Our roundup and recap of the most relevant municipal bond market news:
The CT Mirror: CT’s Budget Reserve on the Brink of Hitting Unprecedented High
- Connecticut will have more than $2.3 billion in reserve when the audit of the just-completed 2018-19 fiscal year is done in late September
- By the end of the new budget cycle, Connecticut could have a reserve three times the size of the cushion it built in the early 2000s
- The $2.3 billion represents 12 percent of annual operating expenses, topping the 8% mark also set in 2009
The Wall Street Journal: New Tax Laws Drive More Americans Into Muni Bonds
- Inflows for municipal bonds this year have been massive, with funds for CA, NY and NJ receiving over $6.5 billion through the end of July
- This marked the most of any seven-month period since 2014
- Bond yields in high tax states have come under extreme pressure with the changes under the Tax Cuts and Jobs Act
- Clients are being advised to look at out-of-state bonds as alternatives rather than take on credit risk
Brookings: Is Municipal Bond Insurance Still Worth the Money in an ‘Over-Insurance’ Phenomenon?
- In theory, municipal bond insurance should reduce the cost of municipal borrowing by reducing expected default costs
- White paper examines whether bond insurance provides any value to issuers of muni bonds and explores the phenomena of over-insurance, which may/may not be influenced by conflicts of interest between underwriters and financial advisors
- One conclusion reached is that highly-rated issuers appear to be subsidizing the lower-quality issuers for whom insurance continues to provide positive gross value
Pennsylvania Capital Star: Wolf’s Natural Gas-Backed Infrastructure Plan Enjoys Majority Support, New Franklin & Marshall Poll Finds
- Pennsylvania’s Governor has proposed a $4.5 billion infrastructure plan that would be funded by a severance tax on natural gas drillers
- Money would be borrowed against 20 years of revenue from a tax on natural gas produced in the Commonwealth
- Estimates for rates on borrowings have been floated at around 5%, but supply and demand imbalance in the muni market would help lower borrowing costs
- While polling indicates public support for the bill, there is very little legislative support to tax shale producers in PA
Kiplinger: Municipals Rock On
- Year-to-date returns have solidified tax-exempt bond holdings as core portfolio allocations
- Standard and Poor’s rates the U.S. Treasury as AA+ but rates 15 states and many local borrowers as AAA
- Credit risks associated with rising pension costs in some states have been taking a back seat to the hunt for yield
- Foreign buyers fleeing negative rates have found an unlikely home in U.S. local muni bonds
The Washington Post: A Silent Pension Crisis is Eating Away Local Government Services. Here’s What You Need to Know.
- “Over the past few decades, policymakers from California to Wyoming have made public pension benefits ever more generous— while setting aside too little money to pay for them.”
- Governments have underfunded pensions by at least $1.28 trillion
- Strong legal guarantees protect pensioners’ benefits
- Governments continue to cut costs and jobs rather than a focus on increasing revenues to meet growing pension obligations
- Raising taxes has become politically more difficult given the new SALT limitations
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