Week of 10/4/2021

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Puerto Rico House Approves Puerto Rico GO Debt Pact… Lawmakers Eye Lower Price Tag… SALT or No SALT… Housing “Infrastructure” Aid Could Be A Game Changer… Second Term For Murphy?… Dwindling Muni Bond Sales Defy Expectations…

Puerto Rico House Approves Puerto Rico General Obligation Debt Pact… The Island territory’s House of Representatives approved legislation to approve the plan support agreement that seeks to sell new restructuring bonds to restructure central government debt. Still, pensions continue to be a sticking point. The bill does not cut some pensions by 8.5%. House members voted 33 to 14 to pass House Bill 1003 that authorizes the issuance of new Puerto Rico general obligation bonds and the creation of a contingent value instrument in exchange for legacy debt. House Speaker Rafael “Tatito” Hernandez called the legislation “the most important in the last 20 years and the most important for the next 20 years,” adding that it could potentially put the Island’s economy back on track. A rebound in the Island’s economic growth is evident as its Economic Activity Index has seen five straight year-on-year increases following twelve consecutive decreases, per the Economic Development Bank of Puerto Rico. Territory bankruptcy law PROMESA requires Puerto Rico legislative assembly approval before the Title III Court can confirm the debt pact. The legislation addresses debt and the Oversight Board has said that local legislative action on pensions is not a must for the debt deal to advance. The board has said it has the legal right to restructure the debt even without local government approval but acknowledged getting approval would avoid complications. The Oversight Board has said that some pension cuts must go hand-in-hand with the debt reduction plan. The board is willing to shield 84% of pensioners, should the Island receive federal Medicaid funds above certified fiscal plan projections. Governor Pierluisi stated, “I’ll make my case before the court when the time comes, arguing in favor of not having any pension cuts,” “I hope that the judge will see this issue my way.” House approval of the debt pact is a step forward, Puerto Rico Senate is expected to act this week and pension accord is awaited. Puerto Rico’s fiscal agency executive director said the House bill is an indispensable step toward achieving the confirmation of the debt deal by the Title III Court.

Lawmakers Eye Lower Price Tag… The federal package on climate change and social spending could be somewhere between $1.9 trillion and $2.3 trillion, President Biden stated on Friday. On Saturday, Biden said of the $1 trillion bipartisan infrastructure bill, “I support both of them, and I think we can get them both done.” Centrists oppose the $3.5 trillion price tag, and Senator Joe Manchin’s (D-WV) $1.5 trillion limit is considered too small. Rep. Alexandria Ocasio-Cortez (D-NY) has floated the possibility of funding programs for shorter durations. Sen. Bernie Sanders (D-VT), who originally argued for spending beyond $3.5 trillion, said, “What the president has said is that there’s going to have to be some give and take and I think that’s right.” Meanwhile, top House Democrats repeatedly delayed a vote this past week on the roughly $1 trillion infrastructure bill that has Senate approval, as progressives insisted on reaching an agreement on the social policy and climate bill first. A compromise could shorten the spending timeframe and/or focus the funds on fewer programs.

SALT or No SALT… The question on restoring higher state and local tax deductions (SALT) on individual tax returns looms large. “No SALT, no deal!,” Rep. Tom Suozzi (D-NY) reiterated last week, to end a cap on SALT deductions, a call echoed by city mayors and local government officials. SALT is a hot topic not just for high tax areas like NY or CA, but it also has revenue implications for smaller local governments. Fully restoring SALT to pre-Trump era levels could cost the U.S. Treasury about $88 billion a year, per Joint Committee of Taxation. Some Democrats, such as Rep. Alexandra Ocasio-Cortez (D-NY) and many Republicans, are opposed to full SALT cap repeal, which are presumed to largely benefit wealthy real estate owners who itemize tax returns. As lawmakers find a compromise, part of the solution could be a SALT fix.

Housing “Infrastructure” Aid Could Be Game Changer… Affordable housing projects could score a win if housing related funding measures of the $3.5 trillion budget reconciliation package come to fruition. Various housing measures, $327 billion aggregate, include $90 billion in housing vouchers, $80 billion for public housing repairs and $15 billion for new affordable units. Los Angeles Mayor Eric Garcetti said that the housing is, “the most important piece of infrastructure for most Americans”. Only a fraction of COVID-19 related emergency rental assistance, $25 billion in March 2020 and $21 billion in March 2021, has been spent by states and local governments. The $3.5 trillion bill, which has several high stake measures for states and locals, could be trimmed. More housing related federal support, be it new affordable housing units, public housing upgrades, block grants or vouchers, could be a game changer for many affordable housing projects.

Second Term For Murphy?.. 51% of voters polled support Governor Murphy’s re-election, while 38% favor opponent Jack Ciaterelli. Both have vowed to stay away from tax hikes in the Garden State. On jobs and the economy, the duo are close, with 39% of voters in favor of Murphy and 32% for Ciaterelli. Murphy is an alumni of Goldman Sachs, while Ciaterelli has earned his stripes as former state assembly man. If re-elected, Governor Murphy could make history as the first Democratic governor to serve two terms in New Jersey in over forty years. Only two states, New Jersey and Virginia, will elect a governor in 2021. The outcomes could be a forerunner of the political environment leading up to 2022 mid-term elections, where Democrats’ narrow majority could be at stake.

Dwindling Muni Bond Sales Defy Forecasts… Dashed are the hopes of Wall Street strategists who opined that 2021 could fetch $450 to $550 billion of new muni bonds. In September, states and locals sold 30% fewer muni bonds than a year ago. October bond sales too are expected to trail last year’s bond volume. In 2021, $340 billion muni bonds have been issued, up barely 2% from a year ago. Citigroup and JP Morgan rolled back their sales forecast somewhat, while Bank of America strategists are asking, “Now, the question is, is it possible to catch up?”, while keeping a check on refundings, seasonality and new infrastructure packages. Over the next 30 days, almost $18 billion of new muni bonds could be sold, the fastest pace this year. “At the onset of the year we expected another year of record supply,” a JP Morgan strategist added, “That record supply was largely beholden to an increase in taxable issuance.” A dip in taxable bond sales amid an avalanche of federal aid has put on hold states’ and locals’ borrowing plans. With lawmakers in Washington debating tax hikes on the wealthy, money has poured into the municipal bond market, which has received cash inflows for 29 weeks in a row. Tax-free muni bond supply has kept up with neither strategists’ forecasts nor investor demand.

Compare 30-Year taxable U.S. Treasury yield 2.06% to 30-Year tax-exempt muni bond yield “AAA” 1.72%; “AA” 1.92%; “A” 2.20%; “BBB” 2.36%. For investors in the 35% tax-bracket, a 2.3% tax-exempt yield is equivalent to a 3.5% taxable yield. Top rated tax-free bonds yield 83% of comparable taxable U.S. Treasuries.