Mar 04, 2023

How is credit performing in your sector?

I was wondering how credit was performing for everyone else, the credit space is so siloed it’s often hard to get visibility. I mostly cover local and state governments, so I’ll opine on that. I’d love to hear from other folks as to what they’re seeing in their sectors.

In munis, state and local general govies including school districts have tended to do really well. ARPA and other stimulus era programs mean most are sitting on budget surpluses/rainy day funds. Pensions have been mixed as the decline in the value of plan assets has been largely offset by the increased discount rate. Overall performance has been good and upgrades surpass downgrades. Out years may be more interesting though as the rise in assessed property values and increased sales tax will get whacked in a recession scenario. Property collections fall as well as people get laid off, I think for broadly diversified economies it’s less of an issue but for some places reliant on either one or two large manufacturers driving ad valorem tax or for those using a local income tax they will need to budget conservatively. In addition, some municipalities seem to have locked in higher cost structures with multi year COLAs assuming high inflation.

A big credit positive I’ve seen is pension and OPEB have been taken really seriously lately. Lots of pension plans are cutting assumed returns and going above and beyond actuarially determined contributions to get towards fully funded status. If this continues even if there is a recession I think muni credit will come out stronger on the other side.

 
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