U.S. Supreme Court To Rule On Puerto Rico Fed Board Constitutionality…Bond Insurer Questions Puerto Rico’s Pension Claims…NYC’s All-Time High Reserve Funds…NJ Budget Talks…Chicago Public Schools New Debt 8x Oversubscribed…Treasury Yields Under 2% Could Drop Lower…Fed Goal Firms Rate Cut Expectations…Muni Demand Set to Beat 2009 Record…

U.S. Supreme Court To Rule On Fed Board Constitutionality…The U.S. Supreme Court will decide whether Puerto Rico’s Oversight Board is constitutional. In February 2019, a day after the COFINA Plan became effective; the 1st U.S. Circuit Court of Appeals ruled that 016 appointments of the Oversight Board members violated the U.S. Constitution because the Senate did not confirm their appointment. General obligation bondholder hedge fund Aurelius Capital, a Puerto Rico labor union and bond insurer Assured Guaranty claim the Oversight Board’s appointment was unconstitutional and asked the court to invalidate all Oversight Board actions including Puerto Rico’s Title III bankruptcy as ‘null and void’. While the appeals court declined in its February ruling to void actions taken by the Board, their decision that the seven Board members must be replaced or reappointed by July 15 creates ambiguity. On June 18, the White House nominated the current members for Senate confirmation. The Oversight Board and the United States have appealed to the U.S. Supreme Court to defend the Board’s constitutionality while creditors filed opposing appeals. The highest court in the nation will hear both sides this October. The U.S. Supreme Court’s decision will carry implications for Puerto Rico’s Title III bankruptcy and debt restructuring.

Bond Insurer Questions Puerto Rico’s Pension Claims…Puerto Rico has not been entirely forthcoming on how it arrived at its massive pension obligation claim, AMBAC asked the Title III court to look into Island’s pension claims amounts. From May 2019 to June 2019, the Island’s pension claims grew by $5 billion or 10% higher, the Oversight Board’s May 2019 fiscal plan and the June 2019 general obligation tentative plan reveal. If and when such flaws are corrected, billions of dollars could potentially be freed up for other purposes. There is no basis to substantiate the ‘massive figure in pension liabilities’ AMBAC stated: “Transparency into the size and scope of the Commonwealth’s true pension liabilities is necessary if the Commonwealth is to pursue a restructuring of its liabilities and successful exit from bankruptcy.” Assured Guaranty is opposed to the Oversight Board’s tentative plan on general obligation debt with a few hedge funds holding only 10% of the bonds in question; other hedge funds Aurelius Capital and Autonomy Capital, who challenged Oversight Board’s constitutionality, are not a party. The plan pits hedge funds against each other as major bond insurers unite against it in the courtroom.

NYC’s All-Time High Reserve Funds…“This is literally the all-time highest reserves in the history of New York City,” Mayor Bill de Blasio referred to New York City’s $6 billion reserve which includes $250 million new reserves from the City’s fiscal 2020 budget. This week New York City reached agreement on a final fiscal 2020 budget. NYC is one of the largest issuers of general obligation debt rated Moodys “Aa1”, S&P and Fitch “A”.

New Jersey Budget Talks…Governor Phil Murphy and the New Jersey state legislature have to iron out differences on New Jersey’s fiscal 2020 budget amid accord on higher pension contributions. Governor Murphy insists upon a rainy day fund, a Millionaire’s Tax and a one-time $125 tax-credit to two million residents. The state legislature approved $39 billion budget opposes the Millionaire’s Tax as it seeks property tax relief and higher New Jersey Transit funding. The governor’s agenda item, Millionaire’s Tax, projected to raise $500 million is on the chopping block. Last year, Murphy had to concede to lawmakers’ budget which did not allow for the Millionaire’s Tax and reinstated a higher 7% sales tax. Lawmakers have given short shrift to the governor’s plan to replenish New Jersey’s rainy day fund with record-setting April 2019 income tax receipts. Budgeted higher pension contributions have found accord with lawmakers and the governor. Governor Murphy says he’ll meet the July 1 deadline to enact the Garden State budget.

Chicago Public Schools New Debt 8x Oversubscribed…Interest rates were cut to half of what Chicago Public Schools paid for a short term borrowing last year. The lower interest rates recognize fiscal progress, bring savings and ‘promote the type of fiscal stability needed’ for the junk-rated school district. Higher state school aid in Illinois’ fiscal 2020 budget, a bevy of local tax levies, and state help with pensions helped ease the finances of one of the nations’ largest public school systems. Far from its 2017 budget crisis when CPS short-term notes were privately placed, last week’s $250 million note offering was sought by 7.9x times as many demand orders or bids. Heading into the budget season, CPS faces a new contract with teachers and possibly a new elected board desired by Mayor Lightfoot. State aid secured CPS general obligation bonds rated S&P “B+” Fitch “BB-” yield about 200 basis points more than top-rated munis.

States Wager on Sports Betting Taxes…Sports betting is increasingly being tapped by U.S. states looking to shore up revenues amid pension burdens. New Jersey, a contender for the nation’s largest sports betting arena, was the first U.S. state to legalized sports betting in 2018. Near-by states Delaware, Pennsylvania and Rhode Island have followed suit along with a few southern states, Mississippi and West Virginia, Illinois and Iowa are set to join the bandwagon. New Jersey and Nevada have fared well because they pioneered online and mobile sports betting which some states restrict. Roughly 75% of sports bets are made online in the Garden State despite relatively higher taxes for online bets. Although sports betting tax brings new revenue, its revenue contribution is a long way from making a dent in state finances.

Treasury Yields Under 2% Could Drop Lower…With 100% certainty, futures markets predict a fed funds target rate of 1.61% down from 2.38% reflecting three rate cuts this year. 10-year Treasury yields slid below 2% this week, the lowest since 2016. Goldman Sachs analysts say 10-year Treasury yields could fall as far as 1.75% if the Fed does cut rates twice this year, as most Wall Street economists now expect. The 2-year Treasury Note, most reflective of Federal funds rate expectations dropped to 1.74% about 50 basis points less than current Fed funds target range 2.25%-2.50%. The impetus for lower Fed funds rate comes from low long-term inflation running about 1.7%, short of the Fed’s 2% target. Some Federal Reserve officials advocate for a 50 basis-point rate cut and a “commitment not to raise rates again until core inflation reaches our 2% target on a sustained basis.” Low inflation lowers long term U.S. Treasury bond yield, 2.55% for 30 years, and brings gains for bondholders.

Fed Goal Firms Rate Cut Expectations…The Fed did not surprise anyone by not cutting rates last week as it implied the market expectation of three 0.25 cent rate cuts, “My colleagues and I have one overarching goal, to sustain the economic expansion,” Fed Chair Powell stated. The Fed conceded that inflation is running below the 2% Fed target and downgraded economic activity as ‘rising from a moderate pace’ from ‘solid’ earlier. The trade war has already claimed the manufacturing sector as a victim. Manufacturing activity in the New York area suffered its biggest tumble on record in May. Growth is slowing; Goldman Sachs predicts GDP growth of 2.4% this year and 2.1% next year down from around 3% last year. Federal Reserve Board Vice Chair Clarida echoed Fed Chair Powell’s stance, “The case for providing more accommodation has increased.”

Muni Demand Set to Beat 2009 Record…This year, inflows to municipal bonds are set to outpace 2009’s record high inflows. So far this year, munis have pulled in $42 billion of cash compared to $81 billion in 2009. The big difference from 2009 is muni bond supply. There are only $3.6 trillion muni bonds outstanding compared to $4 trillion ten years ago. The outcome has brought gains for tax-free bondholders. For 24 weeks in a row, investors have purchased tax-free municipal bonds. This week $5.5 billion new tax-free bonds are set to be issued compared to $7.3 billion last week. Long term tax-free yield 2.39% is 94% of comparable taxable U.S. Treasury yield 2.55% reflecting attractive muni bond prices.

Compare 30-Year taxable U.S. Treasury yield 2.55% to 30-Year tax-exempt muni bond yield “AAA” 2.39%; “AA” 2.61%; “A” 2.80%; “BBB” 3.48%.