Week of 06/07/2021

Illinois Bond Prospects Boosted…New Jersey Eyes Pension Funding Boost…Chicago Schools Eye Elected School Board…White House Boosts PR Safety Net Payments…Graduate Enrollment Grows…Low Rates Premise of Federal Budget…High Yield Munis Biggest Winners…

Illinois Bond Prospects Boosted…Bond investors see more upside in Illinois general obligation bonds. Plans to pay off federal loans early and a dwindling stash of unpaid bills has boosted credit prospects for the lowest rated U.S. state. State leaders hope that early payoff of federal loans will translate into rating upgrades. “We probably don’t have to worry about a downgrade anytime soon and maybe could get a positive outlook at some point,” an institutional muni bond investor noted. Illinois will use $2.5 billion of the $8.1billion direct federal aid in Fiscal 2022 for infrastructure projects and other spending. Revenue forecasts have outperformed by $1.4 billion in Fiscal 2021 and $842 million in Fiscal 2022.Closing corporate tax breaks will bring an additional $600 million recurring revenue to state coffers. The state’s bill backlog hovers around $3.2 billion and is at lows not seen since before the 2015-2017 budget impasse drove it up to a record $17 billion. Illinois’ $42 billion Fiscal 2022 budget pays scheduled hikes in school funding and makes statutory pension funding. Illinois’ $141 billion unfunded pension liabilities are burdensome on its ratings. Illinois general obligation bonds yield about 70 basis points more than top rated tax-free bonds, down from about 200 basis points yield penalty six months ago and 430 basis points a year ago. “Ours is a budget that addresses the historical structural deficit and makes responsible choices paying off debt early, nearly eliminating our backlog of bills and making critical investments to stimulate economic growth, jobs and opportunity for our people all while keeping our operating budget flat aside from education and critical human services,” Governor Pritzker added, “All of these achievements collectively mark a significant turning point for our state.”

New Jersey Eyes Pension Funding Boost…Flush with cash, New Jersey lawmakers look to pile hundreds of millions of dollars to pension contributions, above and beyond what Governor Phil Murphy proposed in his budget. “If we’re in a position to make larger contributions it’s to our benefit to do that because it saves us a great deal of money in the long haul,” a New Jersey Assemblyman stated. The aid has created a significant surplus available to the second lowest rated U.S. state, although none of the direct federal aid, $6.4 billion, could directly fund the state’s pension bill per U.S. Treasury guidelines. Validating the uptrend in Garden State finances, the state treasurer expects to present revenue numbers this month that “will increase by hundreds of millions of dollars due to the federally induced surge in consumer spending.” Boosted pension funding will not go unnoticed by ratings agencies.

Chicago Public Schools Eye Elected School Board…Democrats in Illinois Senate voted 36-15 to approve a 21 member city elected board and do away with the current mayor controlled seven member board. Chicago has never had an elected school board. Politically motivated school board appointments have been blamed for the woes of the nation’s third largest school district. Under the legislation, Chicago Public Schools (CPS) would transition to a hybrid board in January 2025, with 10 members elected to four-year terms in the 2024 general election and 11 members appointed by the mayor, including the board president. The mayor’s appointments would require City Council confirmation. An elected school board is supported by Governor Pritzker and opposed by Mayor Lightfoot. If lawmakers approve, CPS could have a fully elected school board by 2027.

White House Boosts Puerto Rico Safety Net Payments…Puerto Rico’s economy would receive a boost of billions of dollars annually from three federal safety net programs under President Biden’s proposed budget. The White House calls for “eliminating Medicaid funding caps for Puerto Rico and other territories while aligning their matching rate with states” and “moving toward parity for other critical federal programs including Supplemental Security Income and the Supplemental Nutrition Assistance Program.” Governor Pierluisi highlighted “If Puerto Rico were treated as a state for Medicaid purposes, the Island would be receiving more than $3 billion in fiscal year 2022 with an FMAP as high as 83%, which means that the burden on Puerto Rico’s budget would be only 13%.”Between 2011 and 2019, the Puerto Rico Medicaid program received between $300 million and $380 million in federal funding. If Congress approves, Governor Pierluisi estimates that the Island could eventually receive around$5 billion. A policy analyst on the Island noted, “I think it’s very positive that the White House is endorsing parity for Puerto Rico and all the U.S. territories for key safety net programs.”

Graduate Enrollment Grows…Fall 2021 is likely to see a surge of college applications, a positive indicator for college demand. Faced with admission deferrals from last Fall, college enrollments will trend higher. Fewer jobs and remote learning trends proved favorable for graduate enrollment, which grew 5.8% during the pandemic. Student preference for staying closer to home brought stable enrollment for public universities. International enrollment dropped starkly and non-investment grade S&P rated colleges and universities saw about a 3%enrollment decline. From a financial standpoint, federal stimulus helped buffer COVID-19 related revenue loss and resulting operating pressure for colleges and universities. American Rescue Plan, the third round offer Federal aid, brought more than $80 billion for colleges and direct state aid is a significant positive as it lifts state funding uncertainty. Market recovery of most college endowment portfolios has eased some pressures.

Low Rates Premise of Federal Budget…President Biden’s budget, the clearest signal of White House priorities, anticipates low interest rates through 2031. The federal budget plan indicates that inflation is expected to remain contained between 2.1% and 2.3% through 2031 and economic growth will taper down to 1.9% in 2024, following a growth boom in 2021 and 2022. Independent of the U.S. Treasury, Federal Reserve officials decide upon the benchmark federal funds rate. To monetize soaring federal spending and keep borrowing costs low, the White House agenda is premised on Federal Reserve’s bond purchases and low interest rates.

High Yield Munis Biggest Winners…Long term high yield bonds have returned 6.2% this year, outperforming overall muni market return 0.99% and negative returns on taxable Treasuries and corporate bonds. Faced with bond yields at sixty-year lows, inflows to municipal bond funds have surged. Last week, high yield muni bonds received cash inflows exceeding $813.8 million, the third highest inflows in 2021. “Muni summer: tons of cash, scarce bonds”, aptly summed by Bank of America Merrill Lynch, is reflected in several large new municipal bonds issued last week. New bonds issued by Metropolitan Washington Airports Authority and Chicago Transit Authority were repriced at lower yields and upsized due to strong investor demand for tax-free bonds.

Compare 30-Year taxable U.S. Treasury yield 2.25% to 30-Year tax-exempt muni bond yield “AAA” 1.57%; “AA”1.63%; “A” 1.90%; “BBB” 2.87%. For investors in the 35% tax-bracket, a 2.8% tax-exempt yield is equivalent to a 4.3% taxable yield. Top rated tax-free bonds yield 70% of comparable taxable U.S. Treasuries.

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