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Muni Week Review / Preview 7/14/2017

Friday, Jul 14, 2017

S&P AFFIRMS ILLINOIS RATING AS FEAR SUBSIDES… LIQUIDITY RELIEF FOR CHICAGO PUBLIC SCHOOLS… BUDGET WOES WEIGH ON HARTFORD, CT  RATINGS… PUERTO RICO MEDIATOR SEEKS FINANCIAL ADVISOR…

Illinois Credit Fears Subside… Odds of Illinois’ GO credit rating falling to below investment grade within the next year have substantially diminished. “Through a combi-nation of spending cuts and tax increases, the budget fiscal package brings the state’s revenue and expenditure base much closer to structural alignment and reduces the near term uncertainty that had come to characterize its financial operations,” S&P stated after law-makers enacted Illinois’ fiscal 2018 budget. As budget developments were unfolding, Moody’s remained guarded on IL’s pension burden while Fitch offered an initial positive assessment. As risks abate investors cut the extra yield sought to own Illinois bonds. Illinois bonds traded at premium prices and were amongst most actively traded bonds.

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Illinois Yield Penalty Shrinks… The difference between the yields on Illinois 10-year bonds and top rated debt has tumbled this month to the smallest since November after the state enacted its first full budget in two years, reducing concerns of an unprecedented cut to junk. That gap, which stood at as much as 3.36 percentage points on June 8, has dropped to about 2.1 percentage points as investors see less risk. Moody’s has warned that it may still downgrade IL following a review of the government’s finances.

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What Ending Illinois’ Record Budget Impasse Means for Chicago… Illinois enacted a full year budget for the first time in more than two years, ending a record long stalemate that cast financial uncertainty across the state. Here are three big takeaways for the city of Chicago, which has been contending with its own fiscal struggles; Pensions: Chicago won state approval to over-haul its municipal employee and laborer retirement funds, which had been on track to run out of money by 2025 and 2027, respectively. The changes allow Chicago to boost contributions to those pensions and have new city employees pay more into their retirement plans, part of Mayor Emanuel’s efforts to put all four of the city’s pensions on a path to solvency. The measure became law despite Governor Rauner’s veto; Borrowing: State budget includes provisions that allow a home rule municipality like Chicago to sell debt secured by state funds they received. By providing greater protection against default, that “should be favorably received by investors and is likely to lower the borrowing cost to the extent that” the city utilizes it, said Richard Ciccarone, the Chicago based president of Merritt Research Services LLC, which analyzes municipal finances. This could especially come in handy for the city, given that it is rated below investment grade by Moody’s and pays a steep premium to sell traditional general obligation debt; Schools: The enacted state budget dictates that general aid for schools now be doled out through an evidence based funding model. While the Democrat led legislature passed legislation that rewrites the formula to do that, its fate is uncertain because Rauner has threatened to veto it, calling it a bailout for the city. Emanuel said Monday that enacting that law is his “number one effort”.

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New Laws Offer Liquidity and Pension Relief to Chicago Public Schools (CPS)… New laws that are part of Illinois’ fiscal 2018 budget usher in a favorable borrowing program and some pension relief for CPS. A new program allows the state's 200 home rule municipalities to dedicate or pledge tax revenues they receive from the state to a special limited use entity such as a trust or corporation which would pledge such dedicated revenues to secure future debt with a statutory lien. The new law says, “Obligations issued by an issuing entity shall be secured by a statutory lien on the transferred receipts received, or entitled to be received, by the issuing entity that are designated as pledged for such obligation” . Bonds secured by dedicated revenues are insulated from the issuer’s general credit and offer greater protection against default. Debt secured by ded-icated revenue is favorably viewed by investors and could lower borrowing costs. Chicago also won state approval to overhaul its municipal employee and laborer retirement funds, which had been on track to run out of money by 2025 and 2027, respectively. Changes tucked away in the enacted IL budget allow Chicago to boost contributions to those pensions and have new city employees pay more into their retirement plans, part of Mayor Rahm Emanuel’s efforts to put all four of the city’s pensions on a path to sol-vency. The enacted budget calls for general state aid to schools to be based on an evidence based funding model. Lawmakers are now focused on revamping Illinois’ school funding formula for which Chicago Bd of Education is fighting hard.

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Budget Woes Weigh on Hartford Ratings… Hartford plans to approach bondholders to restructure debt in an effort to avert bankruptcy. Hartford currently projects a fiscal 2018 deficit of $50 million. Hartford’s budget woes arise in part because of tax-exempt property. Last week, the city hired law firm Greenberg Traurig LLP to advise it on debt restructuring. Both Moody’s and S&P dropped Hartford’s rating this week. Moody's Investors Service has downgraded the City of Hartford, general obligation debt rating to “B2” from “Ba2”; S&P lowered its rating two notches to junk level “BB” from “BBB-”. The down-grade, which affects $550 million debt, reflects the increased likelihood that the city will pursue out of court consensual debt restructuring to address its fiscal challenges. Mayor Bronin, who has asked the State of Connecticut for an additional $40 million in aid, has also called on labor and bondholders to collaborate stating, “This is the time to come together to support a true, far-sighted restructur-ing.” The state has not yet adopted its 2019 biennial budget specifying aid for the city for the fiscal year begin-ning July 1. Connecticut Governor Dannel Malloy has said keeping Hartford out of bankruptcy will require a collaborative effort as he alluded to recent labor concessions as well as more equitable distribution of state aid to municipalities.

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Puerto Rico’s Mediator to Seek Financial Adviser… Barbara Houser, the U.S. judge who is mediating between Puerto Rico and its credi-tors in the Island’s $70 billion bankruptcy, plans to hire an outside finan-cial consultant to advise her. Advis-ers for the Commonwealth bondholders and financial guarantors met on July 12 with Houser, the lead mediator, and other judges. During the meeting, Houser said the mediation team plans to hire a financial expert to help them with the restructuring and will begin looking for such adviser. U.S. District Judge Laura Taylor Swain, who is overseeing Puerto Rico’s bankruptcy process, last month assigned Houser and four other judges to help the Island and its creditors resolve fights through mediation, which is non-binding.

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Municipal Bond Market Poised for Slow Summer… The 30-day trailing average of state and local government securities trading fell to its lowest level since March 2016, putting the market on track for a slower summer than last year. That mirrors the broader slump for Wall Street, where the biggest banks are expected to report a drop in trading revenue during the second quarter. This week retail investors were attracted to “AA1/AAA” Florida Dept of Transportation 3.50%, 30-year bonds priced at 100.

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Fed Fund Futures Show Odds of Another 2017 Rate Hike About 40%… Fed fund futures rallied across the complex after disappoint-ing retail sales and CPI data released this week. Chances of a September rate hike are less than 10%, based on October Fed fund futures contract. Odds of a hike by yearend had dropped to 50% Wednesday after Fed Chair Woman Yellen said in written testimony the Fed funds rate would not have to rise all that much further to get a neutral policy stance. The odds were around 60% after the release of June FOMC minutes.

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Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.