Week of 5/07/2019

Illinois Governor’s Income Tax Plan Advances… P R Announces Deal to Restructure PREPA Debt… U.S. Senate to Weigh on Puerto Rico Oversight Board… Transportation Funding At Crossroads… Connecticut Mulls Tolls For More Revenue… President Trump Doubles Infrastructure Plan to $2 trillion… Fed Keeps Rates Unchanged… Low Inflation a Strategic Concern… Dwindling Supply a Tailwind to Muni Gains…

Illinois Governor’s Income Tax Plan Advances…A supermajority of Democrats in the Illinois Senate favor a graduated income tax, Democrat Governor Pritzker’s top priority. Senate Democrats want a constitutional amendment to replace Illinois’ 4.95% flat tax rate for all Illinoisans with a graduated tax plan that levies 7.95% on those with incomes more than $750,000. The Illinois House, also Democrat-controlled, must approve the plan before voters decide at the November 2020 election. The new graduated rate structure would bring in an estimated $3.3 billion in new state revenue and modest breaks to 97% of taxpayers. Governor Pritzker is pushing the General Assembly for the graduated income tax plan to be in place by May 31. The Senate also approved a repeal of a levy on inherited estates and property tax relief, if the income tax plan goes through. New revenue that could help fill a $3.2 billion budget gap for the lowest rated U.S. state upends political stand-offs under the former governor.

Puerto Rico Announces Deal to Restructure PREPA Debt…The latest PREPA pact with Assured Guaranty and other stakeholders including a group of uninsured PREPA bondholders calls for investors to exchange each dollar worth of their securities for 67.5 cents of senior coupon bearing bonds and 10 cents of capital appreciation bonds. The agreement still needs a minimum 67% support from voting bondholders and Title III court approval, where it could be challenged by some creditors. Puerto Rico’s oversight board said the restructuring is expected to save PREPA and Puerto Rico residents about $3 billion more in debt-service payments over the next 10 years than a previous agreement and will cut the company’s legacy debt by nearly a third. “We have long made the case that the solution to Puerto Rico’s difficulties is through consensual settlements” , said Assured Guaranty CEO. “This settlement builds on the work that successfully produced an earlier version of an RSA for PREPA, before the enactment of PROMESA in 2016.” The initial trading, while sparse, suggests that the terms were largely in line with investors’ expectations. PREPA bonds have rallied to over 80 cents after trading around 70 cents in March 2019 and hitting a low of 25 cents post Hurricane Maria in late-2017.

U.S. Senate to Weigh on Puerto Rico Oversight Board…By July 16, the U.S. Senate will decide on President Trump’s re-nomination of seven members of Puerto Rico’s Oversight Board. A U.S. congressional hearing on PROMESA pitted Governor Rosselló against Oversight Board Executive Director Jaresko. Rosselló gained the sympathy of Democrats, including U.S. House Natural Resource Committee Chair Grijalva who vouched against severe budget cuts. Meanwhile, the Oversight Board claimed completed restructuring of 30% of Puerto Rico’s debt stack amongst accomplishments. Rosselló, who accused the Oversight Board for ‘micromanaging’ the Commonwealth budget, told lawmakers that the Commonwealth’s 2016 Muni Week 5/07/2019 Review / Preview Illinois Governor’s Income Tax Plan Advances… P R Announces Deal to Restructure PREPA Debt… U.S. Senate to Weigh on Puerto Rico Oversight Board… Transportation Funding At Crossroads… Connecticut Mulls Tolls For More Revenue… President Trump Doubles Infrastructure Plan to $2 trillion… Fed Keeps Rates Unchanged… Low Inflation a Strategic Concern… Dwindling Supply a Tailwind to Muni Gains… audit could be available in the coming weeks, followed by audits for more recent years. Puerto Rico’s Treasury cash balance topped at $6.6 billion which is $2 billion or 30% ahead of estimates. Chairman Grijalva called the Oversight Board’s performance ‘mixed at best’. Ahead of a Senate confirmation vote on the Oversight Board, the hearing provided a chance to hear straight from the horse’s mouth.

Transportation Funding at Crossroads…A flux in technology and driving trends has sparked a national debate over how to overcome falling gas tax revenues. “We may think of a different mousetrap to capture the movement around this state,” New Jersey Governor Murphy is exploring a mileage-based fee as a replacement for soaring gas taxes to fund the Garden State’s infrastructure. The I-95 Corridor Coalition, a partnership of transportation agencies and toll authorities from Maine to Florida, is testing a federally funded mileage-usage pilot program. So far, Oregon is the only U.S. state that offers an optional mileage-use fee. New York City intends to implement congestion pricing, which supporters say could generate up to $15 billion through bonding for the city’s subways and buses, while Los Angeles, Philadelphia and other cities are considering it. Taxing marijuana, legal to some extent in 33 states, and gambling as well as privatization are amongst funding options to fix strained mass transit and highways. At least 30 states raise their own gas taxes to fill the void in federal infrastructure funding.

Connecticut Mulls Tolls For More Revenue…Toll-free state Connecticut is considering resuming tolls to fix its roads and bridges amid ongoing revenue and debt challenges. Democrat Governor Lamont’s plan to generate $800 million in toll revenue is opposed by Republican lawmakers’ plan to fund transportation infrastructure with general obligation bonds. The politically divided state’s legacy debt and budget strife led to ratings downgrades in 2017. The first upward tweak to Connecticut’s general obligation rating (Moodys ‘A1’ S&P ‘A’ Fitch ‘A-’) came in March 2019 when S&P changed its outlook from stable to positive.

President Trump Doubles Infrastructure Plan to $2 Trillion…President Trump has agreed to invest $2 trillion to revitalize the nation’s infrastructure. Congress still needs to figure out how to pay for it. “I would say that 80% of it focused on infrastructure writ large. We agreed upon a broad figure of $2 trillion of investment. Probably the largest chunk would go to roads, bridges, transit, but we’re also going to do waste water, harbors, and probably include airports,” House Transportation Cmte Chair Peter De Fazio informed. In 2016, President Trump had proposed a $1 trillion infrastructure package. Reforming federal gas tax which has been 18.4 cents since President Reagan took office could be in the cards. Muni bond investors are keen to see to what extent tax-exempt bonds including private activity bonds could form part of the mix.

Fed Keeps Rates Unchanged…Inflation a Strategic Concern…It was not surprising that Fed Chair Powell kept rates unchanged stating “we don’t see a strong case for moving in either direction” at the Fed’s May meeting. In April, more Americans dropped out of the workforce and wages missed estimates despite 50-year record low unemployment. “Core inflation has retreated to relatively low levels over the past three months, elevating my concerns over the outlook for inflation,” Fed Reserve Bank of Chicago President Charles Evans said this week. The Fed’s preferred index decelerated to 1.6% for the year ending March versus 2% in December. The Fed is reviewing its approach to its 2% inflation target this year. A gauge of U.S. service industries unexpectedly dropped for a second month, slipping to the lowest level since August 2017 in the latest sign of weaker economic momentum at the start of the second quarter.

Dwindling Supply a Tailwind to Muni Gains…Not only was April’s new muni issue supply 16% lower than last year, state and local governments are set to pay off $117 billion of debt from June through August. The amount of bonds that will be paid off over the summer months will far exceed the average $26 billion of new securities that have been issued each month so far this year. Soaring tax bills have led investors to buy more muni bonds in the first four months of 2019 than they usually do in a whole year. The dynamic has led to strong returns on muni bonds relative to comparable U.S. Treasuries. Yields on 30-year municipal bonds dropped to about 2.62% while those on Treasuries were little changed. That reduced the tax-exempt municipal yields to about 89% of taxable Treasuries’ yield: the lowest since 2013.