Municipal Bond News 2/10/25

Muni Bonds Rally…Medicaid Faces Federal Funding Pressures…Chicago Real Estate Valuation Grows…Trump Pushes SALT Reform…MTA Seeks State, Federal Support…U.S. State Taxes Vary…Super Bowl Spurs Sports Bets…

Muni Bonds Rally…State and local government bond yields have declined 25 basis points since mid-January. Muni bond indices have returned close to 1% this year. “Through early February, propelled by the UST rally, muni indices are on pace for solid returns this year, although a lot could still change,” Bank of America strategists said. Strong primary market issuance provides investors with many tax-free investment choices. The education sector is on pace to issue a record amount of tax-free bonds, while healthcare and transportation sector issuance volume is in line with prior year. This week, a $1.7 billion New York City Transitional Finance Authority, ‘AAA’- rated State of Ohio and Hawaii airport bonds are expected to see strong investor demand.

Medicaid Faces Federal Funding Pressures…U.S. states would likely cut Medicaid benefits substantially if there are dramatic changes in federal funding. Medicaid, which covers about 21% of U.S. population, is the largest expense for most U.S. states. The potential for major federal spending cuts to Medicaid has been highlighted in a recent high-level list of proposed cuts released by House Republicans. The House proposals are high-level and not all are likely to be enacted, but they indicate that Medicaid likely will be a primary target for federal budget savings. U.S. states have broad flexibility in the design of Medicaid programs. However, cuts to Medicaid spending would be credit negative for U.S. states, Moody’s noted. Additionally, Medicaid cuts could also have downstream, credit-negative consequences for both public and private healthcare providers.

Chicago Real Estate Valuation Grows…The City of Chicago’s assessed valuation grew by 23% in 2024. Multifamily and industrial real estate segments led the growth. “The growth reflects credit-positive resiliency of Chicago’s tax base,” Moody’s noted. However, over 20% of offices in Chicago’s central business district are vacant, and Class B and C office buildings face challenges in Chicago’s real estate market. During the city’s budget process, overall valuation trends are taken into account. Positive trends in commercial valuations are often considered by city officials when evaluating potential future property tax increases. Additionally, rising valuations could benefit the city by increasing revenue generated from tax increment financing districts.

Trump Pushes SALT Reform…House Ways and Means and Senate Finance Committees are currently crafting a federal budget reconciliation package that will likely include an extension of the 2017 Tax Cuts and Jobs Act. President Trump is focused on adjusting the cap on State and Local Tax (SALT) deductions, which has been a sticking point for Republicans in high tax states. The Bond Dealers Association (‘BDA’) visited committee staff of the House Ways and Means and Senate Finance Committees last week to advocate for preserving muni bonds’ tax-exemption. “The meetings were productive, and staff seemed well informed and receptive to our thoughts and ideas but reiterated multiple times that everything is on the table,” BDA’s vice president of federal legislative and regulatory policy said. The BDA spokesperson said that there is “growing confidence” that Congress would not try to yank the tax exemption on outstanding bonds. However, new private activity borrowers and sports stadium-related borrowers could be more at risk of losing their ability to sell new tax-exempt bonds as lawmakers look to offset the costs of extending the 2017 Tax Cuts and Jobs Act. Municipal bond industry experts expect that the current tax-exempt status for state and local government bond issuance will likely remain unchanged. Any restrictions of future tax-free issuance could reduce the supply of tax-free bonds.

U.S. State Taxes Vary…The average American family pays approximately $17,902 in federal taxes each year. In addition to federal taxes, U.S. states also collect revenue to fund public services, and they do so through various methods. California leads the nation in state tax revenue, collecting $220 billion annually. Following California are New York with $125 billion, Texas with $86 billion, and Illinois with $63 billion. In New Jersey, which ranks seventh in total state tax collections, sales tax is the largest contributor to the state’s revenue.

MTA Seeks State, Federal Support…MTA wants the New York State legislature to help find $2 billion to $3 billion of new or existing recurring annual revenue. The MTA would then borrow against those funds to raise the $35 billion and close the shortfall in its $68.4 billion 2025-2029 capital budget. New York State has some options to boosting state funding to MTA. Raising income taxes on the highest earners, boosting the state’s capital gains levy, directing 2% of the state’s budget every year to the MTA, imposing a 0.25-cent fee to every online package, and New York City Street parking charges are currently being advocated. The MTA is also looking to the federal government to help support its capital budget. The next plan estimates Washington will provide $14 billion of funding. “History says that bipartisanship on transportation investment prevails,” MTA CEO added “We partnered with red-state transit systems through Covid, and transit funding was preserved. So we are optimistic, but obviously we’re going to have to wait for the dust to settle before we have any indications.”

Super Bowl Spurs Sports Bets…More Americans than ever likely betted on the biggest wagering event of the year. Legal American sportsbooks are estimated to take $1.39 billion in bets for Super Bowl LIX. The number represents an uptick from the estimated $1.25 billion placed with legal books for Super Bowl LVIII. 38 U.S. states, Washington D.C. and Puerto Rico offer legal sports betting. Since the last Super Bowl, only one new state has gone live with legal online sports betting: North Carolina. Missouri, the state the Chiefs call home, legalized sports betting in November but is not expected to go live until summer 2025.

Compare 30-Year taxable U.S. Treasury yield 4.69% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.89%; “AA” 4.26%; “A” 4.43%. For investors in the 35% tax bracket, a 3.9% tax-exempt yield is equivalent to a 6% taxable yield. Top-rated long-term tax-free bonds yield 83% of comparable taxable U.S. Treasuries.