Early Reports From Muni Issuers

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

It’s early in the reporting season, but the state of West Virginia hit record-setting revenue collections last month and most other states are expected to meet or exceed their revenue forecasts.

The Mountain State recorded general revenue collections of $319 million above estimates for April. It was the single largest monthly surplus in the state’s history.

Early reports from muni issuers

The state also reported that personal income tax collections were $192.8 million above estimates for April, also a new record for a single month. Record year-to-date collections of more than $2.78 billion exceeded estimates by $439.5 million and were 9% ahead of receipts for the same period last year, Gov. Jim Justice announced May 1.

States’ revenues on track

West Virginia was among the first states to report revenues.

Fitch Ratings said most U.S. states should meet their budget forecasts, though state income-tax revenues for last month were, as expected, lower.

“As widely anticipated, state income tax revenues for April have been coming in well below the prior year, and in some cases below state projections,” the rating agency said.

“However, most U.S. states are still on track to meet or exceed year-end budget forecasts due to a combination of conservative revenue forecasting and continued growth in other categories of state taxes. Many states used prior-year revenue surpluses to improve financial resilience by boosting reserves and paying down debt, supporting state ratings stability.”

Adapting to expectations

April, when income taxes are due, is an important month for states.

Last April, strong performance powered large budget surpluses for many states. With slower growth and weak capital markets in 2022, a dropoff was expected this year.

“Based on data from early reporting states, this is playing out largely as expected,” Fitch said.

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    The agency noted three early-reporting states – Illinois, Pennsylvania and Georgia – experienced declines in tax revenues in April, yet “all three states are on track to comfortably exceed their adopted budget revenue forecasts, which anticipated tax revenue declines for the full fiscal year.”

    Flexibility of issuers is key

    Fitch, among others, expects an economic downturn later this year, and some states could face budget pressure, depending on revenue declines. Most states, though, are using cautious revenue forecasts as they set their budgets for fiscal 2024.

    No one can predict how the economy will fare, and it’s fruitless to try.

    But as longtime municipal bond market professionals, we applaud states that are cautious in their revenue projections.

    Of course, we are also comforted by the fact that state and local governments – issuers of municipal bonds – have many tools they can use to fortify their finances (“States, Localities Shoring up State Pension Plans”).

    This flexibility is, after all, a key reason why municipal bond investors sleep peacefully at night.

    James A. Klotz is the President of FMSbonds, Inc.
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    May 17, 2023

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