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Municipal Bond News 4/24/23
Illinois Bonds Oversubscribed…Muni Bond Demand Boosted…Fewer Insured Municipal Bonds…Ratings Agencies Weigh Recession Clouds…Chicago Budget Deficit Narrower…MTA Seeks State Budget Fix…Mass Transit Sector Seeks Funding…Property Taxes Shoot Up…
Illinois Bonds Oversubscribed…Illinois received five times worth of orders for $2.5 billion general obligation bonds offered last week. Retail and institutional investors flocked to buy the Illinois bonds, newly upgraded to ‘A’ level. Longer-term maturities were highly sought after and repriced to lower yields. The 2047 maturity — the largest of the transaction offering $192 million — with a 5.5% coupon attracted strong interest and was 14 times oversubscribed, and yields were lowered 10 basis points. The bond issue allowed the state to save $102 million. Illinois long-term bonds offer investors 145 basis points more than top-rated municipal bonds. Governor Pritzker led investor meetings in NYC ahead of the bond sale, which came in a week of stronger-than-usual bond volume.
Municipal Bond Demand Boosted…A gauge of municipal bond demand ticked positive last week. Investors bought $229 million of municipal mutual funds last week per ICI data. The latest fund inflows come after seven straight weeks of outflows. A near-even split between weekly inflows and outflows, with inflows in seven weeks, and outflows for eight weeks, has been seen so far in 2023. Last year’s record outflows from municipal bonds, driven by rate hike fears, led to a rout in the municipal bond market. This year, the broad municipal bond index has returned 2.4% so far.
Fewer Insured Muni Bonds…32% fewer insured bonds were sold in the new-issue market during the first quarter of 2023, compared to a year ago. The decline is an outcome of lackluster municipal bond sales in the primary market. Assured Guaranty insured close to 60% of newly insured municipal bonds. Build America Mutual insured the remainder. Insurance penetration, or volume of insured bonds as a share of overall municipal bond volume, continues to be high at 7.7%, similar to last year’s level. Bond insurance has gained favor from both investors and bond issuers. Assured Guaranty said that high demand for bond insurance comes from investors’ increased awareness of the benefits that bond insurance provides, especially during volatile economic conditions, and issuers’ recognition of its cost-effectiveness.
Ratings Agencies Weigh Recession Clouds…The flood of US pandemic aid that flowed into state treasuries helped balance budgets and raise bond ratings. Now the question is whether a recession will halt states’ financial progress. S&P anticipates a shallow recession but says if a contraction were to linger some states could see credit impacts. Fitch also says that due to the aggressive Fed tightening to arrest inflation there will be a mild recession in 2023. “If the downturn becomes much more severe and much deeper than we’re anticipating, that does raise risk and there’s the potential that there would be more negative rating action,” a Fitch analyst said “But that’s not what we’re anticipating. Our ratings build in an expectation of a moderate downturn. If things get much deeper and much weaker, there’s more risk there.”
Chicago Budget Deficit Narrower…Chicago expects narrower deficits over the next few years. Chicago’s deficit in Fiscal 2024 will be $85 million, down from a $473 million projected deficit last August per the city’s mid-year budget forecast released by outgoing Mayor Lori Lightfoot. The improved forecast includes inflation- linked property taxes, which Mayor-elect Brandon Johnson has termed ‘painfully high’. Without inflation- adjusted property taxes, 2024 budget gap would likely be higher. Johnson’s campaign has proposed $800 million in new taxes to fix the deficit. The city ended Fiscal 22 with a surplus of $554 million and expects another surplus in Fiscal 23. Fiscal 23 surplus is expected to be $142 million, a turnaround from a $127 million deficit projected earlier.
MTA Seeks State Budget Fix…The nation’s largest transit agency is looking to New York State for boosted state aid. Governor Kathy Hochul wants to raise the state’s payroll mobility tax levied on businesses within MTA’s service area, a recurring funding source the MTA already receives. Without additional state help, higher- than-anticipated fare hikes and job cuts are likely. Meanwhile, its largest labor union is pressing for inflation- adjusted wage hikes and other benefits. MTA’s Fiscal 23 budget has a smaller 2% wage hike, as it faces a $600 million budget shortfall this year. The union’s current contract runs out on May 15. New York State budget, which was due on April 1, is likely to be enacted a couple of weeks late. State lawmakers are wrangling over budget issues such as MTA funding, higher Medicaid reimbursements for hospitals and nursing homes, and additional taxes on the wealthy.
Mass Transit Sector Seeks Funding…As they spend the last remaining pandemic federal aid dollars, transit agencies nationwide, particularly large urban ones, face significant operating deficits. Ridership declines started even before the pandemic hit, per the American Public Transportation Association. While looking for a recovery plan, many transit systems are more reliant on taxes levied by governments in their service area. For example, New Jersey Transit is seeking a $140 million state subsidy this year, up $40 million from a year ago. Meanwhile, the Federal Transit Administration outlined a $14 billion formula funding last week that it’s sending to states and transit agencies within a few months. The money represents the largest-ever annual investment in American public transportation due to increased federal support to the transit sector offered by the 2021 Bipartisan Infrastructure Law. President Biden has floated a new budget recommendation that would allow large urban agencies to tap their federal capital improvement grants for operating costs in 2024. Large transit agencies have said the move would be helpful but doesn’t address the longer-term problem.
Property Taxes Shoot Up…Property taxes surged higher, twice as fast last year than in 2021. Nationwide, the average tax on single-family homes increased 3% in 2022, to $3,901, after rising 1.8% the previous year. Varying tax bases, services and costs nationwide bring wide disparities in property taxes across U.S. states and cities. New Jersey leads with the highest average property tax in the United States, followed by Connecticut and Massachusetts. Among large metros, cities in the north-east and mid-west pay the highest effective property tax rate, or annual property tax as a percentage of home market value per Attom. States in the South have traditionally had lower property taxes. However, immigration to southern states accelerated during the pandemic, fueling the need for more infrastructure and services. Accordingly, property taxes have jumped. For example, in Palm Beach County, Florida, property taxes jumped almost $2,000 in 3 years for single-family homes.
Compare 30-Year taxable U.S. Treasury yield 3.74% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.46% “AA” 3.91%; “A” 4.26%. For investors in the 35% tax-bracket, a 4% tax-exempt yield is equivalent to a 6.15% taxable yield. Top-rated long-term tax-free bonds yield 93% of comparable taxable U.S. Treasuries.