Week of 06/21/2021

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Supreme Court Upholds Affordable Care Act…Fed Holds Rates Near Zero, Maintains Bond Buying… Federal Relief For Affordable Housing Projects… Record Investment Returns For Public Pensions… State Tax Revenues Outperform… Legal Marijuana In Connecticut… Puerto Rico Tax Revenue Outperforms… High Yield Municipal Bonds Favored…

Supreme Court Upholds Affordable Care Act… For the third time, U.S. Supreme Court upheld the Affordable Care Act, an ‘epic trilogy’ in the words of Justice Samuel Samuel Alito, cementing public health insurance for Americans. Seven of nine top court justices brought judicial approval for the Affordable Care Act (ACA or Obamacare) enacted by President Obama in 2010.  Supreme Court approval signals growing support for the ACA law, an integral part of US healthcare system.  Public support is at an all-time high with a record 31 million Americans enrolled in Obamacare.  Time and again, Republicans have slammed public health insurance while Democrats moved to expand its benefits. The American Rescue Plan Act increased federal subsidies for ACA plans to cover people at higher income levels and to offer plans that cost little or nothing to lower income people.  The Biden administration and ACA supporters want to make those additional subsidies permanent.  “Today’s ruling maintains healthcare coverage for tens of millions of Americans under the ACA and we expect this to prevent a decline in operating margins associated with a shift in payor mix that would have reversed the positive margin trend evidenced at hospitals in the years following the ACA rollout. Fitch’s not for profit hospital operating margin median rose during those years the ACA was fully implemented, increasing from 2.2% in 2013 to 3.0% in 2014 and again in 2015 to 3.5%,” Fitch noted.  Incremental revenue from more insured patients has boosted hospital operating margins.  Supreme Court approval alleviates uncertainty for the healthcare sector.  The top court’s repeated validation of ACA suggests that even if Obamacare provisions are modified by future legislation, public health insurance is here to stay.

Fed Holds Rates Near Zero, Maintains Bond Buying… “With regard to interest rates, we continue to expect that it will be appropriate to maintain the current zero to 0.25% target range for the federal funds rate until labor market conditions have reached levels consistent with the committee’s assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time,” the Fed held its key interest rate near zero and vowed to maintain its bond buying stimulus. “In addition, we are continuing to increase our holdings of Treasury securities by at least 80 billion dollars per month and of agency mortgage- backed securities by at least 40 billion dollars per month until substantial further progress has been made toward our maximum employment and price stability goals.” The Fed’s latest forecast now shows benchmark short term rate at a range of 0.5% to 0.75% in 2023, up from near zero currently.

Federal Relief For Affordable Housing Projects… Unprecedented rental assistance to struggling households, $46 billion, administered by the U.S. Treasury for COVID-19 relief has boosted the finances of affordable housing facilities. 16,500 Section 8 properties received $800 million subsidy funding from CARES Act. Jobs are recovering after the U.S. economy lost millions of jobs permanently and suffered 11.5 million temporary layoffs from March to July 2020. America Rescue Plan’s supplemental unemployment payments, $300 a week, is a boost to affordable housing projects, whose residents faced disproportionate economic hardship. Federal emergency rental assistance is likely to strengthen projects going forward. Overall, multifamily revenue secured tax-free bonds are performing strongly despite the economic pressures experienced during the pandemic.

Record Investment Returns For Public Pensions… This years’ investment returns are approaching 25% to 30% for many public pension funds, if market conditions maintain their strength in the coming weeks, per Moody’s. For example, the New York State and Local Retirement System recently reported a 33.6% investment return for Fiscal 2021. Roaring returns boost pension assets, improve near term funded levels and lower pension contribution requirements. Aggregate funding levels for state and local pension funds increased to 74.7% from 72.8%, per a Center for Retirement Research June report. Moody’s estimates state and local governments’ net pension liabilities are slated to fall by around $1 trillion primarily due to Fiscal 2021 investment returns, but will nevertheless remain historically elevated and north of $4 trillion. Fiscal 2021 pension funding results, led by potentially record setting investment returns, benefits governments’ credit quality.

State Tax Revenues Outperforms… Fiscal 2021 tax collections are higher than prior year for 45 U.S. states per Urban Institute. More than 40 states reported stronger year on year corporate and personal tax revenues, with 38 showing higher general sales tax collections for the period between July 20 and April 21. State tax revenues increased 9.6% to $294 billion in the first quarter compared with the same period last year, according to U.S. Census Bureau data. Michigan tax revenue gained the most, up 60% from a year ago, while Texas fell the most, down 6%. Among state general obligation bonds, $340 billion outstanding, Illinois bonds have brought the highest returns, 3.5% so far this year.

Legal Marijuana In Connecticut… Connecticut lawmakers voted to legalize marijuana and Governor Lamont pledged his approval. “We’re not only effectively modernizing our laws and addressing inequities, we’re keeping Connecticut economically competitive with our neighboring states.” Governor Lamont added, “It will help eliminate the dangerous unregulated market and support a new, growing sector of our economy which will create jobs.” Retail marijuana sales could start in May 2022. The cannabis market to generate estimated state tax revenue of $33.6 million by Fiscal 2023, rising to $97 million by Fiscal 2026. Connecticut will become the 19th state, plus the District of Columbia, to legalize weed for non medical use.

Puerto Rico Tax Revenue Outperforms… Sales and use tax collections were $394 million or 30% more than projected for the first nine months of Fiscal 2021. General fund revenues were 19% above oversight board projections and 4% more than a year ago. A large number of challenges filed in the Title III court and Governor Pierluisi’s opposition to pension cuts have plagued the central government debt restructuring plan. Ahead of a July 13 disclosure statement hearing, Judge Swain has asked the parties to resolve differences through court mediation headed by Judge Barbara Houser.

High Yield Municipal Bonds Favored… Junk rated muni bonds, which account for only about 5% of the $3.9 trillion muni market, have received a quarter of cash flows seeking tax-free bond investments. Close to $50 billion cash inflows have been pumped into municipal bond funds this year. Voracious investor appetite for higher yield has led many lower rated borrowers to lock in more favorable terms than they had earlier hoped for. Charter schools have also been particularly active in issuing debt this year. The schools are often seen as riskier than public schools, given they are not backed by the taxing powers of a local government. This month Build NYC Resource Corporation borrowed $18m to fund a new seven story school for 600 students in the Bronx. High yield municipal bond yields decreased by 11 basis points on average last week. Relative to top rated muni bonds, investors receive about 200 basis points extra yield from riskier tax-free bonds, the yield gap is expected to narrow suggesting gains for high yield muni bonds.

Compare 30-Year taxable U.S. Treasury yield 2.05% to 30-Year tax-exempt muni bond yield “AAA” 1.52%; “AA” 1.68%; “A” 1.86%; “BBB” 2.68%. For investors in the 35% tax-bracket, a 2.6% tax-exempt yield is equivalent to a 4% taxable yield.  Top rated tax-free bonds yield 74% of comparable taxable U.S. Treasuries.

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