Week of 1/10/2022

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U.S. State Revenue Exceeds Pre-PandemicMunis Poised to Outperform, PIMCO… Chicago Public Schools Nears Investment Grade… COFINA Credit Positive: Record High Retail Sales… Senior Housing Occupancy… Atlantic City Casino Taxes Revamp… Airports Bond Spree… Illinois Monetizes Real Estate…

U.S. State Revenue Exceeds Pre-Pandemic… State and local receipts were 16% above pre -pandemic levels in Q3-21 per the Committee for a Responsible Budget, while noninterest spending was up just 5%. U.S. state rainy day funds climbed to a record high $113 billion in Fiscal 2021. States are expected to increase general fund spending 9.3%. “I have one priority every session that is the number one priority and that is balancing our budget making sure we are doing the right thing to put our state on firm fiscal footing, to continue to get credit upgrades as we have and to make sure we are providing the services people need,” Illinois Governor J.B. Pritzker (D), who enjoys Democratic supermajorities in the House and Senate, will unveil his spending early next month. Due to revenue outperformance, Illinois paid off its $3.2 billion borrowing from the federal reserve earlier than planned. In California, where revenue is 25% ahead of estimates, Governor Newsom will unveil his Fiscal 2023 budget plan this week. U.S. state budgets are flush, benefiting from an aggregate $885 billion in direct federal stimulus, soaring tax revenue and curbed costs as some state and local services moved online. California, Illinois, Connecticut and New York are among 36 gubernatorial elections in 2022. While election day is far off, spending plans for Fiscal 2023 are front and center. Investors want to see if spending plans maintain or improve states’ fiscal and credit trajectories.

Munis Poised to Outperform, PIMCO… The municipal market has a history of outperforming during periods when the Fed hikes rates, a PIMCO portfolio manager told Bloomberg. When yields rise, the tax-free interest that munis pay makes them more attractive. “It’s this dynamic that historically has caused tax-exempt muni spreads to tighten relative to other taxable fixed-income investments as rates rise,” he said. “The muni market has a long history of outperforming as interest rates rise.” During the last Fed tightening cycle, which began in December 2015 and lasted until December 2018, investment grade municipals returned over 7%, while U.S. Treasuries earned about 4%. Lower rated municipal bonds too have outperformed when rates rise, as they tend to offer higher taxable equivalent yields and safety relative to similar rated corporate bonds. On Tuesday, Federal Reserve Chair Jerome Powell will likely share his views on the pace of tightening financial conditions with lawmakers.

Chicago Public Schools Nears Investment Grade… Fitch lifted the ratings of Chicago Board of Education to “BB+”, one step below investment grade. The upgrade ‘reflects a trend of improved financial performance, restoration of reserves to adequate levels and strengthened liquidity’ while rising pensions and union pressures are credit risks. Windfall of federal aid and declining enrollment are fallouts of COVID-19. Moody’s and S&P upgraded the nation’s third largest school district in 2021. This is the first upgrade the district has received from Fitch since August 2019.

COFINA Credit Positive: Record High Retail Sales… Credit positive for COFINA bonds, Puerto Rico retail sales are up 24% since 2020. Retail sales of $30.4 billion from January to October 2021 are the highest since at least 2009. COVID-19 related federal aid and reconstruction funds have boosted the Island’s economy. If enacted, the “Build Back Better” spending package could increase the federal Medicaid funding permanently and for the first time, extend Supplemental Social Security Income for the Island’s elderly and disabled. The economic boost has been a boon for the Island government which has a record high cash balance of $25 billion, in government bank accounts. On the mainland, 36 U.S. states saw October sales tax revenue increase 17% from a year ago.

Senior Housing Occupancy… Hard-hit by COVID-19, the senior housing sector is seeing occupancy rates of 80%- 81% nationwide, down from 88% pre-COVID-19. Nonprofit continuing care retirement communities had an 87% occupancy rate in the third quarter of 2021, down from 93% a year ago. San Jose, San Francisco and Boston had the highest occupancy rates, while Atlanta, Cleveland and Houston had the lowest. Fierce competition for workers, higher wages and cost pressures have weighed on operating margins, while rental rates have risen 2.3%. Median net operating margins fell to 18% in 2020 from 23% in 2019 for investment grade borrowers and to 14% from 18% for those below investment grade per Fitch Ratings. Amid investors plowing a record $22 billion into high yield municipal bonds last year, senior living facilities sold $7.4 billion in new bonds in 2021, 21% more than they did in 2019. An ICE Data official said, “Senior living deals were well received with strong investor interest.”

Atlantic City Casino Taxes Revamp… Atlantic city casinos start the new year with lower property taxes. Governor Murphy revised the casino PILOT agreement struck in 2016 under former Governor Chris Christie, or payment in lieu of taxes, to reduce the amount casinos would pay in property tax. The new plan would no longer use online gambling and sports betting revenue for calculating casinos’ tax payments to local governments, an annual loss of $30 to $65 million over the next three years for local governments per the Office of Legislative Services. Some believe that few casinos could pay more under the new law, which lasts until 2026. The city’s nine casinos and state racetracks collectively brought in $4.3 billion through November, a 69% increase over 2019. Thanks to online gambling and sports betting, Atlantic City casinos are in much better shape than before the pandemic.

Airports’ Bond Spree… From New York to Los Angeles, airports nationwide are actively selling new muni bonds to save interest and revamp terminals. Federal aid and strong recovery of domestic leisure travel has allowed airports to advance capital programs mostly as planned before COVID-19 hit. Airport bond volume rose 5% in 2021 to $14.2 billion from $13.5 billion in 2020, the first year of the pandemic. Last month San Diego International Airport sold $1.9 billion bonds, the largest bond sale for a California airport, following bond sales by LA, Denver, Salt Lake City, JFK and Dallas Fort Worth over the year. All three ratings agencies carry a positive outlook on airports. A Dallas airport official said three relief packages confirmed his reassurance to investors that the federal government would not leave airports high and dry in a crisis.

Illinois Monetizes Real Estate… Converting a sprawling downtown Chicago government owned state office building to privately held office, retail and hotel space will save Illinois $20 million a year for the next 30 years. The planned sale, worth $70 million, is a public private partnership that will enhance the property’s value, save taxpayers $800 million and allow Illinois to keep a 30% stake in the real estate. The idea of selling the 17-storey marquee building on 3 acres in downtown Chicago dates back to former Governor Rauner. In 2019, Governor Pritzker set up a task force to transfer state real estate assets to Illinois public pensions. Governor Pritzker said, “By returning vital real estate in downtown Chicago to private ownership, tens of millions in revenue will be generated for Chicago Public Schools and for property taxpayers.”

Compare 30-Year taxable U.S. Treasury yield 2.11% to 30-Year tax-exempt muni bond yield “AAA” 1.63%; “AA” 1.89%; “A” 2.0%; “BBB” 2.71%. For investors in the 35% tax-bracket, a 2.7% tax-exempt yield is equivalent to a 4.15% taxable yield. Top rated tax-free bonds yield 77% of comparable taxable U.S. Treasuries.