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Week of 06/28/2021
Texas MUDs Rock Solid… Illinois Outlook Positive, Fitch… New Jersey’s Surplus Budget… New York State Credit Outlook Boosted… Federal Legalization of Online Gaming Sought… Airport Bonds Fly High…Deal on Infrastructure Funding…
Texas MUDs Rock Solid… Undeterred by COVID-19, Texas municipal utility districts known as MUDs have surged forward from strength to strength. Fabled bidding wars for homes in Austin, Dallas and Houston metro areas reflect solid demographics, a positive credit factor. Texas’ population has grown 17%over the past decade, the third largest increase among U.S. states. Property values have continued to soar, driven by favorable single family home prices and positive relocation trends. Accentuated by COVID-19, a higher property tax base and growing reserves have added credit strength to MUDs. MUDs are special districts unique to Texas that provide water, sewage and other housing related infrastructure. The Houston area has the most MUDs in Texas. Dallas area MUD property values grew the fastest. As the fastest growing metro in the U.S., Austin MUDs carry potential. MUDs rated Moody’s “Baa1” and“Baa2”categories came out very strong with full value 23% and17%, respectively, higher than prior year, likely due to new development. Higher rated MUDs are generally more developed, so grow this driven more by appreciation rather than new construction. Lower rated MUDs’ higher debt burden reflects higher capital needs in early years of development. Unlike counties and cities, MUD fixed costs are relatively stable, consisting mainly of debt service. Entering Fiscal 2020 and 2021, districts were well positioned to absorb COVID-19 related financial disruptions, but the pandemic appears to have had no effect on districts’ operations. Strong reserves also provide a buffer against damage from natural disasters. Each MUD debt issuance is approved by the Texas Commission of Environmental Quality, which brings strong governance. Unrated MUD issued muni bonds, researched by a Municipal Bond Specialist, could bring yield advantage for a diversified tax-free portfolio.
Illinois Outlook Positive, Fitch… “Recent fiscal results and the enacted Fiscal 2022 budget suggest further improvements in operating performance and structural balance in the near and medium term that could support” a ratings upgrade for the lowest rated U.S. state, Fitch Ratings raised its outlook on Illinois general obligation bonds to positive. Both Moody’s and S&P, which carry stable outlooks, have recognized Illinois’ improved fiscal picture. The rebound comes from direct federal aid, broader federal stimulus and unified state government policy. Outperforming state revenue is tracking pre-pandemic levels, but structural gaps remain. State budget makes statutory pension contributions, which fall short of actuarial demands and cause unfunded pension liabilities to grow. A unified state government allowed Illinois to reverse course from past gridlock and irresolute fiscal decision making. “Fitch’s improved outlook for Illinois is yet another sign of positive momentum for our state’s
New Jersey’s Surplus Budget… New Jersey lawmakers approved a $46.4 billion budget that makes a historic $6.9 billion pension contribution, repays debt sooner than expected and funds infrastructure. On the back of a Millionaire’s Tax brought by Governor Murphy, Garden State income tax receipts have surged higher. New Jersey’s revenue is anticipated to be $5.1 billion higher than forecast through Fiscal 2022. The state would repay $3.7 billion of debt coming due in the next couple of years. Another $1.2 billion would be used to pay for infrastructure projects. Thousands of New Jersey families will receive income tax rebate checks. Predictions of Covid-19 related shortfall never came true. New Jersey’s Fy22 spending plan, the largest in state history, is balanced with billions of dollars from a $10.1 billion projected surplus amassed when tax collections surged to record highs over the past year.
New York State Credit Outlook Boosted…With COVID-19 receding into the rear-view, New York State credit outlook took a step forward. A positive outlook from Moody’s, follows raises to ‘stable’ outlooks from S&P and Fitch. When New York’s finances were called into question a year ago, sophisticated tax-free investors scooped up NY high grade tax-free bonds at bargain prices. High taxes and ultra rich population add luster to Empire State muni bonds. “Coupled with a decade of fiscal integrity preceding the pandemic, an economic recovery that’s beating expectations thanks to our nation leading vaccination programs and hard-fought-for federal funding, New York State is today emerging from this unprecedented crisis on firm financial footing,” Governor Andrew Cuomo added, “I’m encouraged to see these efforts recognized by the major credit rating companies.”
Federal Legalization of Online Gaming Sought… 27 U.S. states are calling on the U.S. Department of Justice to rescind a 2018 legal opinion it issued during the Trump Administration that found state sanctioned online gambling such as lotteries and casino games could be subject to criminal prosecution under federal law. “New Jersey’s legal gambling industry and the many state services and programs supported by gaming revenue and tax dollars would have been devastated in 2020 without online gaming. Internet gaming has for years been and remains, an essential industry here, one the Department of Justice viewed since 2011 as perfectly legal until its baseless backtracking.” New Jersey Attorney General noted. Online revenue in New Jersey rose to $970.3 million in 2020, more than double that of a year earlier. With online bets accounting for more than 46% of New Jersey’s 2020 gaming revenue, the Garden State leads all other U.S. states in online gaming. After online bets emerged stronger during COVID, impetus for federal legalization of online gaming has gained.
Airport Bonds Fly High… June 20 was the busiest day at U.S. airports post-COVID-19. Airport bonds have rallied this year returning 2.4% to investors, outperforming overall municipal market close to 1% benchmark return. On the heels of substantial federal aid and vaccinations, airport bonds’ yield penalty relative to top rated muni bonds has declined. With about 46% of Americans fully vaccinated, airports fly higher with likely more travel.
Infrastructure Funding Deal… “We have a deal,” President Biden announced a $579 billion infrastructure deal with a bipartisan group of senators. Under the plan, $312 billion would go to transportation projects, $25 billion to airports and $55 billion to waterways. Public-private partnerships, private activity bonds, direct pay bonds will fund the new infrastructure spending. Strengthening the IRS to enforce tax collections is part of the agreement.
Infrastructure Funding Deal… “We have a deal,” President Biden announced a $579 billion infrastructure deal with a bipartisan group of senators. Under the plan, $312 billion would go to transportation projects, $25 billion to airports and $55 billion to waterways. Public-private partnerships, private activity bonds, direct pay bonds will fund the new infrastructure spending. Strengthening the IRS to enforce tax collections is part of the agreement. By going after those that owe taxes but don’t pay them, particularly high earners, the federal government could recoup as much as $140 billion over eight years for a net gain of $100 billion that can be used to cover the cost of expanded infrastructure. Biden and Democrats have not lost sight of proposed tax hikes, which Democrats are trying to push through Congress. “If this is the only thing that comes to me, I’m not signing it,” Biden added. “It’s in tandem.” Both the President and top Democrats say the comprise could move forward, if other items in Biden agenda, such as tax hikes and a larger spending plan, can move together with the infrastructure deal. However, Senate Minority Leader McConnell wants infrastructure de-linked from the spending bill.
Compare 30-Year taxable U.S. Treasury yield 2.13% to 30-Year tax-exempt muni bond yield “AAA” 1.59%; “AA” 1.78%; “A” 1.90%; “BBB” 2.36%. For investors in the 35% tax-bracket, a 2.3% tax-exempt yield is equivalent to a 3.6% taxable yield. Top rated tax-free bonds yield 75% of comparable taxable U.S. Treasuries.
If you have any questions or desire updated information contact your GMS Account Executive