The relationship between municipal credit ratings and pensions is simple, and pension health has become a critical factor in determining states’ credit ratings. The funding rate of pension plans is indicative of a state’s long-term ability to manage general finances responsibly. For municipal issuers, credit rating is arguably the most important element when determining financing costs. Since the Great Recession, rating agencies have used pension funding as a dominant factor in their rating methodology.
Borrowing costs are typically higher for issuers with a history of financial stress related to debt repayment and revenue streams. Of course, state and local governments have varying pension funding levels and liabilities, some healthier than others. A portion of payroll taxes primarily funds the liabilities. The higher the liabilities, the more likely they will affect credit evaluations. Furthermore, pensions affect state and local government budgets because many states redirect general fund revenue receipts to the programs.
Since March of 2020, The Federal Reserve has kept the Fed Funds target rate at the 0-0.25% range to stimulate the economy, and elected to maintain that level at the most recent Federal Open Market Committee meeting. With the country beginning to reopen and return to normal, the idea of rising interest rates has resurfaced.
with longer average maturities and lower average coupons have a longer duration, and therefore generally experience a higher degree of price fluctuation, while bond funds with shorter average maturities and higher average coupons have a shorter duration and generally experience a lesser degree of price fluctuation.
state tax exemption. This accounted for almost one third of all municipal bonds issued and ultimately accounted for the entire increase in total issuance in 2020. The prominent rise of this mechanism in the municipal market occurred as a consequence of the component of the 2017 Tax Cuts and Jobs Act which eliminated tax-exempt advance refunding of tax-exempt issues.
