The Week in Public Finance: Tax Reform Hits Muni Market, California Plays Tax Games and Local Pensions Do Better Than State

Corporate Tax Break Already Affecting Muni Market

Even though the federal tax overhaul has yet to go into effect, the cuts to the corporate tax rates are already impacting the municipal market. Preliminary data shows that banks have begun to reduce their muni bond buying. According to Municipal Market Analytics (MMA), banks' third quarter net buying fell to about $5.7 billion. That’s the lowest quarterly number since 2009, when banks collectively sold off a net $10.3 billion.

In addition to reducing how much they buy, MMA’s Matt Fabian says it’s “not unreasonable that at least some institutions will become net sellers” of tax-exempt municipal bonds in the early months of 2018. This, he says, could counteract what was expected to be an advantageous interest rate climate for governments.

http://www.governing.com/week-in-finance/gov-finance-roundup-tax-reform-muni-market-california-local-pensions.html

Tax Overhaul, Pension Change Are an 'Unwelcome Gift' for New N.J. Governor

New Jersey and its municipalities are likely to face greater fiscal pressures in the year ahead after the state opted to lower the assumed rate of return for pension assets, according to Municipal Market Analytics.

The state treasury's decision to change the investment return assumption to 7% from 7.65% is "an unwelcome gift" from outgoing Gov. Chris Christie to Governor-Elect Phil Murphy, MMA analyst Lisa Washburn said in a Jan. 3 report. The more fiscally conservative assumption will translate into higher unfunded pension liabilities, lower funded ratios and higher required contributions for New Jersey local governments, Washburn said. The timing is also problematic, she said, because the state's revenue-raising ability "has likely been impaired" following a tax overhaul package signed by President Trump that caps the federal deduction on state and local taxes at $10,000. 

https://www.highbeam.com/doc/1G1-521461982.html

Tax overhaul, pension change are an ‘unwelcome gift’ for new N.J. governor

New Jersey and its municipalities are likely to face greater fiscal pressures in the year ahead after the state opted to lower the assumed rate of return for pension assets, according to Municipal Market Analytics.

The state treasury’s decision to change the investment return assumption to 7% from 7.65% is “an unwelcome gift” from outgoing Gov. Chris Christie to Governor-Elect Phil Murphy, MMA analyst Lisa Washburn said in a Jan. 3 report. The more fiscally conservative assumption will translate into higher unfunded pension liabilities, lower funded ratios and higher required contributions for New Jersey local governments, Washburn said. The timing is also problematic, she said, because the state’s revenue...

https://www.bondbuyer.com/news/tax-overhaul-pension-change-an-unwelcome-gift-for-incoming-nj-governor

Virgin Island bonds stir concern

U.S. Virgin Island bonds have plunged since Hurricane Maria amid deepening concern over the territory's ability to make payments due in the coming year.

Prices of the Series 2014C U.S. Virgin Islands gross receipts tax bond in the secondary market have declined by 40%, according to Markit. The bonds are trading at about 44 cents on the dollar, down from about 74 cents in mid-September.

https://www.bondbuyer.com/news/concern-about-virgin-island-bonds-grow?feed=0000015b-11b9-dcff-abff-f9fd85f60000

Muni investors left reeling from a year of political change

The final days of 2017 find municipal bond investors looking back on a year of unprecedented volatility, mostly driven by political change in President Trump's first year in office.

It was a year marked by price fluctuations, yield curve flattening, spread compression, credit quality concerns, supply and demand imbalances, and most of all, political wrangling over tax reform, strategists and fund managers said.

“The political backdrop provided an overriding influence for the municipal bond market in 2017,” said Jeffrey Lipton, head of municipal research and strategy at Oppenheimer & Co.

https://www.bondbuyer.com/news/skimpy-supply-low-yields-and-tax-reform-among-key-impacts

FEMA loan to the government remains uncertain

In the case of the Virgin Islands (USVI), FEMA indicated that it granted a financing of $ 202 million for the water and electricity systems of the territory, its central government and two hospitals.

Governor Kenneth Mapp, according to USVI news media, has stated that the financing already approved by FEMA reaches about $ 500 million.

According to Fabian, in the case of the USVI CDLs, the federal Treasury requested a repayment priority on the bonds of the territory, but this did not prosper.

USVI, according to Fabian, had to offer as collateral to the financing the collections of the "gross income tax", which would be equivalent to the Sales and Use Tax (SUT) of Puerto Rico and the collections for matching that it receives through the reimbursement of the rum tax.

In addition, the USVI CDLs have the same payment priority as debt owed by creditors in the territory.

https://www.elnuevodia.com/english/english/nota/femaloantothegovernmentremainsuncertain-2384434/

Race is on to sell tax-free bonds ahead of U.S. tax changes
 

That possibility, which first surfaced Nov. 2 in the U.S. House Republicans’ tax bill, would saddle nonprofits with higher borrowing costs as well as eliminate a way all muni issuers can take advantage of lower interest rates to save money.

“We’re seeing a huge race to get to market and every kind of transaction. December may be the best market for issuance that we’ve seen in a long time,” said Matt Fabian, a partner at Municipal Market Analytics.

Muni issuance totaled $40.3 billion in November, the biggest supply for that month since $45 billion of bonds were sold in November 2010, according to Thomson Reuters data. That was when issuers rushed Build America Bonds to the market before the federal government’s subsidy program for the debt expired at year end.

https://in.reuters.com/article/us-usa-tax-municipals/race-is-on-to-sell-tax-free-bonds-ahead-of-u-s-tax-changes-idINKBN1DV61T

Sanders' Puerto Rico bill dwarfs requests from Gov. Rosselló, Trump

U.S. Sen. Bernie Sanders, I-Vt., introduced a comprehensive support bill for Puerto Rico and the U.S. Virgin Islands Tuesday, calculated to cost up to $146 billion.

https://www.bondbuyer.com/news/sanderss-puerto-rico-request-eclipses-that-of-governor?feed=0000015b-11b9-dcff-abff-f9fd85f60000

Trump seeks Texas, Florida hurricane relief; Puerto Rico request to come later

No matter how much the island gets, it won’t be enough, said Matt Fabian, a partner with Municipal Market Analytics. “Puerto Rico will likely be requesting aid this time next year,” he said. Officials in the White House “probably think that that’s an incredibly generous offer.”

http://www.newhampshire.com/article/20171118/NEWS06/171119246/-1/SERVICES04

Muni-Bond Market Braces for Borrowing Rush Ahead of Tax Changes

The House of Representatives bill would require investors to pay income taxes on so-called private activity bonds, or PABs, which finance projects like airports, water facilities and toll roads, and do away with a frequently used refinancing technique known as advanced refunding. While the Senate version leaves PABs intact, the risk may push borrowers to act before the law is changed, Municipal Market Analytics said in a research report.

“It could be a huge end of the year,” Matt Fabian, a partner with MMA, said in an interview. “Issuers will probably begin to access the market shortly just on the risk. If they’re going to borrow next year they might as well accelerate to borrow now.”

A late-year rush -- if significant enough -- would offset the slowdown in the municipal market, where new debt sales have declined from last year’s record pace. That contributed to this week’s drop in state and local government bonds prices, paring the gains that came after the tax overhaul promised to slash sales in the years ahead by pulling the tax-exemption from a significant chunk of the market.

https://www.bloomberg.com/news/articles/2017-11-14/muni-bond-market-bracing-for-borrowing-rush-ahead-of-tax-changes

Smaller private colleges face tougher burden if private activity bonds go away

The House Republican tax package would put some more pressure on the already pressured private higher education sector.

Eliminating the tax-exemption for private activity bonds would force private schools to issue more expensive taxable debt for capital projects.

The House bill, which advanced Thursday from the House Ways and Means Committee, would terminate PABs on Jan. 1, 2018.

https://www.bondbuyer.com/news/smaller-private-colleges-would-be-impacted-more-by-an-elimination-of-private-activity-bonds

Of the Newest Governors, New Jersey's Has the Bigger Financial Bind

By 2016, the state had about $168 billion less than it will need to cover all the benefits that have been promised to employees. Among all 50 states, New Jersey has the most underfunded pension system in the country, according to data compiled by Bloomberg.

It will be a challenge to pay that down, said Lisa Washburn, a managing director at Municipal Market Analytics.

"It seems like a millionaire’s tax is going to be woefully insufficient to make those payments and fund other spending priorities," she said.

The state will need to balance spending on social programs that Murphy has highlighted, such as more investment in community colleges, with keeping up with pension and OPEB costs, Washburn said.

"I don’t see personally in the near-term credit rating boosts coming New Jersey’s way," she said.

https://www.bloomberg.com/news/articles/2017-11-08/of-the-newest-governors-new-jersey-s-has-bigger-financial-bind

States' Financial Practices Get Graded

Take Illinois. The state went two years without a budget and saw multiple downgrades from ratings agencies. But it was still able to float bonds and easily find buyers because no state in the modern era has defaulted on its debt. "There's no reasonable risk of a state actually defaulting," Matt Fabian, a principal at Municipal Market Analytics, which consulted on the report, said at the report's release. "But you had the governor and legislature acting in completely unpredictable ways that belied the understanding of almost anyone. So, the bonds of Illinois ended up trading almost like a day stock which is terrifying to anyone in the market."

http://www.governing.com/topics/finance/gov-states-financial-practices-get-graded.html

Detroit foresees end to state oversight

Experts say bankruptcy allowed Detroit to drop billions in debt, setting it on a solid financial path. But the city faces massive future payments for past borrowing and pension obligations that are difficult to plan for.

“It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there,” said Lisa Washburn, managing director of the Concord, Massachusetts-based firm Municipal Market Analytics.

“Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”

http://www.detroitnews.com/story/news/local/detroit-city/2017/11/06/detroit-financial-outlook-regain-control/107393696/

NJ’s Hefty Unfunded Liabilities Matter of Concern to Outside Analysis

The Volcker Alliance began its analysis of the states’ budget policies in 2015, releasing an initial report that scrutinized the fiscal practices of just New Jersey, California, and Virginia. The exercise was then widened, with help from faculty and staff at 11 universities, as well as Massachusetts-based consultant Municipal Market Analytics. The goal, according to the organization’s new report, is to better inform the public about state budgeting matters so they can begin encouraging policymakers to improve transparency and overall performance. Worst practices

“By pursuing this investigation, the Volcker Alliance hopes that drawing attention to prevailing practices — and identifying the strongest and weakest among them — will encourage new efforts to raise standards for all states,” the report said.

GOP Tax Plan Puts Billions in Muni Market Savings at Risk

Among the most concerning to local leaders, it would ban governments from issuing what are called advanced refunding bonds. These bonds allow governments to refinance debt earlier than they would have otherwise, ultimately letting governments take advantage of lower interest rates years sooner. The bill also bans issuing tax-exempt bonds for sports stadiums, a proposal that had already been floated this year on Capitol Hill.

It’s unclear exactly how much of the municipal market would be affected by the change, but experts say it would be a significant portion. According to Municipal Market Analytics’ Matt Fabian, up to 20 percent of the $3.7 trillion municipal market is made up of private activity bonds. Making those bonds taxable would dampen future issuance.

When it comes to the advanced refunding bonds, Fabian says between 10 and 20 percent of all annual bond refinancings fall under that category. That means up to one-tenth of the total $386 billion in average annual bond issuance could be attributed to that type of bond.

http://www.governing.com/topics/finance/gov-gop-republican-congress-trump-tax-reform-muni-market.html

While market ponders loss of PABs, one takes center stage

Market participants reacted negatively to the proposal in the tax reform bill to eliminate advanced refundings and private activity bonds, saying it would crimp volume and the savings issuers can get when rates fall. Against that backdrop, strong demand met the Virginia Small Business Financing Authority's $737 million PAB offering in the primary.

In the biggest deal of the week, Bank of America Merrill Lynch priced the Virginia Small Business Financing Authority’s $737 million of senior lien private activity revenue bonds for the Transform 66 P-3 Project. The bonds yield 3.71% with a 5% coupon in 2047, 3.79% with a 5% coupon in 2049, 3.90% with a 5% coupon in 2052 and 4.00% with a

https://www.bondbuyer.com/news/municipals-finish-stronger-as-analysts-ponder-possible-end-to-advanced-refundings

The fallout: With the budget dam broken, what's next for Pa's state government and politics?

Here's what Matt Fabian, a bond market analyst with Municipal Market Analytics, said about the proposed 2017-18 package Thursday:

"Deficit borrowing and gimmicks like fund transfers are bad by almost any measure.

"Were the Commonwealth's ratings already in a much stronger place, its chances of getting by without a (further) downgrade would be better. As it is, the ratings are fairly weak and this revenue budget raises the risk of downgrade above 50%."

Clearly the Wall Street types just don't get the Pennsylvania Legislature.

For the controlling forces here, it's not so much how you solve the budget, as it is can you solve it without raising taxes.

Even when that forces them into weirdly inconsistent policies like voting for new caps on government borrowing for capital projects even as they agreed to borrow to cover this year's deficit.

So by their measure, this budget is a win.

http://www.pennlive.com/politics/index.ssf/2017/10/the_fall-out_with_the_budget_d.html

Market expects SEC to narrow its disclosure proposal

PHOENIX - Muni market participants expect the Securities and Exchange Commission to narrow its proposal to add new material event notice disclosures for bank loans and other alternatives to tax-exempt bonds after receiving many critical comments that it was too broad and would be overly burdensome.

The SEC proposed the amendments to its Rule SEC 15c2-12 in March and took public comments on them until mid-May.

https://www.bondbuyer.com/news/sec-disclosure-proposal-likely-to-be-narrowed

Dan Haar: Hartford troubles could have wide impact

Early this week, the Business Council of Fairfield County will host Hartford Mayor Luke Bronin in Stamford to talk about a possible bankruptcy of the capital city.

Neither the council nor the mayor’s office announced the confab and there are no public events connected with Bronin’s trek down to the much healthier city that passed Hartford in population four years ago. But the gathering will amplify the idea that the pain from an ailing central city in a small state throbs from border to border.

“We’re meeting with him because you can’t have a state in which its capital city goes bankrupt,” said Joe McGee, vice president for policy at the council and a former state economic development commissioner. “There’s got to be an urban strategy and Fairfield County has as much a stake in this as anyone.”

That’s true for lots of reasons, from the simple fact that residents and institutions in this part of the state could well hold hundreds of millions of dollars in shaky Hartford debt, to the more layered idea that state finances — read: stable taxes — depend on functioning cities across Connecticut.

Climbing the ladder of complexity, we have a bond market that may or may not punish municipalities not named Hartford in the event of a capital city bankruptcy — there’s a lot of debate about that among analysts.

http://www.newstimes.com/business/article/Dan-Haar-Hartford-troubles-could-have-wide-impact-12294360.php