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

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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

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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

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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

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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

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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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