Week of 04/19/2021

Record Inflows to High Yield Muni Bonds… MTA Taps Payroll Mobility Tax For Bonds… Fed Aid Could Help With Chicago Debt… Chicago Could Pick Casino Bidder in 2021… Connecticut Yield Penalty Narrows… State Revenue Robust… Calls For More SALT Deductions…

Record Inflows to High Yield Muni Bonds…Investors poured the highest amount of cash last week to buy high yield muni bonds. High yield funds took in $1.28 billion last week, besting the previous record set in January 2021 per Refinitiv. An unprecedented amount of direct federal aid to states, cities, transit systems and other municipal bond issuers is causing government revenues to outperform and bringing gains to muni bond holders. “There are very few clouds on the horizon, in our view, and we think that ratios will remain depressed over the next several months, while credit spreads might continue grinding even tighter, especially for credits and sectors that will benefit the most from economic recovery and return to normal,” Barclays strategists added, “Consequently, trading down in credit quality is still the trade that makes sense, in our view, as wider names might compress even further.” President Joe Biden’s economic policy has been more favorable to state and local governments than to corporates. While taxable Treasury and corporate bonds have negative returns, tax-free high yield municipal bonds have brought 3.5% index returns this year outperforming top rated tax-free benchmark returns, 0.58%.

MTA Taps Payroll Mobility Tax For Bonds… For the first time, New York State payroll mobility taxes will secure bonds issued for MTA bridges and tunnels. The new $1.3 billion payroll mobility tax bonds will refund MTA’s transportation revenue bonds. The new “AA+” rated bonds reflect the credit of New York State and not MTA’s credit quality. Payroll mobility taxes dedicated to the new MTA bonds are levied along with other payroll taxes by New York State and allocated to the MTA without requiring annual legislative approval. Leveraging the payroll mobility tax for capital has been a long term goal of the MTA. The COVID-19 related fiscal crisis has accelerated importance of establishing the new credit.

Fed Aid Could Help With Chicago Debt… Looming federal funds, $1.9 billion from the America Rescue Plan, could allow Chicago to nix a $965 million scoop-and-toss borrowing. The borrowing would have extended Chicago’s debt by eight years and returned maligned debt extensions that former Mayor Rahm Emanuel ended. To avoid politically difficult tax hikes, former Chicago mayors resorted to extending debt by refinancing upcoming maturities as a way to fix budget shortfalls over the past decade. The practice is frowned upon by ratings agencies as it brings higher future costs, reduces flexibility and takes away from structurally balanced finances. Former Mayor Rahm Emanuel phased out the practice and Mayor Lightfoot followed suit until COVID-19 struck. “We said during budget season that, if we received federal funds, we would have to first repay our debts. That debt includes the $465 million of scoop-and-toss used to address the 2020 shortfall and the $500 million to address the 2021 shortfall,” Chicago CFO stated. Chicago’s revenue for the first two months of 2021 was 0.6% below projections and the city has lost an estimated $1.7 billion in revenue across 2020 and into 2021. Some city aldermen note that the $1.9 billion federal aid is barely enough to cover COVID-19 related lost revenue. “We need to make good on those commitments made during budget discussions by recommending that we eliminate the scoop and toss through a use of the portion of the America Rescue Plan funds,” Chicago CFO. “We need to strike the right balance.”

Chicago Could Pick Casino Bidder in 2021… A half dozen gaming companies including MGM Resorts International, Rush Street Gaming, Wynn Resorts Ltd. and Hard Rock International are eyeing the new Chicago Casino. The state’s gaming board could decide the winner by year-end from bids to be submitted this spring. The opportunity includes the operation of as many as 4,000 gaming positions, including at O’Hare International Airport which could help pay Chicago police pensions. Lightfoot envisions the casino as the anchor for a larger entertainment complex and a destination that draws locals as well as tourists to the nation’s third most populous city. Although Illinois legislature approved a Chicago casino in 2019, potential operators were scared off by onerous taxes and license fees. Last year, the legislature went back and revised the law to make a casino viable. To jump start revenue flow to the city, Lightfoot expects the operator to set up a temporary casino for 36 months till a permanent structure is built. “We are not going to undercut this opportunity,” Mayor Lightfoot added, “This has been a long time coming.”

Connecticut Yield Penalty Narrows… Gone are the days Connecticut would be in the company of lower rated U.S. states. Connecticut’s rainy day fund is projected to grow to $3.75 billion at the end of the fiscal year, enough to cover almost 19% of spending and the state stands to receive $2.6 billion under the American Rescue Plan. Connecticut’s credit rating took a giant step forward last week. Investors have cut down the extra yield sought for Connecticut general obligation bonds to the lowest in eight years. The state’s 10-year debt yields 1.16%, just 23 basis points more than the benchmark. That’s not far from what top rated U.S. states pay for tax-free borrowings.

State Revenue Robust… New York State collected $3 billion more tax revenue in the last fiscal year than projected, but collections are $513 million lower than prior year. “The state’s year-end financial position was significantly better than anticipated,” New York State Treasurer stated. New York State and its localities are slated to get direct aid of $24 billion from the America Rescue Plan. Federal aid has helped states and local governments to prove that dire predictions of Covid-19 related losses were wrong. State tax revenues increased 7% to $273.9 billion in the fourth quarter compared with the same period last year per U.S. Census Bureau data. Aggregate state tax receipts rose $17.8 billion from last year and fell $35.9 billion, or 12%, from the previous quarter. U.S. States have $345 billion in outstanding general obligation bonds.

Calls For More SALT Deductions… State and local tax (SALT) deductions will likely make or break a deal on the American Jobs Plan. Just because President Biden did not ask for a repeal of SALT deductions in his latest proposal, does not mean that the debate on SALT deductions is dead. In fact, SALT deductions will likely emerge as the hidden piece of the puzzle when House Speaker Nancy Pelosi and lawmakers put a compromise together. Biden’s planned tax hikes on corporations and the highest earners have not found any takers amongst Republicans. SALT deductions are particularly valuable to high tax states such as California, New Jersey and New York. Emigration from high tax states and cities became a pressing issue after President Trump put a
$10,000 cap on state and local tax deductions in 2017. A new bipartisan caucus of 21 Democrats and nine Republicans is pushing for expanding SALT tax deductions. The broad based impact of SALT deductions has put it front and center at a national level.

Compare 30-Year taxable U.S. Treasury yield 2.27% to 30-Year tax-exempt muni bond yield “AAA” 1.61%; “AA” 1.70%; “A” 1.98%; “BBB” 2.96%. 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 71% of comparable taxable U.S. Treasuries.

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