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Week of 04/12/2021
America Jobs Plan Credit Positive… Chicago Public School Bonds Upgraded… Illinois Earns Two Stable Outlooks… New Jersey Rating Outlook Boosted… Connecticut’s First Rating Upgrade In 20 Years… PR Sales and Use Tax Outperforms… Legal Marijuana in Tri-State… Higher Taxes For New Yorkers… High Yield Muni Bonds Outperform…
America Jobs Plan Credit Positive… President Biden’s proposed $2.3 trillion America Jobs Plan is credit positive for state and local governments as it supports investments in government infrastructure assets without burdening state and local governments with additional debt. Mass transit, toll roads, bridges, airports and public private partnerships will benefit from additional federal funding; $621 billion for transportation infrastructure. Water, sewer and electric utilities could receive $200 million. Affordable housing/public housing and public schools could each get $100 million. The new funding is a small fraction of infrastructure needs and long term funding solutions are absent from the 8-year America Jobs Plan. The federal investment could spur private capital in some municipal bond sectors. Higher taxes are supposed to pay for most of the spending. Amid opposition from Republicans, Democrats are considering expedited procedures to approve the President’s wish list. The America Jobs Plan is about the same size as the CARES Act March 2020 federal stimulus which resulted in outperforming revenues for state and local governments. Direct aid to states and locals from President Biden’s America Rescue Plan March 2021 has brought a flurry of ratings upgrades and outlook boosts for lower rated municipal bonds.
Chicago Public School Bonds Upgraded… Both Moody’s and S&P upgraded Chicago Bd of Education bonds. S&P raised the rating last week to “BB” from “BB-” and assigned a stable outlook, on the heels of Moody’s one-notch upgrade last month. “In our view, the federal funds will bolster the Board’s already positive financial trajectory,” S&P analyst stated. Moody’s added that substantial prior increases in state and local revenues have improved the third largest school district’s financial performance. America Rescue Plan’s $1.8 billion federal aid, coupled with prior federal aid of $206 million in March 2020 and $796 million in December 2020 have taken CPS’ junk rated bonds closer to investment grade status.
Illinois Earns Two Stable Outlooks… In March, S&P and Moody’s lifted their outlooks on the state to stable from negative. Substantial federal aid will allow the lowest rated U.S. state to pay down its bill backlog, pay down COVID-19 related federal loan, rebuild its economy and strengthen its financial footing. Illinois expects a “reasonable amount of flexibility” for the one time money that will likely run out in a couple of years, Deputy Governor Hynes added that “But we just want to be mindful of the fact that these will be one time dollars,” Hynes said. “If we build up spending in an artificial way, it’s going to make our problems worse and our challenges more difficult in later years.”
New Jersey Rating Outlook Boosted… Moody’s upgraded its outlook on New Jersey general obligation bonds to stable from negative last Friday. The Garden State will end Fiscal 21 with record high liquidity and fund balance as tax revenues have outperformed. Unprecedented direct aid, $6.4 billion from the American Rescue Plan, has allowed New Jersey to accelerate pension contributions a year ahead of schedule. Moody’s stated, “The stable outlook further reflects our view that the current “A3” rating is well positioned for the next 12-18 months as the state continues to manage historic budget challenges, including large structural budget gaps and growing pension contributions.”
Connecticut’s First Rating Upgrade in 20 Years… Moody’s has upgraded Connecticut’s general obligation bonds credit rating to “Aa3” from “A1”, the first such credit rating upgrade for Connecticut in just over 20 years. “The upgrade of Connecticut’s GO rating to “Aa3” reflects the state’s continued commitment to numerous governance improvements that have already borne fruit in the accumulation of significant budgetary reserves and good financial performance through the pandemic,” Moody’s stated. Connecticut Treasurer noted, “This rating upgrade is exceptional news for Connecticut and sends a clear signal that its improved long term financial sustainability will contribute towards a strong economic recovery.”
Puerto Rico Sales and Use Tax Outperforms… Sales and use tax collections are 26% higher for the seven months ended January 2021 compared to a year ago. General fund revenues from July 2020 through January 2021 were 21% higher than forecast and 1.3% more than a year ago. Massive federal aid for COVID-19 and hurricane damage has contributed to strong sales tax and income tax collections. Revenue estimates for fiscal year 2021 will change as Puerto Rico officials and the Island’s Financial Oversight Board are revising the commonwealth’s Fiscal Plan per the Island’s Treasury Secretary. Continued tax revenue outperformance has led the Island’s bond investors to believe that the Board’s 30-year projections are too pessimistic.
Legal Marijuana in Tri-State… New York is the latest U.S. states to legalize marijuana and Connecticut could follow suit. Governor Andrew Cuomo enacted a law that paves the way for the retail sale of the drug in New York in 2022. New York becomes the second most populous state, after California, to legalize recreational marijuana. Marijuana sales could net about $350 billion a year for the Empire State. Neighboring states’ legal weed spurred legal recreational marijuana in New York. New Jersey legalized marijuana in February 2020 and Massachusetts voters legalized marijuana in 2016. Connecticut lawmakers voted Tuesday to advance a bill to legalize recreational marijuana, moving Connecticut closer to joining other states in the region that have already done so. Illinois brought in more than $200 million in tax revenue from marijuana sales in 2020, outperforming expectations in the first year of legalized marijuana. So far, recreational marijuana is legal in 15 U.S. states.
Higher Taxes For New Yorkers… The highest earning New Yorkers would face the nation’s steepest income tax rate. State lawmakers and Governor Cuomo reached an agreement to raise taxes as part of a $212 billion budget deal last week. With New York City residents also paying steep city taxes, the combined top rate for the highest earners would be between 13.5% and 14.8%, surpassing the 13.3% rate in California, currently the highest in the nation, per the Tax Foundation. Overall, together with federal levies, the richest New Yorkers would be hit with a combined marginal rate of 51.8%. New York’s move is the latest attempt to target wealthy Americans to fund budget shortfalls or future spending.
High Yield Muni Bonds Outperform… High yield bonds have outperformed with 3% index returns this year, surpassing 0.1% index returns on top rated tax-free municipal bonds and negative year-to-date returns on taxable corporate and treasury bonds. The biggest gainers among riskier muni bonds include bonds sold for student housing and other education facilities, which climbed 1.93% last month. Credit spreads, or the additional yield investors seek for lower rated bonds, have narrowed bringing gains for high yield bonds. Top rated tax-free muni bonds yield about 73% of comparable taxable Treasury yields. Muni bond issuance was 7% higher than last year, in the recently ended quarter. California was the largest state issuer in the first quarter, followed by New York, Texas and Illinois. In 2021, states and locals are expected to issue more muni bonds than a year ago. Advanced prospects of higher taxation have enhanced the value of tax sheltered investments found in the $3.9 trillion tax-free muni bond market.
Compare 30-Year taxable U.S. Treasury yield 2.33% to 30-Year tax-exempt muni bond yield “AAA” 1.70%; “AA” 1.87%; “A” 2.06%; “BBB” 3.04%. For investors in the 35% tax-bracket, a 3% tax-exempt yield is equivalent to a 4.6% taxable yield. Top rated tax-free bonds yield 73% of comparable taxable U.S. Treasuries.
Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.