December 6, 2022

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Reporters’ roundtable: What midterms mean for munis

19 min read
Reporters' roundtable: What midterms mean for munis

Chip Barnett (00:03):
Hi and welcome to The Bond Buyers’ Regional Reporters Round Table, our Election 2022 edition. I’m Chip Barnett and with me today is the core of The Bond Buyer’s senior reporting staff, Caitlin Devitt, Yvette Shields, Karen Pierog, Keeley Webster and Thomas Nocera. Welcome all. Today we’re gonna be taking a look at some of the most important takeaways for the municipal bond market that came out of the midterm elections for each of our coverage regions. So let’s get started with taking a high level overview of the elections. Caitlin, what are the national implications that came outta these midterms?

Caitlin Devitt (00:42):
Hi Chip. Good to be here. So late last night, the AP finally called the House for Republicans. This was, as many of our listeners know, a pretty historically tight midterms and unexpectedly competitive and the so-called red wave failed to materialize. But the House did go to the Republicans, so they’re gonna have a very narrow majority. The Democrats are gonna keep the Senate, although by how much is still a question. Georgia has a runoff on Dec. 6. What all that translates into is divided government. And what that means for us is, I think of some of our lobbyists said gridlock can be good because it’s gonna mean we’re not gonna see speedy legislation that can overtake the market and surprise muni bond advocates with measures that don’t necessarily benefit the market. So for example, moves on the tax-exemption are perennial sort of golden treasure are gonna probably be limited as well as some other moves that could possibly eat away at the tax exemption.

But also it means that many things that we want that the market wants might be limited. For example, our well known wish list, the restoration of tax-exempt advance refunding, lifting the bank qualified debt ceiling, direct pay bond program. These are things that might not move forward in a divided government as well. So in this, the lobbyists and advocates in Washington say their top priority for the 118th Congress next year is gonna be to educate new members and leaders and their staff about the basics of public finance and why it’s important. We’re gonna see new leaders in key tax writing committees in the House, for example, the Ways and Means leader hasn’t been appointed. We’re hearing Florida Republican, ver Buchanan is gonna be a top contender for that also in the midterms. As a result, we saw several advocates of eliminating or lifting the current $10,000 cap on state and local tax deductions, either lose their seats or not run.

Again, this includes like Sean Patrick Malone in New York, Tom Malinowski in New Jersey. This is an issue. The SALT cap is an issue that’s important to high tax states like New York and California, and also to investors that hold paper from those high tax states. So the current SALT cap was of $10,000, was set in 2017 under the Trump Tax Act, and it’s now set to expire in 2025. But with these reformers out, possibly the camp could be extended. And so we don’t know where it’s gonna go. Though of course, the old lawmakers have been replaced by new ones who might suddenly find their position has changed as it remains an issue of importance to them in the high tech state. Also, most of the House Municipal Finance caucus won their reelection. But again, how much they can actually do in a divided government is remains to be seen with Republicans in the House.

Investigations are gonna become a real thing. And for our world, that probably means investigations into state and local governments use of stimulus funds, ARPA funds, and into the oversight of infrastructure dollars under the big bipartisan infrastructure law that passed last year. How the federal agencies are allocating that, possibly how it’s being spent on the state and local side. But the important thing to note is that even if the GOP launches investigations into it, they won’t be able to touch the infrastructure dollars because those are allocated by statute under law for five years for the life of the law. So they won’t be able to necessarily touch the flow of the funds. So that sort of for the midterms, meanwhile, before next year, before the 118th takes Washington, what all eyes right now are on the lame duck session. In particular, this bill called the Financial Disclosure Transparency Act.

It requires standardized issue or disclosure. That’s a very simplified way of putting it, and we’ve written extensively about it so people can go look at it, but it’s causing a lot of angst among issuers who call it an unfunded mandate, say it’ll be very costly and that it won’t benefit the market because with roughly 50,000 issuers, there’s so much diversity there that requiring standard disclosure is unrealistic. This is a provision that’s expected to be talked into the 2023 National Defense Authorization Act. That’s one of those must pass bills by the end of the year. The House has already passed it, I think in July. The Senate’s expected to take it up any day before the end of the year for sure. Now, as of today, which we’re recording this on Nov. 17, the FDTA hasn’t been tucked into it yet as an amendment as far as I know, but it probably will be. And so everybody’s watching it real closely. That’s gonna be a big deal in the lame duck. And just one note, the House bill is, is a little different than the Senate bill here. So there is, even if it passes in the Senate, there’s a little bit of hope that if it gets hammered up in conference that it might be dropped or might be watered down. So those are of some of the big takeaways from on the national and the D.C. federal side from the midterms.

Chip Barnett (06:10):
Thanks very much for that, Caitlin. Overall, it was a really good time to ask voters to approve bonds. Nationally, more than 80% of all bonds that went up for a vote were approved. Now let’s drill down regionally, Thomas, what happened in the Northeast this year?

Thomas Nocera (06:28):
Hi Chip. So I’m gonna start with New York, and I know you just said most of the bond ballot questions were approved by voters in New York that was no different. So they had a $4.2 billion clean water, clean energy, green Jobs environmental bond act that was approved, and that’s gonna fund a range of green or oriented capital projects across the state. Also, big news developing out of New York with Gov, Kathy Hochul winning her first gubernatorial election. She’s returned into office and she’s facing a big threat to where administrations showpiece project to renovate Penn Station. So support among a local officials for that plan, which is about $8 billion. The state estimates it’ll funnel $8 billion in funds to Penn Station for a number of renovations across the hub. The local officials originally very supportive and that support is eroded lately as key parts of that financing arrangement have kind of remained unanswered.

So the sole developer on that project is Vernado who struck a deal with the Cuomo administration and there’s still things like accurate cost and revenue projections that lawmakers have been seeking that haven’t been provided. So there’s been an erosion of local support. A recent lawsuit filed on behalf of community groups and some advocates in the neighborhood who are opposing a number of state mandated decisions that paved the way for this bill. So one of them is a reclassification around of the area around Penn Station as blighted, which allows the state to come in, take over the area, and which importantly paved the way for a very generous $1.2 billion package of incentives for Vornado. So that lawsuit’s still developing and where it goes is gonna be very important. There are alternate ideas for how the station could be developed, but the way support for this plan has eroded is definitely not good for the governor.

Moving on to Connecticut. Democrat Eric Russell, who was a partner of Pullman and Cole law firm was elected treasurer and while he campaigned on supporting the debt management policies of Gov. Ned Lamont, he’s been pushing against other policies that Lamont has made key to his administration. And those include expressing concerns over the state’s pension funding scheme, which according to him simply shifts the burden of pension to future taxpayers as well as his borrowing of $220 million last year to fund debt service on existing bonds. Russell took stances against both those moves on the campaign trail, how those concerns will flesh out when he is in office off the campaign trail are still being seen, but it could be an interesting development there. And then finally we have Massachusetts who elected a new governor, Democrat Mor Healy, who campaigned on permanent tax press tax cuts and increased social spending. And the previous leadership was a bit more fiscally conservative, very reserve centric. In fact, Massachusetts reserves reached their highest levels in history recently. So what’s going go on there? How much will change and whether the new governor will stick to her plans stated on the campaign trail are still to be seen. And that’s it for me for the Northeast.

Chip Barnett (10:03):
Thank you very much, Thomas. In the Southeast, the biggest focus was on the Florida Governor’s race and the Georgia Senate battle. Incumbent Gov. Ron DeSantis, a possible top contender for the Republican presidential nomination in 2024, won handily over his Democratic opponent, former Gov. Charlie Kris. In Georgia, Republican Newcomer Herschel Walker and Democrat Sen. Raphael Warnock fought each other to a standstill and are going to face each other in a December runoff election. Most of the big bond issues in the Southeast, from North Carolina to Miami Beach, were approved by voters. Turning to the Midwest, Yvette what’s going on out there?

Yvette Shields (10:45):
Thanks, Chip. So I think I’ll start with the shifting political winds in two states that led to major state house power swaps that really have implications for governance and fiscal policies in the next few years. Let’s see, Minnesota and Michigan, so they reelected their respective governors, Tim Walz and Gretchen Whitmer. Both are Democrats and both now will enjoy legislative majorities that smooth the path through their agendas. In Minnesota, the GOP lost its Senate majority, while the DFL party, that’s the Democratic Farmer Labor Party held onto its House majority. And then in Michigan, both houses flipped to the Democrats for the first time in four decades. So both governors have managed to get along with the GOP well enough to at least agree on budgets. But those deals were really helped by the lack of having to make any really tough decisions because of the flood of Covid pandemic relief, and then also the rising tide of tax revenues we’ve seen all over the country at the state level, but each face pushback in other areas.

Walz had struggled to pass various progressive proposals he was pressing for and he also had to trim his cattle budget proposals. And then Whitmer’s gas tax hike that she had floated early on in her first term to speed up road work was killed by the GOP. So in the coming year in Minnesota, there’ll be a push for legalizing recreational cannabis and greater spending on education and the state has a surplus to spend, so there’s room to spend that money on various issues and movement on other progressive proposals. Bonding bills will still face a tough world though because it’s a narrow legislative majority that the Democrats hold and you need three fifths to approve new borrowing in Michigan. Whitmer and the current GOP majority had agreed on a budget package, but it put off really what would’ve been really contentious, talks over how to spend billions in a remaining surplus on tax relief.

So the GOP would differ on how to do it. It’s unclear whether or now it’ll get done in the lame duck session or it’ll wait till next year when the new legislature is seated. Whitmer has said that she wants to repeal the right to work legislation that have been passed by Republicans in the past and wants to explore new revenue sources for roadwork. She will not roads rec though the gas tax hike. And in Michigan roads are a really big deal. She had campaigned the first time on fixing the damn roads and so there was a lot of debate over what kind of progress the state had made during her first term. They have a upcoming, they did find some bonding room and they have a, they’re gonna wrap up the bonding authority with a $1.9 billion issue coming up the last week in November.

But it really remains a long term struggle to find a ongoing source. Moving over to Illinois to our hometown, the Cook County Forest Preserve district voters and that includes Chicago voters like myself and Caitlin. They gave the green light to a property tax hike that will generate $40 million annually to fund upgrades and stabilize pensions. I hike a lot in the forest reserve. So personally I was really happy to see it approved. But financially the bigger deal is that it really saves the pensions because currently they’re on a path to insolvency and it saves them in the same way that a sales tax hike a few years back did for the county. Also here in Illinois, the voters passed amendment one, which is in a constitutional amendment and it gives more extensive protections to organize and collectively bargain on issues like working conditions, wages, hours. And a bigger deal really is that it bans so-called right to work rules from going into effect in the future.

And labor has really fought those types of laws in other states like Michigan where they’ve passed because it empowers employees to decide whether or not they wanna join a union. Fiscally, critics, and this is why I bring it up, because fiscal critics of the amendment had warned that it would give unprecedented powers to labor that would drive up local government costs and in turn result in property tax hikes. So to cover the enhanced benefits. So on that one, we’ll just have to wait and see what happens. Right down the road in Missouri, Porter signed off on legalizing recreational marijuana and that move could lend a fiscal helping hand to some local governments S&P said in commentary on it. It’s modest taxing revenue, but S&P said it expects that level to grow over time and give some local municipalities additional revenue flexibility.

A couple of the bigger pond referendum in the region, several had to do with affordable housing. So in Kansas City voters signed off on two referendum, one for $125 and one for $50 million and that’s for various improvements, but also includes money to renovate their convention center and then also to fund affordable housing, which the city says is the biggest investment ever. And in Ohio, Columbus voters gave approval to doing $1.5 billion across a series of referendum and it pays for really a range of spending from affordable housing and parks to sewer line improvements and water. In South Dakota, moving away from the bonds here, South Dakota voters endorsed expanding Medicaid as it’s permitted under the Affordable Care Act from back in 2010, and that has dual benefits, one for the hospital sector, which will reduce the cost of uninsured patients. They have to treat because more folks will be insured.

It also has greater ramifications, Moody said in a special commentary because the more support you build nationally for the ACA, it gives it more strength in terms of keeping it from repeal or being scaled back in the future. So let’s see, moving on to Wisconsin, they had a record number of bond and tax referendum and school districts saw $1.4 billion approved and had a pretty high successful rates in Michigan. There were quite a few bond referendum there also by school districts and the biggest one was half a billion that was sought by Troy voters. And there’s one last issue I wanted to mention and it’s a non-bonding issue, but it’s something that’s on the, on the thoughts of some folks in the market and that’s in Michigan and it’s a library district in Jamestown Township, a specific library had gone to voters a second time this year and they were rejected for their millage request.

And it was due to pushback over LGBT theme graphic novels on the young adult shelves. So members of the public, some had demanded that they remove them, the library refused, and now they’ve lost a central source of the revenue. Voters had first defunded the library back in August. But private donations, including some from pretty prominent authors and a GoFundMe effort, helped the library make up for some of the cost, but it has worn that’s facing closure in 2024. So this library specifically doesn’t have any debt, but Municipal Market Analytics had took taken note of the situation and warned that withholding funding over such issues really spells trouble, potential trouble in the future for some library bond investors as it could lead to downgrades and impairments for non GO debt. And the message they said investors should take is that take away from this, that before investing in that type of bond, you really need to keep abreast of local political developments. And I think that’s about it. So I’ll send it back to you, Chip.

Chip Barnett (19:26):
Thanks, and we’ll be right back after this important message. And we’re back talking with our Bond Buyer senior reporters about the midterm elections. Looking to the Southwest. Karen, can you tell us what went on there?

Karen Pierog (19:43):

The election will return some Southwest officials who have been critical of ESG to office in Texas. Glenn Heger won a third term is state controller and will continue to implement a 2021 state law that prohibits banks that boycott fossil fuel businesses from obtaining state and local government contracts, including those for bond issuance. So far, UBS is the only muni investment bank to land on the controller’s list of boycotters costing it deals in the state. Oklahoma’s newly elected state treasurer, Todd Russ, a current Republican member of the state House, will be charged with implementing a similar law enacted this year in that state. Marlo Oaks, who was appointed Utah’s treasurer last year when his first full term in that office, Oaks has been a vocal critic against the use of ESG factors in bond ratings. Texas Attorney General Ken Paxton, who was elected to a third term, joined a multi-state probe into S&P Global Ratings in September.

He said the investigation will determine if S&P engaged in destructive illegal business practices that are so pervasive in the ESG movement. Texas also has contract prohibitions for banks deemed to be discriminating against the firearm industry with that law sidelining some investment banks from the muni market in that state. Looking ahead, some Texas lawmakers could pursue similar legislation next year targeting companies with abortion access policies. The election didn’t change political party control of Southwest state legislatures with Republicans remaining in control in Arkansas, Arizona, Kansas, Oklahoma, Texas and Utah. Democrats control legislatures in Colorado and New Mexico. Split control of state government will continue in Kansas with the reelection of Democrat Laura Kelly and comes to Arizona where Democrat Katie Hobbs will be governor replacing Republican Doug Ducey, who was term limited for running again. Although Republican Kari Lake is contesting the election results. On the bond front, Texas issuers had the region’s biggest amount of debt on November eight ballots in Austin, Texas, alone, voters approved $3.56 billion of bonds, $2.44 billion for the public school district, $770 million for the community college district and $350 million for affordable housing in the city.

The Austin Independent School District CFO tells me the 25 year bonds will be sold over six years in negotiated deals sized in the $400 million to $500 million range. Dallas voters agreed to hike the city’s hotel tax rate, which was needed for the issuance of about $1.8 billion of revenue bonds to replace the convention center. Oklahoma City Public Schools said it will hit the municipal bond market in the next two months with its first sale tapping $955 million of bonds passed by voters issuance will be spread over 10 years. Also, when Oklahoma Republican governor Kevin Stitt was reelected, which means the push for a controversial $5 billion bond financed extension plan for the Oklahoma turnpike will continue.

Chip Barnett (23:17):
Okay, thanks for that. And now I’m gonna throw it over to Keeley Webster to find out what’s been going on in the west coast.

Keeley Webster (23:24):
Thanks Chip, today, I will provide a quick run-down of some of the major elections in the
nine-state western region. Despite a heated battle for Oregon governor as Democrat Kate Brown termed out, the governor’s office remained blue. Former state House speaker Tina Kotek secured victory over Republican Christine Drazan in a close race.
The Oregon governor’s race captured a lot of attention in the 2022 midterm elections, because it was unusual in a state with the second-longest streak of Democratic governors for a Republican candidate to garner so much support. The state has not elected a Republican governor since 1982. Outgoing Gov. Brown’s battles with Republicans in the state’s rural areas set the table for the tough battle that Kotek faced, not only from
Drazan, but from another Democrat, Betsy Johnson, who ran as an independent.

In California, Gov. Gavin Newsom, a Democrat, easily secured a second term defeating Republican lawmaker Brian Dahle. Newsom had just overcome a recall in 2021, however, so it was unsurprising that the popular governor secured a second term. Democrats also retained majorities in the state Assembly and Senate.
California Treasurer Fiona Ma, a Democrat, won a second term in a landslide similar to when she was first elected in 2018. Ma started her second term by replacing her three top deputies, who had quietly stepped down in the months leading up to the election.
During her first term, Ma worked to diversify the finance teams who work on the state’s bonds, has made the state’s housing crisis a priority attempting to streamline the state’s conduits that focus on both housing tax credits and single-family home bonds for veterans.
Her office won a Deal of the Year in 2018 for its issuance of No Place Like Home bonds.
Those bonds tapped a millionaire’s tax to fund supportive housing for mentally-ill homeless people.

In Nevada, incumbent Democratic Gov. Steve Sisolak lost to Republican Clark County Sheriff Joe Lombardo in a close race. Treasurer Zach Conine won a second term over Trump-supported Republican Las Vegas Councilwoman Michele Fiore. Conine has worked to bank the state’s marijuana industry and in forming an infrastructure bank to capitalize on federal funding to build infrastructure. He also backed an effort for the state to divest from automatic weapons and gun manufacturing. In a state where 47% of the populace owns a gun, voters supported Conine, he said in an interview, because with many states suing gun manufactures, investing in them is a liability. So his divestment saved the state money. While it was also a smart financial move, Conine said he divested from gun manufacturers, because he would like to see less violence.

In Los Angeles, Congresswoman Karen Bass has defeated billionaire developer Rick Caruso
in the mayor’s race, according to an Associated Press projection Wednesday, making her
the first woman and second Black Angeleno elected to lead the city.
Caruso spent more than $100 million of his own fortune on his mayoral bid, outspending Bass by a 10 to 1 margin. Bass replaces Mayor Eric Garcetti, who termed out after eight years as mayor.
Nearly half of the Los Angeles City Council is turning over as a progressive wave has swept the 15-member City Council amid a push by Black Lives Matter groups and concerns over multiple corruption scandals.
Analysts have yet to weigh in on whether massive changes in leadership in Los Angeles could affect the city’s bond rating. But muni analysts don’t tend to give as much weight to “headline risk,” as stock market analysts do. And the city continues to receive high markets for fiscal management in bond ratings.
Unsurprisingly given California has 977 school districts and 482 cities including major metros like Los Angeles, San Francisco and San Diego, the state had the most local bond measures in the country with nearly $15 billion on the ballot.

California school districts had 100 school bond measures on the ballot totaling $23 billion. Some of that money will go for teacher housing, but schools are also hedging against inflationary costs as construction prices soar.
Some have been decided, but many are too close to call and the result will likely not be made final until they are certified Dec. 7. California had no statewide bond measures.
Drawn out election results have been a factor in California school and bond measures for some time, but it has become more pronounced as more people vote by mail. The state counts ballots up to a week after the election, as long as they are postmarked by election day.
Voters in Los Angeles and San Francisco also approved measures that would streamline development to make it easier to build affordable housing. The state and major cities have
already approved and are spending billions in bond dollars to either house homeless people or build affordable housing, but the lack of progress in building the number of units necessary to make a dent in the state’s housing crisis has voters asking for more.

In a Thursday report, Fitch Ratings highlighted Proposition 28 in California and Proposition
123 in Colorado as examples of ballot initiatives that would put constraints on state spending decision by directing a portion of existing revenue to specific revenues. Fitch
said while the initiatives would not affect ratings in the near-term, greater limits on state governments’ ability to respond to changing circumstances could negatively affect credit quality over time. California’s measure allocates general fund money to arts and music education, while Colorado’s Prop 123 commits .10% of income tax revenues to housing programs.
Oregon voters passed Measure 111, which obligates the state to provide all residents with
cost-effective, clinically appropriate and affordable health care. Fitch considers the amendment somewhat akin to the requirements in many state constitutions (including Oregon’s) for public education. Importantly, the proposed amendment does not confer unlimited resources but requires that implementation of a right to healthcare “must be balanced against the public interest in funding public schools and other essential public services”.

That’s the wrap-up for the West, back to you Chip.

Chip Barnett (29:39):
Thank you Keeley. And thanks to everybody for being here today.
And special thanks to our listeners of this latest Bomb Buyer podcast. Special thanks to Kellie Malone who did the audio production for this episode.
And please don’t forget to rate us, review us and subscribe at For the Bond Buyer, I’m Chip Barnett and thank you for listening.