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Market News Commentary - From The Desk of David Loesch 11.12.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on November 12th, 2020
- CA voters rejected a measure that would have made the most significant change to their signature tax limitation law; this is a setback to proponents hoping to raise more money for local governments and schools. Prop 15 was failing 52% to 48%. This proposition would have allowed property taxes on most commercial buildings worth more than 3MM to increase by allowing the levy to market value rather than purchase price. Under the law, property taxes on both homes and businesses are limited to 1% of the purchase price, and annual asset taxable valuation is capped at 2%. This issue has been ongoing with CA and its residents; and not the norm in most of the country. For example, Disneyland pays taxes based on the purchase price of the land based on the 1970's value; however, it charges customers 2020 prices - many in the MUNI world do not agree with this type of tax application.
- CT expects to collect $18.8B in general fund revenue in this current fiscal year, a $326.6MM increase from last month's forecast. CT also has raised revenue forecasts for the next two fiscal years by $875MM and $704MM, respectively. This state is on the comeback, with lower taxes than NY. Many are moving into this state, for this reason, hence the updated numbers. Overall, this is a positive for the bonds, and expect S&P to view this state as improving.
- High-yield bonds have rallied on vaccine hopes. High-yield corporates started the rally with all “transportation” paper moving up, although this has not rolled into the airport debt or paper like MTA's. A vaccine will be positive for such bonds, and I believe that as we march towards a solution, high-yield paper like MTA, airports, stadiums, toll roads, and parking garages will continue to improve.
- NY State will collect $3.8B more in tax revenue in the current fiscal year than projected. Actual tax receipts are $1.1B higher as of now, with the increased taxes that the state has imposed. NY State continues to be one of the only states in our nation that you do not see a mass exodus of citizens with tax increases moving up. This increase will continue through this year and next. We are buyers of this paper despite the high tax rates.
- NJ was downgraded over the weekend by S&P to BBB+; the outlook currently is stable. The downgrade comes after the Governor signed a budget that counts on borrowing more than $4B for operating costs and boosts the income tax rate to 10.75% from 8.97%. On people earning at least 1MM per year. This downgrade will pressure residents to move to neighboring states in the upcoming years, thus creating additional decreased revenues while decreasing debt service coverage. I also suspect you will see further downgrades on states like this who tax their citizens to make up for a bad fiscal policy.
- An influx of cash into the largest MUNI bond exchange-traded funds suggests that investors are shifting back into High-Grade MUNI paper. Muni bond funds saw large inflows last week. Some funds saw their most significant inflows since 10/16; this is a direct result of moving from the equity markets into FI - with the Senate's uncertainty and the presidential election secured by Biden, I believe you will continue to see this trend through the end of this year.
- With the election rapidly entering the rearview mirror, the focus will shift to the virus and getting the economy back on track.
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