Closing the door on the first half of 2014
The first half of 2014 was positive for muniland after a very tough 2013, but weak spots still remain.
Muniland relies on state and local government revenues, which were up slightly for the first quarter. Early indications suggest that the second quarter will also be up (though personal income taxes were off more than expected). The Census Bureau reported that first quarter 2014 tax revenues for four state and local government tax categories increased 2.4 percent to $295.7 billion from $288.7 billion in 2013.
Some states are lagging on the revenue front. The Rockefeller Institute, which tracks state revenues, found seven states that had revenue come in significantly below budget in April: Kansas, Rhode Island, Vermont, Ohio, Mississippi, Arizona and West Virginia. California revenues weakened in May, but year-to-date they still exceed projections by $1.8 billion, or 2.1 percent. It will take about 45 days until a complete revenue picture is available for the first half.
Employment levels in muniland have been relatively flat with 14.1 million local and 5 million state employees. Local governments added 12,000 jobs a month from February through May after shrinking 595,000 in the five years through March 2013.
Public pension assets have barely grown since 2013. The National Association of State Retirement Administrators reported:
The Federal Reserve publishes data on state and local defined benefit assets on a quarterly basis. In the first quarter of 2014, assets grew to $3.66 trillion, up from $3.65 trillion as of the year-end 2013. The pre-recession high was a reported $3.2 trillion.
Low municipal bond supply and strong demand pushed AAA and AA municipal bond yields lower over the last 12 months:
Long term fixed-rate municipal debt sales by states, cities, schools, hospitals and other muni issuers totaled $142.8 billion, a 16.1 percent drop from 2013.
Muniland is sensitive to economic conditions like the housing market, and tax revenues suggest that recovery at the state and local level may be slowing.
Municipal bond mutual funds had good returns in the first half of 2014. Natalie Cohen of Wells Fargo wrote in her mid year report:
Through June, the S&P High Grade Municipal Index has shown a 12.48 percent return and municipal High Yield a 9.67 percent. Lower yields invited in some higher volume from issuers — mainly through the addition of refunding bonds, which became attractive again to issuers after this market dried up when rates backed up in mid-2013.
We believe these trends are likely to continue at least through the end of the summer, and probably through the end of the year on softer (is ‘less robust’ a more accurate term?) economic news.