Tax Windfall To Bridge Illinois Budget Gap… California Tax Revenues Surpass…Many States Welcome Tax Windfall…Motor City’s Resurgence Credit Positive… Higher Funding For Florida Public Schools Credit Positive…Oversight Board Pushes Back Island Surplus On Federal Funding Delays…Inflation Below Expectations…Higher Pace Of Muni Inflows…

Tax Windfall To Bridge Illinois Budget Gap…Recent developments bring Illinois closer to improving its stressed finances. April 2019 revenue outperformed prior year by 38% or $1 billion and is 7% or $1.5 billion more than projected. The tax windfall, coupled with other state revenue, will be enough to cover most of Illinois’ $1.6 billion deficit for the current fiscal year. Moreover, Illinois’ sales tax collections accelerated since October 2018 when online retail was brought under the tax net. Outperforming April individual and corporate tax revenue brings immediate relief to Illinois’ pension woes. Facing nearly $134 billion unfunded pension liabilities, Governor Pritzker had earlier proposed extending pension payments over a longer time frame and selling state assets. Governor Pritzker recommends funding the state’s Fiscal 2020 statutory pension payment, with the tax windfall. The revenue boost, an outcome of the stock market performance, better federal reimbursement for Medicaid and federal tax reform, could be short-term as Illinois is working on more detailed data analysis. Illinois increased estimated Fiscal 2020 general fund revenues by $800 million or 4%. Robust April revenues provide some short-term budgetary relief, but significant uncertainties remain on structural balance, Fitch Ratings noted. Governor Pritzker’s inaugural budget was termed a ‘bridge’ that would buy time until Illinois could implement the Governor’s progressive tax plan, approved by the Illinois Senate on May 1, for structural fiscal balance. If voters approve of a tiered income tax structure in November 2020, Illinois would gain greater revenue-raising flexibility necessary for structural balance. Illinois’ industrial diversity and high wealth levels lend to its ability to support a higher tax burden. It may be noted that California’s former Governor Brown’s initiative brought higher taxes on the wealthiest to stabilize the Golden State’s credit profile and delivered gains to California bondholders. Illinois’ steps, geared towards improving its revenue picture, are critical to improving the credit quality of the lowest rated U.S. state. Illinois general obligation bonds rallied: Illinois general obligation bonds (Moodys “Baa3” S&P “BBB-” Fitch “BBB”) yield 1.3% more than top rated munis: the gap or spread has narrowed from a 1.8% average spread this year due to Illinois’ steps into the right direction.

California Tax Revenues Surpass…A financial boost of $3 billion for the most-populous U.S. state, California came with April personal income tax haul of $18.4 billion that surpassed estimates by 19%. California Governor Gavin Newsom’s $147 billion general-fund budget for fiscal 2020 expects more revenue from the stock market’s gains but scales back growth rates for later years as the U.S. economy surges into its 10th year of expansion. Newsom’s fiscal 2020 budget reduces the revenue projection for 2023 by $1.6 billion compared to earlier estimates. California’s voter-mandated rainyday fund would reach $16.5 billion next year from $14.4 billion this year. By the end of the 2023 fiscal year, the account would hit $18.7 billion. In the meantime, however, California is flush as the stock market and the technology industry lift fortunes, particularly for the wealthy, who are taxed under higher rates in the progressive system. California (Moodys “Aa3” S&P “AA-” Fitch “AA-”) bonds yield 1.7% for 10 year and 2.6% for 30 years.

Many States Welcome Tax Windfall…All 15 U.S. states that have reported April tax collections so far have seen tax collections outperform. California, Illinois, Connecticut are among them, and New Jersey expects to join next week. New Jersey Governor Phil Murphy expects April tax collections to surpass projections by $250 million. Connecticut’s personalincome taxes brought in $100 million more in April and $600 million more for the fiscal year relative to forecast. New York’s March tax revenues outperformed forecasts. High tax states are enjoying windfalls after struggling to predict how President Donald Trump’s federal tax law changes would ripple through their revenue. In some cases, the outperformance is making up for shortfalls earlier in the budget year because of uncertainty in predicting how the U.S. tax changes, including the $10,000 cap on state and local tax deductions known as ‘SALT’ would ripple down at state capitols. “We’re seeing good signals and good signs in the economy at large, that always would tend to be correlated with revenue growth,” said a Moody’s analyst. Clearly growing revenue, all else equal, tends to be credit positive for the states. Solid growth in the U.S. economy in 2018 and 2019 provided a stable base for state and local governments. Projected U.S. GDP growth, although slower, will help support credit stability for state and local governments for the foreseeable future.

Motor City’s Resurgence Credit Positive…Income tax revenue, a crucial factor in Detroit’s recent robust financial performance, has recovered strongly since 2010. Over the last decade, income tax revenues have grown by over 4% on average after dropping more than 10% in 2009 and 2010. Detroit has found plenty of traction with Google’s self-driving Waymo unit (+400 jobs) Ford Motor’s tech campus (+5,000 jobs) and most recently, the Fiat Chrysler’s $2.5 billion planned Jeep and truck manufacturing site per Moodys. Detroit has acquired 200 acres of land to rope in Fiat Chrysler’s $2.5 billion investment and agreed to tax abatements. Although there have been job cuts at General Motors, Detroit is showing a competitive advantage for auto makers. A growing employment base brings credit positive momentum for Detroit.

Higher funding for Florida Public Schools Credit Positive…Reversing several years of anemic state funding, Florida’s Fiscal 2020 budget contains significantly higher funding for K-12 students. Average per-student state funding will increase by $7,656 or 3.2%. The boost is credit positive for all Florida public schools. Nationwide, many states are witnessing healthy revenue growth over the past year, allowing them to increase K-12 education spending.

Oversight Board Pushes Back Island Surplus on Federal Funding Delays…Puerto Rico’s Oversight Board pared back the Island’s cumulative surplus through 2023 while boosting surplus projections through 2049. “For the five years the surplus goes down, the growth goes down,” Jaresko said during a public meeting this week. “And a lot of it has to do with the changes in the federal spending expectations or projections.” The longer wait for federal funds will reduce the Island’s estimated cumulative surplus from the 2019 to 2023 budget years to $11.6 billion from the $14.8 billion forecast in October, according to the most recent draft of the plan. “You get a longer effect of growth because you now have 15 years of fiscal stimulus rather than 10,” Jaresko said. “We’re now showing the federal funds coming over a longer period of time so that growth comes over a longer period of time.” A $19.7 billion surplus over 30 years, up from the $12.8 billion projection earlier is included in the updated board certified fiscal plan. Puerto Rico Treasury Secretary stated that the Commonwealth’s much overdue 2016 audit has been completed although not yet released.

Inflation Below Expectations…Price gains fell below expectations in April. US CPI or consumer price index for April rose 0.3% from a month ago and gained 2% in a year. Americans paid 11% more at the pump last month while a stronger U.S. dollar, up 8% in a year, lowers import prices. “Rising income inequality may help explain the lack of inflation despite wage growth and low unemployment,” Minneapolis Fed Chief Neel Kashkari stated. “The U.S. labor force has seen its share of national income decline over the last decade as more wealth is concentrated in the hands of the richest households. Higher tariffs on China could factor into interest rates. The Fed could reduce rates if the higher tariffs prompt a severe cutback in consumer spending,” Federal Reserve Bank of Atlanta President Raphael Bostic. Fed funds futures on Friday showed traders are fully pricing in a cut within the first few months of next year.

Higher Pace of Muni Inflows…The pace of inflows to muni bonds has increased. Investors added about $1.5 billion up from $1.2 billion last week boosting muni bond prices. In the 18th straight week of inflows to muni bonds, investors have shown a preference for longer dated tax-free munis amid the backdrop of low inflation. Long term top-rated tax-free munis yield 89% of comparable taxable U.S. Treasuries’ yield.

Compare 30-Year taxable U.S. Treasury yield 2.8% to 30-Year tax-exempt muni bond yield “AAA” 2.5%; “AA” 2.7%; “A” 2.9%; “BBB” 3.3%.