States and municipalities showing uneven growth, munis steady

State and local governments in the West, Southwest and Southeast are leading the pack in economic growth as some analysts are seeing good times for the municipal bond market. 

“We’ve had $40 billion monthly in new issue calendars for the last seven months in 2024,” said Tom Schuette, senior vice president and investment grade credit research analyst for PIMCO Municipals

“I think we’ve already outpaced full issuance from 2023 and 2022. October has been exceptionally strong in terms of governments issuing new debt. As an investor, it’s been great because we’ve actually had a little bit of a backup in rates so it’s a really attractive time to be in the market and buying munis.”  

The comments came via a panel discussion on Thursday hosted by the Volcker Alliance and Penn Institute for Urban Research. Schuette attributed the upticks to the current Goldilocks economy based on low unemployment, stable growth and cooling interest rates. 

The good news has washed into overall credit ratings. “I think we’re like 14 or 15 consecutive quarters of upgrades outpacing downgrades across U.S. public finance, which no one would have predicted,” said Schuette. “Coming out of the pandemic, we see local governments running like three to one, upgrade to downgrade from one of the rating agencies.”      

Fitch Ratings quotes figures from the National Association of State Budget Officers showing total state budget fund balances trending downwards, while dedicated operating reserves have been increasing or stable.  

The degree of financial health somewhat depends on geography. “The West, Southwest, and the Southeast have all seen the strongest GDP growth since the pandemic onset,” said Eric Kim, senior director for Fitch Ratings. “The Midwest and Northeast, including New England, have grown at a much slower rate and trail national growth.”  

Georgia continues to be a bright spot for growth. 

“Since the last quarter before the pandemic, real GDP growth has run 2.4% per year on average, slightly better than the 2.3% average for the nation,” said Robert Buschman, state economist for the State of Georgia.

“In addition, we’ve enacted permanent income tax cuts, albeit so far modest ones, accelerated the schedule for additional planned rate cuts by one year, and we’ve been able to fund two tax rebates of about a billion dollars each.” 

According to Buschman, the state announced another $1 billion tax rebate on Tuesday while adding $2.8 billion to their revenue shortfall reserve, which has been sitting at the 15% statutory cap for the last four years while also accumulating $11 billion of undesignated reserves.  

Although the Midwest is suffering from population loss, there are still pockets of public finance strength. Schuette points to the city of Dayton Ohio, whose population of 137,000 is half of its peak but has been able to retain a AA credit rating with reserves pegged at 50% of its revenue base.  He also gave shoutouts to strong ratings for Cleveland and St. Louis, Missouri. 

Predictors of the financial future are flummoxed by an economy that continues to dodge recession. 

“The question of when that pace slows down is still a little bit unclear.” said Kim. “We’ve been expecting the economy to slow for several years in a row now, and it just keeps beating our expectations. We don’t see signs yet that that consumer slowdown is happening in a sustained way that would really threaten the economic growth trajectory.”