Week of 11/22/2021

More Pension Obligation Bonds… California Budget Surplus… Bids For Chicago Casino, A Win-Win… States’ Post-COVID-19 Rebound… Governments Dip A Toe In Crypto…

More Pension Obligation Bonds… Illinois is the third largest issuer of pension obligation bonds, following California and Arizona. Low borrowing costs are a panacea to Illinois’ vastly underfunded pensions. A law that empowers the pension plan to intercept various taxes and grants that flow through the state, if local governments do not meet state mandated funding targets, is driving a surge of pension obligation bonds in Illinois. Illinois’s unfunded pension liabilities rose to a peak of $141 billion last year, while funded ratios in Chicago are as low as 19%. Pension reform has faced obstacles due to constitutional protections for promised benefits to retirees. A wave of cities in Illinois has tapped the municipal bond market to shore up funded ratios, without straining budgets. For rated pension obligation bonds, the impact of added debt service on budget flexibility, underlying fiscal condition of the local government and bond structure are factors. Nationwide, more than 90 municipalities sold bonds this year to cover rising pension costs. States and local government pension funds have about $3.8 trillion less than needed to cover benefits promised to retirees, the shortfall is about the same as aggregate bonded debt. With over $11 billion pension obligation bonds issued this year, the tally of pension obligation bonds is the highest on record and poised to accelerate.

California Budget Surplus… California’s budget surplus could be about $31 billion next year; the state’s Legislative Analyst Office predicts that the surplus could be as low as $10 billion or as high as $60 billion as the Golden State’s tax collections are heavily tied with the economy. The surplus was $75 billion in Fiscal 2021. California tax collections are more than $10 billion ahead of projections for three months ended September 21 and the outperformance is estimated to be about $28 billion for Fiscal 2022. If the outperformance proves out, it could be opportune for Governor Gavin Newsom (D) who faces an election next year. With California’s progressive tax system, the top 1% of earners pay nearly half of all personal income tax collections.

Bids For Chicago Casino, A Win-Win… Five bids for the much awaited casino take the Windy City and the State of Illinois a step closer to new revenue. Chicago could reap about $200 million new annual revenue and a larger share of about $500 million annually is slated for the State. Ballys, Hard Rock and Rush Street Gaming are contenders for exclusive rights to own and operate a $1 billion plus casino, hotel and resort complex, as well as rights to operate slot machines at Chicago O’Hare and Midway airports. A temporary venue would precede a permanent set up likely by 2025. “The submission of bid responses represents a major step toward the thoughtful development of a casino resort that uplifts our businesses, employs and empowers our residents and encourages tourism,” added Mayor Lightfoot, a long-time advocate of the casino. After initial casino legislation in 2019 failed to attract bids, Lightfoot worked with the Illinois legislature to enhance the financial viability of a casino. A selection is likely by early next year, and the state gaming board must approve the city’s chosen operator. While Illinois plans to use its casino revenue for construction, Chicago’s share of the new revenue will boost pensions, which face a $31 billion unfunded liability, nearly twice the size of the city budget.

States’ Post-COVID-19 Rebound… “Less than a year after the pandemic recession officially ended, every state took in a higher amount of total personal income,” Pew Charitable Trusts noted, “That’s a far faster recovery than after the Great Recession, when it took five years for all states’ personal income to rebound.” The big difference comes from federal aid. Long term revenue fell short of expenses, a measure of structural balance, in eight states per Pew’s analysis of state financial reports spanning a decade. Jobs have lagged, with an average 76% of prime age workers employed, compared to 80% pre-pandemic. Reflecting muted economic growth, personal income after excluding COVID-19 related federal aid is still below pre-pandemic levels in eighteen states, a signal that inflationary pressures may be transient.

Governments Dip A Toe In Crypto… Some cities are eager to jump on the crypto bandwagon, while others find the volatility of digital currency to be a barrier. Miami envisions it could be the first U.S. city to offer a “Bitcoin yield as a dividend” to residents for off-setting taxes, as the city’s forays in cryptocurrency has earned $21 million recently per Miami Mayor Francis Suarez. The first U.S. public pension fund to buy crypto is a Houston firefighters’ pension fund which recently made a minimal cryptocurrency investment, less than 0.5% of its fund size. The first mayor with Bitcoin in his paycheck could well be New York’s newly minted Mayor-elect. With the United States poised to become a cryptocurrency global hub, it is no surprise that governments, politicians and lawmakers seek a slice of emerging digital currency.

Compare 30-Year taxable U.S. Treasury yield 1.92% to 30-Year tax-exempt muni bond yield “AAA” 1.61%; “AA” 1.75%; “A” 1.93%; “BBB” 2.49%. For investors in the 35% tax-bracket, a 1.61% tax- exempt yield is equivalent to a 2.47% taxable yield. Top rated tax-free bonds yield 83% of comparable taxable U.S. Treasuries.