Week of 10/28/2019

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Chicago 2020 Budget Update… Chicago Public Schools Lowers Borrowing Cost… Illinois’ $23.5 Billion Road Capital Plan Advances… U.S. States And Locals Attentive To Climate Change Risks… Hospital Bonds Outperform… Interesting Slate Of New Munis On Offer…

Chicago 2020 Budget Update…Chicago plans to close a fiscal 2020 budget gap with $538 million of savings and $352 million of revenue increases. Nearly a quarter of the budget gap will be closed by lower interest costs without extending debt maturities. The City plans to refinance $1.3 billion existing debt by December 2019 subject to City Council approval. Overhead cost-cutting brings savings of $168 million. Higher taxes on computer leases, restaurant meals, parking meter increases, and a real estate transfer tax are anticipated to generate an additional $125 million revenue in 2020. Taxes on single-use ride shares and congestion pricing bring an additional $47 million. The city budget will receive $32 million from a record surplus in Chicago’s tax-increment districts. The budget counts on state action for ambulance service reimbursements and graduated real estate transfer taxes. The budget relies on $313 million one-time measures, leaving the city with a 7% structural imbalance before actuarial pension funding shortfalls which S&P considers as ‘a reasonable one-year approach’ to closing the sizable 2020 budget gap. Given Chicago’s potential revenue sources, budget gaps should be manageable in 2021 and 2022. The $11.6 billion budget does not rely on property tax hikes or borrowing to cover settlements, debt or pensions. It does not lower pension contributions. “As we expected, the 2020 budget relies on a mixture of recurring and non-recurring items,” a Fitch analyst noted. S&P is focused on whether the city has a plan to close the budget gap within the medium term, be it with state action on real estate taxes, casino revenues or if contingencies such as property tax hikes come into play. The budget meets scheduled pension and debt service payments. Avoiding property tax hikes and promising a higher $15 minimum wage raises the budgets’ prospects. Following council hearings, a budget vote is set for November 26. Illinois lawmakers will consider Chicago casino legislation and graduated real estate transfer taxes in the October 28 veto session. Influential watchdog, Civic Federation has called the budget “a strong effort by a new mayor.” If state approval on amended legislation for a Chicago casino and a graduated real estate transfer tax come about, Chicago could be on a path to structural balance, funding all four pension plans on an actuarial basis by 2022. The proposed budget does not heighten ratings pressures, has a reasonable approach and buys time for Chicago to implement long term structural solutions.

Chicago Public Schools Lowers Borrowing Cost…Recent ratings upgrades and a low rate environment have lowered Chicago Public Schools (CPS) interest costs. Yield fell and spread or gap relative to top-rated munis narrowed for Chicago Board of Education $250 million Tax Anticipation Notes offered last week. The Notes were offered at a 1.69% yield or 55 basis points above top-rated one-year benchmark yields compared to a 2% yield and 70 basis point spread for similar notes offered five months ago. Bond investors appear unfazed by the ongoing Chicago teacher strike. Chicago’s mayor said Sunday that CPS and a labor union have reached a tentative deal while teachers are holdouts.

Illinois’ $23.5 Billion Road Capital Plan Advances…Governor Pritzker rolled out a five-year $23.5 billion spending plan for Illinois roads and bridges. The spending is a major piece of the $45 billion ‘Rebuild Illinois’ legislation for a range of infrastructure projects including public universities, parks, high-speed internet, bridges and highways. The plan includes $3.76 billion in highway projects in fiscal 2020 to improve 4,200 miles of highways statewide. The Plan marks a new capital strategy of investing in up front maintenance and received bipartisan support. The spending is funded by hikes on gas, cigarette and license plate fee taxes approved by the Illinois Legislature six months ago. Spending on infrastructure, an economic asset, is viewed favorably.

U.S. States and Locals Attentive To Climate Change Risks…Be it Hurricane Sandy or Katrina, states and local governments have eventually recovered lost ground from acts of nature. More U.S. cities are taking credit positive steps to address long-term risks caused by climate change per Moody’s. Roughly 10% of the world’s largest cities face higher service costs from climate change and many invest heavily to protect shorelines. For U.S. cities, roughly 60% of climate projects are geared to alleviate flood risks. In Puerto Rico, federal disaster aid helped to lift the Island’s economy to higher ground. No one can predict how costly future natural disasters could be. Natural disasters bring short-to-medium term ratings risk that could be alleviated with time and technology. 82% of U.S. cities surveyed by Moody’s will have a climate risk action plan in place by the end of 2019. With timely infrastructure investments, U.S. states and local governments, along with FEMA, have a track record of proactive response to natural disasters.

Hospital Bonds Outperform…Hospital bonds have returned 7.8% this year. Due to high investor demand, yields on tax-free hospital bonds have dropped and credit spreads have narrowed significantly. Some of the largest U.S. hospitals are benefiting from record low borrowing costs. Sales of bonds by not-for-profit hospitals have surged, with more than $21 billion offered this year, a third more than last year. Adventist Health System is starting a $1 billion sale; New Jersey’s largest health care network, RWJ Barnabas Health will borrow $437 million and New York Presbyterian Hospital is scheduled to sell $500 million in century bonds. A Municipal Bond Specialist could help tax-free investors select hospital bonds for a diversified portfolio and discern unique operating and regulatory risks faced by hospitals as they provide an essential service. An index of 20-year hospital muni bond yields is at the lowest since at least 1961.

Interesting Slate of New Munis on Offer…“A” and “BBB” rated Tobacco bond issues by a California agency, a Broward County Florida airport revenue bond, and an “A+” rated PA hospital revenue bond will pique the interest of investors seeking higher yields. New York bonds will dominate next week’s bond market with a large taxable New York State GO bond offering and a New York City building aid revenue bond issue. Investors’ flow into muni bonds has been positive for 42 weeks-in-a-row. Last week, San Francisco Bay Area Rapid Transit District sold $223 million in tax-exempt sales tax revenue bonds with some yields below top-rated benchmarks.

Compare 30-Year taxable U.S. Treasury yield 2.32% to 30-Year tax-exempt muni bond yield “AAA” 2.17%; “AA” 2.42%; “A” 2.54%; “BBB” 3.10%. For investors in the 35% tax-bracket, a 3.1% taxexempt yield is equivalent to a 4.7% taxable yield. Top rated tax-free bonds yield 94% of comparable taxable U.S. Treasuries.