletShares® 2021 Municipal Bond ETF (BSML).

Municipal bonds give investors exposure to a bond market that historically has low default rates. While a company can fold, local government typically won’t so the safety of investing in debt paid for by taxpayers adds that extra layer of assurance.

As for BSML, the fund is based on the Invesco BulletShares® USD Municipal Bond 2021 Index. The Fund will invest at least 80% of its total assets in municipal bonds that comprise the index. The Index seeks to measure the performance of a portfolio of US dollar-denominated, issued by US state, state agencies, or local governments with effective maturities in 2021.

Continue reading.

ETF TRENDS

by BEN HERNANDEZ on NOVEMBER 5, 2020

Summary

• High yield munis continue to face enormous macro-pressure, as current revenues for local and state governments are well below their pre-pandemic levels.
• HYD holds a large amount of non-rated and non-investment grade bonds. These will be the first to face selling pressure if states do not get a better handle on their finances.
• The fund’s top state is Illinois, which is notorious for its budget problems. This past week, residents voted down a proposal to move to a progressive income tax, challenging future revenues.

Continue reading.

Seeking Alpha

Nov. 6, 2020

Read the Fitch White Paper.

Hospital systems will not just have to pay higher costs for personal protective equipment and other medical supplies but also for public construction projects, a new analysis from Moody’s said.

The analysis found that higher costs for materials and public spending constraints are going to likely increase the price tags for new construction projects for hospitals. At the same time, hospitals will face higher costs for PPE and other supplies as the supply chain shifts to more domestic manufacturing.

“Increased costs for essential medical supplies and building materials would impact not-for-profit hospitals and healthcare providers as well as public finance sectors with significant capital expenditure programs,” the analysis, released Tuesday, said.

The costs for construction projects are likely to rise due in part to higher costs for imported building materials as the global supply chain gets more fragmented due to the pandemic.

“Beyond major producing regions in the global construction supply chain such as Chinese copper and steel, Canadian lumber, Italian marble and ceramic tile from Brazil, Spain and Turkey, a range of other materials and equipment are sourced globally, including paving stones, lighting, electrical equipment and elevators,” the analysis said.

State and local governments, which are contributors to hospital spending projects, are also facing major demands to improve infrastructure and are pressured by pension liabilities.

Hospitals are also trying to recover from a massive hit to their patient volumes in March and April at the onset of the pandemic. The financial crisis has caused systems to preserve any liquidity to keep afloat as patient volumes remain below pre-pandemic levels.

This means that some cash-strapped hospital systems have paused construction projects. Michigan Medicine announced back in May that it will hold off on a $920 million, 12-story hospital construction project, according to the Detroit Free Press.

Hospital system ProHealth Care in Wisconsin suspended construction back in April of a new hospital in Mukwonago in the state. The hospital was supposed to be opened this summer.

Hospitals aren’t just struggling with how to move forward with infrastructure projects.

Throughout the pandemic, systems have faced higher costs for PPE and other supplies as demand has surged to unprecedented levels.

Moody’s report said that COVID-19 is likely to accelerate a more fragmented international trade and supply chain. The pandemic caused a major disruption to the overseas supply chain, especially in China where most PPE production is centered and massive delays occurred.

Some U.S. lawmakers have called for more production to shift to domestic manufacturers. Premier and 15 U.S. health systems invested in domestic PPE manufacturer Prestige Ameritech.

This trend likely means supply chains will get shorter as production moves to more local and domestic markets.

“A shift away from globalization has the potential to reshape or even reverse the build-up of production bases concentrated in China and other emerging markets,” Moody’s said.

However, any adjustments are going to require new costs like building new factories and training workers.

“A greater focus on local production would likely increase inventories, raise costs and lower margins,” Moody’s said.

These realignment costs will likely be passed on to hospitals.

“Higher production costs and more fragmented supply chains will increase costs for hospitals and procurement teams sourcing essential medical supplies,” Moody’s said.

fiercehealthcare.com

by Robert King | Oct 28, 2020 3:05pm

Partnership Pairs CUSIP Identifier with ACRe Data’s Municipal ESG Scores to Provide Quick Reference Snapshot of Values-Based Data for Investors

NEW YORK, Oct. 28, 2020 /PRNewswire/ — CUSIP Global Services (CGS) today announced a partnership with ACRe Data Inc. (ACRe) to provide two new mapping files that link municipal CUSIP identifiers with ACRe’s environmental, social and governance (ESG) scores and other geographic and socioeconomic data relevant to each municipal bond issuer. By pairing the CUSIP ID with ACRe’s localized ESG scoring data, the new data files will give institutional and retail investors a clearer perspective on ESG risk assessments of their municipal bond portfolios.

The CUSIP is a nine-character alphanumeric security identifier that captures the unique attributes of issuers and their financial instruments throughout the U.S. and Canada. In the municipal bond market, the CUSIP is used by investors to uniquely identify and track municipal securities and link them with the underlying issuing entity (e.g. a municipal water treatment facility or a school system). Through this partnership, CGS will link to geographic, socioeconomic and other regional data, along with ACRe’s ESG scoring related to each municipal ID.

Under the partnership, CGS and ACRe will link the first six characters of the unique CUSIP ID for each municipal issue with the geographic identifier (GEOID) hierarchy for the issuer, including state, county, city and school district level detail. The GEOID is a unique geographic identifier assigned by the U.S. Census Bureau to administrative/legal and statistical geographic areas. That GEOID-level detail is then paired with ACRe’s proprietary ESG scoring rubric, giving market participants insight into what level of exposure their municipal securities have to certain ESG attributes.

“This new capability addresses a longstanding issue in the U.S. municipal bond market, where interested parties could not easily make the link between underlying issuer and related census, socioeconomic, climate change and crime data,” said Scott Preiss, Managing Director and Global Head of CUSIP Global Services. “Through this partnership with ACRe, we are able to deliver even more transparency into the municipal bond market, facilitating links to data that can be used to inform risk models and values-based investment strategies. We are honored to be in a position to support the municipal market in a way that will benefit both institutional and retail markets.”

Initially, CGS will provide two new data files augmented with ACRe data:

• CGSACRe: This data file will link the first six characters of the CUSIP ID to the GEOID hierarchy for the issuer, supporting the mapping of state, county, city and census tract-level socioeconomic, climate risk, environmental and crime data to the underlying municipal bond issuer.
• CGSACReESG: This data file will include all of the information provided in the CGSACRe file, along with ACRe’s proprietary ESG scoring data, giving investors a direct link between underlying municipal issuer and ESG exposure.

“We’re thrilled to be working with CGS to start the process of embedding of vital ESG metrics into the foundational infrastructure of financial markets,” said John McLean, Managing Director of ACRe Data Inc. “We believe this standardized approach to ESG scoring and reporting will help market participants incorporate ESG into their workflows and speed the adoption of values-based investment strategies in the municipal bond market.”

For more information on the two new mapping files, please visit: https://acredata.com/cusip-%2F-geoid-file

About ACRe Data Inc.

ACRe Data Inc. is the largest provider of ESG Scoring, rankings, and underlying datasets for the U.S. Municipal Bond marketplace. ACRe was created in 2015 in response to the need for Alternative Data, and socioeconomic data for the universe of over 50,000 issuers of Municipal Debt in America. ACRe ESG scores and datasets cover all Cities. Counties, School Districts, and States. As of Q2 2020, ACRe utilizes seventy differing datasets for its calculation of ESG Scoring for the U.S. Municipal marketplace. For more information, visit www.acredata.com

About CUSIP Global Services

The financial services industry relies on CGS’ unrivaled experience in uniquely identifying instruments and entities to support efficient global capital markets. Its extensive focus on standardization over the past 50 years has helped CGS earn its reputation as a trusted originator of quality identifiers and descriptive data, ensuring that essential front- and back-office functions run smoothly. Relied upon worldwide as the industry standard provider of reliable, timely reference data, CGS is also a founding member and co-operates the Association of National Numbering Agencies (ANNA) Service Bureau, a global security and entity identifier database for over 34 million public and privately traded instruments, contributed by 116 national numbering agencies providing ISIN coverage across more than 200 jurisdictions.. CGS is managed on behalf of the American Bankers Association (ABA) by S&P Global Market Intelligence, with a Board of Trustees that represents the voices of leading financial institutions. For more information, visit www.cusip.com.

About The American Bankers Association

The American Bankers Association represents banks of all sizes and charters and is the voice for the nation’s $13 trillion banking industry and its 2 million employees. Learn more at www.aba.com.

For More Information:

Farhan Husain
farhan.husain@spglobal.com
212-438-3271

The U.S. Department of the Treasury (Treasury) recently updated its frequently asked questions (FAQ) related to the CARES Act. Treasury published the Coronavirus Relief Fund Guidance for State, Territorial, Local, and Tribal Governments (Guidance) originally on April 22, 2020, and updated the Guidance on September 2, 2020, for recipients of direct payments from the $150 billion Coronavirus Relief Fund (Fund). The Guidance sets forth Treasury’s interpretations on the permissible use of payments from the Fund (Fund Payments). Treasury published the FAQ concerning the Fund to supplement the Guidance on May 4, 2020, and has updated it several times through October 19, 2020. The FAQ provides additional guidance regarding eligible expenditures and the administration of Fund Payments.

The Act was signed into law by President Trump on March 27, 2020. The Act established the Fund, through which Treasury will make direct payments to each state, eligible units of local government, the District of Columbia, U.S. Territories (the Commonwealth of Puerto Rico, the United States Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands), and Tribal Governments. The direct payments can be used this year to help with state and local government expenses incurred in connection with the COVID-19 pandemic. Eligible state, territorial, local, and tribal governments were required to apply for direct payments from the Fund by April 17, 2020. According to a recent survey of 42 states and territories published by the National Governor’s Association, nearly 90% of the Fund Payments have been allocated and approximately 62% of the Fund Payments have already been obligated. The survey respondents indicated that they are on target to spend all of the Fund Payments by the CARES Act deadline of December 30, 2020.

The CARES Act only permits direct payments from the Fund to cover those costs that are necessary expenditures incurred due to the public health emergency with respect to COVID-19; were not accounted for in the budget most recently approved as of March 27, 2020 (the date the CARES Act was enacted) for the government entity; and were incurred during the period that begins on March 1, 2020, and ends on December 30, 2020. The Guidance offers Treasury’s interpretation of these limits and provides nonexclusive lists of examples of both eligible and ineligible expenditures. The FAQ clarifies that governments are responsible for determining what expenses are necessary and will not need to submit expenditures for Treasury’s approval. The FAQ also provides answers to specific questions relating to Treasury’s lists of eligible and ineligible expenditures in the Guidance.

Treasury provided additional guidance on the following topics, among others, in the FAQ:

• Safe reopening of schools – Fund Payments may be used to cover costs with providing distance learning or for in-person learning. As an administrative convenience, Treasury will presume that expenses of up to $500 per elementary and secondary student are eligible expenses and schools do not need to document the specific use of funds up to that amount. The FAQ provides examples of permissible costs and illustrations of the $500 expense presumption.
• Public health infrastructure – Fund Payments may be used to upgrade public health infrastructure, such as providing access to running water to help reduce further spread of the virus. Upgrades must be incurred by December 30, 2020.
• Public university student refunds – If the responsible government official determines that expenses incurred to refund higher education expenses (such as tuition, meal plans, and activities fees) to students are necessary and are incurred due to the public health emergency, then such expenses are eligible uses of the Fund Payments. Fund Payments may not be used for expenses that have been or will be reimbursed by another federal program (including the Higher Education Emergency Relief Fund administered by the Department of Education).
• PPP or EIDL Loan – A unit of government may use the Fund Payments to give a grant to a small business that has also received a Small Business Administration (SBA) Payment Protection Program (PPP) loan or an Economic Injury Disaster Loan (EIDL). However, the receipt of such loans would need to be taken into account when assessing whether the business’ need for further assistance from Fund Payments. If the grant from Fund Payments is provided to assist with particular expenditures, the business must not have used the PPP loan or EIDL for those expenditures.
• Types of employees whose payroll may be covered by Fund Payments – A state, territorial, local, or tribal government may presume that payroll costs for public health and public safety employees are payments for services “substantially dedicated” to mitigating or responding to the COVID-19 public health emergency.
• Transfers of Fund Payments to other government units – States receiving payments may transfer funds to a local government if it qualifies as a necessary expenditure incurred due to a public health emergency and meets other statutory requirements. Since local governments with populations of 500,000 or less were not eligible for direct payments from the Fund, states should transfer a portion of the Fund Payments they received to such local governments. The FAQ recommends using the per capita allocation formula in the CARES Act, under which a state should distribute 45% of the Fund Payments it received to local governments within the state with a population of 500,000 or less. States may impose restrictions on transfers of funds to local governments to the extent such restrictions facilitate the state’s compliance with the requirements in section 601(d) of the Social Security Act. Restrictions that do not directly concern the use of funds, such as restrictions on reopening, are not permissible.
• Ability to use Fund Payments in conjunction with other CARES Act funding or federal funding for COVID-19 relief – Expenses that have been or will be reimbursed under any federal program (including reimbursement pursuant to the CARES Act of contributions by states to state unemployment funds), are not eligible uses of Fund payments.
• Use of Fund Payments to support unemployment insurance funds and costs – States may use Fund Payments to support unemployment insurance funds separate and apart from the State’s obligation to the unemployment insurance fund as an employer to the extent costs incurred by the unemployment insurance fund are incurred due to COVID-19, and may also use Fund Payments for unemployment insurance costs incurred by the State as an employer if such costs will not be reimbursed by the federal government otherwise under another program.
• Inability of governments to use Fund Payments for government revenue replacement or capital improvement projects – Fund Payments may not be used for government revenue replacement, including meeting tax obligations or paying unpaid utility fees, or for capital improvement projects if they are not necessary expenditures incurred due to COVID-19. However, a government could provide grants to electricity account holders facing economic hardship to allow them to pay their utility fees and continue to receive essential services, if the government determined this to be a necessary expenditure.
• Return of unspent Fund Payments to Treasury – Recipients must return to Treasury unspent Fund Payments or amounts received from the Fund that have not been used in a manner consistent with the Guidance and section 601(d) of the Social Security Act. If Fund Payments are not used in a manner consistent with the Guidance and/or section 601(d) of the Social Security Act, Treasury would seek to recoup the funds from the government that received the Fund Payment from Treasury. Accordingly, governments that transfer a portion of their Fund Payments should ensure that the recipient government uses the Fund Payments appropriately.
• Deposit of Fund Payments in interest bearing accounts – Permitted as long as the recipient uses the interest earned or other proceeds of the investment only to cover expenditures incurred in accordance with the Guidance and section 601(d) of the Social Security Act.
• Retention and disposition of assets purchased with Fund Payments – Governments may retain assets purchased with Fund Payments if the purchase was consistent with the Guidance and section 601(d) of the Social Security Act. If the assets are disposed of before December 30, 2020, the proceeds are subject to the restrictions on the eligible use of Fund Payments.
• Audits – Fund Payments may be used to cover the expenses of an audit conducted under the Single Audit Act, subject to the limitations in the Uniform Guidance. Fund Payments are considered “other financial assistance” under the Uniform Guidance (2 C.F.R. Part 200) rather than grants. The Catalog of Federal Domestic Assistance (CFDA) number for the Fund is 21.019, pending completion of registration.

October 29, 2020

by the Public Finance Group

Copyright © 2020 by Ballard Spahr LLP.

www.ballardspahr.com

Key Takeaways

• The 20 largest U.S. cities’ pension funded levels and medians were stable entering fiscal 2020, but we expect mounting economic pressures to negatively affect funded ratios over the next few years.
• Despite elevated costs, contribution sufficiency for most cities surveyed did not meet our minimum funding progress (MFP) metric, and a handful did not even reach static funding payments necessary to preserve their current funded status. If budgetary pressures persist, funding discipline will worsen in the near term.
• Fixed costs remain elevated for most of the largest cities and are likely to grow as a percentage of expenditures if revenue growth stalls.
• Social risks related to changing demographics and service needs could further pressure budgets as costs grow.

Continue reading.

26 Oct, 2020

Key Takeaways

• State HFA issuer credit ratings remained strong and stable from 2019 through the first 10 months of 2020
• Of the 23 state HFAs we rate, 21 are rated ‘AA-‘ or higher
• Ratios in 2019 show mixed performance, but mostly positive trends with equity and assets at decade-long highs
• We expect 2020 financial ratios to deteriorate somewhat due to the COVID-19 pandemic, with higher delinquencies overall and stressed liquidity for some
• HFA management teams have prioritized equity preservation and built intrinsic liquidity for when they need it most; that time may be now.

Continue reading.

27 Oct, 2020

Key Takeaways

• If state and local government infrastructure investment had continued at the rate prior to the Great Recession, $1.5 trillion more in infrastructure spending would have occurred in 2009-2019.
• In the decade following the Great Recession, state governments devoted significantly less of their budgets to capital spending and reduced their overall debt burden.
• As COVID-19 restricts consumer travel, billions of transportation activity-derived revenues that fund capital projects are at risk.
• Federal stimulus was vital following the Great Recession to prevent steeper declines in capital spending, but there is no agreement on a new comprehensive infrastructure spending plan.

Continue reading.

29 Oct, 2020

Key Takeaways

• The U.S. not-for-profit senior living sector demonstrated consistent occupancy, solid investment income, and improved balance sheet metrics in 2019 that allowed most of our rated organizations to enter the pandemic in a position of strength.
• Rating distributions shifted slightly, although rating actions and outlook changes are infrequent, suggesting consistent credit profiles.
• Macroeconomic trends have a moderate to high influence on the sector, with favorable industry demographics helping to partially offset recessionary pressures.
• The pandemic’s effect on our rated U.S. not-for-profit CCRC entities is predominantly neutral to date, although challenges persist.

Continue reading.

29 Oct, 2020

Read the S&P Report.

Read the S&P Report.

Acute physical risks, caused by extreme weather events such as hurricanes, wildfires, and tornadoes can materialize at any time, and can cause significant physical damage and disruption. Across U.S. public finance (USPF), these events can have greatly varied credit impacts. Leading up to and immediately after the event, management teams are focused on emergency responses, public health and safety, and supporting the general welfare of residents. But while they are engaged in fulfilling their immediate responsibilities, credit market participants want to understand the potential short- and long-term impacts on credit. S&P Global Ratings strives to relay any such impact in our ratings.

(The most unanticipated event of 2020, thus far, has been the COVID-19 pandemic, which we view as a social event through its impact on health and safety. For a reference to our coverage of the credit effects of the pandemic, see “COVID-19 Activity In U.S. Public Finance.”)

However, this report focuses on extreme weather events that have occurred recently and the potential credit implications. It summarizes our process and considerations for analyzing and updating the market about our ratings across our USPF sectors during and after an extreme weather event. We also highlight sector-specific issues that we view as key credit considerations during these events.

Continue reading.

2 Nov, 2020

Commodities don’t have the panache of most equities but it’s an opportunity investors can consider when it comes to investing in needs versus wants. In the case of water, something the world obviously needs, clean water initiatives can be vital for exchange-traded funds (ETFs) that focus on infrastructure.

Today’s contentious times amid the pandemic stress the importance of ensuring water resources are untainted. One mechanism for this water is the S&P Global Water Index, which tracks 50 of the largest publicly traded companies involved in water-related business activities.

“As these demands for clean water increase, companies involved in water-related business activities stand to grow in the coming years,” wrote Tianyin Cheng, Senior Director, Strategy and Volatility Indices at S&P Dow Jones Indices. “Allocation to water can be systematically captured by rules-based, transparent index construction. Market participants could utilize index-linked water strategies to gain exposure to water, manage water risk, express their sustainability views, or allocate as part of a broader natural resource theme.”

Continue reading.

ETF TRENDS

by BEN HERNANDEZ on NOVEMBER 2, 2020

Analysis | Case Studies

The impact of the COVID-19 public health emergency has stretched beyond any global catastrophe experienced in the past century. With cases of the virus increasing at an astounding rate in the month of March, President Trump declared a national emergency. This set off a chain of events culminating in an extraordinary spike in unemployment rates amid a crashing economy which put immense pressure on State and local governments to continue providing public services through the turbulence of rapidly decreasing revenues. Congress was pushed to take urgent action to address the landslide of challenges that erupted as the country fell into a deadlock, and on March 27th, the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law.

The Coronavirus Relief Fund

Title V of the CARES Act established the Coronavirus Relief Fund (CRF). Under the fund, $150 billion was allocated to State and local governments with populations over 500,000 to be used for costs meeting the following conditions:

1. Costs must be necessary expenditures incurred due to the COVID-19 public health emergency.
2. Costs must not have been accounted for in the budget most recently approved as of March 27th for the State or government.
3. Costs must have been incurred during the period of March 1 – December 30, 2020.

Continue reading.

A new research report completed by Greenwich Associates through a partnership with BDA, on bond trading and dealer adaptability in 2020.

Read the Report.

Bond Dealers of America

October 28, 2020

Fitch Ratings-New York-30 October 2020: Not-for profit (NFP) hospitals that treated more coronavirus patients in the spring and received high-impact funding under the Coronavirus Aid, Relief and Economic Security (CARES) Act have generally seen stronger YTD financials than non-coronavirus hot-spot hospitals that had lower patient volumes earlier in the year, Fitch Ratings says. These disparities should dissipate in 2H20 as most hospital volume has rebounded throughout the country, although full-year 2020 financials will continue to be marked by uneven results in 1H20. The targeted supplemental aid, which particularly benefited large hospitals in the northeast, and management’s ability to quickly flex labor costs, contributed in part to the disparity noted by Fitch in financial results through the end of June and July.

Timing and eligibility criteria for the targeted high-impact funding distributions favored larger hospitals due to the required caseload threshold. The first allocation totalled $12 billion for 395 hospitals in May, providing $76,975 per COVID-19 patient. The second distribution, totalling $10 billion in July, went to 695 hospitals and provided $50,000 per COVID-19 patient. These funds were in addition to payor reimbursement for COVID-19 patients and general CARES Act stimulus funds. Infections subsequently increased in areas not initially hard hit, but there has been no additional high-impact funding since the July distribution covering COVID-19 admissions through June 10.

High-impact funding was provided as part of the Provider Relief Fund, allocating $175 billion to hospitals and healthcare providers under the CARES Act and the Paycheck Protection Program and Health Care Enhancement Act. Over $120 billion has already been distributed, and providers are currently applying for the next $20 billion allocation as part of the phase 3 general distribution.

Hospitals in current surge areas will not likely see the level of targeted hot-spot funding that was initially distributed to hospitals in the first few months of the pandemic, and will instead need to manage their COVID-19 cases while remaining operational for their non-COVID-19 volume. Providers should be able to recover some portion, but not all, of their coronavirus-related losses with the phase 3 distribution. Other future funding would also help, although any additional federal aid beyond the current $175 billion program would need Congressional approval.

Besides high-impact funding, labor and geographic location also contribute to uneven financial results among hospitals. With current volumes settling around 95% of previously expected volumes, hospitals with greater labor flexibility are expected to report higher operating results as they better align cost structures to new lower revenue expectations. Staffing is a critical consideration during the pandemic, and many hospitals did not reduce staff in anticipation of an increase in coronavirus cases or because they operate in competitive markets where layoffs would endanger future recruiting and retention. Hospitals with a significant union presence may also have less flexibility to respond to changing staffing needs during the pandemic.

In terms of location, providers with a robust local market to sustain demand for services have done better during the pandemic than those that rely on out-migration from other areas or international referrals, as travel has been disrupted. The sudden but temporary dislocation in residential patterns in high-cost, compact urban markets due to mostly younger residents and families riding out the pandemic in other locations has also contributed to market shifts. These factors highlight the impact of a hospital’s local payor mix, which could deteriorate longer term if the high number of unemployed transition to Medicaid or uninsured status.

Contact:

Olga Beck
Senior Director, US Public Finance
+1 212 908-0772
Fitch Ratings
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.

Read the Fitch Report.

Thu 29 Oct, 2020 – 11:16 AM ET

Fitch Ratings-New York-28 October 2020: Fitch Ratings expects most U.S. toll roads have enough financial flexibility to weather the global coronavirus pandemic provided that economic conditions continue to improve. However, the Fitch peer review report shows that some issuers with tighter financial metrics at their rating levels or weaker regional conditions are more likely to be downgraded due to the coronavirus pandemic.

Since Fitch’s peer review last year, Fitch upgraded two toll road systems prior to the onset of the pandemic and downgraded two others. Additionally, Fitch revised the Rating Outlook on eight toll road systems to Negative but has since returned the Outlook to Stable for two issuers who implemented measures including toll increases to counteract pandemic-related losses.

Already weighed down by legal uncertainty surrounding its governance structure, Fitch downgraded Miami-Dade County Expressway (MDX) back in February. Making matters worse over time will be MDX’s exposure to coronavirus-related traffic and revenue losses. “MDX could face legal and political challenges in implementing countervailing measures such as toll rate hikes until a final judicial decision is rendered,” said Director Anne Tricerri.

Toll roads already feeling more acute effects of the pandemic include Dulles Greenway, which Fitch downgraded in April reflecting weaker revenues caused in part by the coronavirus crisis. “Resolution of the Negative Outlook for Dulles Greenway will depend on near-term traffic and operational performance in conjunction with clarity into near-term toll increases necessary to maintain adequate coverage levels and financial flexibility while meeting near-term capital needs,” said Tricerri.

Fitch has also launched its 2020 update to the interactive peer study for U.S. toll roads, the Fitch Analytical Comparative Tool, or FACT, concurrently with the release of today’s peer review.

Fitch’s 2020 U.S. Toll Road FACT, contains comparative financial data for a portfolio of 42 publicly rated operating U.S. toll road issuers and enables graphical plotting of key metrics by region, facility type, asset type and rating. The database includes five years of data, providing a comprehensive base for historical trend analysis specific to individual issuers or within the peer group at large.

Fitch’s latest ‘Peer Review of U.S. Toll Roads’ and the ‘2020 Fitch Analytical Comparative Tool – U.S. Toll Roads’ are available at ‘www.fitchratings.com’.

Contact:

Anne Tricerri
Director
+1 646 582-4676
Fitch Ratings, Inc.
300 W 57th St.
New York, NY 10019

Scott Monroe
Senior Director
+1 415 732-5618

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

Additional information is available on www.fitchratings.com

Fitch Ratings-New York/Chicago-28 October 2020: The coronavirus has heightened enrollment and revenue pressures that higher education faced prior to the pandemic, Fitch Ratings says. Universities already navigating demographic changes, tuition affordability concerns, discounting pressures, and state funding declines have less flexibility to manage the pandemic revenue hit to operating budgets. We anticipate rating changes will remain predominantly negative into 2021.

We expect more highly selective and flagship research universities to weather these challenges due to stronger demand profiles and greater revenue diversity. Some smaller, rural campuses that preserved or even grew enrollment are also bright spots, likely benefitting from the perceived safety and institutional trust of their student base. However, other private colleges with limited financial strength may face steep budget cuts and outsized use of reserves, and have borne the brunt of most negative rating actions to date in 2020.

According to preliminary National Center for Education Statistics data, enrollment across the US higher education sector fell 3% in fall 2020 over last year, better than Fitch’s initial expectations for a 5%-10% decline, with significant variability by institution type. Undergraduate enrollment fell 4% overall, with a 2% decline at four-year non-profit private institutions. First-time students declined 16%, accounting for nearly 70% of the undergraduate decline. Public two-year/community college enrollment fell by 9.4% yoy, and international enrollment saw a sharp 13% drop following several years of milder, consistent declines.

Continue reading.

• Monthly sales hit $71.2 billion, far more than 2017 peak
• Governments seize on low rates, calm in the bond market

America’s state and local governments unleashed a record-setting torrent of bond sales this month.

Racing to seize on low interest rates and financial-market calm ahead of the presidential election, public officials sold more than $71 billion of debt this month, according to data compiled by Bloomberg. That’s 22% more than the previous record in December 2017, when governments hurried to borrow before President Donald Trump’s tax-law yanked the subsidies from a major refinancing technique.

The borrowing surge reflects the unpredictability associated with the election and a surging pandemic that is threatening to leave governments contending with deepening financial strains as shutdowns hit tax collections.

“Because of the uncertainty tied to the election outcome you are looking at a lot of issuers rushing to market,” said Dennis Derby, a portfolio manager for Wells Fargo Asset Management, which has about $40 billion in muni assets under management. “Issuers who have come to market in the month of October have enjoyed very strong market access.”

The October surge was easily absorbed by the market, where yields barely budged and governments have had little trouble raising money despite the toll of the pandemic. It’s unclear, however, how the financial markets will respond to the outcome of next week’s election, given than President Donald Trump’s surprise victory four years ago triggered a bond-market selloff that temporarily sent yields surging.

The pace of debt sales is anticipated to slow dramatically since so many deals were moved up into September and October. Citigroup Inc. analysts said in a note Friday that they expect new offering to plunge by 70% in November due to the election and Thanksgiving holiday.

Buyers have scooped up municipal debt amid indications that the pipeline of new deals will slow in the last two months of the year, leaving 10-year benchmark yields at about 0.92%, up only slightly from 0.83% at the start of the month. The volume of municipal debt sales so far scheduled for next month stands at about $11 billion, almost one-third what it was in mid-October, according to data compiled by Bloomberg.

During the recent “burst of supply,” muni bonds “are holding in,” said Kathleen McNamara, senior municipal strategist for UBS Financial Services.

Bloomberg Markets

By Shruti Singh

October 30, 2020, 10:44 AM PDT

Investors are demanding more transparency around green municipal bonds as the bonds grow in popularity, according to Amy Hauter, partner, portfolio manager and head of sustainable fixed income at Brown Advisory, a global investment firm based in Baltimore.

Investors want additional information about whether sustainable municipal bonds are successful in fulfilling their pro-environment missions, Hauter said in a recent interview. Brown Advisory’s sustainable fixed-income strategies include its Sustainable Core, Tax-Exempt Sustainable and Sustainable Short Duration composites.

“Municipal bonds are sometimes overlooked by investors when they are considering sustainability, but these bonds can fund sustainable projects” that help the community, she said. In particular, the pandemic has highlighted the need for sustainable projects, particularly for underserved populations. “The pandemic has highlighted the need for such things as affordable housing and mental health facilities and services.”

Brown Advisory adheres to the International Capital Market Association’s guidelines for sustainable investing, which means the proceeds of the bonds are to be used exclusively for green and social projects, according to the website for ICMA, a not-for-profit membership association with offices in Zurich, London, Paris and Hong Kong that includes private and public sector bond issuers.

Since the pandemic hit, the sale of green bonds has grown, as has the transparency, Hauter said, but the amount of transparency can vary from one project to the next.

“Increasing transparency is where investor engagement comes in,” Hauter said. Issuers need to be more engaged with the buyers” to provide information on what guidelines the project developers are adhering to. Definitions for what is considered a green or sustainable bond vary and more clarity is needed, she said.

In addition to the growth in sustainable bonds, the pandemic brought to light the need for projects that serve underserved populations, Hauter added. “The types of projects are changing. For instance, colleges and universities are issuing bonds to include students who may not have the internet access or the technology they need,” she said.

To further sustainable causes, Brown Advisory favors bonds in the university and college sector, for hospitals that are addressing health-care disparities, public transit and water and power utilities. Public transportation ridership is rebounding from a low during the first and second quarters, she said.

“You would think people would have pulled back from sustainable investing, including investing in green munis, this year as they focus on other more immediate things,” Hauter said. “But that did not happen.”

Because there is more interest in green municipal bonds, regulatory pressure probably is going to increase around what it means to issue green and sustainable bonds, she predicted.

FINANCIAL ADVISOR

NOVEMBER 2, 2020 • KAREN DEMASTERS

In the run-up to the presidential election, BrandeisNOW asked faculty to provide analysis and insight into some of the most pressing issues facing the country. This is part of the series. Dan Bergstresser is an associate professor of finance at Brandeis International Business School.

The COVID-19 pandemic and resulting economic disruptions have cost the United States more than 200,000 lives and led to the steepest drop in gross domestic product (GDP) in history.

The effect of this crisis on state and local budgets has been particularly sharp and has come at a time during which the need for services provided by state and local governments is greater than ever.

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, also known as the “CARES Act.” It included $150 billion in direct support to state and local governments, but it was still not sufficient to help states and localities avoid steep cuts in services.

An additional stimulus bill, the Health and Economic Recovery Omnibus Emergency Solutions Act (the “HEROES Act”) has been introduced in the House of Representatives. It includes an additional $400 billion in assistance to state and local governments, but the chances of passage appear very cloudy at the moment.

Although the federal government will employ deficit spending to smooth the effect of temporary economic disruptions, states and localities generally do not employ deficit spending to cover cyclical gaps in operating budgets.

Without more federal support for states and localities job losses and cuts in services will be inevitable. These cuts will compound the economic disruption for people who depend on their services, in particular families with school-age children and especially lower-income families.

The extent to which states and localities have been affected by the pandemic and recession depends to some degree on how they generate revenues to fund their budgets.

Typically, about a third of state revenues come from the federal government. The rest mainly comes through state-imposed taxes on income, business and retail sales. At the local level, about a third of revenue comes from transfers from states to localities, with the bulk of the remainder coming from property taxes.

But there are differences across the states, with states like Oregon and New York being particularly reliant on income taxes for revenue, while Florida and Texas are particularly reliant on sales taxes.

These differences in revenue sources and the unusual nature of this pandemic-driven recession make their impact on state and local budgets different from place to place.

The impact on retail sales and sales taxes have so far been greater than the impact on personal income, so the effect of this recession on state and local budgets will be larger in places that are more dependent on sales taxes and in places where sales and income tax receipts have been more affected by the pandemic.

For example, the Colorado legislature is now forecasting a 20 percent decline in revenue in 2021, while in Idaho the state is now forecasting a 1 percent decline.

Investing in our families and school-age children is one of the most important and highest return investments that our society can make. Cuts to these services will affect our country for years to come.

brandeis.edu

By Dan Bergstresser

Oct. 28, 2020

The $3.9 trillion municipal bond market could be a big winner if Democrats sweep the White House and both houses of Congress. Such a “blue wave” scenario is now given odds of better than 50% in betting markets.

The muni market would benefit in multiple ways. Financially strapped state and local governments could be expected to get relief from a stimulus bill along the lines of the $2.2 trillion bill that passed the House of Representatives, providing about $436 billion to them.

“A Democratic sweep is a grand slam for state and local governments,” says Dan Clifton, head of policy research for Strategas. He points to a stimulus bill and the prospect of additional federal Medicaid funding for states, as well as the potential reinstatement of full deductibility of state and local taxes.

Such a move could curb the flight of wealthy residents from high-tax states like California, New York, and New Jersey to places like Florida and Texas, which have no income taxes.

Joe Biden wants to raise the top federal income-tax rate back to 39.6% from 37%, and that would enhance the allure of munis for individuals. Biden also wants to raise the corporate tax rate to 28% from 21%, and that would probably increase demand from corporations for muni debt.

“If we get a blue wave, it’s likely that tax-exempt bonds would do very well,” says Peter Hayes, head of the municipal bond group at BlackRock. “Munis are very cheap and are not factoring in higher tax rates.”

Triple-A-rated 10-year munis now yield about 0.95%, 110% of the yield on the 10-year Treasury note, now at 0.85%. That is a high percentage relative to the past 20 years. It has usually been below 100%.

The yield on the 10-year muni is up from a low of 0.55% in August but is historically low, dampening demand from individual investors. Hayes sees a favorable backdrop for the rest of the year.

Muni issuance was heavy in October, at about $70 billion, although a growing chunk of that—now about 30%—is in the taxable muni market. Muni supply is expected to fall in November, and that could bolster the market.

While state and local governments are apt to get more financial relief from a Democratic-controlled Washington, long-term fiscal challenge stemming from the pandemic are likely to persist. Barron’s highlighted this risk in a cover story in August.

“There’s an enormous loss of revenue going on, and we don’t know how long it will last,” Richard Ravitch told Barron’s at that time. Ravitch is the former Metropolitan Transportation Authority chairman who helped pull New York City back from the brink of bankruptcy in the mid-1970s. He is now director of the Volcker Alliance, a nonprofit group that advises on effective government.

The metropolitan New York area has been hard hit economically by Covid-19. Moody’s Investors Service recently downgraded the credit ratings of New York City, New York state, and the Metropolitan Transportation Authority, which operates the city’s subways, buses, and commuter rail networks.

The city and state remain highly rated at double-A2, while the MTA, which faces a grave financial outlook because of sharp declines in ridership, has a still-solid investment-grade rating of single-A3.

Reflecting fears about the region’s outlook, long-term New York City debt yields about 2.5% and MTA debt yields 4%. That compares with a yield of about 1.75% on top-grade long-term munis.

Investors, however, may want to steer clear of MTA bonds, given the agency’s high debt load of $44 billion, large projected deficits in the coming years, and a need for federal financial help.

Barron’s

By Andrew Bary

Updated November 1, 2020 / Original October 30, 2020

For all the years Donald Trump has lived in Manhattan, he’s cast American cities as the enemy during his presidency.

Big cities—in particular those run by Democratic mayors—earned particular vitriol from the president, who has deemed them “rodent infested,” “disgusting” places sieged by violence “worse than Afghanistan.” He’s sent federal agents in to crack down on protests against the wishes of local leaders, threatened to withhold federal funding from “anarchist” and “sanctuary” cities, and castigated local leaders when they fight his policies.

The antagonistic relationship has many in local government banking on a reprieve if former Vice President Joe Biden ousts Trump on Election Day.

“The Trump administration has a hostile relationship with local government,” said Mitch Landrieu, the Democrat mayor of New Orleans from 2010 to 2018 and former president of the U.S. Conference of Mayors. “There has never been a level of hostility that exists today in previous administrations.”

But the animosity hasn’t undercut all of the Republican president’s relationships with local government—Trump received a standing ovation when he spoke at the National Association of Counties conference in March and promised to continue to be a “friend, partner, ally and resource” to local governments. It was the first time a sitting president had addressed the NACO conference, which includes both rural and urban county leaders, a symbol some Republican officials say reflects the Trump administration’s accessibility to local government officials.

“The president and his directors have been available,” said Ron Wesen, a commissioner in Skagit County, Washington and the past president of the National Conference of Republican County Officials. “It was really impressive to me the outreach the administration had.”

The clear partisan split isn’t as evident when it comes to the most pressing crisis that local governments currently face: the coronavirus pandemic. Lobbying groups for counties and cities agree that much more federal assistance is needed, both to pay for the Covid-19 response and help governments deal with budget shortfalls that have already resulted in furloughs and layoffs.

This spring, Trump at times signaled a willingness to consider more direct aid for state and local governments than was included in the CARES Act package approved in March. But that sentiment has since largely evaporated. More recently, the president has echoed Senate Republicans who’ve said they don’t want to “bail out” Democratic cities and states they describe as poorly run.

That means the outcome of the election could be a determining factor in whether states and localities get more aid. The Democratic-led House passed legislation in May that would have provided nearly $1 trillion in direct aid to state and local governments. On Thursday, House Speaker Nancy Pelosi described state and local assistance as one of the key sticking points in working out a new deal.

While Senate Republican resistance means a Democratic takeover of the Senate is probably a necessary condition for a sizable new package, Biden is vowing to help and has promised local leaders direct access to the White House.

“We should have a local emergency fund that drives resources straight to you, expand your health infrastructure, reimburses overtime pay for the essential workers and first responders,” Biden said during an address to the U.S. Conference of Mayors in late September. “Whatever your community needs the most.”

Cooperation with Biden

Political observers say there is plenty of reason to believe a Biden administration would approach relationships with local governments differently than Trump. Biden has a strong record of engaging local leaders and taking the time to understand how local government works, said Frank Shafroth, the director of the Center for State and Local Government Leadership at George Mason University.

In particular, Shafroth points to Biden’s role as vice president working with the city of Detroit after the city filed for bankruptcy in 2013. Detroit’s was the largest municipal bankruptcy filing in U.S. history. Under President Obama, Biden helped the city secure federal transportation funding for several projects and was credited as advocating for the city’s needs throughout the process.

“It shows he has experience and that he appreciates those cities,” Shafroth said of Biden’s interactions with city leaders. “He listened and had he not listened, I don’t know if Detroit would exist as a city today.”

It’s that willingness to listen and get involved at the local level that Debbie Goettel, chairwoman of the National Democratic County Officials, said would be beneficial in helping to get local governments back on track as they emerge from the coronavirus pandemic. Collaborating with the Trump administration on infrastructure projects, the type of investments that could help revive local economies post-pandemic, has been slow going, Goettel said. She placed the blame on the departure of federal employees with experience working with local governments, including many who have not been replaced.

“It’s been harder and it’s been slower,” said Goettel, a commissioner in Hennepin County, Minnesota, specifically citing delays on a light rail project that only recently received grant funding from the Federal Transit Administration.

She believes a Biden administration would take requests from local governments more seriously.

“Trump is listening at a much higher level. Biden would really get down to a local level and really listen to us,” Goettel said.

Last month, Biden told local government leaders that improving relationships with them would be a goal of his administration should he win.

“Whether your city is red or blue, I’m going to be there,” Biden said during the mayors’ conference. “Every American community deserves the full support of the American president. The worst thing that a president can do is drive wedges that make your job tougher because he thinks it benefits him or stirs up chaos in your communities.”

Trump’s Open Door

Despite Trump’s public brawls with big-city mayors, some Republican local leaders said they have found his administration to be particularly accessible.

The “back channels were always open” when it came to discussions between the administration and state and local governments about increased federal funding as part of a coronavirus stimulus bill, said Bryan Barnett, the Republican mayor of Rochester Hills, Michigan and past president of the U.S. Conference of Mayors.

“We found at times an ally in the White House, at times an obstacle,” Barnett said of the still unsuccessful discussions. “We were always talking about numbers we thought that could work.”

The Trump campaign did not return a request for comment inquiring about his record on working with cities.

Trump has prioritized “law and order” on the campaign trail and the U.S. Department of Justice has provided federal resources and pushed efforts to crack down on violent crime in a handful of Midwestern cities. Trump continues to have high support among police and sheriffs.

However, when local government leaders have balked at enforcing Trump’s policies, the president has tried to counter by taking away federal money.

Early on in Trump’s tenure, the Justice Department sought to link the award of law enforcement grants to local and state cooperation with federal immigration authorities as part of the president’s bid to crack down on illegal immigration and “sanctuary cities.” But the policy has been stymied, as three of four federal appellate courts have ruled against Trump’s sanctuary city policies.

More recently, Trump tried a similar tactic when he announced an executive order that would seek to limit federal grants to “anarchist” jurisdictions that he said did not do enough to contain violence during national protests this summer against police brutality. Among the grants the White House has considered targeting for cuts are millions of dollars for coronavirus relief, as well as support for HIV treatment and health screenings for newborns, Politico reported this month.

“We have other cities that are out of control; they’re like warzones,” Trump said during a press conference over the summer. “We’re not going to put up with that.”

Cities’ Needs Don’t Change

No matter who is declared the winner of the presidential election next month, the most pressing challenges facing cities will remain the same, Barnett said.

“Mayors are going to get up on Nov. 4 and continue to have to lead their cities,” he said.

Because so many pandemic-related challenges—from reopening schools to help with distribution of any future Covid-19 vaccine—are local responsibilities, it will be important for the winner to forge strong working relationships with local governments, political observers said.

“This country is made of local, state, and federal governments,” said Wesen, the Washington state county official. “Our taxpayers expect us to work together.”

Route Fifty

By Andrea Noble,
Staff Correspondent

OCTOBER 29, 2020

This week Fitch published the 2020 State Liability Report – an annual survey of state direct debt and pension liabilities. State long-term liability burdens continued to decline in fiscal 2019, the last full year of the long economic expansion that followed the Great Recession.

Five states continue to carry elevated long-term liability burdens above 20% of personal income in fiscal 2019, including Illinois (at 27% of personal income), Connecticut, New Jersey, Hawaii and Alaska. For all of them, pensions remain the driver of elevated liabilities. Conversely, 37 states carried burdens below 10% of personal income, which Fitch views as low.

Fitch Ratings-New York-02 November 2020: The pace of job recovery continues to slow for most U.S. states with COVID-19 cases and hospitalization rates increasing throughout much of the country, according to Fitch Ratings in a new report.

“States by and large saw continued improvement in jobs recovery in September, although the pace has slowed since the summer, we expect the economic recovery to continue slowing this quarter.” said Senior Director Olu Sonola. Median jobs recovery (gain in non-farm payrolls) improved to 55% in September from 51% in August. Fitch considers most states are well-positioned to deal with resulting budget volatility at current rating levels, though economic contraction could compound revenue declines that erode states’ gap-closing abilities.

New York, Alaska, Illinois, Nevada, New Jersey and Kentucky all saw the steepest employment declines in the first three months of the pandemic and have seen slower employment recovery in recent months. Additionally, nine states lost jobs in September with Hawaii topping the list. Fitch downgraded Hawaii to ‘AA’ and revised the Rating Outlook to Stable last month, noting the outsized impact of the coronavirus pandemic on Hawaii’s economy and workforce, particularly its large leisure and hospitality sector.

Conversely, the employment picture improved dramatically for states like Massachusetts in September. Massachusetts’ official unemployment rate improved to 9.6% in September from 11.4% in August with the Fitch-adjusted unemployment rate also falling to 10.8% from 18.9%. “Massachusetts has seen a notable uptick of hiring in the education and health services sector, which drives a large portion of their economy,” said Sonola.

Fitch’s ‘U.S. States Labor Markets Tracker’ is available at ‘www.fitchratings.com’

Contact:

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

Arthur Tildesley, CFA
Associate Director
+1 646 582 4749

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 drop in tax revenue has led to a total shortfall expected in the hundreds of billions of dollars—greater than 2019’s K-12 education budget for every state combined, or more than twice the amount spent that year on state roads and other transportation infrastructure.

Connecticut acted fast. Social distancing, lockdowns and testing slashed Covid-19 cases in the spring.

But when Comptroller Kevin Lembo opened an email from his budget director on April 15, it was clear the state’s quick action to contain the pandemic hadn’t insulated its finances.

“We hit the brakes so quickly on the economy that we went through the windshield,” his deputy wrote.

Continue reading.

The Wall Street Journal

By Heather Gillers and Gunjan Banerji

Oct. 28, 2020 2:45 pm ET

The pandemic’s impact on state revenues this spring was smaller than the historical record predicted. Nevertheless, states, localities, tribal nations, and U.S. territories like Puerto Rico still face large shortfalls for this fiscal year and the next in funding schools, health care, and other basic public services. They desperately need more federal aid to avoid more layoffs and other cuts that would further weaken the economy, increase hardship, and worsen racial and class inequities.

State and local revenues have fallen as the pandemic has forced businesses to close or scale back, costing millions of jobs. Sales taxes, a major revenue source for states and, to a lesser extent, localities, have fallen especially sharply. Income taxes — states’ other primary revenue source — are also down, as are revenues from gasoline taxes and other lesser sources.

As a result, states and localities have furloughed or laid off 1.2 million workers to date, far more than the 750,000 that lost their jobs during the Great Recession.[1] They’ve also imposed spending cuts that diminish the reach and quality of public services. Georgia, for example, cut K-12 funding by nearly $1 billion,[2] and California cut higher education by roughly the same amount.[3] Because many states are operating under budgets they know are unrealistic, more cuts — likely leading to more layoffs, tuition hikes, and reductions in public services — are coming unless the federal government steps up.[4]

Continue reading.

CBPP.ORG

BY MICHAEL LEACHMAN & ELIZABETH MCNICHOL

OCTOBER 30, 2020

As Senate Republicans continue blocking state and city budget aid in a new stimulus package, progressive advocates want the Federal Reserve to be a much more active municipal lender. But the immediate risk to the municipal finance market—and thus to state and city budgets— is the scheduled expiration of the Municipal Liquidity Facility (MLF) at the end of 2020, which could threaten a repeat of this spring’s market liquidity crisis. So the MLF needs to be extended now.

Remember the MLF was created in response to spring’s sudden liquidity crisis in municipal finance. Investors pulled back from the muni market, forcing a selloff to cover their withdrawals. The cascading selloff in turn quickly drove up interest rates for billions of dollars in muni bonds approaching 10% in some cases, threatening a seizing-up of the entire market.

Continue reading.

Forbes

by Richard McGahey

Oct 30, 2020

The failure to pass another Covid stimulus package because of Senate Republican resistance is increasing the budget squeeze on cities and states and raising cautions in the municipal bond market. Although Joe Biden and the Democrats want significant new spending aid, post-election gridlock could hurt cities, states, and the public finance market and also damage the economic recovery. That in turn will increase calls for aggressive new Federal Reserve powers and actions that could dramatically affect the muni market.

State and city revenues remain under water, and the sputtering economic recovery isn’t likely to bail them out. According the Center on Budget and Policy Priorities, “state tax collections for March through July 2020 were 7.5% less than in the same months of 2019.” And in September, Moody’s MCO 0.0% said its improved baseline economic forecast would still mean that “the fiscal consequences…for states and local governments would be the worst since the Great Depression.”

Chicago illustrates the problem. With revenues pummeled by the ongoing recession and no relief from a troubled state or a gridlocked federal government, the city plans to refinance existing debt at lower interest rates to generate short-term savings, and also stretching out the period for repayment.

Continue reading.

Forbes

by Richard McGahey

Oct 27, 2020,06:00am EDT

Hint: They tend to attract more buyers when taxes rise.

The results of the 2020 election could have a dramatic impact on the municipal bond market.

If Joe Biden wins the presidency and if the Democrats take control of the Senate, marginal tax rates for the wealthiest Americans could rise, increasing demand for munis, whose interest payments are exempt from federal income taxes and from state taxes for residents of the issuing state.

Under Biden’s tax plan, individual taxpayers earning more than $400,000 annually would be taxed at 39.6%, up from 37% currently, and subject to an additional 12.4% Social Security tax on wages split equally with their employer. If they itemize deductions (which Biden’s plan caps at 28%) and live in a high-tax state like California, their total tax burden would be close to 60%, providing them a tax-equivalent yield of 5.625% on a California muni yielding 2.25%.

A Democratic sweep could also help shore up the finances of state and local governments, which would support muni credits. Congress then would be more likely to pass an economic aid package that would provide billions of dollars for state and local governments, which has been a key sticking point in recent stimulus negotiations between Republicans and Democrats. Those talks have so far failed to develop a compromise plan. Moreover, If the pandemic worsens, as it’s expected to, the financial needs of state and local governments will increase.

James DiChiaro, senior portfolio manager at Insight Investment, said financial markets are now pricing in a higher probability of a Democratic sweep and probability of stimulus, which is why interest rates have been rising in the past week. The 10-year Treasury yield on Friday topped 0.85% in intraday trading on Friday, its level since June.

“Solid fund flows [for muni bonds] through the fall” also suggest that investors expect a blue wave in the upcoming election, said Rabasco. He explained that higher tax rates for wealthier individuals coupled with higher tax rates on corporations — Biden plans to raise corporate tax rates from 21% to 28% — also boost support for muni bonds.

Corporations, saddled with higher tax rates could also be attracted to the tax-exempt income that muni bonds provide. Banks and property and casualty insurers especially would tend to be attracted to munis, according to AllianceBernstein.

Even if there is no Democratic sweep in the upcoming election and the federal government remains divided, demand for munis will still be strong because the limits on state and local tax (SALT) deductions will remain. Those limits, set by the 2017 tax overhaul, “drove a lot of demand in the marketplace,” said Rabasco, adding that there has been “solid fund flows” for munis through the fall.

He expects state and local governments will adopt austerity measures and debt financing if there is no strong federal support for their finances.

On the opposite end of the bond market outlook post election is the Commercial Mortgage Backed Securities (CMBS) market, which supports commercial real estate. “I would feel a lot more comfortable investing in CMBS if I was working out of an office building now,“ said DiChiaro.

He said it was a “bit early to go heavily into CMBS right now” because of the impact the pandemic is having on commercial real estate hough data warehouse credits have attractive values.

ThinkAdvisor

By Bernice Napach | October 26, 2020 at 11:28 AM

• School bonds make up more than half of 10 largest proposals
• LA $7 billion bond would help post-Covid learning environment

U.S. voters will decide on an estimated $45 billion of bond sales this election as municipalities across the country seek funding for projects ranging from hospital improvements to school infrastructure.

More than half of the 10 largest ballot measures would fund school improvements, and if approved, some of that money would help districts grappling with educating students during a pandemic, including enhanced internet access and resources to prevent the spread of Covid-19. Other deals would pay for water and sewer projects, libraries and other infrastructure.

It’s the lowest amount of borrowing on U.S. ballots during a presidential year since 2012, according to preliminary data compiled by IHS Markit, which has updated its tally from a previous estimate that cited a higher amount of bond measures. The economic collapse caused by the pandemic stalled plans to borrow as municipalities and taxpayers face increasing financial uncertainty.

“Covid-19 by far has really thrown the global economy for a loop, let alone the municipal market,” said Christopher Brigati, head of municipal trading at Advisors Asset Management.

The borrowing slump comes at an unprecedented moment for state and local finances. Despite low interest rates, borrowers are contending with uncertainties over the outcome of the election and the prospect of credit downgrades as the coronavirus pandemic upends the economy.

The largest proposed borrowing, a $7 billion bond for the Los Angeles Unified School District, would pay for an ongoing project to upgrade accessibility and earthquake safety, as well as “address facilities needs to adapt to a post-Covid-19 learning environment,” according to a press release.

The Dallas Independent School District in Texas is weighing $3.7 billion of bonds to pay for enhanced internet access for students and teachers and facility renovations, including adding family resource centers in four historically redlined areas to address racial equity. A school district in Maricopa County, Arizona, is seeking approval of $75 million in bonds in part to help prevent and fight the spread of Covid-19.

In Portland, Oregon, voters will decide on a $1.2 billion offering that would upgrade the area’s high schools without raising taxes. Jefferson High School, which predominantly serves students of color, is slated to receive the lion’s share of the proceeds.

“Portland public schools historically has not served black students well,” said Julia Brim-Edwards, bond campaign chair for Portland Public Schools. “We made a decision to prioritize Jefferson High School.” It’s the largest school bonds in the state’s history, Brim-Edwards said.

The San Antonio Independent School District in Texas called for a $1.3 billion bond on the ballot that would finance school renovations and technology. Taxpayers would not see a rate increase from the bond, according to district projections.

King County, Washington will seek approval for a $1.7 billion bond that would fund improvements and increase critical surge capacity at Harborview Medical Center, a hospital facing rapid population growth that treated some of the first known Covid-19 cases in the U.S.

Fairfax County, Virginia is asking voters to approve four bonds, including $160 million that would be used for the county’s contribution to Metro’s capital improvement program. Funds would be used to buy new railcars and buses and construct a new bus garage.

California and New Mexico are the only ballots with state bond questions. California has a $5.5 billion measure that would authorize borrowing for stem cell and other medical research, and New Mexico collectively has about $200 million in measures that would fund schools, senior facilities and library improvements. California is also the largest issuer, with about twice as much bonding on the ballot as Texas, the second largest.

Bloomberg Politics

By Nic Querolo

October 30, 2020, 10:39 AM PDT

An ACLU case against New York City is the latest to allege that cities responded to demonstrations with brutality.

U.S. cities are facing a growing number of lawsuits alleging excessive force against protesters this year.

The New York branch of the American Civil Liberties Union and the Legal Aid Society on Monday sued New York City, Mayor Bill de Blasio and police leadership and officers over their response to summer protests sparked by the police killing of George Floyd. The suit claims the New York City Police Department violated protesters’ First Amendment rights with brutal force.

This marks the latest such allegation against a city government, joining cases in Omaha, Nebraska; Los Angeles; New York; and Minneapolis, the focal point of the protests. The growing list shows that departments are not fixing the issues that land them in court, said Joanna Schwartz, a professor at the UCLA School of Law who specializes in police accountability. The costs of such claims add up, forcing cities to spend more on police.

This week’s lawsuit alleges the NYPD unnecessarily used tools like batons and pepper spray on demonstrators and deployed tactics like kettling, in which police surround and trap a group in a location. These tactics resulted in injuries, including a broken arm for one of the 11 plaintiffs, according to the suit, which also alleges false imprisonment.

“What everybody saw in the aftermath of George Floyd’s murder was egregious police misconduct and violations of protesters’ rights across the country but particularly in New York City,” said Daniel Lambright, an ACLU attorney working on the case. “We don’t think there was a ‘bad apple’ problem. We think these were part of policies and practices endorsed by the mayor and the commissioner.”

The mayor’s office declined to comment further on the lawsuit, but de Blasio addressed it in part during a Monday news conference. “From what I’ve heard of the lawsuit’s allegation, it doesn’t sound right at all to me,” he said. “You know, there’s been a conscious effort for seven years now to change the relationship between the NYPD and communities.”

Schwartz, the law professor, said it would be in cities’ economic interest to address the underlying problems that lead to conflict with protesters and allegations of brutality, rather than spending resources on settlements and court battles.

The coronavirus pandemic has left state and local governments facing a projected $467 billion decline in revenue between 2020 and 2022, according to the Brookings Institution. At the same time, governments across the U.S. are facing questions about public safety spending; one rallying cry among protesters this year was to “defund police.”

In some localities, public safety already exceeds a third of general fund spending. Louisville, Kentucky, where Breonna Taylor was killed by police in March, spends 29% of its general fund budget on police. In Minnesota and Omaha, it’s 35% and 36%, respectively. New York City spends nearly 6% of its vast general fund on police, which comes out to more than $5 billion. Misconduct payouts are a further way departments pull on city purse strings.

Moody’s Investors Service, the credit ratings agency, said reform efforts that lead to fewer legal settlements are good for local governments’ financial standing. These costs aren’t always crippling for municipalities, but they can crowd out other vital spending. Chicago paid $757 million in settlements between 2014 and 2018, New York City paid $220 million in fiscal 2019, and Louisville recently paid $12 million to Taylor’s family.

“There are simple economic reasons to try to learn from these suits,” Schwartz said. “It is a really distressing sign of our times that police departments are sometimes responding to what has been an unprecedented outcry against police misconduct with more misconduct, and sometimes even more blatant misconduct and excessive force than we’ve seen in the past.”

Bloomberg CityLab

By Fola Akinnibi

October 28, 2020, 9:08 AM PDT

Democratic Reps. Alexandria Ocasio-Cortez (N.Y.) and Rashida Tlaib (Mich.) on Friday introduced a bill to create a federally chartered and supported public banking system.

Called the Public Banking Act, the bill would develop a system through which the Federal Reserve System and Treasury Department would recognize, offer grants and open credit facilities for nonprofit banks. These banks would be intended to compete with the commercial banking industry and would be barred from charging fees on checking or savings accounts, requiring minimum balances and levying interest rates of more than 15 percent.

Tlaib and Ocasio-Cortez said the bill is intended to expand access to financial services in areas where a large portion of the population is unable to afford conventional banking services. Nearly 30 percent of those without bank accounts cited an inability to meet minimum balance requirements as the main reason they did not use a bank, according to a June 2019 survey conducted by the Federal Deposit Insurance Corp., and nearly 49 percent said it was at least a contributing factor.

“From overdraft fees to charging for having a checking account period, Wall Street-run banks put key financial services out of reach for many of my residents who are struggling to make ends meet,” Tlaib said in a statement

“It’s long past time to open doors for people who have been systematically shut out and provide a better option for those grappling with the costs of simply trying to participate in an economy they have every right to—but has been rigged against them.”

Tlaib and Ocasio-Cortez said the bill is also intended to give local governments, community development projects and small businesses easier access to loans and federal financial relief programs as they grapple with the damage wrought by the coronavirus pandemic.

“The creation of public banks will also facilitate the use of public resources to construct a myriad of public goods including affordable housing and local renewable energy projects,” Ocasio-Cortez said in a statement. “Public banks empower states and municipalities to establish new channels of public investment to help solve systemic crises.”

The bill from Tlaib and Ocasio-Cortez, both members of the House Financial Services Committee, is the latest push from progressive Democrats to create federally funded and supported alternatives to the financial sector.

House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) in June introduced a bill that would order banks within the Federal Reserve System to offer “FedAccounts” with similar terms as specified in the Public Banking Act.

A task force set up by Democratic presidential nominee Joe Biden and Sen. Bernie Sanders (I-Vt.) in July also called for the creation of a government-run banking system set up through the Federal Reserve and U.S. Postal Service.

THE HILL

BY SYLVAN LANE – 10/30/20

Summary

• Rising long-end rates are making some income investors nervous about the impact of growing deficits and inflationary dynamics on their portfolios.
• Short-duration high-yield municipal bonds provide an attractive combination of yield, historical drawdown dynamics and a muted sensitivity to rising rates.
• Within the sector we like NVHAX due to its modest leverage use, attractive yield and strong historical returns.

Continue reading.

Seeking Alpha

Oct. 28, 2020

The municipal bond market was in great shape prior to the COVID-19 outbreak. After the passage of the Tax Cuts and Jobs Act in 2017, the combination of strong investor demand for yield and a limited supply of tax-exempt issues led to a compression in quality and sector spreads. Of course, the COVID-19 outbreak led to a sudden disruption of financial markets, including muni markets.

COVID-19’s Impact on Munis

The U.S. COVID-19 outbreak in March sparked a rapid sell-off across financial assets. In the municipal bond market, $40 billion in redemptions in just three weeks caused a severe liquidity crisis, particularly as leveraged funds were forced to sell. Quality and sector spreads also widened as investors sought out safe-haven assets, such as general obligation bonds.

Continue reading.

dividend.com

Oct 28, 2020

Fitch Ratings-New York-26 October 2020: Long-term liabilities burdens fell for a fourth straight year for U.S. states and hit a notable threshold last fiscal year, according to Fitch Ratings in its latest annual survey of state direct debt and pension liabilities.

Long-term liabilities relative to personal income declined to 5% in fiscal 2019, from 6% in fiscal 2016. “The downward trend does not necessarily reflect an enduring drop in state burdens, especially for pensions,” said Senior Director Doug Offerman. “Instead, robust economic growth up to the coronavirus pandemic drove faster gains in personal income than in debt and pensions.”

Over that time, median personal income by state grew 4.1% annually. Direct debt, which constitutes about 40% of long-term liabilities, remained relatively flat, at 2.1% of personal income in fiscal 2019, vs. 2.3% in fiscal 2016. State debt is carefully managed, including through various limits on authorization, issuance and debt service.

By contrast, net pension liabilities, adjusted by Fitch to a 6% investment return assumption, fell to 2.7% in fiscal 2019, from 3.1% in fiscal 2016, and has been volatile, driven by shifting market values for pension assets.

States have tightened pension management over the last decade, trimming benefits, lowering return targets and raising contributions, but only a few states have seen lower pension burdens. This is because falling investment return assumptions raise liabilities, more than offsetting the incremental gains from lower benefits, higher contributions and other assumption changes.

Five states continue to carry elevated long-term liability burdens above 20% of personal income in fiscal 2019, including Illinois (at 27% of personal income), Connecticut, New Jersey, Hawaii and Alaska. For all of them, pensions remain the driver of elevated liabilities. Conversely, 37 states carried burdens below 10% of personal income, which Fitch views as low.

Fitch’s ‘2020 State Liability Report’ is available at ‘www.fitchratings.com’.

Contact:

Douglas Offerman
Senior Director
+ 1-212-908-0889
Fitch Ratings, Inc.
300 W. 57th St.
New York, NY 10019

Eric Kim
Senior Director
+ 1 212 908-0241

Arlene Bohner
Managing Director
+1 212 908-0554

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

Additional information is available on www.fitchratings.com

Fitch Ratings-New York-22 October 2020: Fitch Ratings has launched its first Fitch Analytical Comparative Tool (FACT) for U.S. state and local governments.

The Excel-based tool provides an easy-to-use, interactive platform with clear graphics to provide market participants with a deeper understanding of the credit profiles of U.S state and local governments. FACT allows for multi-dimensional comparisons of demographic data, financial metrics, and key rating drivers for over 850 Issuer Default Ratings, including states, counties, cities and school districts. Users can create customised charts and peer groups to gain credit insights and support credit analysis. FACT currently presents information for fiscal years 2016 – 2019, and Fitch anticipates quarterly updates as new financial and economic data is released.

Ratings Summary
FACT includes a comprehensive view of the portfolio’s rating distribution and transition tables to track rating movements from 2015 through 2019. A summary of key rating driver assessments is provided by unit of government and rating level.

Peer Group Selector & Median Analysis
FACT’s peer group selection function allows the user to select a customized peer group of any size and compare key rating driver assessments, demographic trends and the performance of various financial metrics from fiscal years 2016 through 2019. Users are offered various cross-sections of the data; dynamic visualizations allow for intuitive analysis of peer group medians and time series.

Issuer Analysis
The Issuer Analysis section of the tool allows users to take an in-depth look at a single issuer of interest, through the lens of Fitch’s Key Rating Drivers. For a selection of financial and demographic metrics, issuers can be compared to various peer groups or the portfolio.

Contact:

Mike Rinaldi
Senior Director, Local Governments
+1 212 908 0833
Fitch Ratings, Inc.
300 W 57th St.
New York, NY 10019

Eric Kim
Senior Director, State Governments
+1 212 908 0241

Arlene Bohner
Managing Director
+1 212 908 0554

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

Additional information is available on www.fitchratings.com

Practices and platforms vary, but dashboards provide insight and enhance transparency

Most states require local governments to submit financial data—typically on an annual basis—and at least 38 now present that local fiscal data on easily accessible online platforms to give the public access to important information on their cities, towns, and counties.

The various state websites, which promote transparency by allowing a glimpse into local government finances, offer a range of features. Some enable users to compare localities, for example, while others let people create graphic visualizations of historical trends on local taxes and spending.

Among the states with such dashboards, California, Massachusetts, Michigan, New York, North Carolina, Ohio, and Washington provide assessments of local governments’ fiscal health using financial indicators or overall scores to bring additional insights. For example:

Continue reading.

The Pew Charitable Trusts

By: Jeff Chapman & Katy Ascanio

October 20, 2020

• Bond queries facing voters are down nearly $20 billion
• Pandemic isn’t time to ask voters to approve loans: officials

Local governments are scuttling borrowing plans that would normally be put before voters on Election Day as financial uncertainty strains municipal budgets and stresses taxpayers that need to sign off on such debt.

State and local governments will ask voters to weigh in on at least $52 billion worth of bond measures on the Nov. 3 ballot, according to preliminary data from IHS Markit. That’s the lowest for a presidential election year since 2012 and nearly $20 billion less than 2016 even as interest costs are well below the rates of four years ago.

“We did not feel it was right or responsible to place further burdens on our residents,” said Mayor Linda Anthony of West Lake Hills, Texas, whose town shelved two measures totaling $22 million in what would have been its first ever bond deal. “We don’t want our maiden attempt to fall flat on its face, and it didn’t seem like the right time to ask residents to vote to increase their taxes, and that’s essentially what it would have done.”

Ballot measures where residents vote on whether or not to allow a municipality to sell bonds to finance public work projects like new schools, parks or a town hall are getting canceled, showcasing the fiscal anxiety facing U.S. towns and cities. Budgets have been hit hard by the coronavirus pandemic, as shutdowns slash tax revenue and public health costs rise. States and local governments face combined shortfalls of $450 billion through fiscal 2022, according to a September estimate from Moody’s Analytics.

It took West Lake Hills officials four years to put together the bonding plan to finance road and drainage improvements and to pay for a new municipal complex. The deal was originally supposed to go on the ballot in May but that election was also postponed amid the pandemic.

Deferring infrastructure projects, which are often financed by bonds, is usually one of the first steps governments take during an economic downturn, according to Christopher Berry, a public policy professor and academic director of the Center for Municipal Finance at the University of Chicago.

“It’s easier to push off for a couple of years because they’re generally long-term projects that voters won’t miss in the short-run,” Berry said. “It’s a natural response when times are tight to cut things that are less painful in the moment — even if we are just delaying the pain.”

Nixed Borrowings

And it’s not just towns and cities that are nixing bond-ballot measures this election. New York state pulled a $3 billion environmental bond from the November ballot, citing a dire financial situation stemming from the pandemic.

“It was my proposal. I believe deeply in it, but we need to have financial stability before we do that,” Governor Andrew Cuomo said in July.

Texas is normally a boon for municipal deals because of its soaring population and infrastructure needs. But this year Irving, Texas, outside of Dallas, canceled 12 bond ballot measures totaling more than $560 million for projects ranging from parks and recreation improvements to an art project. And further south, in Killeen, Texas, the school board canceled a proposed $265 million bond.

“The Covid crunch and its effect on the economy in the state of Texas just appears to be unbearable,” said Corbett Lawler, president of Killeen ISD board of trustees, “and with all that unknown we didn’t want to saddle our voters with a $200 plus million bond.”

‘Too Uncertain’

Money from the sale would have constructed four new elementary schools, renovated a high school and improved athletic facilities. Lawler said the district may revisit the bond issue in a year or so. “It’s just too uncertain right now.”

The West Ada School District near Boise, Idaho, originally planned to ask voters for more than $60 million for campus improvements but postponed the ballot item because of the rapidly climbing unemployment rate and deteriorating economy, said Char Jackson, a district spokesperson. She said the district plans to run the bond in March.

Not all local governments are taking such austerity measures, especially amid near record low borrowing rates. The Los Angeles Unified School District is asking voters for $7 billion in bonds for school construction upgrades, and Dallas Independent School District has a $3.7 billion measure on the ballot, which is believed to be the largest issuance of debt from any local entity in Texas history.

Indefinitely Postponed

Tom Kozlik, head of municipal strategy at Hilltop Securities said it took years for governments to be comfortable issuing debt after the financial crisis. Governments were concerned about having one more thing to pay for, he said. Similar discussions in statehouses and city council meetings are happening now.

“Even though the money is near the cheapest it’s ever been, you need to have the revenue to pay it back and there’s a lot of other expenditures grabbing at that money right now,” Kozlik said.

In South Carolina, the Rock Hill School board indefinitely postponed a $295 million bond measure. The decision whether or not to reapply to voters depends on the education needs in a post-Covid world, said Helena Miller, chairman of the board.

“The needs before and after Covid are very different,” she said. “We may have to go back to the drawing table to see what the needs in our community really are.”

Bloomberg Economics

By Danielle Moran

October 23, 2020, 6:30 AM PDT

— With assistance by Nic Querolo

• The two active municipal bond insurers — Assured Guaranty (AGO +2.4%) and Build America Mutual — are seeing opportunity in the erosion in local government creditworthiness.
• That’s leading both municipal bond issuers and some investors to insure the debt against municipality to defaults. The share of newly issued muni debt carrying insurance increased to 7.13% in Q2 and was 6.8% in Q3 vs. an average of 4.72% in the 10 years before the pandemic, the Wall Street Journal reports, citing Municipal Market Analytics data.
• For muni bond issuers, insuring the debt helps to keep borrowing costs down.

Continue reading.

Seeking Alpha

By: Liz Kiesche, SA News Editor

Oct. 22, 2020

Build America Mutual and Assured Guaranty see opportunity with the drop in local government creditworthiness

The decimated municipal-bond insurance industry is having a renaissance.

Weakened by Covid-19, state and local borrowers are using insurance at their highest rates in more than a decade. This type of upfront protection offers a promise from insurance companies to pay investors if the municipality defaults. Overall, the share of newly issued muni debt carrying insurance reached 7.13% in the second quarter and was 6.8% in the third quarter, up from an average of 4.72% in the decade before the pandemic, according to Municipal Market Analytics data.

Fueling the trend is a drop in local government creditworthiness that has left public officials looking for ways to keep down borrowing costs. That dynamic has spelled opportunity for the two active municipal bond insurers, Build America Mutual and Assured Guaranty Ltd., and helped the muni market run smoothly, despite significant stress.

For investors, however, the increased need for insurance is a growing concern, especially since insurance firms are only willing to back certain types of bonds.

“The bond insurers are only underwriting policies for bonds they believe are not going to default,” said Nicholos Venditti, senior portfolio manager at Wells Fargo Asset Management.

Most governments continue to borrow without insurance and the risk of default remains low, limiting how much buy-and-hold investors benefit from the sacrifice in yield that comes with insurance. Out of an estimated 50,000 issuers in the roughly $4 trillion municipal market, there have been only about 50 new defaults since the pandemic began.

Among recent issuers, Oregon State University used bond insurance to secure lower interest rates on about $300 million in taxable long-term bonds issued this month to help pay for capital projects and manage the pandemic’s financial impact, said spokesman Steve Clark.

The school didn’t attach insurance to its last two pre-pandemic bond issues, but revenues from housing, dining and athletics have fallen as a result of Covid-19 as has international student enrollment. The majority of prospective investors preferred an insured bond issue, Mr. Clark said, and the rate the school was able to get fell by 0.08 percentage points after adding insurance.

Mr. Clark said the decision to use insurance wasn’t based on the pandemic or its impacts on the school but on investor feedback and a desire to lower borrowing costs.

A recent stress test by Merritt Research Services found that if universities lost a quarter of their revenues, 44% of public schools and 39% of private schools would exhaust any available financial cushion unless they made cuts. In the same scenario, about a fifth of hospitals would run out of cash, the firm found.

“In a sector like higher education where all credits tend to get painted with a negative brush…to some degree putting insurance on top of it is attractive to some investors who then don’t have to do all the research,” said Dan Hartman, managing director at PFM Financial Advisors LLC, which counsels government borrowers.

Mr. Hartman estimated that an A-rated borrower might pay $500,000 for insurance that would lower rates on a $100 million 20-year bond issue by 0.05 to 0.1 percentage points after factoring in the cost of insurance. The savings in that scenario could amount to roughly half a million present-day dollars, stretched out over the life of the bond, he said.

Issuers aren’t the only ones buying more insurance; investors are also choosing to add protection to their uninsured holdings.

Asset manager Lord Abbett this spring bought insurance on some of its munis after ratings firms placed negative outlooks on the issuers, said partner and director Daniel Solender. The extra protection will enable the bonds to remain in the firm’s high-grade portfolios in the event of a downgrade or help the firm find buyers if it chooses to sell, Mr. Solender said.

The return of significant insurance to the muni market comes more than a decade after that industry was decimated in the financial crisis.

Extra Protection

Bond insurance is more popular than at anytime since the last recession but remains farbelow pre-crisis levels.

In the wake of the crisis, bond insurance firms that had sold protection on residential mortgage-backed securities lost their AAA credit ratings, creating a host of problems for the state and local borrowers they insured.

Build America Mutual and Assured Guaranty said they are well positioned to weather pandemic-related downgrades or losses. Both firms have increased prices on some insurance products, according to people familiar with the matter.

S&P Global Ratings credit analyst David Veno said Build America Mutual and Assured Guaranty each have enough capital to cover the insurance payout scenarios resulting from the pandemic and maintain their financial stability. Both are rated AA by S&P.

Build America Mutual, which started in 2012, sticks to government-backed bonds and steers clear of nonprofit hospitals and private universities, which also issue debt in the municipal market.

“We sort of have stuck to our knitting all along, so that’s the backdrop of why we are less concerned about the severity of loss in our portfolio going forward,” said Chief Executive Seán McCarthy.

Mr. McCarthy said that while he believes the likelihood of default on this type of debt is very low, it isn’t zero, creating a benefit even for buy-and-hold investors.

“When you take out a life insurance policy, you don’t think you’re dying next year,” he said.

Assured Guaranty, the only insurance firm from the financial crisis to remain active, now has a portfolio comprising 96% municipal debt and insures about $232 billion, less than half the amount it did before the crisis. “We believe our insured portfolio is in good shape to weather this economic disruption,” said Robert Tucker, a spokesman.

It remains to be seen in what shape insurers will emerge from the pandemic, said Josh Esterov, a senior insurance analyst at CreditSights. Any gains from the increase in business could be eroded by payment delinquencies on bonds in the insured portfolio.

“Is this good or bad? It’s going to depend on the level of delinquencies,” Mr. Esterov said.

The Wall Street Journal

By Heather Gillers

Oct. 22, 2020 5:30 am ET

Fitch Ratings-New York-22 October 2020: Fitch Ratings has published an updated version of its “Airports Rating Criteria,” initially published on March 24, 2020. The primary changes improve alignment with the Infrastructure and Project Finance Rating Criteria (March 2020) in the areas of debt structure, infrastructure development/renewal and financial metric definitions.

“Airports Rating Criteria” is available at ‘www.fitchratings.com’.

Contact:

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

Jeffrey Lack
Director
+1-312-368-3171

Bruno Pahl
Senior Director
+1-312-368-3112

Shyamali Rajivan
Director
+44 20 3530 1733

Sajal Kishore
Senior Director
+65 6796 7095

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 Special Report.

20 OCT, 2020

Read the Exposure Draft.

This report details Fitch Ratings’ approach to determining the primary criteria when rating projects at or in the vicinity of U.S.-based, not-for-profit private and public colleges and universities (institutions). Projects can range from student housing, parking and mixed-use to energy and utility projects, or a combination thereof. Fitch’s approach to higher education project financings can include the U.S. Public Finance College and University Rating Criteria, the Infrastructure and Project Finance Rating Criteria or the U.S. Affordable Housing Rating Criteria. The coronavirus pandemic resulted in fiscal challenges at institutions and virtual learning dampened housing demand, but Fitch anticipates an increase in project financings and public private partnerships (PPPs) over the medium term as institutions look to expand housing and repurpose assets. Debt Structure and University Involvement Determine Primary Criteria Determining which criteria will anchor the analysis depends on debt structure, repayment, affiliation with the institution, and exposure to completion and cost risk. While anchoring its analysis on one criteria, Fitch will look to the other criteria to inform its assessment of the key rating drivers in a higher education setting.

ACCESS REPORT

Tue 20 Oct, 2020 – 9:54 AM ET

• Some schools may be on hook to help struggling private dorms
• As virus spread continues, campus reopening prospects dim

Empty dorms are putting pressure on U.S. colleges to help investors in the approximately $14 billion student housing debt market, adding to the strain on schools already reeling from the pandemic.

West Virginia State University, already hit with a 10% enrollment drop, plans to give money to a school foundation so it can meet its bond covenants for residence hall debt. A community college in Ohio is using part of a $1.5 million donation for a financially-strapped student housing project. And officials at New Jersey City University, which serves largely first-generation and lower-income students and has recorded years of deficits, are prepared to shore up a dorm there.

The squeeze on university finances arrives at the worst possible time. Some debt sold for student housing requires the schools to assist. Other colleges are chipping in even without that requirement to ensure dorms are available when campuses fully reopen. On top of that, enrollments are dwindling and cash flow from athletics, dining halls and parking has disappeared.

“The limiting factor is some of these schools themselves are facing uncertainty with many of their revenue streams,” S&P Global Ratings analyst Amber Schafer said in an interview. “It’s a matter of not only willingness, but if they’re able to support the project.”

Shrinking Enrollment

Investors have billions of dollars relying on the outcome. Typically, privatized student housing debt is paid off by the revenue generated by the dorms — meaning there’s little recourse for bondholders if things go south. With fewer students on campus, options are limited. The number of first-year undergraduate students enrolled dropped 16% this semester, the National Student Clearinghouse Research Center said in a report last week.

The constraints facing student housing could worsen as the coronavirus continues to spread across the U.S., making it harder for colleges to reopen. Since March, S&P has downgraded 15 student housing borrowers in a universe of the about 60 borrowers that it rates, while Moody’s Investors Service has slashed the rating on five considered public-private partnerships.

Nine student housing projects have become impaired in 2020, the most since 2009, according to Municipal Market Analytics, which tracks actions by municipal borrowers like defaults, reserve withdrawals, and technical defaults.

Borrowers have begun revealing how empty residence halls are as the pandemic spurs many campuses to keep classes online. West Virginia State University’s dorm is 71% full, putting it about 20 percentage points from where it needs to be to satisfy debt covenants, according to the school foundation that sold the debt. Other privatized student housing projects, like two on Howard University’s campus, are virtually empty due to online-only instruction there.

On the Hook

Privatized dorms are struggling the most given that they weren’t structured to withstand 20% to 30% drops in occupancy — or no students at all.

West Virginia State University may have to step in to help student housing bonds at risk of violating a debt service coverage ratio, Moody’s warned this month. The historically-black college faces “considerable” challenges in backstopping the bonds, Moody’s said.

The nearly 290-bed residence hall with rents of $3,881 per semester was just 71% occupied this fall, while it needed to be about 92% occupied, said Patricia Schumann, president of the university foundation that sold the debt. Schumann said the university is projected to provide a $75,000 payment in January. In the meantime, she said the school was working to bolster its financial position and boost recruitment and donations.

“We’re not standing still,” she said.

Ohio’s Terra State Community College, which has more than 2,100 students, was downgraded deeper into junk over the risk posed by a dorm owned by a nonprofit, given that the school “appears to provide an unconditional guarantee” to meet the debt obligations, Moody’s said. The project was financed through a bank note.

The dorm’s occupancy fell to 62%, and the college is using a previously-received donation to cover a shortfall in project revenue amounting between $500,000 to $600,000, the ratings company said in a report this month.

At New Jersey City University, a student housing project financed though a separate entity will likely miss a required debt service coverage ratio. The public school having to step in to help the bonds would be a challenge, but a surmountable one, said Jodi Bailey, the university’s associate vice president for student affairs. The student housing bonds aren’t a debt of the university, so the school would be choosing to provide financial support, according to bond documents.

The school is working to cut expenses related to the dorm. “Is it a harder year? Most definitely,” she said.

The student housing bonds, issued by West Campus Housing LLC in 2015, were slashed deeper into junk in September by S&P, which said in a report that residence halls’ occupancy there had fallen to 56% so the school could accommodate social-distancing guidelines.

Helping Out

To provide relief, some universities have deferred lease payments that are owed if student housing projects meet certain debt service coverage levels, said Debra Lockwood, senior adviser and former president of Provident Resources Group, a nonprofit that finances, owns and operates student housing projects.

Provident’s deals, which are sold by separate entities, are structured as project finance deals that rely on the site’s revenue, meaning that typically Provident and the related college aren’t legally obligated to step in to support debt repayment, Lockwood said.

Dorms at Howard University in Washington, D.C., financed through a Provident-affiliated entity, were virtually empty at the end of August after the college moved classes online, according to a regulatory filing. It’s likely that the borrower will use surplus funds to make bond payments in 2020, according to S&P, which slashed the debt further into junk in August.

Provident’s Lockwood said there is a great deal of uncertainty around reopening plans in the spring and that her team was working to model different scenarios on its projects. She said colleges could be incentivized to go back given that so-called auxiliary revenue from sources outside tuition — like dorms — is hurting.

“We just don’t know,” she said.

Bloomberg Markets

By Amanda Albright

October 20, 2020, 6:10 AM PDT

Municipalities with 20 largest police departments paid over $2 billion since 2015 for alleged wrongdoings and civil rights violations

The 20 U.S. cities and counties with the biggest police departments have paid over $2 billion since 2015 for alleged misconduct and civil rights violations, according to a Wall Street Journal analysis.

The payments have settled allegations of excessive force, wrongful detention and other abuses that sometimes stretch back decades and in extreme cases resulted in death or permanent injury.

New York City, the nation’s largest police department, has rung up more than $1.1 billion in payouts since 2015, followed by Chicago at about $253 million, according to data gathered by the Journal through public-records requests. Los Angeles County paid out more than $238 million since fiscal year 2015.

Continue reading.

The Wall Street Journal

By Scott Calvert and Dan Frosch

Updated Oct. 22, 2020 11:26 am ET

Investors are losing trust in the Land of Lincoln.

Illinois, the fifth largest state economy in the United States, is being forced to pay sky-high interest rates on its general obligation municipal bonds to compensate investors for the risk of lending the state money. The three largest credit rating agencies have not only classified Illinois debt as on the brink of junk, but they’ve also issued negative outlooks to boot.

The Prairie State has plenty of company in this regard. Moody’s recently lowered the credit ratings of both New York State and New York City. New Jersey, despite being known as the state with the most millionaires per capita in the U.S., is considered a problematic bet—two credit rating agencies have it on negative outlook.

Continue reading.

Forbes

by Taylor Tepper

Oct 23, 2020

Summary

• We expect that stimulus will be passed (although probably not until early 2021) and that it will include state and local government assistance.
• In the run-up to the election, the municipal sector may see higher volatility given uncertainty on a second round of fiscal stimulus.
• But we believe that either election result bodes well for municipal bonds.

Continue reading.

Seeking Alpha

Oct. 21, 2020

A little-noticed provision of the revised Heroes Act which passed the House on Oct. 1 might destroy the U.S. municipal bond market. Although this may be a desirable outcome to proponents who would like to free state and local government from the costs and constraints associated with issuing bonds, such a radical change at least merits a debate.

The legislation threatens to eliminate the municipal bond market by expanding the Federal Reserve’s Municipal Liquidity Facility. The MLF was created by the Federal Reserve as an emergency backstop when the municipal bond market temporarily froze up at the start of the COVID-19 crisis in March. Under its current rules, MLF offers government borrowers financing for up to three years at varying interest rates that depend on the entity’s bond rating. For most municipal market borrowers, interest rates quoted by the Fed are higher than market yields. As a result, only two relatively distressed borrowers, the State of Illinois and the New York Metropolitan Transportation Authority have taken advantage of MLF thus far.

The municipal market regained its footing in late March and has met the needs of most other public sector borrowers at near record low rates.

Section 801 of the new Heroes Act (HR 925) would increase the maximum borrowing term to ten years and lower the interest rate for all government borrowers to 0.25 percent — regardless of credit rating. Since no state or local government can borrow for ten years at such a low rate, the rational choice for them would be to abandon the municipal bond market and rely exclusively on the Fed while the liberalized MLF remains in effect. Although many governments issue bonds for terms longer than ten years, for most it would make sense to borrow from the Fed and then refinance in 2030 or 2031.

In considering the potential impact of Section 801, it is worth noting that its provisions would only be in effect until Feb. 1, 2021 and that HR 925 is unlikely to become law in its current form given resistance from Senate Republicans.

But if the November elections return a unified Democratic government, language like that in Section 801 could become law, and its provisions could be extended well beyond next February, when — in all likelihood — the COVID-19 crisis will still be with us.

Indeed, like many pieces of crisis legislation, the MLF extension could become permanent. That outcome would be welcome to many advocates who wonder why banks get to borrow from the Federal Reserve at 0.25 percent (the current Federal Funds rate) when states and cities cannot. While it may be reasonable to expect banks and governments to be able to borrow on equal terms, this inequity could be solved by making it harder for banks to access credit at artificially low interest rates rather than making cheap loans more universally available.

Replacing the municipal bond market with Federal Reserve financing means eliminating an institution that has worked reasonably well for over 200 years. Although there have been notable default spikes during the 1840s, after the Civil War and in the Great Depression, the market has been orderly most of the time. Further, the need to attract capital from private investors has imposed discipline on state and local government. Today, municipal debt outstanding is a small fraction of U.S. Treasury securities held by the public.

That said, the municipal bond market is open to valid criticisms. The exemption on municipal bond interest from income taxes can be regarded as a giveaway to the rich. Issuing municipal bonds can be costly — as underwriters, financial advisors, attorneys, and rating agencies all expect fees for their efforts. And municipal bonds, especially those floated by smaller issuers, can be highly illiquid.

But these concerns can be ameliorated by reforming the municipal bond market rather than abolishing it. The tax exemption on municipal bonds could be replaced by federal interest subsidies to bond issuers, turning a tax expenditure into a more transparent form of spending, leveling the playing field for investors in all tax brackets. More states could follow Vermont’s example by establishing a bond bank, which issues bonds on behalf of smaller local governments, spreading origination costs across multiple borrowers and providing greater liquidity. Multistate bond banks may also be worth exploring.

Federalizing municipal debt may have undesired outcomes. Ultralow interest rates could lead to increased borrowing and defaults. Unlike private investors, the Fed does not have a strong incentive to take delinquent borrowers to court. The result could be mountains of new state and local debt added to the high and rapidly rising federal debt — with defaults being ultimately eaten by U.S. taxpayers.

But regardless of whether federalizing municipal debt is good or bad public policy, it is a significant change worthy of discussion. Before the Heroes Act or successor legislation makes further progress, Section 801 warrants a healthy debate.

THE HILL

BY MARC JOFFE, OPINION CONTRIBUTOR — 10/24/20 01:30 PM EDT

MUNIS in FOCUS: Eric Kazatsky, Senior U.S. Municipals Strategist for Bloomberg Intelligence: stimulus, new issuance, spreads. Hosted by Paul Sweeney and Vonnie Quinn

Listen to audio.

Bloomberg Radio

October 23, 2020 — 10:03 AM PDT

RJ Gallo, Senior Portfolio Manager: Fixed Income and Head of the Municipal Bond Group at Federated Hermes, on bond markets and the election. Hosted by Paul Sweeney and Vonnie Quinn.

Listen to audio.

Bloomberg Radio

October 19, 2020 — 10:12 AM PDT

The U.S. Treasury Department opposes extending the Federal Reserve’s $500 billion municipal lending program beyond the end of 2020 or easing the costly terms that have left it virtually unused.

The Trump administration’s views were laid out in response to questions from the Congressional Oversight Commission, which was created to monitor the central bank lending efforts ushered in by the March economic stimulus bill.

Extending the Fed’s ability to intervene in the $3.9 trillion municipal market improved the confidence of investors and caused prices to rebound from the fear-driven selloff that erupted in March and threatened to severely curtail governments’ ability to raise cash. It has since been almost completely unused, with loans extended only to two borrowers, Illinois and New York’s Metropolitan Transportation Authority, since governments can borrow more cheaply in the public markets.

The lending facility was the subject of a commission report last week that reflected a partisan split on whether it should be expanded. It’s currently set to lapse at the end of December, unless the Fed’s Board of Governors and the Treasury agree to extend it, according to the central bank.

The Treasury currently opposes keeping it in place beyond the end of the year, according to responses to questions included in an Oct. 16 letter to the commission from Frederick Vaughan, an official in the Treasury’s Office of Legislative Affairs. The Treasury is also currently against lowering the pricing of the loans or extending their terms beyond the three-year limit, according to the document.

Local government lobbying groups have urged the Fed and Treasury to loosen the terms of the program and extend it, given that the pandemic continues to hurt municipal budgets and the prospects for a large amount of aid from Washington appear dim for now.

The Treasury said the program succeeded in calming the market by providing a backstop for state and local governments.

“The facility’s low utilization reflects a recovered and functioning municipal securities market,” the document says.

While the program hasn’t seen major usage, it helped drive down borrowing costs for states and cities since March. Local government lobbying groups said in the letter last week that support for the market would likely still be needed in 2021 due to the pandemic’s fiscal toll.

Bharat Ramamurti, a member of the Congressional Oversight Commission and a former aide to Senator Elizabeth Warren, said in an interview Tuesday that extending the facility into 2021 would be a “bare minimum” change that could help state and local governments.

He said the Treasury Department’s position is reflective of Republicans’ resistance to helping state and local governments.

“It’s quite obvious that the hit that state and local governments are going to take from Covid is going to last beyond the end of this year,” he said.

The Treasury Department worked with the Fed on the design of the program and reviewed amendments to it.

Ramamurti said the Treasury’s comments show that officials there may be a key obstacle to the Fed expanding the scope of the facility given that the department could veto changes.

He noted that Treasury’s resistance to some proposed changes have no legal basis. For example, local government lobbying groups have called for the Fed’s Municipal Liquidity Facility to buy longer-term municipal debt. Current purchases are limited to debt maturing in three years or less, which borrowers say is too restrictive.

The Treasury noted in its responses that there’s no legal impediment under the Cares Act to making that change, but said it opposed doing so.

Ramamurti said the Treasury is not being aggressive enough in trying to help governments, which the Cares Act called for.

“I’m really disappointed in the responses that we got,” Ramamurti said.

Bloomberg Markets

By Amanda Albright

October 20, 2020, 1:16 PM PDT Updated on October 20, 2020, 2:42 PM PDT

The U.S. Department of Treasury last week responded to written questions from the CARES Act Congressional Oversight panel charged with monitoring the Treasury’s stimulus programs, stating that they do not believe that the Municipal Liquidity Facility (MLF) should be extended beyond its current sunset date of December 31, 2020.

These echos recent comments from CARES Act Congressional Oversight Member Senator Pat Toomey (R-PA) calling for the end of the program at years end.

The letter can be viewed here.

In their response, Treasury made the case to end the MLF stating:

“At this time, the Treasury Department does not believe that the Municipal Lending Facility should be extended beyond its current expiration date of December 31, 2020. The Federal Reserve and Treasury continue to monitor market stability and issuer market access in order to determine whether any changes to this expiration date would be warranted,” Treasury stated.

In another response, Treasury acknowledged that reduced spending by state and local governments, “could contribute to a short-term decline in GDP” but didn’t draw any connection to the Fed municipal facility.

Further, Treasury also said it doesn’t expect any losses on a couple of loans made under the program so far:

“While Treasury does not consider taxpayer losses a desirable policy outcome, the incurrence of losses would be acceptable. ”

The BDA will continue to provide updates as they become available.

Bond Dealers of America

October 21, 2020

With Election Day right around the corner, fixed income investors have a variety of outcomes to consider. That includes potential impacts for municipal bonds. Investors can improve outcomes and get defensive with the VanEck Vectors Municipal Allocation ETF (Cboe: MAAX).

MAAX, which launched last year, is based off a proprietary model that incorporates momentum, along with both duration and credit risk indicators, to tactically allocate among selected VanEck Vectors Municipal Bond ETFs, which covers the full range of the risk/return spectrum in the muni market and includes five VanEck Vectors Municipal Bond ETF options.

Recent action suggests MAAX positioning could benefit investors into year end.

“Demand for the riskier segments of the municipal bond market faded in September. Demand for high yield municipal bonds was strong leading up to the pandemic and then fell sharply from February to April. Thereafter, demand ticked up from May through August, but fell, once again, in September,” according to VanEck research.

Are Safe Haven Bonds that Safe?

It almost seems like “safe haven bonds” has become a misnomer. Some of the safest debt, such as municipal bonds, are now causing issuers to ask for help from the Federal Reserve amid the coronavirus outbreak, and it looks like their pleas will be answered.

Municipal bonds, known simply as munis, are debt obligations issued by government entities. Like other forms of debt, when you purchase a municipal bond, you are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period of time. At the end of that period, the bond reaches its maturity date, and the full amount of your original investment is returned to the investor.

Since muni bond interest is exempt from federal taxes, muni ETFs are a good way for investors seeking tax-exempt income, especially those in higher tax brackets. Due to its tax-exempt status, the asset category is also best utilized in taxable accounts. Current risk trends indicate it could be time to consider MAAX.

“MAAX will continue to seek to balance both the risks and rewards of the asset class. It maintains a 35% allocation to high yield, a 35% allocation to investment grade long duration and a 30% allocation to intermediate-term investment grade. We believe that this allocation should allow MAAX to continue to benefit from attractive after-tax yields relative to what other asset classes are offering,” notes VanEck.

ETF TRENDS

by TOM LYDON on OCTOBER 23, 2020

Rising sea levels are a credit risk for investors in coastal states’ infrastructure and municipal bonds.

A recent report by Moody’s Investor Service says that coastal states and local governments of cities face increased investment risk from rising sea levels as frequent and severe flooding threaten their economies and infrastructure.

Moody’s climate speciality affiliate Four Twenty Seven estimates that by 2040, increased sea levels will have a significant impact on every coastal state and over 110 cities with a population of more than 50,000.

According to the National Oceanic and Atmospheric Administration (NOAA), in the last two decades, the Atlantic and Gulf coasts experienced anywhere from a 100-150% increase in annual days of high-tide flooding.

Continue reading.

INDUSTRY LEADERS MAGAZINE

by CHRISTY GREN

OCTOBER 16, 2020

Demand for New Municipal Identifiers Rises 18%

NEW YORK, Oct. 14, 2020 /PRNewswire/ — CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for September 2020. 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 increase in request volume for new corporate and municipal debt identifiers.

CUSIP identifier requests for the broad category of U.S. and Canadian equity and debt totaled 4,816 in September, up 17.4% from last month. On a year-over-year basis, corporate CUSIP requests are up 10.5%. September volumes were driven by an 84.9% monthly increase in requests for corporate debt identifiers and an 18.1% monthly increase in requests for corporate equity identifiers.

Municipal requests also climbed in September. The aggregate total of all municipal securities – including municipal bonds, long-term and short-term notes, and commercial paper – surged 18% versus August totals. On an annualized basis, municipal CUSIP identifier request volumes were up 12.6% through September.

“Record low interest rates and lingering fears of a possible liquidity crunch throughout most of this year have not materially slowed the pace of new capital creation in the major fixed income and equity asset classes,” said Gerard Faulkner, Director of Operations for CGS. “While we continue to see month-to-month volatility in CUSIP request volume, the overall direction in U.S. corporate and municipal securities continues to trend positive so far this year.”

Requests for international equity and debt CUSIPs were mixed in September. International equity CUSIP requests were down 29.1% versus August. International debt CUSIPs increased 66.8% on a monthly basis. Syndicated loan requests were up 37.9% on a monthly basis and down 31% year over year.

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

• Number of passengers last week most since early in pandemic
• Despite industry’s pain, bondholders see long-term recovery

Americans are slowly starting to fly again, which signals a positive turnaround for owners of the more than $120 billion of municipal debt sold by the nation’s airports.

Some 5.7 million travelers passed through checkpoints in the week ended Oct. 10, the most since the coronavirus pandemic scuttled air travel and halted tourism, according to the Transportation Security Administration. On Sunday alone, the agency counted more than 980,000 travelers, the most since March 16.

The activity is still significantly lower than before the pandemic reached the U.S. and major carriers are idling thousands of employees as a resurgence in the virus threatens to keep travel depressed this year.

But it marks a welcome turn for airports that borrowed tens of billions of dollars in recent years to build new facilities before the coronavirus sent the economy hurtling into the worst recession in modern history. Airport bonds are typically backed by reserves and a combination of fees from passengers, airlines and rental cars or parking.

Jason Appleson, a portfolio manager at PT Asset Management in Chicago, said muni-bond investors anticipate that air travel will eventually return to normal once coronavirus vaccines are developed and widely distributed. Such optimism has allowed airports to continue to borrow easily despite the financial hit dealt to the industry and the deadlock in Washington over further measures to stoke the economy.

Chicago’s O’Hare International sold more than $1 billion worth of securities in late September and Hawaii’s airport system told $582 million last week. Denver International Airport and Kansas City International Airport are slated to sell a combined $1.5 billion of bonds this week.

“People still need to travel city to city, state to state — I don’t think that will be going away,” Appleson said. “It may not happen in the next six months, but in a year, or two years, things should come back.”

Even so, airport bonds have lagged other municipal securities during the pandemic, with investors anticipating a risk of widespread rating downgrades. They have returned about 1.9% this year, according to Bloomberg Barclays index, less than the 2.9% gain for the broader market.

Bloomberg Markets

By Danielle Moran

October 13, 2020, 10:30 AM PDT

— With assistance by Eric Kazatsky, and Natalia Lenkiewicz

• AHA predicts losses that top $300 billion by year-end
• Revenues are down while costs are rising for facilities

A grim reality is setting in across the U.S. hospital sector: a surge in coronavirus infections is encroaching while most facilities are still recovering from the onset of the pandemic.

The growing number of cases is threatening the very survival of hospitals just when the country needs them most. Hundreds were already in shaky circumstances before the virus remade the world, and the impact of caring for Covid patients has put hundreds more in jeopardy.

The new coronavirus sidelined profitable elective procedures and pushed up costs to keep patients and staff safe. Meanwhile, hospitals are losing the privately insured patients they depend on as millions of Americans lose their jobs and employer-sponsored coverage.

“It sort of all comes together as essentially a triple whammy,” Aaron Wesolowski, vice president for policy research, analytics and strategy at the trade group American Hospital Association, said in an interview.

More than 215,000 Americans have now died from the novel coronavirus and 7.8 million have had confirmed infections, numbers that set the U.S. apart on the world stage. Though new virus cases fell last month after a summer spike, Covid-19 is again on the rise, especially in the Midwest. Thirty-eight states are now considered hot spots, according to the Kaiser Family Foundation, which considers rising cases, test-positivity rates and new daily cases per million population in its analysis.

The AHA has estimated the pandemic will cost U.S. hospitals more than $323 billion through the end of this year. U.S. hospital revenue totaled about $1.1 trillion in 2018, according to the most recent AHA data available. The industry group is asking Congress for an additional $100 billion and full forgiveness of loans made under Medicare’s accelerated payment program, among other requests for relief.

As many as half of hospitals could be losing money by year end, Wesolowski said, citing a report it released in July from Kaufman, Hall and Associates. That’s up from about a third that were operating at a loss ahead of the pandemic.

More than three dozen hospitals have already entered bankruptcy this year, adding to a similar number last year, according to data compiled by Bloomberg. More than a dozen in rural areas have also shut their doors, according to the Cecil G. Sheps Center for Health Services Research at the University of North Carolina. The AHA put the total U.S. hospital count at 6,146 in its most recent report, a decrease of 64 from the previous year.

The financial pain has flowed through to Wall Street. Many of the hospitals that entered bankruptcy this year were part of Quorum Health Corp.’s Chapter 11 filing in April. Quorum’s 24 hospitals and other facilities struggled under the demands of treating coronavirus patients. In late June, a judge approved the company’s exit plan, which wiped out shareholders and handed the chain to creditors.

Returns on junk-rated hospital municipal bonds are down nearly 4% this year, recovering after losing 10% in March. As the pandemic set in, Wall Street banks saw a rush of hospitals draw down existing credit lines and were inundated with requests for new or expanded financing. Junk-rated munis have since rallied and are overall little changed this year as investors seek higher-yielding securities.

Shuttered Hospitals

Across the U.S., hospitals are struggling to balance their books and in some cases, already shutting their doors.

“Rural hospitals are closing down right and left,” Bert Cunningham, city manager of Bowie, Texas, said in an interview.

Central Hospital of Bowie closed in February and its owners filed for bankruptcy two months later, debilitated by years of red ink, Cunningham said. Now the property is up for sale for any use, potentially leaving the 10,000 residents in its service area — many of whom are elderly — 30 miles from the nearest acute-care emergency room, he said.

The hospital’s closing could prompt a broader business exodus from the area. “I’ve had local industry tell us they would consider cutting staff or closing down,” only adding to the area’s uninsured, he said.

The pain, though, spreads far beyond smaller communities to larger facilities treating some of those most at risk for serious illness.

Nearly a thousand miles from Bowie, Loretto Hospital on Chicago’s West Side was also coping with its own challenges. Even before the pandemic, life expectancy in the city’s Austin neighborhood was just 68.2 years — 20 years shorter than a few miles away downtown, according to Chief Executive Officer George Miller. A full three-quarters of Loretto’s patients have no insurance or Medicaid, with the latter reimbursing Loretto at about 25 to 30 cents on the dollar, Miller said. Medicare, which represents just 12% of patients, pays about 50 cents.

The hospital received two rounds of CARES Act money, most recently for $500,000, but with $100 million of annual hospital expenses, Miller says it’s not nearly enough. The hospital has spent well over a $1 million on goods to protect its workers. When hospitals throughout the country were scrambling for supplies, he managed to procure personal protective equipment through connections with old fraternity brothers.

Larger hospitals hit by later waves of cases learned how to isolate Covid patients and convince others to come in for some elective surgery — the more profitable procedures that pay the bills, said Sanjay Saxena, co-leader of The Boston Consulting Group’s Center for U.S. Health Care Reform and Evolution. But disparity between the leading facilities and the rest is getting starker, he said.

Millions of new job losses mean a cut in the number of Americans with private insurance — a critical component for hospitals since federal payments don’t cover the bills. In an April report, Saxena said almost two-thirds of U.S. hospitals face “material financial risk” — compared with 20% pre-pandemic — with options extremely limited for the 25 to 30% at the very bottom.

“There’s not a logical savior for that group,” he said. “No one’s running to go buy hospitals and certainly not those.”

Over the years, Bowie, Texas, coped with declining federal payments and residents using its emergency room for free primary care. Now, with layoffs mounting amid virus-induced closures, yet another stream of income is dwindling. “If someone loses their health care they had through work,” Cunningham said, “Who picks up the tab?”

In Chicago, Miller says his facility is carefully managing cash and expenses, sometimes through delayed payments to certain vendors, and thankfully has no debt. “Candidly, we rob Peter to pay Paul,” Miller said.

Loretto did get some good news recently, learning that Merck & Co. had selected it as a site for clinical trials of its coronavirus vaccine, Miller said.

Meanwhile Mercy Hospital & Medical Center on the South Side, the oldest in the city and one that treated patients from the great fire in 1871, has announced it’s closing next year. Says Miller, “Nobody rushes into the inner city, the West Side of Chicago to build a hospital.”

Bloomberg Markets

By Lauren Coleman-Lochner

October 14, 2020, 6:34 AM PDT Updated on October 14, 2020, 7:37 AM PDT

— With assistance by Emma Court, and Elizabeth Campbell

Key Takeaways

• The creditworthiness of HFA single-family and multifamily programs remains strong and stable despite ongoing economic challenges for some borrowers.
• Historic changes in market indicators point to increased housing demand in 2020.
• The median parity ratio among rated single-family programs is about 123%, while programs with a majority of MBS, and with less frequent bond issues, tend to have higher parity ratios.
• Among rated multifamily programs, the median parity is about 124%, with some of the larger programs driving an average total loan balance among the rated portfolios to nearly $1.1 billion.

Continue reading.

15 Oct, 2020 | 17:16

With record low interest rates, pension plan sponsors are increasingly turning to pension obligation bonds (POBs) for a variety of reasons. At S&P Global Ratings, we understand the importance of monitoring not only expected interest savings, but also the risks associated with market volatility. (See Related Research for links to other articles with our views on pension-related obligation bonds.)

Between Jan. 1, 2018, and Oct. 1, 2020, S&P Global Ratings has rated 25 new POB issuances in the public sector totaling nearly $3 billion–22 by cities and three by fire districts.

Continue reading.

14 Oct, 2020

As we are nearing the end of calendar-year 2020, contrary to earlier expectations and political promises, the COVID-19 cases are back on the rise throughout the United States (U.S), local and state governments are being forced to bring back their strict restrictions and the unemployment numbers are still high with low consumer sentiment to revive the economy.

Furthermore, the national civil unrest and natural disasters on both coasts are further exacerbating the issues for all forms of government throughout the U.S.

In this article, we will take a closer look at ways cities and other local governments are able to weather the storms.

Continue reading.

municipalbonds.com

by Jayden Sangha

Oct 14, 2020

Universities have utilized public-private partnerships (P3s) in recent years to facilitate various types of campus construction projects, including campus housing, specialized facilities, utility systems and even overall campus expansions. Utilizing P3s for campus improvements has allowed universities to deliver important projects and leverage private industry expertise while shifting capital cost investments to the private sector.

Despite the growing trend of using P3s to deliver projects, the COVID-19 pandemic may impact universities’ interest in utilizing P3 models for campus improvements in the near future. Two interrelated factors that could affect the attractiveness and feasibility of university P3s are potential revenue reductions and declines in demand for the facilities constructed. The uncertainty of potential shutdowns, limitations on normal student activities and travel restrictions have caused schools to worry that some students may not return to classes this fall, negatively impacting revenues. Significant decreases in the number of out-of-state and international students for public universities could especially impact university budgets. Furthermore, a recent Moody’s report predicted a slow-down in the student housing P3 sector, in part due to concerns about on-campus housing demand softening, as COVID-19 forces many students to continue to learn off-campus.

However, even in the face of such uncertainty, P3 project delivery could allow universities to leverage the flexibility afforded by P3 models to continue progressing campus projects in the midst of these challenging times. One advantage of P3 project delivery is that it can allow owners to defray or shift certain capital cost investments. With tighter budgets, universities may seek to engage the private sector to fund or finance capital outlays, especially for larger capital projects that may not be sensitive to short-term enrollment declines. For projects that may not generate significant revenue through operations, universities can utilize availability payment P3 models to spread payment obligations over a longer period. An example of a project delivered with availability payments is the University of California Merced 2020 Campus Expansion Project, completed in June of this year, which delivered student housing, classrooms, recreational facilities and research buildings, as well as the underlying infrastructure to support these new facilities. Utility infrastructure projects, similar to the University of Iowa’s utility P3 project, may also be particularly attractive, as these projects often include large upfront payments to universities that are later repaid through fees paid to developers over the life of the project.

Furthermore, even in light of potential challenges for student housing P3s, some universities have forged ahead with projects, such as South Dakota University, which recently issued an RFP for a student housing project and the University of Oregon, which reached financial close for a student housing P3 near its Eugene campus.

Though the COVID-19 pandemic will certainly disrupt how universities approach and plan for campus building projects, the flexibility afforded by P3s may allow for universities to continue to progress campus improvements despite short-term uncertainties over revenues and demand.

Nossaman LLP

By Josh Burke on 09.29.2020

Fitch Ratings-New York/Sao Paulo-15 October 2020: Fitch Ratings has published an updated version of its “Ports Rating Criteria,” initially published on March 24, 2020. The primary changes improve alignment with the Infrastructure and Project Finance Rating Criteria (March 2020) in the areas of debt structure, infrastructure development/renewal and financial metric definitions.

Contact:
Isabella Magalhaes
Director
+55 11 4504-2208

Fitch Ratings Brasil Ltda.
Alameda Santos, n 700 – 7 andar Edificio Trianon Corporate
Cerqueira Cesar Sao Paulo – SP
01.418-100

Stacey Mawson
Director
+1 212 908 0678

Shyamali Rajivan
Director
+44 20 3530 1733

James Hodges
Associate Director
+61 2 8256 0377

Media Relations: Jaqueline Carvalho, Rio de Janeiro, Tel: +55 21 4503 2623, Email: jaqueline.carvalho@thefitchgroup.com
Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com

Additional information is available on www.fitchratings.com

Tax-exempt municipal bonds continue to trade favorably to Government Bonds as the Federal Reserve and Treasury support most fixed income markets with the exception of municipals.

Unless, of course, you count the little used $500 billion Municipal Liquidity Facility (MLF) created by the Federal Reserve Board in conjunction with resources provided in the CARES Act at the beginning of the pandemic. New York Metropolitan Transit and the State of Illinois are the only two issuers to participate to date in the MLF. So, even though interest rates are at historically low rates, municipals are offering an incremental yield advantage with the bonus of tax-exemption when compared to Treasurys and Agencies as a consequence of the Federal Reserve Board’s unprecedented intervention in the fixed income markets.

Even if Congress doesn’t act to assist state and local governments with additional fiscal aid, we should expect to see many types of municipals continue to outperform Treasurys and Agencies. Keep in mind however that tax-exempt bonds financing convention centers, transit facilities, senior living, private post secondary education, and economic development have been most affected by the economic contraction caused by the pandemic. Property tax supported general obligation bonds and essential fee for service revenue bonds consequently have been the strongest muni assets through the pandemic.

As Congress has stalled in its attempts to pass additional support for state and local governments through either the Democrats’ HEROES Act ($3 trillion) or the Republicans’ HEALS Act ($1 trillion), issuers and investors are looking to the November 3rd election to provide guidance on future fiscal policy relief. And with presidential and vice presidential debates and a Supreme Court justice appointment confirmation hearings absorbing most of Washington’s oxygen, it isn’t likely Congress will act anytime soon on state and local government fiscal relief.

Municipal bond investors have much at stake in this election. Financial matters are very much in play as both parties are promoting shifting policy emphasis on taxes, trade, monetary intervention, fiscal legislation, and social justice. The direction our economy and society take as a consequence of this election will long be felt.

Most importantly, keep in mind that all other things being equal, increasing federal or state taxes will make tax-exempts more valuable while trade and immigration policies will influence local economic development and expansion or contraction. In the absence of fiscal relief it will become even more challenging to evaluate municipal credits in a timely manner. And don’t lose sight of the fact the Fed will eventually have to adjust monetary policy to account for the aggressive intervention exercised during the pandemic.

There is no precedent for the level of government involvement in today’s fixed income markets. The consequences of this election and the policy steps taken in 2021 will have a powerful influence on both investor returns and issuer borrowing costs. Investors and issuers can however find safe harbor in the fundamental security of what municipal bonds finance – streets, clean water, schools, public safety – knowing these fundamentals will persist while rewarding investors with predictable, though perhaps unsatisfying absolute, rates of return and offering state and local government issuers historically low costs of borrowing.

Tom Lockard is the co-founder, head of originations at 280 CapMarkets, a fixed income fintech organization supporting execution by providing access, clarity and confidence via BondNav its cloud-native platform.

FINANCIAL ADVISOR MAGAZINE

OCTOBER 15, 2020 | TOM LOCKARD

Summary

• In years with presidential elections, we take a deeper dive into how the national election could impact state and local governments.
• Political risk is also an important component of our analysis, as the political party makeup of the executive and legislative branches can have a large impact on municipal bonds.
• We think it is unlikely we’ll see any additional aid ahead of the election, but post-election we think the potential rises, particularly if Democratic nominee Joe Biden wins in the US presidential race.
• Regardless of the November election outcome, we are prepared to take advantage of any changes to the muni bond market where we see potential investment opportunities.

Continue reading.

Seeking Alpha

Oct. 14, 2020

In a widely expected move, Federal Open Market Committee (FOMC) members voted to hold interest rates near zero during September’s meeting.

Projections released by the Central Bank signal that interest rates are expected to remain unchanged for several years. The latest dot plot shows thirteen of seventeen officials projecting rates on hold through 2023, one member projecting a rate hike in 2022, and three seeing rates above zero in 2023. The Federal Reserve does not expect inflation to reach the two percent level until 2023. Officials also expect the unemployment rate to extend its decline, with median projections calling for an unemployment rate of 4 percent by 2023.

Continue reading.

municipalbonds.com

by Corey Boller

Oct 13, 2020

Related Fitch Ratings Content: The Next Phase: How Coronavirus-Related Changes Could Permanently Alter the Global Public Finance and Infrastructure Landscape

Fitch Ratings-New York-07 October 2020: Four areas of change brought on or accelerated by the coronavirus pandemic could have an outsized impact on both public finance and infrastructure throughout the world, according to Fitch Ratings in a new report.

The past nine months have seen changes to personal, corporate and government behavior of unprecedented rapidity and scope, according to Laura Porter, Fitch’s Global Head of Public Finance and Infrastructure. ‘In many ways, the coronavirus outbreak seems to have accelerated shifts that were already under way,’ said Porter. ‘However, the extent to which the landscape has fundamentally changed can only be truly discerned once pandemic conditions have passed.’

The trends that are key to watch, particularly once pandemic conditions have passed, are:

–Work-from-home;
–Residential preference shifts;
–Virtual delivery of both goods and services;
–Globalization trends.

Local and regional governments, along with certain transportation assets are exposed to the largest number of potential permanent changes, although the severity of impact for specific risks could be higher for other sectors.

Working from home has become the norm on a much grander scale during the pandemic. Whether this leads to vastly changing residential preferences remains to be seen. For example, suburban or more rural areas with larger living spaces may have become fundamentally more competitive versus high-density cities.

Though increasing in prominence for many years, e-commerce and the virtual provision of services has grown dramatically due to the coronavirus. Government tax systems, supply and distribution chains and brick and mortar retailers have already adjusted their business models to accommodate this trend to varying degrees. ‘Virtual offerings provide an additional delivery option that is likely to further reduce traditional demand, making a complete return to pre-pandemic behaviors highly unlikely,’ said Senior Director James Batterman.

‘The Next Phase: How Coronavirus-Related Changes Could Permanently Alter the Global Public Finance and Infrastructure Landscape’ is available at ‘www.fitchratings.com’.

Contact:

Laura Porter
Managing Director, Global Head of Public Finance & Infrastructure
+1 212 908-0575
Fitch Ratings, Inc.
300 W 57th St
New York, NY 10019

James Batterman, CFA
Senior Director
+1 212 908-0385

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

Additional information is available on www.fitchratings.com

*In response to a Barron’s story from September 22, 2020

In “‘You’re Cornered if You’re a City.’ How Concentration in the Municipal Bond Market Is Raising Borrowing Costs” (Barron’s, September 22, 2020), Garphil Julien tries to make the case that a “concentration of power” among banks and securities firms in the municipal bond market harms state and local governments. Unfortunately, the author does not have a clear understanding of the market and made several factual misstatements. Further, the author never explains the concentration of the municipal bond market or how the purported concentration increases borrowing costs.

The municipal bond market is the opposite of concentrated. It is instead the most democratic sector of our capital markets.

A defining characteristic of the municipal market is its breadth and diversity. There are 15,000 states, cities, towns, school districts, water and sewer authorities and numerous other categories of issuers who access the market and more than one million individual municipal securities outstanding. Most deals in the municipal market are small—the average new issuance last year was just $37 million. The diverse and small nature of the market drives its structure. Most big Wall Street firms focus on big transactions and simply are not interested in the hundreds of small deals sold every year.

The diverse nature of the market means those who serve the market are also diverse. Look at the 2019 “league tables,” the market share rankings for municipal bond underwriters. Big Wall Street firms certainly feature prominently among the nation’s top 20 underwriters. But so do “Main Street” regional underwriters in places like Minneapolis, Dallas, Chicago, and Great Falls, Montana. Due in part to decades of effort by local governments around the country to engage women and minority owned firms in their transactions, several MWBE underwriters are also in the top 20 municipal underwriters.

These smaller regional companies serve their clients well. But they are hardly Wall Street powerhouses, and their success demonstrates the lack of concentration in the market.

The diverse nature of the market makes it possible for small towns and school districts to borrow at low fixed rates for terms up to 30 years and longer. The municipal market is an extraordinary product of our federal system of government and is the envy of other countries.

There are other issues with the piece. The author seems to conflate two widely used municipal pricing benchmarks, the Refinitiv MMD Scales and the SIFMA Municipal Swap Index. The two benchmarks are used quite differently. MMD is an estimated yield curve generally used to price new municipal bond issues. The SIFMA Swap Index, on the other hand, is compiled from re-marketings of certain variable rate municipal bonds and was designed as a means to set rates for municipal interest rate swaps. We are aware of no controversies surrounding the SIFMA Index.

In addition, the author quotes a source referring to local governments saying “You have no choice but to turn to financial markets, and they are well-positioned to extract high interest rates.” This is perhaps the most misleading point in the piece. High grade municipal issuers today can sell bonds at the lowest rates since the 1940s. Where are these “high interest rates” that underwriters are ostensibly extracting?

Without identifying municipal market concentration or how that purported concentration leads to higher borrowing costs, the author argues that state bond banks may be a solution to the phantom “concentration of power”. Bond banks can be an effective financing tool, but they do not change the nature of the issuance process or the relationship between the issuer and the market.

Instead of, say, a school district accessing the market on its own, the state serves as issuer and re-lends the proceeds of the sale to the relevant borrowers. But the issuance process is the same. The bond issuer still negotiates with underwriters on deal pricing, and investor demand still drives the rates that issuers pay. Moreover, unlike direct bond issuance by the school district, the bond bank transaction is more likely to be underwritten by Wall Street firms that the author seems to think are at the heart of the “problem” in the municipal bond market. Bond banks are not a magic bullet for anything.

One point where we agree with Mr. Julien is that state and local governments are in a fiscal crisis. Governors have told Congress that states need $500 billion of federal help in order to maintain state and local government employment and services as the economy recovers from the pandemic and shutdown.

Bond banks will not fill the gap. Only Congress can address this problem.

Michael Nicholas
Chief Executive Officer
Bond Dealers of America

Bond Dealers of America

October 7, 2020

• London Stock Exchange listing to be first by U.S. muni issuer
• Utility wants to grow investor base with European listing

San Francisco’s water and power utility will test European appetite for U.S. municipal green bonds with an inaugural listing on the London Stock Exchange.

The Public Utilities Commission of the City and County of San Francisco, which provides water, wastewater treatment, and hydroelectric and solar power, is scheduled to sell $665.4 million in taxable bonds on Oct. 7. A $341.9 million slice of that will be designated as green bonds and listed on the London exchange, making the utility the first U.S. municipal issuer to do so.

Green bonds are a growing segment of fixed-income markets, with $258 billion of debt and loans issued in 2019, up from $171 billion the year before, according to the Climate Bonds Initiative. The growth was led by the broader European market, which accounted for 45% of the total, the CBI said. Sales of sustainable municipals have also been on the rise, with $9.9 billion sold this year, a 46% increase from 2019, according to data compiled by Bloomberg.

“A lot of European investors are restricted to green bonds that are listed on a European exchange,” Mike Brown, the utility’s environmental finance manager, said in an interview. “Our goal is to help grow our investor base and also grow the U.S. muni-green bond investor base.”

International investors have been an increasingly bigger presence in the municipal-bond market that normally caters to retail and institutional buyers within the U.S. Holdings of state and local government debt by overseas buyers jumped to $107.3 billion as of the second quarter, according to Federal Reserve data. It was the biggest quarterly increase in a decade.

Municipal bonds can appeal to buyers in Europe and Asia because they’re high-quality assets that have a good amount of yield and are less risky than corporate bonds, said Jeffrey Burger, a portfolio manager at Mellon Investments Corp. Mellon has a municipal bond fund in Ireland specifically targeted to European buyers. Burger said he’s been fielding an “unequivocally” higher volume of calls from investors in Europe and Asia interested in municipals.

Proceeds from the San Francisco sale will be used to refinance debt sold for projects relating to improving water supply and drought preparedness, restoring habitats and protecting the water supply against seismic activity, among other environmental projects.

Once the sale has closed, the London exchange is expected to officially list the bonds by late October, Brown said.

The utility explored multiple European exchanges for the listing, but settled on London mainly because it could maintain the same disclosure process used for U.S. investors, said Vishal Mawkin, an attorney with Norton Rose Fulbright, bond counsel for the deal.

“We were keen to ensure that we didn’t need to include additional disclosure,” Mawkin said.

If interest is strong and the deal is successful, this could be the first of many taxable green bond sales into Europe for the commission, Brown said.

Bloomberg Finance

By Fola Akinnibi and Danielle Moran

October 5, 2020, 2:00 AM PDT Updated on October 5, 2020, 6:53 AM PDT

— With assistance by Romy Varghese

Read the Report.

October 9, 2020

Key Takeaways

• States relying on in-person casino gaming activity collected nearly no related taxes from April through June.
• Nevada, the state most reliant on gaming activity, saw some gains in June and July as casinos began to reopen, but faces headwinds from a disrupted travel industry and canceled conventions.
• In the Northeast, casino tax collections varied widely from March to August with New Jersey’s revenue decline only 23% compared to 78% for New York State, due to New York’s casinos being closed for nearly the entire period.
• Future sports betting revenue growth remains uncertain as events are canceled or scaled back, but some states may look to it as new source of incremental revenue.

Continue reading.

7 Oct, 2020

Related Fitch Ratings Content: U.S. Public Finance College and University Rating Criteria

Fitch Ratings-Chicago-07 October 2020: Fitch Ratings has made minor updates to its “U.S. Public Finance College and University Rating Criteria” as part of the routine criteria review process.

Primary revisions to the criteria are: minor editorial changes; recharacterization of test score data as a qualitative rather than scaled consideration to reflect the sector’s shift in their use; clarification of adjusted cash flow margin to explicitly incorporate non-cash Other Postretirement Benefit Obligation (OPEB) expense to be consistent with now-universal reporting standards; shifted pension treatment section to an appendix; and aligned operating lease language to reflect changes in FASB guidance and support cross-sector criteria consistency.

There is no impact on existing ratings from this update.

This report replaces the criteria report of the same name dated March 26, 2020.

Contact:

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

Tipper Austin
Director
+1-212-908-9199

Raj Sanghvi
Senior Analyst
+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

Municipal bond investors are anxiously awaiting the outcome of the upcoming Election Day and that was evident last month as the iShares National Muni Bond ETF (NYSEArca: MUB) posted a modest decline.

MUB, the largest municipal bond exchange traded fund, seeks to track the investment results of the S&P National AMT-Free Municipal Bond IndexTM. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index measures the performance of the investment-grade segment of the U.S. municipal bond market.

“The municipal market was nearly stagnant in September, with the S&P Municipal Bond Index returning just 0.02% for the month,” according to BlackRock research. “Uncertainty around fiscal policy and the pending U.S. presidential election left investors reluctant to put their cash to work in the muni market. Performance was relatively strong in muni bonds with short and intermediate duration (i.e., low to medium levels of interest rate risk) and barbell credit strategies (i.e., exposure to both low- and high-quality bonds). Year-to-date, the asset class has gained 3.18%.”

Yields on munis have been steadily falling with bond prices rising even before the coronavirus hubbub. After the 2017 tax law changes, demand for tax-exempt munis became more attractive in response to caps in the federal deduction for state and local taxes, especially among more high-tax states. The tax law also diminished supply due to new limits on when governments can issue tax-exempt debt.

Munis: Still Worth a Hard Look

Some market observers believe that if election results weigh on municipal bonds over the near-term, that could be a buying opportunity with the asset class.

Due to the economic shutdown, which led to a spike in unemployment rates across the country, plenty of states are facing budget woes. Some of those with the worst shortfalls are among the largest issuers of municipal bonds, meaning they’re also among the biggest weights in this category’s ETFs. However, to this point, the muni market is proving resilient.

“Fund flows remained positive but decelerated over the month, mostly in long-term and high yield funds,” according to BlackRock. “Waning demand was also evident in the new-issue market, which saw lower overall subscription rates and better investor discipline among credits with increased idiosyncratic risks. However, as fiscal stimulus negotiations re-intensify and Democrats expand their lead in the polls, the focus on fundamentals may soon shift toward expectations for higher taxes and increased need for tax-exempt income.”

ETF TRENDS

by TOM LYDON on OCTOBER 9, 2020

Summary

• While most polls have Vice-President Biden ahead by 6-7% points, we know the race has the potential to be much closer.
• A higher marginal rate should also flatten the muni yield curve over time as the demand for longer-dated paper increases because of the benefits it provides on a taxable equivalent yield.
• More fiscal stimulus, more deficits, and an immediate infrastructure program are all strong possibilities if we get the Blue Wave that sweeps the White House, House, and Senate all into the Democratic column.

Continue reading.

Seeking Alpha

by David Kotok

Oct. 7, 2020

• Bond sales jump as governments rush ahead of the election
• Uncertainty about economy, risks of acceleration in pandemic

Analysts who track the $3.9 trillion municipal-bond market, where prices have barely budged since late August, are bracing for a return of volatility.

The presidential race, a failure to enact another economic stimulus bill and a potential spike in Covid-19 cases during flu season could bring price swings back to the muni market, Wells Fargo Securities analyst George Huang said in an Oct. 7 note. That echoes the view of analysts at BlackRock Inc., the world’s biggest asset manager, who said they’re expecting heightened volatility as local governments rush to sell new debt before the election.

It would mark a departure from the calm that’s characterized the market since it recovered from a record selloff in March. That has persisted even as states, cities and transit agencies have been upended by the pandemic’s financial toll, with yields holding effectively unchanged during all of August before ticking up slightly this month.

“We recommend investors be nimble with execution and prepare for potential of en masse exodus again if COVID cases spike more rapidly, if White House infections worsen, and if more meaningful stimulus talks break down yet again,” Wells Fargo’s Huang said in the note.

Muni market has calmed since March’s record price swings

The muni market has seen yields slowly climb, with those on 30-year debt rising about 15 basis points since the start of last week, according to Bloomberg BVAL. Investors last week pulled cash out of municipal-debt mutual funds for the first time in 20 weeks, according to Refinitiv Lipper US Fund Flows data. And the market is facing added headwinds from a surge in debt issuance by states and cities as well as uncertainty around whether Congress will extend aid to help governments replace the tax revenue lost because of the pandemic shutdowns.

“People were waiting and seeing if something would come through, and now there’s more skepticism about that,” Huang said in an interview. He said the firm is recommending that investors move to higher-quality debt.

For investors, higher yields could mark a buying opportunity. BlackRock said in a note that the stepped up pace of issuance this month may do just that.

“We anticipate increased volatility in the coming months, and a pull-forward of issuance ahead of the U.S. election that is similar in magnitude to the pull-forward experienced in December 2017 ahead of tax reform,” they said in a note.

Jeffrey Burger, senior portfolio manager at Mellon, said he was positioning defensively by moving to higher-quality municipal debt given the risk of volatility ahead of the election. “What we want to do is be positioned opportunistically to take advantage of that,” he said.

Bloomberg Economics

By Amanda Albright

October 8, 2020, 10:41 AM PDT

From the widespread Coronavirus pandemic to the worldwide economic halt, 2020 also happens to be the presidential election year in the United States.

Contrary to previous presidential elections, the incumbent and former Vice President Joe Biden couldn’t be more polar opposite on issues related to economy, disease control and reviving job growth in the U.S. If elected president, Biden has vowed to reverse things like the tax reform implemented by President Trump, which can bring a significant change to how investors will look to shift their investment holdings to seek tax shelter and capital security.

In this article, we’ll take a closer look at the impacts of the potential political shift and how it can transform the capital markets in the U.S.

Continue reading.

municipalbonds.com

by Jayden Sangha

Oct 05, 2020

Tax Policy and Municipal Bonds

As the only DC-based advocate for US focused bond dealers, the BDA has produced the linked document – 2020 Electoral Outlook: Tax Policy and Municipal Bonds.

The brief discusses both Presidential and Congressional predictions, along with comparisons of Committee priorities and potential Leadership and how the potential outcomes will affect tax policy and municipal bonds.

The BDA continues to work to expand the breadth of its policy products provided to membership. This new policy analysis series includes deep policy dives into both legislative and regulatory issues that directly effect the U.S. fixed income markets including policy briefs on: infrastructure and GSE reform.

Bond Dealers of America

October 7, 2020

Political disagreements have prevented a congressional commission from releasing a monthly report about how federal stimulus aid is being spent.

WASHINGTON — An oversight panel responsible for monitoring $500 billion in federal aid has become stymied by disagreements about a program to prop up struggling state and local governments and has failed to send a legally mandated report to Congress for weeks.

The standoff over the Municipal Lending Facility, which is operated by the Federal Reserve and supported by the Treasury Department, comes as talks between Congress and the Trump administration over additional stimulus have stalled. Those talks have run aground largely because lawmakers disagree about whether the federal government ought to provide more money to states and municipalities, with Democrats arguing for it and Republicans against it.

The $2.2 trillion stimulus law passed in March created a Congressional Oversight Commission, which includes two Republicans and two Democrats, to keep tabs on some of that spending. By law, it must issue a report to Congress each month.

While the passage of the stimulus legislation was overwhelmingly bipartisan, the oversight commission’s work has become politically charged. A Democrat on the commission recently accused his Republican colleagues of stonewalling its work.

The dispute centers on whether the Fed’s lending program could be doing more to help lower borrowing costs for states, cities and other local governments.

“The commission has a legal obligation to issue monthly reports,” said Bharat Ramamurti, the Democratic commissioner and a former aide to Senator Elizabeth Warren of Massachusetts. “I’m disappointed that Republican foot-dragging has caused us to delay the release of the September report, which reflects broad support for expanding the Fed’s state and local lending program — including from one of the Republicans’ own witnesses at our recent hearing.”

The Fed announced in early April that it would set up a program to buy municipal debt using its emergency lending powers, and the Treasury Department agreed to insure the program against defaults. The central bank hired Kent Hiteshew, an expert on municipal debt, to help devise the program, which is run on a day-to-day basis by the Federal Reserve Bank of New York.

The program was set up as a last-ditch option for local governments that could not borrow money as they usually do by selling bonds. While it has been expanded several times to make more borrowers eligible, the program offers loans at relatively high interest rates, making it an expensive option for all but the hardest-hit states and localities. So far, only Illinois and the Metropolitan Transportation Authority, which operates New York City’s subway system, have used it, borrowing a total of $1.65 billion.

Democrats and some economists have argued that the Fed and Treasury should be more generous, offering lower rates and longer payback terms.

The Fed, for its part, has pointed out that the mere existence of the program has helped calm the market for municipal debt, so that states and localities have been able to sell bonds at extremely low interest rates. The Fed is not supposed to supplant willing private lenders, according to the legislation that enabled its emergency powers.

“Our mandate is to serve as a backstop lender to accomplish these objectives — not as a first stop that replaces private capital,” Mr. Hiteshew said last month at the oversight commission’s hearing. The program “has contributed to a strong and rapid recovery in municipal securities markets.”

He added that state and local governments and other municipal bond issuers could issue securities with interest rates that are “at or near historic lows.”

Democrats counter that the Fed is doing more to help lower the interest rates at which corporations borrow money than it is for state and local governments.

One of the Fed’s corporate programs buys bonds directly and is akin to the municipal program. It, too, charges high interest rates, and, partly as a result, has never been used. But the central bank has a second program that buys corporate debt that has already been issued, either through exchange-traded funds or according to a preset index.

That program was announced early in the pandemic, when the corporate bond market was struggling. But it has bought bonds in the months since, even after borrowing costs for businesses dropped sharply — something officials characterized as follow-through on their promise. The purchases have slowed to a trickle in recent months.

The Fed and Treasury never established a similar program to buy up existing municipal bonds. If one had been, it might have lowered already-low borrowing costs in the municipal market, but that might not do much to help governments that are facing the most stress because their revenues have tumbled or they are legally prohibited from running budget deficits.

According to a summary of a draft of the September report reviewed by The New York Times, some members of the commission planned to call for the existing municipal program to be broadened, offering loans with lower interest rates that can be repaid over longer periods. Another proposal would grant state and local governments more flexibility so that the money could be used for capital infrastructure projects, not just for certain cash flow purposes.

The report is expected to be structured in a way that offers views of expert witnesses who testified at last month’s commission hearing. Republicans intended to offer dissenting views of many of the recommendations that called for making the program more generous.

The municipal bond program, like most of the Fed’s facilities, expires at the end of the year. Treasury Secretary Steven Mnuchin and the Fed chair, Jerome H. Powell, could choose to renew any or all of them, but have not said whether they intend to do so.

Senator Patrick J. Toomey of Pennsylvania, one of the Republicans on the commission, has supported winding down the municipal program, saying that it has served its purpose.

The unfinished September oversight report has been languishing in Mr. Toomey’s office. A spokesman for Mr. Toomey, Steve Kelly, said that he hoped the report would be released “soon” but offered no timeline.

“The reports written by the oversight commission require significant collaboration and compromise,” Mr. Kelly said. “Right now, the members and their staffs are working through some differences of opinion.”

The New York Times

By Alan Rappeport and Jeanna Smialek

Oct. 9, 2020

Bloomberg Opinion columnist Brian Chappatta presents a column explaining that with Congressional leadership unable to reach an agreement on providing aid to state and local governments, the Fed should immediately extend its Municipal Liquidity Facility by a year and consider reducing its interest rates once again.

Listen to Podcast.

Bloomberg

October 9, 2020 — 7:15 AM PDT

• Absent aid, states and cities warn of spending cuts, tax hikes
• Nuveen’s Miller says delay not major concern for muni market

President Donald Trump’s decision to halt coronavirus stimulus talks with Congress means America’s pandemic-stricken states and cities aren’t likely to get any financial help soon, virtually ensuring additional rounds of spending cuts, layoffs and tax increases that will deal a fresh hit to any economic recovery.

Trump on Tuesday abruptly announced on Twitter that he was calling off talks with Democrats until after the election amid a dispute over how much aid should be given to state and local governments, which saw revenue plummet this year as the pandemic shuttered large swaths of the economy.

“America’s cities, towns and villages are reeling from the financial impact of the pandemic while continuing to expend significant resources to combat ongoing cases of COVID-19, recover from natural disasters and provide essentials services to their residents,” Clarence Anthony, chief executive officer of the National League of Cities, said in a statement. “We can expect severe economic consequences from the failed negotiations, including more businesses closing and more public and private sector layoffs.”

Trump said if he wins reelection he’ll bring a new stimulus proposal forward. If Joe Biden wins the White House, states and cities would have to wait until he takes office toward the end of January before he could offer up his plan to Congress, though Democrats would likely extend a large amount of aid.

Pittsburgh, Pennsylvania, is facing a $100 million deficit — after depleting its reserves — that it must close during the fiscal year starting in January. Mayor William Peduto said in an emailed statement on Tuesday that the lack of aid this fall is “devastating” for cities like his.

“It is forcing us to look at layoffs and cuts to city services at a time when we’re already spread dangerously thin, and our residents need our help more than ever,” he said in a statement.

Economic Drag

The president has mischaracterized the effort to mitigate the tax loss caused by the worst recession since World War II as a bailout for mismanaged cities and states run by Democrats, echoing a line of political attack used by Tea Party-backed Republicans after the downturn caused by the housing market crash.

Lobbying groups including the National Governors Association have pressed for a bipartisan agreement on stimulus package, saying the failure to provide enough aid to states and local governments after the Great Recession slowed the nation’s growth for a decade.

A group of Democratic governors on Tuesday criticized the president, saying that every state needs help.

“This is not an attempt to ‘bail out’ any state,” the governors said in a statement through the Democratic Governors Association. “The pandemic has done untold damage to budgets in both red and blue states. This is money needed to boost the economy, maintain critical services, and beat back the virus.”

New York’s Metropolitan Transportation Authority, the nation’s largest mass-transit system, has warned for months that it will be forced to cut service, fire workers and boost planned fare hikes if the agency failed to receive $12 billion to cover budget shortfalls this year and next. Those changes could result in a nearly $100 billion loss of economic activity in the region and affect about 350,000 jobs, based on preliminary analysis, Pat Foye, MTA’s chief executive officer, said last month.

“This decision is an insulting slap in the face to our heroic transit workers who continue to show up during this once-in-a-hundred year pandemic to keep the economy moving,” Foye said in a statement Tuesday. “We urge the President to return to the negotiating table and deliver relief for the country.”

Signs that Wall Street was becoming increasingly concerned that stimulus talks would falter were already materializing before Trump’s surprise move. The $3.9 trillion municipal market, where states and local governments raise funds, has seen yields edge up amid concerns over a stimulus package, with the 10-year benchmark rising about 10 basis points since the start of last week.

Delaying the talks until after the election is a “temporary setback” for stimulus talks rather than the death knell for the next package, said John Miller, head of municipals at Nuveen, which had $188 billion in municipal assets under management as of June 30.

The delay is “not too concerning” because budgetary gaps have been smaller than forecast earlier this year, Miller said. He also said the Federal Reserve’s $500 billion Municipal Liquidity Facility has “plenty of capacity available” to make loans to cash-strapped borrowers.

“Even before the announcement, it felt like the odds were against passage of another stimulus package this year,” said John Ceffalio, municipal credit research analyst at AllianceBernstein, which has about $50 billion in municipal securities under management.

Bloomberg Markets

By Amanda Albright and Shruti Singh

October 6, 2020, 3:43 PM PDT Updated on October 7, 2020, 8:12 AM PDT

— With assistance by Fola Akinnibi, Danielle Moran, Michelle Kaske, and Romy Varghese

A borrowing facility for states and cities should be extended for another year and provide more affordable financing.

It’s abundantly clear that U.S. lawmakers aren’t going to agree on the amount of aid to send to state and local governments. President Donald Trump has made such support into something of an “us versus them” issue ahead of Election Day, claiming House Speaker “Nancy Pelosi is asking for $2.4 Trillion Dollars to bailout poorly run, high crime, Democrat States, money that is in no way related to COVID-19,” in a tweet on Tuesday that called off fiscal stimulus negotiations.

In reality, the two sides weren’t even that far apart. Republicans, led by Senate Majority Leader Mitch McConnell, said they would be willing to give states and cities $250 billion in federal aid, up from an earlier $150 billion, while Democrats wanted about $436 billion, down from an initial $1 trillion. Whom to blame for the inability to bridge that gap most likely depends on your political leanings.

Then there’s more technocratic Federal Reserve. It’s no secret that Chair Jerome Powell has been pushing Congress for more fiscal aid, noting just hours before Trump’s tweet that “the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste.” This wasn’t directly about providing funds for states and municipalities, but it doesn’t take much of a leap to read it that way. Is it truly such a tragedy if governors and mayors have some leftover cash to retain employees, maintain public services and shore up pensions to ensure payments to retired teachers, firefighters and police officers?

And yet, on the same day that Powell was making his case for congressional action, the Fed posted this deadline regarding its Municipal Liquidity Facility, which can extend loans to state and local governments:

Any Eligible Issuer that wishes to issue Eligible Notes to the [Municipal Liquidity Facility] must submit an [Notice of Interest] no later than 30 calendar days before the Facility’s stated termination date. The present termination date of the MLF is December 31, 2020, unless the Board of Governors and the Treasury Department extend it.

Given the state of stimulus negotiations, Powell and Treasury Secretary Steven Mnuchin should extend the termination date immediately, perhaps taking a cue from legislation passed by House Democrats earlier this year that would keep the MLF running until the end of 2021. There’s simply too much uncertainty around what the coronavirus pandemic will look like in the coming months to even think about removing this backstop for states and cities.

Besides, given how the facility is structured, it’s practically a costless exercise. The MLF has an impressive $500 billion in potential firepower to deploy in the $3.9 trillion municipal market, yet so far the Fed has extended only two loans worth a combined $1.65 billion. New York’s Suffolk County might become the third borrower, Bloomberg News’s Amanda Albright reported this week, and New Jersey has also floated the option of tapping the central bank’s program.

Still, this effort falls far short of the “whatever it takes” mantra that Powell brandishes when asked about the central bank’s other initiatives, such as buying corporate bonds and exchange-traded funds in the secondary market and increasing the Fed’s balance sheet by $3 trillion in just three months. I’ve written practically since its inception that the MLF pricing scale is simply too punishing for all but the most desperate borrowers.

Some Fed watchers say this is exactly what central bankers intended. As my Bloomberg Opinion colleague Tim Duy put it on Twitter, “The Fed views it as fiscal policy; if Congress wanted to help munis, it would. Arguably, the Fed would be going against the will of Congress if it just opened the floodgates.” Meanwhile, others argue, “market conditions for municipal securities have improved significantly,” so an overwhelming majority of states and cities can simply go through the traditional debt market to raise money. Top-rated two-year munis yield just 0.16%, while single-A revenue bonds due in two years yield just 0.44%, Bloomberg data show.

All of this has been true for months. And yet, in mid-August, the Fed announced it would cut borrowing costs by 50 basis points in the MLF anyway. At the time, I said this was evidence that central bankers realized their attempts to jawbone congressional leadership into action had failed, even though a compromise was still an option at that point. It was more of a gentle reminder to Congress that the financial health of state and local governments would be crucial to any rebound from the coronavirus crisis while also tiptoeing toward a more active role in the municipal-bond market.

Now that negotiations are over, it’s time for the Fed to take to take a more forceful stand. In addition to extending the MLF for at least another year, the central bank should take another hard look at its pricing scale and make it more affordable for a broader swath of states and cities.

At this point, I’ve already proposed more than one pricing scale. In fact, the yield I suggested in June for borrowers on the brink of junk turned out to match the Fed’s adjusted rates in August. But that was just smoothing out the otherwise haphazard differences between certain credit ratings. It wasn’t meant to be overtly stimulative.

The most drastic action the Fed could take would be to adopt the guidelines from the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, which would “ensure that any purchases made are at an interest rate equal to the discount window primary credit interest rate” of 0.25%, regardless of credit grades. That’s probably too far for the Fed — lower-rated states, cities and agencies might rush to max out their credit lines under those conditions.

So here’s another proposal: Start the pricing scale for triple-A issuers at the discount window primary credit interest rate. Top-rated three-year muni yields haven’t exceeded 0.25% since mid-July anyway, and there’s virtually zero risk that a state holding such a pristine grade would default in the coming years (or would want to take on a pile of new debt and risk a downgrade). Create a more uniform scale from there. Here are two ways that might look:

The first option could encourage more higher-rated states and cities to use the Fed’s facility, which may or may not be what the central bank wants. The second would disproportionately benefit triple-B rated municipalities, which are more in need of cheap funding. Either way, the MLF would be far more likely to put money in the hands of governors and mayors who are trying to balance their budgets, either directly or by strong-arming muni-bond buyers into accepting lower yields.

While it’s understandable that the Fed would want to avoid getting caught in political crossfire, is that enough reason to jeopardize an economic recovery? It’s possible that Powell sees preserving the central bank’s independence as crucial. But a persistent onslaught of criticism from the president before the coronavirus crisis already threw that into doubt.

Making affordable loans to states and cities — even if they turn out to be primarily led by Democrats — is rooted in pragmatism, not politics. That’s why Congress failed. And it’s why the Fed must do more.

Bloomberg Finance

By Brian Chappatta

October 7, 2020, 10:50 AM PDT

Evaporating federal aid and uncertainty over what will happen next with the virus and the economic recovery are casting a long shadow over states’ finances.

In some states, the steep tax revenue declines predicted in the early months of the coronavirus outbreak haven’t materialized, with officials in recent weeks saying state budgets for this year appear more promising than initially expected.

But even states where the outlook has improved are confronting the likelihood of significant financial pressure and uncharted fiscal terrain in the months ahead. And states and local governments remain on track to face billions of dollars in shortfalls and the need for spending cuts as they seek to balance their budgets over the next couple years.

Continue reading.

Rout Fifty

by Bill Lucia

OCTOBER 10, 2020 02:44 PM ET

Fitch Ratings-New York-06 October 2020: The vast majority of US states experienced continued improvement in employment recovery in August, although the pace of recovery was slower than it was in July, and a few states have seen declines in recoveries, Fitch Ratings says. The median employment recovery, or gain in non-farm payrolls since the April trough, improved to 51% in August from 45% in July.

Those states in the lower left quadrant in the chart below experienced the steepest declines in employment in the first three months of the pandemic and have seen lower overall employment recovery in the following three months. Of those states where job losses at the height of the pandemic exceeded the state median of 13%, most have seen total employment recoveries of 45% or more. The pace of recovery is slowing somewhat with a median increase in employment recovery in August of 7 percentage points (pp) from the prior month versus 8pp in July.

Of those states with severe peak-to-trough job losses close to 20%, Hawaii, New York and Massachusetts are the only states with recoveries still below 40%. Put another way, these states have the largest gap between February and August employment levels. New York was the epicenter of the pandemic in the spring and bore considerable economic consequences as a result. Massachusetts has been significantly affected by job losses in the leisure and hospitality (L&H) and education and health services sectors.

Continue reading.

As President Trump sends mixed signals about his support for a new economic relief bill, states and localities urgently need additional fiscal aid so they can both rehire workers they laid off or furloughed this spring and avoid additional layoffs and budget cuts that they will likely otherwise make to balance their budgets this fiscal year.

After COVID-19 struck this spring, states and localities laid off or furloughed over 1 million workers, more than the 750,000 that they laid off over the full course of the Great Recession of about a decade ago.

Only a modest portion of those jobs have returned. There were still 1.2 million fewer state and local employees in September than February, after adjusting for normal seasonal variations, according to new Bureau of Labor Statistics data. Compared to September of last year, there were 1.1 million fewer state and local jobs this September. That large decline compared to last year has been apparent for months now. (See chart.)

Continue reading.

Center on Budget and Policy Priorities

OCTOBER 8, 2020 AT 1:15 PM

In what can only be described as a wild and unprecedented few weeks in Washington, President Trump and multiple members of his Administration tested positive for COVID-19 along with many sitting U.S. Senators-an October surprise like none seen before.

After learning that multiple Members of his Caucus have tested positive, Senate Majority Leader Mitch McConnell put the Senate into recess through at least October 19th, likely sidelining all stimulus and Supreme Court deliberations for at least a few weeks.

Continue reading.

Bond Dealers of America

October 9, 2020

Yahoo Finance’s Alexis Christoforous and Brian Sozzi speak with Sylvia Yeh, Co-Head of Municipal Fixed Income at Goldman Sachs Asset Management, about the state of the municipal bond market.

Video Transcript

ALEXIS CHRISTOFOROUS: One of the key sticking points in stimulus talks continues to be money to help state and local governments which could face severe funding shortfalls if Washington doesn’t step in to help, and that could trickle down to the municipal bond market. With us now to talk about it is Sylvia Yeh, Co-Head of Municipal Fixed Income at Goldman Sachs Asset Management. Sylvia, good to have you here. So look, investors were withdrawing from their municipal bonds pretty aggressively at the height of the virus in mid-March. Has that calmed down now?

SYLVIA YEH: You know, good morning. Yeah, if you look back to March and consider where we are today– excuse me– some would think, did March ever really happen? What, we’ve rallied back in rates. We’ve rallied in credit. We had wide distribution with respect to investors in our marketplace. The market is open for business, both in two way secondary flow and new issue market is thriving. So market has come back, cautious, but coming back in action and, you know, excited for what is ahead.

BRIAN SOZZI: Sylvia, we’ve seen a lot, to your point, a lot of new issuance come to the market. What states are leading in terms of new issuance?

SYLVIA YEH: Yeah, I think they’re spread all over the place, and it’s not only from a state perspective, but sector and in particular taxable versus tax exempt, which I think is probably the bigger play. But the big states like New York, obviously, California, obviously, Illinois, there are lots of states that need, you know, flexibility in cash in different degrees and their assets in the market, big and small.

ALEXIS CHRISTOFOROUS: Sylvia, we’ve seen some state specific funds run in to problems during this pandemic. Just in the past few weeks or so, we’ve had Vanguard, Federated Hermes, and Bank of New York Mellon closing smaller at risk state specific funds. What’s the larger implication to the muni market because of that?

SYLVIA YEH: Yeah, you know, sometimes when– well, first of all, I think have to look at the current environment that we’re in and the interest rate environment that we’re in, and it’s very hard to get invested at these absolute low yields in particular for those states. So closing those funds doesn’t necessarily need to be a negative perception for the market as we’re seeing more cash go into the bigger better distributed and better diversified national funds. So I don’t take that as a negative sign, just of repositioning and better opportunity.

ALEXIS CHRISTOFOROUS: OK, let’s talk about those opportunities, because now we’ve got fewer state money market funds, so where can investors go for tax free ways to invest their cash during this time?

SYLVIA YEH: Yep, and it’s funny. When we talk about investing in the muni markets, still very popular are the traditional mutual funds and money market funds. What we don’t talk about a lot are the separately managed accounts where individuals are allowed to build their own portfolios. So investors have different ways to access the muni market, whether in fund format or individual portfolio format. The opportunity also comes in a bunch of different flavors. Typically, two levers that we can pull. It’s going to be duration and credit. We have a third this year with the mix of supply.

From a duration perspective, if you look at the steepness of the yield curve right now, you can tell everyone is hanging out in the front end, because it’s safer, it’s easier, you can be more nimble, and by the way, we’re going to be here for a bit. Let’s be nimble for some opportunity that could come up. If you just dip a little bit further out on the yield curve going from, let’s say, five years to a 10 or 11 year space, you’re being compensated pretty significantly to extend. And if we had the Fed telling us that we’re going to be here for a while, why not take a little bit and be compensated for it? So duration and a slight extension of something that we’re discussing with clients, one of those levers.

The other lever can be credit, and it is credit. We talked about March to today, and I said that credit has rallied tremendously. Yes, and the high quality portion of our market, the triple As and double As, those strong quality names were the first to rebound. And then the high yield market, completely separate, a little bit tougher and struggled. But we had that triple B, and I would say single A area, that kind of was slow, because it was a bit of a tweener, and that mix actually provided and still provides extra yield and opportunity for clients too without a tremendous amount of risk. So from credit just dipping a little bit below the traditional high grade.

And then finally, what I think is interesting that we have this year that we haven’t had in years past or for a long time are taxable munis. Issuance is up 230% ish, give or take, year over year. So that additional supply in our marketplace as it looks to get distributed as we look for that long term buyer base is going to take time to settle. And at the end of the day, it’s what you take home as an investor that counts. So after you do your math, all things equal, tax exempt muni, taxable muni of the same flavor, you want to walk away with as many basis points as you can. That’s been an interesting mix so that the key here in the message is to be flexible from now through the end of the year and as this mix continues to develop.

ALEXIS CHRISTOFOROUS: Sylvia, real quick before we let you go, the Fed has done its part to prop up the muni market. Jerome Powell speaking later this morning. Do you expect, do you want to see even more support from the fed for the muni market?

SYLVIA YEH: You know, I got to say, munis get a bad rap, and this market has shown how resilient it really can be. The muni market has tools made available to them through the Fed, the MLF in particular. It is there. It is the borrower of last resort, and a handful of issuers have tapped it. There were probably a few more who will tap it. Is additional fiscal stimulus important to the marketplace? In so capacity, I’m sure, but the Fed and others have done what this market needs in order to function. By the way, look at the market. It’s functioning.

ALEXIS CHRISTOFOROUS: There you have it. Sylvia Yeh, Co-Head of Municipal Fixed Income at Goldman Sachs Asset Management, good to have you here this morning.

SYLVIA YEH: Thank you. Take care. Stay well.

Yahoo Finance

Tue, October 6, 2020, 6:58 AM PDT

MUNIS in FOCUS: Eric Kazatsky, Senior U.S. Municipals Strategist for Bloomberg Intelligence: Illinois taps Fed funds, and stimulus still up in the air. Hosted by Paul Sweeney and Vonnie Quinn.

Listen to audio.

Bloomberg Radio

October 9, 2020

Vanguard, Federated Hermes and Bank of New York Mellon’s Dreyfus shutter state-focused funds

The pandemic is putting a nail in the coffin of the most vulnerable municipal money funds, taking away tax-free investment options from some mom-and-pop investors.

In September, Vanguard Group told investors it would shutter New Jersey and Pennsylvania-focused funds. Bank of New York Mellon’s Dreyfus liquidated one state-specific fund last month and in August, Federated Hermes said it would wind four down in February.

These muni money funds invest in the ultrasafe, short-term debt of states and local governments.

In the past six months, assets in tax-exempt money funds shrank nearly 10% to about $130 billion across about 180 funds in August, according to Crane Data. At their height 12 years ago, they held almost four times the amount they do now—and there were more than twice as many.

“The Covid storm revealed these evolutionary changes that had been taking place,” said Patrick Luby, a municipal strategist at research firm CreditSights. “You don’t know your roof has a hole in it until it rains.”

The pandemic accelerated a decline in yields after the Fed pledged to keep rates near zero. The drop in yields is squeezing money fund manager profits, shrinking investor returns and dissuading debt-issuing governments from short-term securities.

“In the current low yield environment, the demand from clients for state-specific municipal funds has decreased significantly,” said Stephanie Pierce, CEO of BNY Mellon Investment Management Cash Investment Strategies.

With fewer state money-market funds, individual investors are left with fewer tax-free ways to invest their cash. A New Jersey resident who uses a Vanguard money fund to avoid state taxes on her short-term investment income, for instance, could opt for a different money manager but her overall pool of choices is shrinking.

From individuals to corporations, many investors use different types of money funds as a safe place to hold cash while earning some income. Money funds that hold municipal debt are a small corner of the industry, offering a way for investors to earn interest exempt from federal income taxes. If the debt comes from municipalities within a specific state, local investors can usually also avoid income taxes there.

When tax rates fell for corporations as part of the 2017 tax law overhaul, many companies’ interest in muni investments waned. However, individual investors piled into the muni market after seeing their tax bills rise from a separate tax law provision that capped state and local tax deductions. As a result, there were fewer other types of investors waiting to pick up the slack when the March upheaval prompted some individuals to dump their holdings.

In March, BNY injected money to prop up its New Jersey money fund after the value of its assets plunged during the liquidity crunch. The firm told investors this summer it was liquidating the fund.

The pandemic also sent shock waves across the more than $4 trillion money fund industry prompting a Federal Reserve rescue in March. It was the second since 2008, sparking questions from regulators last week about whether rules made after the last crisis have fallen short.

Money managers are now struggling to find enough municipal securities in some markets for their funds to invest in. With interest rates near zero, municipal governments are taking advantage of cheap long-term financing, shifting away from short-term debt and floating-rate bonds that reset at short-term rates. Some municipalities are refinancing floating-rate debt at fixed rates to avoid a repeat of March when short-term rates shot up, costing them dearly, said people familiar with the matter.

“People saw what transpired and started to ask themselves whether this was the right type of debt for them to be in,” said Hazim Taib, chief financial officer of the Connecticut Housing Finance Authority. The authority briefly paid between 5% and 7.5% for AAA-rated short-term debt.

Last year, Vanguard monitored how tighter supplies in Pennsylvania and New Jersey affected its money funds. The firm debated steering the two funds beyond their specific state focus, but decided against wiping out local investors’ tax benefits at the time, said a person familiar with the matter. After its latest fund review this year, Vanguard decided that there weren’t enough municipal securities to warrant stand-alone funds. The firm already had to shoulder some expenses borne by investors in its Pennsylvania muni money fund to prevent yields from falling below zero. Dreyfus also cited limited availability of securities in its decision to liquidate a New Jersey fund.

Deteriorating government finances could further shrink debt supplies that meet money funds’ high thresholds for creditworthiness if cash-strapped governments get downgraded or issue less debt.

Federated Hermes plans to close funds focused on Massachusetts, Pennsylvania, Georgia and Virginia around February 2021, saying the moves were in investors’ best interest. The firm doesn’t see supply across muni money funds as a problem and expects states to issue more debt, according to an October note.

Supply is stronger for funds focused on large states like New York and California, where there are many governments issuing many types of debt, as well as for multistate funds aimed at avoiding federal taxes. Closures of smaller state-specific funds could steer investor dollars into remaining funds, helping the strongest.

“It’s not a stampede,” said Pete Crane, president of Crane Data. ”If anyone does exit, it leaves more of the pie.”

The Wall Street Journal

By Dawn Lim and Heather Gillers

Oct. 6, 2020 5:30 am ET

Fitch Ratings-New York-01 October 2020: Fitch Ratings has updated the assumptions that underpin its scenario analysis to reflect the company’s refreshed view of the nation’s path to recovery from the coronavirus pandemic. Informed by Fitch’s “Global Economic Outlook – September 2020” and “Fitch Ratings Coronavirus Scenarios: Baselines and Downside Cases – Update,” the revised scenarios reflect recent slightly stronger economic activity to date than anticipated, and expectations for a slower recovery from 4Q20 onward.

Revised baseline GDP assumptions for the FAST States & Locals – Fitch Analytical Stress Test Model (FAST) model are for a 4.6% decline in year one, followed by growth of 4.0% and 3.0% in years two and three, respectively. In the new baseline scenario, real GDP does not recover to 4Q19 levels until at least 4Q21. Inflation assumptions remain zero in year one, and 2% in years two and three. Scenario analysis informs Fitch’s assessment of state and local governments’ financial resilience.

In addition to the baseline scenario, Fitch has updated its more severe downside scenario, as described in the updated company-wide common scenarios report noted above. This scenario anticipates renewed lockdown measures, coupled with extended periods of voluntary social distancing that cause a second, smaller decline in GDP. The interpretation of the downside scenario for state and local governments was developed in consultation with Fitch’s chief economist and incorporates GDP declines of 4.8% in year one and 0.6% in year two, followed by growth of 3.1% in year three. These assumptions indicate a less severe first-year stress than the prior downside scenario, but a delayed and longer recovery.

U.S. Public Finance Tax-Supported Rating Criteria are forward-looking and designed to communicate state and local governments’ ability to maintain financial resilience through an economic cycle at a level consistent with their typically very high rating levels. The economic crisis caused by the coronavirus pandemic and related containment efforts by government officials has led to a far more profound downturn than the standard moderate recessionary cycle envisioned in the criteria. The criteria allow for a temporary modification of the scenario, including key input assumptions, in a period of economic decline. To reflect the current unprecedented stress, Fitch began adjusting its scenario analysis model–the FAST–in April. Prior to the current downturn, the standard GDP assumptions for the scenario were down 1% in year one, followed by growth of 0.5% and 2% for years two and three respectively, with CPI assumed to be 2% per year.

FAST is not a forecast, but it represents Fitch’s estimate of possible revenue behavior in a downturn based on historical revenue performance. Hence, actual revenue declines will vary from FAST results. FAST does provide a relative sense of the risk exposure of a particular entity compared to others.

Contact:

Amy Laskey
Managing Director
+1-212-908-0568
Fitch Ratings, Inc.
300 West 57th Street
New York, NY 10019

Eric Kim
Senior Director
+1-212-908-0241

Michael Rinaldi
Senior Director
+ 1-212-908-0833

Arlene Bohner
Managing Director
+1-212-908-0554

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

Additional information is available on www.fitchratings.com

Here are links to coronavirus-related activity in U.S. public finance.

This file will be updated regularly.

October 2, 2020

To conclude this series of policy briefs, this fifth brief considers perhaps the most critical question to evaluate the success of impact bonds: whether, given costs and benefits, impact bonds are an efficient and cost-effective way to contract and finance the delivery of social services.

Since very little concrete data is available on costs and benefits in impact bonds compared to alternative financing mechanisms, the brief explores a set of theoretical assumptions and a thorough analysis of potential costs and benefits to provide a more nuanced analysis than has been in the literature to date.

The brief also identifies four ways to potentially lower the design and implementation costs of impact bonds, as well as makes the case for future research.

Read the full policy brief >>

The Brookings Institution

by Emily Gustafsson-Wright and Sarah Osborne

Wednesday, September 30, 2020