An Epidemic of Bad Budgeting

Bad fiscal practices like these are increasingly common among local governments, which claim that Covid-19 required extraordinary measures. A recent study by Matt Fabian and Lisa Washburn of Municipal Market Analytics, examining 442 municipal bond offerings in the second half of 2020, found that at least a quarter used the money for “direct deficit financing” (floating new debt to close budget gaps) or “indirect deficit refinancing” (issuing debt to pay for projects that governments previously had financed with tax revenues). That so many local governments resorted to such financing so quickly—just months after the lockdowns began—suggests how little financial flexibility and reserves many of them had.

Wall Street says NJ is in better fiscal shape, giving Murphy something to brag about

“I think the long-term concern is New Jersey managing its long-term liabilities,” Lisa Washburn, a former managing director at Moody’s Investors Service who now works for the independent research firm Municipal Market Analytics, said in an interview with NJ Spotlight News.

Its bond rating can be a key factor in determining how cheap and easy it is for a state to borrow money to fund long-term investments in schools and in infrastructure like roads and bridges that cannot be paid for in a single budget.

A strong bond rating can also lead to lower borrowing costs that ultimately get funded out of the state budget — good news for taxpayers. New Jersey’s current budget totals $46.4 billion after lawmakers approved a major spending hike in late June.

Pimco Veterans Look To Shake Up 'Old School' Muni Loan Market

In July, the Poulsbo, Washington-based company, which was founded in 2019, made further inroads when California’s Coachella Valley Unified School District borrowed through its platform. It was one of five loan transactions Alpha Ledger has completed this year, after two in 2020.

Banks held about $197 billion of direct loans to municipalities as of the second quarter, according to research firm Municipal Market Analytics. Alpha Ledger wants to move into the public-debt arena -- which accounts for the brunt of municipal borrowing -- some time in 2022.

American Dream Mall Draws on Reserves to Make Bond Payment

Lisa Washburn, managing director at Municipal Market Analytics, said it “seemed inevitable” that American Dream would need to tap reserves on debt tied to mall sales.

“The economic shut-down and travel disruptions related to the pandemic could not have come at a worse time for the project, which had only partially opened and was already contending with a shifting retail landscape,” Washburn said in an email. “Now it needs to overcome concerns about congregating indoors with strangers.”

Puerto Rico Oversight Board reaches deal with Ambac, FGIC

“In big restructurings like these, it’s usually the first to settle that get the best terms,” said Municipal Market Analytics Partner Matt Fabian. “So this is probably the best they could hope for. If nothing else, it’s a step towards mitigating their Puerto Rico exposure, which should be their ultimate goal.”

Cities Awash in Rescue Cash Seek to Use It to Pay Down Debts

It’s unclear how much of an economic impact it would have if the Treasury rolled back some of the limits. But many governments sold debt in the early days of the pandemic as they prepared for tax revenues to tumble. In the second half of 2020, for example, at least one quarter of state and local government debt sales over $100 million included a material element of deficit financing, according to Municipal Market Analytics.

Special Briefing on the Biden Infrastructure Plan: Resilience, Equity, and Federal Investment

"I look at all infrastructure through the climate lens," Municipal Market Analytics (MMA) President Thomas G. Doe said as part of Special Briefing on the Biden Infrastructure Plan: Resilience, Equity, and Federal Investment. "It's looking not just at existing projects and their risk, but also what the future probable risks are for any new efforts that are being done, and, especially, not just on durability but also on equity as well."

‘Trying to strangle local governments’: What happens when states and their cities become adversaries?

“Pre-emption happens all the time,” said Matt Fabian, a partner with Municipal Market Analytics. “It becomes an issue when nonrational reasons drive decisions or where the state sees the city or its residents as an adversary. There can be a certain tribalism that hinges on race or how people vote.”

Fabian, whose firm offers research for municipal bondholders, calls politically motivated pre-emption “an underappreciated risk in the muni-bond market. In general when cities default it’s less about finances and more about what the state does to not help the city navigate a situation. The political factor, the relationship and potential antagonism between a city and its state, is widely underinvestigated.”

Municipal-bond defaults are vanishingly rare, but conflict between city and state is a common thread in many recent episodes of municipal distress, which have often occurred in places where the city’s residents are primarily Black.

https://www.marketwatch.com/story/what-happens-when-states-and-their-cities-are-adversaries-11625756500

Washington wants to bring back Build America Bonds. The muni market isn’t buying it

“State and local issuers are deeply ambivalent about the BABs program,” said Matt Fabian, a partner with Municipal Market Analytics. “It’s being talked about like it’s the core of the infrastructure program, but issuers in general don’t care because demand for tax-exempt bonds is now the strongest it’s ever been,” he said.

“We are flooded with demand,” Fabian said.

The yield on the S&P Municipal Bond General Obligation Index is currently about 1.93%, among the lowest on record back to 2009. Bond yields and prices move in opposite directions.

While Washington lawmakers may believe that a lower interest rate would help issuers, thereby boosting the amount of overall spending on infrastructure, MMA’s calculations show the federal subsidy would have to be at least as high as 50% to make BAB issuance worth it.

More to the point, Fabian told MarketWatch, “state and local infrastructure spending is a zero-sum game. Governments only have so much in revenues to pay back bonds, no matter how low the interest rate.”

https://www.marketwatch.com/story/washington-lawmakers-want-to-bring-back-build-america-bonds-the-muni-market-isnt-buying-it-11621533281

Distressed Muni Borrowers Are Still Piling Up in Pandemic’s Wake

Eight muni borrowers became distressed last week, lifting this year’s tally to 76, according to Municipal Market Analytics. That puts 2021 on track to exceed almost every year since 2012 in terms of impairments. Only 2020, when the coronavirus caused some of the worst market turmoil on record, was worse.

https://www.bloomberg.com/news/articles/2021-06-03/distressed-muni-borrowers-are-still-piling-up-in-pandemic-s-wake

Yield-Starved Investors Snap Up Muni Bonds

A $34 million Illinois bond rated triple-B minus—at the bottom of investment-grade—and due in 10 years recently traded for around 128 cents on the dollar, according to data from Electronic Municipal Market Access. It yielded 1.86%, down from 2.22% when issued in March.

“There are just far more lenders than there are borrowers,” said Matt Fabian, head of research at Municipal Market Analytics. “That keeps municipal-bond yields pinned as low as you can go.”

The average yield on 10-year triple-A-rated munis was 0.82% at Friday’s close, according to Bloomberg Barclays data. That is less than 0.2 percentage point above the record low yield of 0.68% from February, in data going back to 1993. Yields fall when bond prices rise.

https://www.wsj.com/articles/demand-for-municipal-bonds-lowers-borrowers-costs-11620572580

Statehood for Puerto Rico would kill its triple-tax-exemption

Only those who reside in Puerto Rico would still enjoy an exemption from state and municipal-level income taxes on the bonds’ interest if it becomes a state. There is no accurate public figure but in recent years some have estimated that Puerto Rico residents own 20% of the commonwealth's bonds.

Aside from the loss of the triple-tax-exemption, “it’s hard to see Puerto Rico being worse off, or less able to raise capital, if it were a state vs. current status,” said Municipal Market Analytics Partner Matt Fabian.

“We have a hard time seeing Puerto Rico statehood as a negative scenario for bondholders, arguing that a material portion of Puerto Rico’s past financial and economic troubles reflected Puerto Rico’s pervasive reliance on a disinterested and uninvolved U.S. Congress," analysts wrote in the April 19 MMA Outlook. "Further, any transition from territory to state would require substantial revenue and administrative reforms and would reasonably involve years of related preparation.”

https://www.bondbuyer.com/news/statehood-for-puerto-rico-would-kill-its-bond-triple-tax-exemption

Texas Freeze Strands Municipalities With Sky-High Power Tabs

While municipal-bond holders have been paying more attention to climate change in recent years, the Texas freeze is the latest in a series of disasters that have forced investors to rethink the way they evaluate bond portfolios that hold securities that don’t mature for decades.

“The Texas freeze revealed issues that probably most people never thought of,” said Chris Hamel, a senior fellow at Municipal Market Analytics and former head of municipal finance at RBC Capital Markets.

https://www.bloomberg.com/news/articles/2021-04-16/texas-freeze-strands-municipalities-with-sky-high-power-tabs

Climate Change and Municipals

Q&A with Dr. Chris Hartshorn - Cheif Commerical Office at risQ

https://cdn.magloft.com/publication-13046/hpub/38208/3089cee1-fe70-4b82-a584-d3a6e1ecbbbf/index.html#/111947

Volcker Alliance Releases Truth and Integrity in State Budgeting Report

The Volcker Alliance partnered with public finance institutes and schools within The City University of New York, Florida International University, Georgia State University, University of Illinois Springfield, University of Illinois at Chicago, University of Kentucky, University of Utah, and University of California, Berkeley, as well as with Barrett and Greene Inc. and Municipal Market Analytics, to carry out this study and produce the report.

https://www.prweb.com/releases/volcker_alliance_releases_truth_and_integrity_in_state_budgeting_report/prweb17835528.htm

Build America Bonds may stage a comeback in Biden's infrastructure plan

U.S. Transportation Secretary Pete Buttigieg told CNBC late last week that BABs show “promise.”

“Democrats have been trying to relaunch BABs since BABs expired,” said Matt Fabian, a partner at Municipal Market Analytics, adding that Congress was likely to leverage bond-related ideas like BABs that were already discussed or included in past legislation.

Katie Kramer, vice president of the Council of Development Finance Agencies, said BABs’ reinstatement was part of a big infrastructure bill the House passed last summer and that House Ways and Means Committee Chairman Richard Neal “is very fond of that particular tool.”

https://www.reuters.com/article/usa-biden-infrastructure-bonds-idUSL1N2LR1UZ

Illinois primary market penalties shrink to levels of bygone era

The state said it had received strong enough order interest in the pre-marketing wire distributed Monday that it decided to accelerate the sale which drew “more than 700 orders from more than 130 different investors, including respected names that have not invested in the state for a decade,” the state’s Director of Capital Markets Paul Chatalas said in a statement.

Given the state’s vulnerability to headlines, “pricing ahead of the next headline” if orders have lined up is a wise move, said Matt Fabian, partner at Municipal Market Analytics. The supply calendar is also on the rise and that can impact interest.

A confluence of factors helped the sale, from the return of inflows and demand for higher-yielding paper to the state’s improving tax projections and a looming infusion of $7.5 billion from the $1.9 trillion American Rescue Plan signed by President Biden last week.

https://www.bondbuyer.com/news/illinois-primary-market-penalties-shrink-to-bygone-era

States Expected Covid-19 to Bring Widespread Tax Shortfalls. It Didn't Happen.

n March 2020, the municipal market ground to an unprecedented halt as investors spooked by the pandemic's impact on state and local governments pulled out at rock bottom prices. Even gold-plated borrowers had trouble finding buyers. But prices bounced back quickly after an unprecedented pledge to buy up municipal debt, and borrowing grew cheaper than it was in 2019.

Public officials refinanced outstanding bonds and used credit to pay the bills. At least a quarter of state and local government bond issues of $100 million or more between August and December were aimed at filling budget gaps, according to a study from The Pew Charitable Trusts and Municipal Market Analytics. The issuance included about $4 billion in coronavirus emergency bonds from the state of New Jersey.

https://www.marketscreener.com/news/latest/States-Expected-Covid-19-to-Bring-Widespread-Tax-Shortfalls-It-Didn-t-Happen--32649148/

A Big Change is Coming for the Muni Market

According to a study by an industry body “Over the last decade, customer purchases of fixed-rate, tax-exempt municipal securities of $100,000 or less decreased by 46%, the MSRB found. Meanwhile, institutional-sized purchases of over $1 million increased 46% in the same time period”. “Most of the large retail managers have moved clients from traditional, transactional, retail accounts into discretionary platforms like SMAs … The firm itself then makes the allocation decisions and is, therefore, less responsible for making sure that the client understands their investment decision”, said Matt Fabian, partner at Municipal Market Analytics.

https://www.nasdaq.com/articles/a-big-change-is-coming-for-the-muni-market-2021-02-25

Philadelphia relies on a commuter tax to balance its budget. What does that mean in a work-from-home world?

Some public finance analysts think now is as good a time as any to rethink revenue structures that have been around for decades, in some cases.

“A lot of what needs to happen is an adjusting of the pre-pandemic tax structure to a reckoning of the post-pandemic reality, but this is a challenging time,” said Matt Fabian, a partner with Municipal Market Analytics. “We often think about what’s happening now in terms of a regular economic recession, with benchmarks for recovery. But this is more of an evolution. We don’t know what we’re going to recover to.”

Philadelphia has been gradually reducing its reliance on the wage tax for years, Waxman noted. She and other officials are all too aware that taxing workers can be a negative for employers considering setting up shop there, even as the city has tried to market itself as a less-expensive version of New York or Washington.

https://www.marketwatch.com/story/philadelphia-relies-on-a-commuter-tax-to-balance-its-budget-what-does-that-mean-in-a-work-from-home-world-11613678398