Upgrade will help Chicago navigate a thornier bond market

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202210251432SM______BNDBUYER_00000184-0fdf-d34d-a3d7-5fff818a0000_110.1&utm_source=Wirepoints+Newsletter&utm_campaign=845146e7cd-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_895ee9abf9-845146e7cd-30506353#new_tab

Excerpt:

Last week’s Fitch Ratings upgrade of Chicago offers dual benefits for Mayor Lori Lightfoot’s administration as it pursues passage of a proposed 2023 budget and preps a general obligation issue.

Fitch’s Friday upgrade to BBB from BBB-minus, the city’s first from Fitch in 12 years, and the potential for more good rating news could help sell the City Council on supplemental pension contributions and other pieces of the budget plan viewed favorably by analysts.

The Fitch action and an overall rosier view of the city’s fiscal condition should also broaden the investor appeal of an upcoming $757 million general obligation issue in a more fickle and tumultuous market than prevailed in the city’s last GO offering in late 2021.

Author(s): Yvette Shields

Publication Date: 25 Oct 2022

Publication Site: Fidelity Fixed Income

Biden Administration Sues a City Over “Rampant Overspending on Teacher Salaries”

Link: https://www.educationnext.org/biden-administration-sues-a-city-over-rampant-overspending-on-teacher-salaries/

Excerpt:

The Biden administration’s Securities and Exchange Commission is suing the city of Rochester, New York, contending that “rampant overspending on teacher salaries” plunged the Rochester school district into “extreme financial distress,” misleading investors who bought municipal bonds.

The legal action is unusual. Sure, the federal government’s interaction with K-12 education has often extended beyond the bounds of the U.S. Department of Education. The Department of Agriculture administers the school lunch program, and the Department of Defense operates schools serving military-connected children. Under George W. Bush, the Justice Department toyed with the idea of using antitrust law to support charter schools. And in the waning days of the Trump administration, President Trump issued an executive order authorizing “emergency learning scholarships” to be provided via the Secretary of Health and Human Services.

But, notwithstanding Bloomberg columnist Matt Levine’s theory that
everything is securities fraud,” in practice, the K-12 education beat hasn’t intersected greatly with the fraud provisions of federal securities laws. At least until now.

….

How much has Rochester been “overspending?” The website Seethroughny.com, a project of the Empire Center for Public Policy, lists 717 Rochester City School District Employees who earned more than $100,000 in 2019. The district has about 25,000 K-12 public school students, according to the state of New York. Spending runs about $20,000, a little below the statewide average. Whether that amounts to “overspending” probably depends on one’s view of how much the children are learning, and also one’s view of whether the students could learn more, and how much more, if more money were spent.

….

In practice, the legal aspects of the case will probably turn more on considerations about disclosure to potential bond buyers than about the details of the spending on teacher salaries.

Even so, the mere mention of securities law and bondholders as potential tools to curb school district “overspending” is intriguing, especially when the action comes under a president who campaigned promising to increase school spending so as to pay teachers “competitive salaries.” For years, reformers have complained that teachers unions capture school boards and run school systems for the benefit of adults rather than children. Now a different set of influential adults—bondholders—is, in a way, asserting, via the SEC, its own claim that could be a countervailing force.

Author(s): Ira Stoll

Publication Date: 15 June 2022

Publication Site: Education Next

With higher rates, total 2022 issuance projections keep falling

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202206101515SM______BNDBUYER_00000181-4ebf-d2a2-a9ab-dffffeab0000_110.1

Graphic:

Excerpt:

Market participants are revising their supply projections downward as rising interest rates have stymied refunding and taxable volumes and overall market volatility has held some issuers to the sidelines.

The pace of issuance so far in 2022 makes it less likely the market will hit previous records seen in 2020 and 2021.

BofA Securities was the latest shop to revise expectations downward because of the dearth of refundings, with strategists Yingchen Li and Ian Rogow forecasting total volume in 2022 to be $50 billion less than the $550 billion assumption they made at the end of 2021.

Author(s): Gabriel Rivera

Publication Date: 10 June 2022

Publication Site: Fidelity Fixed Income

Munis sit on sidelines while USTs rally post-Fed rate hike

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202206151637SM______BNDBUYER_00000181-67cc-d98e-a5fb-efcf1bfc0001_110.1

Excerpt:

Municipals took a backseat as the Federal Open Market Committee announced its decision to implement a three-quarter point rate hike while U.S. Treasuries rallied into late afternoon following the news. Equities rallied.

The move, prompted partly by hotter-than-expected inflation data Friday, is the largest rate hike since 1994.

?Investors appear encouraged that the FOMC is willing to take forceful action to try and get inflation under control,” Wilmington Trust Chief Economist Luke Tilley said.

By front loading rate hikes, he said, the FOMC will have ?more optionality as the year unfolds,? and will be able to accelerate hikes if inflation persists, ?but if any cracks appear in the economic recovery they?ll have the option to slow down while still having rates below their estimate of neutral.?

Triple-A muni yields were cut a basis point or were little changed while UST yields fell up to 23 basis points on the short end.

Author(s): Christine Albano

Publication Date: 15 June 2022

Publication Site: Fidelity Fixed Income

Jacksonville’s public pension reform helps the city get an improved credit rating

Link: https://reason.org/commentary/jacksonvilles-public-pension-reform-helps-the-city-get-an-improved-credit-rating/

Excerpt:

The city of Jacksonville is about to enjoy the benefits of a credit rating boost. Moody’s Investors Service moved the Florida city’s credit rating to Aa2 from Aa3, citing pension reform among the main reasons for the upgrade. The credit rating increase will allow the state to borrow funds at a lower interest rate and invest in more infrastructure and public services. 

Five years ago, the Jacksonville City Council approved a pension reform package while enacting innovative changes, reducing debt by more than $585 million and adding over $155 million to pension reserves. A key element of the pension reform that led to reduced debt was closing the city’s three pension plans to new public employees in 2017. Since that change was put in place, over $715 million has been used to grow Jacksonville’s economy and invest in public services for its population. In addition, credit rating agencies, such as Moody’s, assign “grades” to governments’ ability and willingness to service their bond obligations, taking into consideration the jurisdiction’s economic situation and fiscal management. Since the pension reform reduced budgetary pressure, it improved the chances of the city getting a credit upgrade. 

Author(s): Jen Sidorova

Publication Date: 1 Jun 2022

Publication Site: Reason

Comptroller asks for upgrade to Illinois’ worst-in-nation credit

Link:https://www.thecentersquare.com/illinois/comptroller-asks-for-upgrade-to-illinois-worst-in-nation-credit/article_464a70c6-8862-11ec-b879-afe32c50f8c6.html utm_term=0_3386e99c24-8d6a8659cc-71461060

Excerpt:

Illinois Comptroller Susana Mendoza is asking the credit ratings agencies to upgrade Illinois’ worst-in-the-nation status.

S&P Global has Illinois at BBB. Moody’s has the state at Baa2. That’s after upgrades from the agencies last year. Fitch has Illinois at BBB-.

“My office is doing everything possible to manage the current backlog of bills and address Illinois’ finances head-on,” Mendoza said in a letter to the agencies that her office announced Monday. “The Illinois Office of Comptroller urges you to consider these positive factors and progress made in strengthening Illinois’ financial position when evaluating Illinois’ creditworthiness.”

Mendoza said in the letter she has paid back recent borrowing from a federal program. Illinois was the only state to borrow from the Federal Reserve’s Municipal Liquidity Fund for a total of $2.6 billion.

Author(s): Greg Bishop

Publication Date: 8 Feb 2022

Publication Site: The Center Square

Investors Sour on Muni Funds

Link:https://www.wsj.com/articles/investors-sour-on-muni-funds-11643568253

Graphic:

Excerpt:

Investors pulled $1.4 billion from municipal-bond funds in the week ended last Wednesday, the biggest weekly outflow since the early days of the pandemic, according to Refinitiv Lipper.

Municipal-bond yields, which rise as prices fall, climbed last week after the Federal Reserve signaled it would begin steadily raising interest rates in mid-March, reducing the appeal of outstanding debt. Yields on the highest-rated state and local bonds jumped to 1.55% Monday from 1.34% last Tuesday, according to Refinitiv MMD.

Returns on the S&P Municipal Bond Index have fallen to minus 2.33% this year through Jan. 28, counting price changes and interest payments, the lowest year-to-date returns in at least 16 years.

Author(s): Heather Gillers

Publication Date: 31 Jan 2022

Publication Site: WSJ

Puerto Rico Released From Bankruptcy as Economic Problems Persist

Link:https://www.wsj.com/articles/puerto-rico-released-from-bankruptcy-as-economic-problems-persist-11642537090

Excerpt:

Puerto Rico received court approval to leave bankruptcy through the largest restructuring of U.S. municipal debt ever, ending years of conflict with creditors as the U.S. territory confronts other stubborn economic problems.

Tuesday’s court ruling approved a write-down of $30.5 billion in public debts built up during an economic decline marked by high joblessness, outward migration and unsustainable borrowing that tipped Puerto Rico into bankruptcy in 2017. The restructuring plan calms tension between Puerto Rico and its Wall Street creditors dating to its debt default, the largest ever on bonds backed by the full faith and credit of a U.S. municipality.

….

The territory entered bankruptcy with $74 billion in bond debt and a $55 billion gap between the pension benefits promised to employees and retirees and the funding set aside to pay for them. Public agencies were beset by cronyism and failed for years to draw up accurate budgets or account for expenses, according to a 2018 investigation commissioned by the board.

Sprawling bureaucracy and a high cost of doing business discouraged investment, especially after the expiration of some corporate tax breaks in 2006 pushed some pharmaceutical and other manufacturers to depart. To make up for a shrinking tax base, officials borrowed to paper over deficits and skimped on pension contributions.

Many residents of Puerto Rico, political leaders, and some investors have called for an independent audit of how the huge debt was built up, according to Judge Swain’s decision.

Author(s): Andrew Scurria and Soma Biswas

Publication Date: 18 Jan 2022

Publication Site: WSJ

Chicago school district finds buyers after offering higher yields

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202201141507SM______BNDBUYER_0000017e-59c7-de0b-a77f-dbef44d30001_110.1#new_tab

Excerpt:

Chicago Public Schools’ $872 million of junk-rated paper met with a more fickle high-yield audience this week, underscoring the district?s vulnerability to market volatility even as it inches closer to investment grade status.

At attractive spreads that offered a healthy yield kick with many maturities offering 4% coupons, the bonds were 2.2 times oversubscribed, CPS said in a statement. More than 40 institutional investors placed orders including some in excess of $150 million each.

The district will pay a true interest cost of 3.51% that ranks among the lowest paid by the Chicago Board of Education over the last two decades. The sale provides $500 million of new money for capital projects and the remainder refunds 2011 bonds.

Author(s): Yvette Shields

Publication Date: 14 Jan 2022

Publication Site: Fidelity Fixed Income

CT to borrow over $1.3 billion to fund a long list of state, local projects

Link:https://ctmirror.org/2021/12/21/ct-to-borrow-over-1-3-billion-to-fund-a-long-list-of-state-local-projects/

Excerpt:

Gov. Ned Lamont helped to hand out more than $1.3 billion on Tuesday by voting to have the state borrow money to pay for various infrastructure projects, state grant programs, improvements at a mental health center in Bridgeport and a new train station in Enfield.

In total, the State Bond Commission, which Lamont leads, agreed to fund more than 50 different projects, programs and initiatives — some of which were championed by state lawmakers who are heading into a campaign season next year and are eager to bring home financial wins to their district.

….

The more than $1 billion in spending that was approved Tuesday will be financed through state revenue and general obligation bonds, which Connecticut officials market to Wall Street investors and will eventually need to repay with interest.

Connecticut frequently relies on that type of borrowing capacity to finance school construction efforts, capital projects at state universities, transportation upgrades, building maintenance projects, land preservation deals and the smaller community projects that often benefit state legislators. This week’s meeting marked the third bond commission gathering this year.

State legislators largely control the first step in the borrowing process by adopting a two-year bond package, but after that, the governor and the executive branch get to decide what gets funded and when.

Author(s): Andrew Brown

Publication Date: 21 Dec 2021

Publication Site: CT Mirror

The muni market: How two big changes could impact government borrowing

Link:https://lizfarmer.substack.com/p/municipal-market-trends-outlook

Excerpt:

The pandemic created a lot of uncertainty around state and local government revenues for much of 2020. That was a big reason for the dramatic boost in the rate of bonds issued with insurance that year: In total, $34.45 billion in new bonds carried insurance — the highest since the Great Recession ended in 2009. Even with the economic stabilization this year, insurance is still going strong. Through October 2021, wrapped municipal bond issuance totaled $31.5 billion, according to RBC Capital Markets.

Looking ahead, the chatter about municipal climate risk has been increasing in recent years. Extreme weather events linked to climate change have called into question the preparedness and resiliency of utilities and other government issuers, while studies point to the potential long-term economic effect. One BlackRock Investment Institute report estimated that some vulnerable cities could see economic losses of up to 10% of GDP without decisive action.

The bottom line: Insurance provided safety for muni market investors during the pandemic and its continued use indicates that investors and issuers are both finding it attractive in situations where there might be a little more long-term uncertainty. Climate risk plays right into this notion. While no one expects bond insurance to dominate the market as it once did, it’s likely that the pandemic spike in usage is here to stay.

Author(s): Liz Farmer

Publication Date: 8 Dec 2021

Publication Site: Long Story Short at substack

Biden’s Falling Approval Ratings Are Bad News For The Municipal Market

Link:https://www.forbes.com/sites/lizfarmer/2021/10/16/bidens-falling-approval-ratings-are-bad-news-for-the-municipal-market/?sh=7c3aed496a80

Excerpt:

Advanced refunding bonds allowed governments to refinance debt earlier, thus letting them take advantage of lower interest rates years sooner and save taxpayer money. The 2017 tax reform eliminated their tax-exempt status which effectively nixed their cost-saving value for governments. But the move increased federal government revenues by billions of dollars each year. Reinstating the bonds, according to a report from the Joint Committee on Taxation (JCT), would cost $11 billion over the next five years.

A federally subsidized taxable bond — what market watchers are calling BABs 2.0 — works differently. Unlike tax-exempt municipal bonds, BABs are taxable, and, as a result, open up the municipal market to new investors, such as pension funds or those living abroad. More buyers is a good thing, but BABs are also more expensive for governments. So to defray the added cost, the federal government in 2009 offered a direct subsidy of 35% of state and local governments’ interest payments on BABs.

That is, until sequestration in 2013 dramatically cut the subsidy and left state and local governments scrambling to fill the void.

BABs 2.0 would work similarly, but also lock in the federal subsidy — a much better deal for governments. They’re expected to cost the federal government more than $22.5 billion between 2022 and 2031, according to estimates from the JCT. 

Author(s): Liz Farmer

Publication Date: 16 Oct 2021

Publication Site: Forbes