Week of 06/01/2021

Tax-Free Bonds Shine in 2021… Lawmakers Seek More IRS Audits… PREPA Privatization Becomes Reality… Wagers on Sports Betting Gain… Brighter Prospects For Private Not For Profit Bond Issuers… Detroit State Oversight Waiver Up For Renewal… “Clear Direction” on Infrastructure Spending Near…

Tax-Free Bonds Shine In 2021… 2021 is on track to be one of the best years in history for the municipal bond market. Weekly inflows to tax-free bonds have hit records multiple times this year. Through mid-May, investors have poured $41.7billion into municipal bond funds. That’s nearly the same amount as in all of last year. The remainder of 2021could witness intense demand for muni bonds. About $122 billion of principal returned to tax-free investors over the next 90 days will seek to be reinvested, in comparison to only $6.7 billion new municipal bonds to be issued in the primary market over the next 30 days. Investor interest in municipal bonds is a boon to states and locals. In 2021, states and local governments are twice blessed, with unprecedented federal aid and raging inflows from retail investors seeking tax-shelter at an accelerated pace. Let alone High Net Worth’s who face the onslaught of tax hikes, can retail investors be blamed for being concerned about their tax bill? An individual can expect to pay about a$1 million of lifetime taxes in high tax states, a mighty sum that deserves to be protected. “This is a very, very good backdrop for muni bond investing and I would say for credit investing. Last summer, it was all about protecting principal. Now, I think investors are really looking to goon the offensive,” an institutional investor told Bloomberg last week “good opportunities” exist among the lower rated tax-free bonds and Illinois general obligation bonds offer a “really, really good deal” for investors seeking higher tax-free yields.

Lawmakers Seek More IRS Audits…“For too long, the wealthiest Americans and big corporations have been able to use lawyers, accountants and lobbyists to avoid paying their fair share and budget cuts have hollowed out the IRS so it doesn’t have the resources to go after wealthy tax cheats,” Senator Elizabeth Warren proposes that IRS budget should be tripled to$31.5 billion and its funding be made mandatory not subject to annual federal budget appropriation. Annual funding to the IRS has dropped off 19% from2010 levels and tax enforcement staffing is down 30%.Overhauled funding would allow the IRS to modernize its technology systems and enforce the tax code effectively.

PREPA Privatization Becomes Reality…A landmark, Puerto Rico’s electric utility privatized today. On June 1,Luma Energy took over transmission and distribution for Puerto Rico’s Electric Power Authority, the main supplier of electricity for the Island’s 3.3million residents and one of the two largest U.S. public power utilities by customer base. PREPA will retain ownership of its infrastructure and assets. The Federal Emergency Management Agency in 2020earmarkednearly$10billionfor repairs to rebuild the power grid ravaged by hurricanes. Long-awaited privatization comes as both the Island’s sole power utility and its central government restructure legacy debt in the Title III federal court. Some lawmakers and unions oppose the privatization and the transition could be tense and marked by protests. PREPA’s transformation could be pivotal to the Island’s economic prospects. Investors and experts have long held that privatizing could improve electric utility operations and management.

Wagers on Sports Betting Gain…California is the latest U.S. state to move towards legal sports betting. Californians will vote to legalize sports betting in the November 22 general election. A 10% proposed tax on betting tribal casinos, horse racetracks, roulette and dice games could raise tens of millions of dollars annually for California. In Connecticut, the Senate passed a bill to legalize online gaming and sports betting. Gov. Ned Lamont has promised to sign the bill and immediately seek federal approval of necessary amendments to the state’s gambling compacts with its two federally recognized tribes and casino owners, the Mashantucket Pequot and Mohegan tribal nations. The Lamont administration broke a deadlock with the tribes, who have exclusive rights to casino gambling and negotiated a framework for the state’s first significant expansion of gambling since the casinos opened in the 1990s. Since the U.S. Supreme Court removed federal restrictions in 2018, many U.S. states have opened sportsbooks.

Brighter Prospects For Private Not-For-Profit Bond Issuers…Decent government funding, donor fundraising and investment returns helped private not-for-profits tide over pandemic woes. Most research foundations’ government funding has not been cut and many have remained relatively stable despite COVID-19 due to resilient balance sheets. The future for cultural institutions is looking brighter, as demand for cultural events remains sound although COVID-19 related capacity constraints could persist. Membership and service based not-for-profits such as YMCA and Salvation Army who carry a legacy of operating surpluses were forced to cut expenses and limit member programs. Foundations’ endowment assets have generally moved with investment returns. With vaccinations underway, many private not-for-profits are preparing for a slow ramp up of revenue and exercising fiscal caution. When sourced and carefully analyzed by a Municipal Bond Specialist, tax-free bonds issued by private not-for-profit bond issuers could bring higher yields to diversified municipal bond portfolios.

Detroit State Oversight Waiver Up For Renewal…Waiver of direct state oversight over Detroit’s finances is up for annual renewal. This month, the Detroit Financial Review Commission will vote on granting another one-year state oversight waiver. The state commission held direct control over the city after its 2014 exit from bankruptcy until the first waiver was granted in 2018, conditional upon the city meeting fiscal targets, including a balanced budget. The city’s current fiscal condition is holding steady with a balanced $2.3 billion budget that includes a $1.1 billion general fund for the fiscal year that begins July 1. General fund revenues dropped in Fiscal 2020 to $927.5 million from $1.05 billion prior year, with Fiscal2021 revenue projected to fall to $843 million. Revenues are expected to climb to $995 million in Fiscal 2022. Pension fund challenges could tip the City to structural imbalance in 2027, city administration has warned. America Rescue Act direct federal aid, $826 million, will help the city cover tax revenue losses and fund social programs. The speculative grade city has won a series of upgrades since emerging from Chapter 9.

“Clear Direction” on Infrastructure Spending Near…“I think we are getting pretty close to a fish or cut bait moment,”Transportation Secretary Pete Buttigieg said that talks on infrastructure spending would near an endpoint on June 7 when Congress returns from recess. Sticking points are the scale and source of funding the projects. Republicans want to tap at least two sources to help pay for rebuilding roads and bridges: repurposed, unspent funds from the $1.9 trillion Covid-19 relief law from earlier this year; as well as user fees on electric vehicles. The Biden administration has proposed funding the measure through tax hikes. Republicans’ latest $928 billion infrastructure offer, which includes about $257 billion in new spending, falls short of White House’s latest $1.7 trillion offer. Mr. Buttigieg’s deadline suggests that Democrats might be closer to abandoning the negotiations and moving toward passing an infrastructure plan through a legislative maneuver called budget reconciliation, as Democrats have a narrow majority in the Senate.

Compare 30-Year taxable U.S. Treasury yield 2.29% to 30-Year tax-exempt muni bond yield “AAA” 1.59%; “AA”1.69%; “A” 1.86%; “BBB” 2.91%. 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 69% of comparable taxable U.S. Treasuries.

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