Let’s agree to disagree
The three main credit agencies have all released new reports or evaluations about Chicago’s credit-worthiness. While they all say the city’s massive pension liability is a big concern, they arrive at different conclusions about the city's actual rating. To quote a Sound of Music song (points for knowing which one), let’s start at the very beginning:
During the last week of February, Fitch assigned an A- rating, the lowest level of the A-rating tier, to Chicago’s upcoming General Obligation (GO) $388 million bond issuance. The outlook for the financial health of these bonds was negative, Fitch said. The ratings agency cited a “lack of meaningful solutions to both the near- and long-term burdens associated with the city's underfunded pension plans” as a key rating driver.
A few days later that same week, Standard & Poor’s weighed in on the city. In a report titled “Will Chicago Suffer Detroit’s fate?” S&P said its A+ rating on Chicago's GO debt (two steps higher than Fitch’s) “reflects our view of its overall solid credit quality, with support from a strong local economy.” The report did note that Chicago and Detroit (which is rated D, the lowest level possible), shared an inability to afford their growing liabilities. It noted in 2012, debt service as a percent of total governmental fund expenditures was 12 percent in Chicago and 14 percent in Detroit. (There. obligatory Detroit reference accomplished.)
Finally, last week, Moody’s announced it rated Chicago’s upcoming GO debt issuance Baa1 – just two steps above junk bond status. The report says the city’s unfunded pension liabilities “threaten the city’s fiscal solvency absent major revenue and other budgetary adjustments adopted in the near term and sustained for years to come.”
The month of February wrapped up on a much quieter note than expected in the municipal market, reports RBC Capital Markets’ Chris Mauro. New bond issuances were much lower than expected, although Mauro says the lag isn’t enough to change his prediction that 2014’s issuances will total $285 billion. Traditionally, he added, the second quarter (April – June) has historically been the heaviest for municipal supply, with 28 percent of the annual volume coming in the spring months. Mauro said that the warmer weather months (no more Polar Vortexes, please) will “help to energize a municipal investor base that has been somewhat unenthusiastic in recent weeks.”
Muni bonds besieged
Speaking of muni bonds, we mentioned in the last WIPF issue that proposed tax reform on Capitol Hill targeted the municipal bond tax exemption. The reform would tax interest earned on municipal bonds by people with more than $450,000 in taxable income. Now, muni bonds’ tax-free status is being attacked on the flank -- this time from about a mile up Pennsylvania Avenue via a proposal in President Barack Obama’s budget that would install a cap on how much municipal bond interest tax filers can declare as tax-free. The proposal drew ire from the usual suspects – states and localities, which depend on that perk to pay back those bonds at a lower interest rate.
“This cap would mean a $173 billion loss of infrastructure funding over the next decade,” U.S. Conference of Mayors CEO and Executive Director Tom Cochran noted in a statement last week. Cochran says there is “no new” legislative funding for America’s infrastructure, while special infrastructure projects and earmarks are gone and highway funding is flat. “Our major infrastructure funding, $1.65 trillion, comes from the tax-exempt bonds,” he added. “As the nation recovers from the great recession, now is not the time to mess with our bonds.”
The tax exempt status of muni bonds is a perennial fight on the Hill. For fun, check out the dates attached to the articles that result in the Google search, “Obama budget muni bonds.”
Movin’ on up
Standard & Poor’s showed some New England love this week by raising the credit ratings of two capital cities: Hartford and Boston. Hartford got a two-step boost with a new rating of AA- (from A) based on “the city's adequate budget performance and flexibility due, in part, to its strong financial practices,” S&P said. Boston was raised one notch to AAA based on a “strong underlying economy, very strong management,” and budgetary flexibility.