Week of 02/22/2021

Likely Fed Aid Could Cut IL Bill Backlog… Puerto Rico Revenues Outperform…
Climate Focused Infrastructure Reform Likely… Green/Sustainable Munis Trend Higher…

Likely Fed Aid Could Cut IL Bill Backlog…“Any money we receive from the federal government needs to be spent wisely by paying down borrowing and our bill backlog,” Governor Pritzker has not included potential federal aid in his $41.6 billion Fiscal 2021 budget plan. Early estimates of Illinois’ direct share of $350 billion America Rescue Plan are around $7.5 billion per a House committee bill. Pritzker has slated the federal relief to first pay down the $2.87 billion outstanding from Municipal Liquidity Facility borrowings and other short term or overdue debt. Unpaid bills of $5.2 billion and an unfunded pension liability of about $141 billion weigh on Illinois’ credit rating. Not banking on federal aid, the Governor’s Fiscal 2022 budget is 4.2% smaller than prior year. So far, Illinois has already received $9.9 billion of federal aid through COVID-19 stimulus measures since March 2020, which bolstered tax revenues. Illinois’ base revenues were lifted upward in November by $2.6 billion, followed by another $2.47 billion for Fiscal 2021 along with $1.7 billion for Fiscal 2022. Illinois budget gap dropped 45% from $5.5 billion forecast last year “after the economy performed more strongly than expected”. Schools stand to receive significant federal aid that will more than offset flat lined state education funding. To close a projected budget deficit of $3 billion in Fiscal 2022, the Governor wants to cut spending on economic development and healthcare and close corporate tax holes. “Congressional action will help us today, but it won’t solve Illinois’ remaining fiscal challenges,” the Democrat Governor noted. Fy22 spending cuts, $1.3 billion, follow $700 million cuts prior year. In Fiscal 2021, Illinois borrowed $3.2 billion from the Federal Municipal Liquidity Fund to tide over missed revenues from voter rejection of Pritzker’s plan to change the state’s flat income tax to a progressive tax rate. Illinois has made an early repayment of $330 million from the Fed borrowing. Eyeing reelection, the Governor steered away from tax hikes in his third spending plan as he sets aside possible federal aid to pay down bill backlog, bring jobs and economic growth. A unified government in Illinois has eased prior political gridlock and led to bondholder gains. The Pritzker administration has been chipping away at Illinois’ bill backlog which peaked at $16.7 billion when former Governor Rauner was at the helm. “There are some positives but there are also uncertainties,” S&P noted. While the lack of structural balance is factored into the current credit status, Fitch added that it will be looking at whether the proposed budget includes any measures that could have negative long term credit implications. “Governor Pritzker’s proposal includes spending restraint and doesn’t rely on cutting pension contributions below statutory levels or other short term fixes that could dramatically magnify long term pressure,” a Moody’s analyst stated that Illinois’ large pension liabilities, only 40% funded, are its greatest challenge. Illinois will fund statutory pension contributions and end Fiscal 2022 with a $120 million surplus. There are questions if the receipt of significant federal aid and improved revenues will usher a stable outlook and wipe off the negative outlook assigned by all three ratings agencies. So far Pritzker’s tenure has seen over 7% annualized index returns on Illinois general obligation bonds. Lawmakers will vote on the budget plan in May. By then there should be clarity on the America Rescue Plan, as Republicans are critical of direct aid to states and locals. The Senate is on track to send a robust $1.9 trillion fed aid package to President Biden’s desk before March 14 per Majority Leader Chuck Schumer. Rating pressures appear to have eased against the backdrop of likely federal aid and improved revenues. An emerging scenario for paying down Illinois’ bill backlog and continued tax revenue outperformance from likely federal aid is a reprieve for the lowest rated U.S. state.

Puerto Rico Revenues Outperform…Puerto Rico sales and use tax revenue was 32% higher than estimated for the first half of Fiscal 2021 and the Island’s general fund revenue collections were 24% higher than estimates and only 0.6% lower than prior year. The Island’s Treasury Secretary noted that the local economy was doing reasonably well, particularly with consumption, due to federal and local funds being delivered to offset the economic effect of the COVID-19 related shutdowns. Puerto Rico Governor Pierluisi is seeking an audit of the Island’s debt issued since 1952. The Oversight Board has reached an agreement in principle last week with holders of 50% of commonwealth debt on a debt restructuring plan. A February 2020 court filed plan to restructure $35 billion commonwealth debt was put on hold because the Oversight Board wanted to assess COVID-19 economic impact. The court appointed mediation team has been in discussions since summer. Details of the latest plan have not been released yet. The debt plan is likely to include a cash payment and exchange bonds. A debt plan could be filed in the Title III court by March 8.

Climate-Focused Infrastructure Reform Likely…‘Build Back Better Recovery Plan’, President Biden’s $2 trillion infrastructure reform is slated on the heels of the $1.9 trillion American Rescue Plan. Last week, the House Transportation and Infrastructure Committee approved $42.5 billion for transportation as part of President Biden’s $1.9 trillion stimulus plan and sought a longer term solution for lagging infrastructure investment. Warning of an infrastructure investment gap of $5.6 trillion over twenty years, American Society of Civil Engineers’ recent report card gives a ‘D+’ grade to America’s aging infrastructure. That could change with President Biden’s infrastructure agenda, but higher taxes could be in tow. Federal gas tax has been unchanged since 1993, forty states have adjusted their fuel tax over the last five years. Both Republicans and Democrats want to make the most of surging investor demand for municipal bonds as part of the solution for funding hefty infrastructure spending.

Green/Sustainable Munis Trend Higher…In 2021, municipal bonds issued to fund projects with a positive environmental and social impact, broadly known as sustainable debt, could grow to $100 billion. Such projects could pick up steam in 2021 with President Biden’s sweeping actions on climate change that accelerate the broad trend toward green, social and sustainable investments. In 2020, COVID-19 related financial drain led green bond volume to double from prior year. Green bonds tend to fund new capital projects, while social bonds are usually issued for affordable housing and education agencies. The largest tax-free issuers, California, New York and transportation agencies, account for two thirds of green muni volume. A quarter of new MTA bonds are labeled green and sustainable bonds make up about 4% of the muni market. Traditional muni bond investors look for yield advantage regardless of the label knowing that municipal bonds fund essential public service projects such as schools, hospitals and roads. A growing number of institutional investors now seek annual validation of environmental and social impact. Growing issuance of sustainable muni bonds reassure bondholders that their tax-free investments are eco-friendly and do a world of good.

Compare 30-Year taxable U.S. Treasury yield 2.13% to 30-Year tax-exempt muni bond yield “AAA” 1.54%; “AA” 1.78%; “A” 1.97%; “BBB” 2.58%. For investors in the 35% tax-bracket, a 2.4% tax-exempt yield is equivalent to a 3.85% taxable yield. Top rated tax-free bonds yield 72% of comparable taxable U.S. Treasuries.

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