Municipal Bond News 1/29/24

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How To Find More Yield From Muni Bonds…Chicago Rating Outlook Boosted… Generous Gifts Credit Positive For HBCUs…Supreme Court Ruling Favors Pension Reform… Affordable Housing Has Political Support…Puerto Rico Sales and Use Tax Soars…Tax-the-Rich Movement Expands…

How To Find More Yield From Muni Bonds…“Munis look even better for individuals in a top bracket in a high-tax state, where that 3.5% is the equivalent of a 6% taxable yield. Throw in some worries about overvalued stocks and the economy softening, and that secure 6% starts to look pretty attractive,’ Barron’s wrote this weekend, adding that investors “like the safety of the asset class and are finding different ways to squeeze a bit more juice from the lemon.” Longer-dated muni bonds offer such an opportunity. Credits that belong to riskier muni bond sectors but carry favorable attributes such as a strong balance sheet or other beneficial linkages could be interesting. A Municipal Bond Specialist can help investors select such bonds, diversify across different sectors of the municipal bond market, and boost tax-free portfolio yield. The rate risk is asymmetric in muni bonds now, Barron’s explained “If rates rise one percentage point in the next year, for example, an A-rated muni portfolio would lose just 3.7% (or 1% with the benefit of harvesting tax losses). But if rates fall one point, the same portfolio would return 12%.” When yields are at multi-year highs, the greater carry or yield income provides a cushion against rate volatility. In January, muni yields climbed about 27 basis points from year-end. An expert told Barron’s that investors who are now overweight cash could move into munis to lock in “some durable yield that is going to be there for many years.”

Chicago Rating Outlook Boosted…Moody’s raised its outlook on Chicago to positive from stable and affirmed its bond ratings. Stronger pension contributions, stable reserves, and improved finances led to a favorable outlook. Chicago’s finances are buoyed by “organic revenue growth”, although its revenue base which includes sales tax and recreation tax is economically sensitive, Moody’s stated. Unfunded pensions are a credit challenge. Chicago CFO said, “We will continue to monitor the city’s finances closely through the year and anticipate working with the state legislature to find solutions for the city’s growing pension liabilities.”

Generous Gifts Credit Positive For HBCUs…Substantial gifts to historically Black college or universities (HBCUs) are being made by wealthy donors, a credit positive for the HBCU sector amid persistent credit challenges, Moody’s stated last week. Recent nine-figure gifts include two $100 million gifts announced in 2024, which follow a $560 million gift from MacKenzie Scott in 2020. The gifts build on increased government aid to HBCUs. Growth in annual state appropriations for higher education and billions in federal aid during the pandemic has benefited HBCUs. However, HBCUs face demand, financial and governance challenges. Fundraising and government support boost operating performance for HBCUs, a niche of the higher education sector.

Supreme Court Ruling Favors Pension Reform…Illinois Supreme Court upheld a pension consolidation law approved by Governor Pritzker in 2019. Pritzker sought to merge over 650 separate local police and fire pension systems into two large funds for better investment opportunities and lower costs. However, a legal battle over pension fund consolidation has been raging since 2021. About 36 first responders filed a lawsuit that the merger took away control of retirement benefits and voting powers. Illinois Supreme Court guarantees that pension benefits “shall not be diminished or impaired.” Last week, the Illinois Supreme Court Chief Justice said, “The ability to vote in elections for local pension board members is not such a constitutionally protected benefit, nor is the ability to have local board members control and invest pension funds.” Pritzker called the ruling “confirmation that smart, thoughtful pension reform can be accomplished in Illinois”

Affordable Housing Has Growing Political Support…More than 200,000 new and preserved affordable rental homes could be developed over the next two years. A bipartisan tax overhaul package aims to allow states to issue more bonds to construct affordable housing. The legislation also boosts tax credits, an incentive offered to developers to fund affordable homes. Tax credits have helped develop over 3.7 million affordable rental homes since 1986. The issuance of tax-exempt mortgage revenue bonds issued by state housing agencies to help first time homebuyers access low interest rate mortgages has also been proposed. “It’s a big signal that housing affordability is a top priority for Congress,” an expert from the Bipartisan Policy Center said. A Tax Foundation expert said, “Expanding the range of policies included in the package seems to have garnered more political support.”

Puerto Rico Sales and Use Tax Collections Soar…The Island’s sales and use tax collections have trended higher for the past three years. Recent sales and use tax collections have outperformed. In Fiscal 2023, sales and use tax collection was 3.4% higher than a year ago. Within the first four months of Fiscal 24, the COFINA bond trustee received 100% of annual pledged sales tax COFINA bond debt service. The Commonwealth is entitled to the remainder. Strong rebound in tourism, inflation, pandemic aid and strong spending by Islanders have contributed favorably to sales and use tax collections. Favorable sales tax collection trends suggest that the Island’s economy is flourishing.

Tax-the-Rich Movement Expands…The Tax Justice Initiative, a campaign to tax the wealthy to address income inequality, has lawmakers in 10 U.S. states coordinating to introduce new wealth tax bills. The initiative, which began a year ago, spans California, Connecticut, Hawaii, Maryland, Minnesota, Nevada, New York, Pennsylvania, Vermont and Washington. New legislation introduced last week in Vermont seeks to tax unrealized gains on individual assets over $10 million, as well as additional marginal taxes on top earners. In an election year, adding new taxes could face political pressures. Arguably, tax-the-rich is a populist stance. The large campaign to hike taxes on the wealthy comes after COVID-19 federal aid was exhausted and U.S. states forecast lower revenues.

Compare 30-Year taxable U.S. Treasury yield 4.34% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.69%; “AA” 3.98%%; “A” 4.28%%. For investors in the 35% tax bracket, a 3.6% tax- exempt yield is equivalent to a 5.5% taxable yield. Top-rated long-term tax- free bonds yield 85% of comparable taxable U.S. Treasuries.