Municipal Bond News 11/13/23

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High Value of Muni Tax-Exemption…New Muni Bonds, Taxes on Ballot…Illinois Earns Fitch Upgrade… Hospital Recovery Gains Momentum…Bally’s Chicago Advances…Conventions Near Recovery…U.S. State Revenue Declines…

High Value of Muni Tax-Exemption…The value of municipal bond tax- exemption for top earners is about 300 basis points. This value, which is the difference between a tax-free muni bond index and its taxable equivalent, hit a twenty-year record high on October 31, Bank of America strategists said. “We view munis’ taxable equivalent yields as attractive given the fundamental credit strength in the muni market, and also on a relative basis versus taxable markets’ yields.” Despite the yield volatility, Barclays strategists still see value in high-quality municipals, and do not consider outflows from mutual funds to be a ‘major headwind’. Muni bond yields peaked at the end of last month, and have declined about 40 basis points this month. “I think the all-in yields are just too high to ignore here and I think we are about to see money come back into mutual funds here in short order,” an institutional investor added that the recent muni bond rally ‘has legs.’ This year, muni bonds have returned 0.33%, a positive showing so far paring losses last year.

New Muni Bonds, Taxes on Ballot…A host of state and local government matters, such as new bond issues, affordable housing, and new taxes on property, wealth, and marijuana were decided upon by voters last week. Over $44 billion of new bond measures nationwide were on the ballot last Tuesday, and the majority earned voter approval. Fast-growing Texas claimed the top spot for ballot bond measures. Arizona, Iowa, Michigan, Minnesota, North Carolina and Washington are among U.S. states with aggregate ballot bond measures exceeding $1 billion. The largest bond measures approved by voters include $2.5 billion for a Houston, Texas hospital, $2.5 billion for North Carolina schools and $350 million for a Des Moines, Iowa airport terminal. Over 100 local governments in Texas sought voter approval for $25 billion in new muni bonds, mainly for hospitals and schools. Opening the door to more voter-approved muni bonds, New York State voters approved a ballot measure to raise the debt limit for schools in smaller cities. New muni bonds to build affordable housing were approved by voters in Arizona and New Mexico. New taxes to fund affordable housing were approved by voters in Seattle, Boulder and Santa Fe, while Cincinnati voters rejected an income tax hike to funds affordable housing. Legalization of marijuana, tobacco and gambling was on ballots in Ohio, Colorado, Richmond and Virginia. The tally of new bond measures is down a third from last year’s $66 billion worth of bond measures. The latest measures come as COVID-19 federal aid funds to states and local governments are nearly spent.

Illinois Earns Fitch Upgrade…Fitch has upgraded Illinois general obligation bonds to ‘A-’ from ‘BBB+’. The lowest-rated U.S. state has earned three rating upgrades this year. “What was the bills backlog is now a normal accounts payable situation,” a Fitch analyst stated. Illinois’ ‘historic fiscal progress’ is driven by ‘tax revenue growth and sound fiscal policy’, state administration said. Governor Pritzker noted “We are continuing to right the past fiscal wrongs in our state with disciplined fiscal leadership, and credit rating agencies and businesses alike are taking notice of Illinois’ remarkable progress.”

Hospital Recovery Gains Momentum…Hospitals’ financial recovery is likely to take hold next year, Moody’s said as it raised its outlook on the not-for-profit hospitals to stable from negative. Hospital operations are rebounding this year, after plummeting in 2022. Labor costs have abated, and revenue has improved due to higher patient volumes. Next year, higher-paying inpatient volumes are expected to grow. Total admissions have already surpassed pre-pandemic levels broadly for the sector. Reimbursement rate hikes are still short of inflation. Improved profitability will allow many hospitals to make needed investments in facilities and programs and maintain liquidity. Hospital operating margins are likely to improve while lagging pre-COVID-19 levels.

Conventions Near Recovery… By next year, convention attendance is projected to exceed 2019 levels. Convention attendance is projected to rebound to 90% of its pre-Covid levels this year per Center for Exhibition Industry Research. Most convention centers shut down in 2020, and re- opened in mid-2021. In Las Vegas, convention attendance is currently 88% of pre-COVID-19 levels. Las Vegas claims the top spot for conventions, followed by Orlando. Large U.S. cities issue muni bonds for build convention centers, an economic engine. This year, $739 million worth of muni bonds have been issued for convention centers, down from $2.1 billion last year and $4 billion in 2021. Recently, Dallas Convention Center offered muni bonds rated ‘A-’ at about 5.5% tax-free yield.

Bally’s Chicago Advances…Bally’s of Chicago, a new casino won a permanent casino owner’s license from the Illinois Gaming Board. This is a key regulatory approval necessary for Bally’s to own and operate the Chicago casino. At present, Bally’s is operating out of a temporary site. Plans to build a $1.7 billion casino and entertainment complex are underway. Casino taxes will help shore city police pensions and fund state infrastructure. The casino will help drive taxes from tourism and recreational activities, a highlight of the city’s recent budget plan.

U.S. State Revenue Declines…In 2023, U.S. State revenue has fallen about 13% in inflation- adjusted terms from a year ago. A cooling economy, tax cuts and weak stock market has contributed to the decline. State collections from personal income tax fell 24%, corporate income tax fell 18% and sales tax fell 1% from a year ago, per recent Urban Institute data. Robust revenue growth on the heels of the pandemic led to record high state reserves. U.S. state reserve balance as a percent of general fund expenditures is 35% compared to roughly 6% in 2012 per National Association of State Budget Officers. A few U.S. states offered tax relief in recent years. That trend is now reversing after the Fed raised policy rates to the highest in over two decades. To navigate a lower revenue environment, states are likely to restrain spending and hike taxes.

Compare 30-Year taxable U.S. Treasury yield 4.75% to 30-Year tax-exempt Municipal Bond yield “AAA” 4.28%; “AA” 4.60%; %; “A” 4.97%. For investors in the 35% tax bracket, a 4.5% tax-exempt yield is equivalent to a 6.92% taxable yield. Top-rated long-term tax-free bonds yield 90% of comparable taxable U.S. Treasuries.