Updates and Perspectives: The Arizona Economic and Pandemic Recovery


Arizona recently reported an unemployment rate of 6.7% in September, adding 30,200 more jobs. While it was an increase from the 5.9% rate reported in August, the uptick was fueled by an increase of 150,000 in job seekers entering the labor pool. This jump was attributed to the quickly recovering state economy that offered motivation and hope for those who had lost jobs when the state economy was “furloughed” in April.

The reopening of the economy following the end of Governor Ducey’s shelter at home mandate has helped drive the unemployment rate down almost 40% from a 10.7% rate in July. Arizona now boasts an unemployment rate well below the overall US rate reported in September of 7.9%. Impressively, only two states larger than Arizona (Virginia and Georgia) reported a lower unemployment rate (6.2% and 6.4%, respectively) in September.

Payrolls Protected are the Key

Arizona’s economic recovery from the Coronavirus pandemic accelerated dramatically in the past quarter.

Most encouraging has been the resilience of overall employment levels in the state. The employment base is the lifeblood of the State economy and can be a significant proxy for the health of the state and local government finances. Maintaining employment levels translates to jobs kept, household incomes maintained, income and sales taxes paid, and tax bases sustained.

From August 2019 – August 2020 employment in the state declined only -3.2%, ranking 4th lowest in the nation and the best among any state of its size or smaller. This deterioration in the employment base was less than half the U.S. average of -7.0% for this period.

This is especially impressive when considered within the context of the largest states. Arizona is currently the 14th most populous state. Among the thirteen larger states by population, only three (also “sunbelt states”) retained a higher share of jobs than the national average:


Fiscal Stimulus: Everyone Benefits When Small Business Wins

Arizona is seeing the massive injection of fiscal stimulus weave its way into the economy. The Payroll Protection Program (PPP) Loans have been one of the main contributors to economic stability to towns and local governments in Arizona. According to SBA figures, over $8.6 billion of PPP loans have been made to 81,000 recipients in Arizona, potentially saving over 750,000 jobs statewide. This encompasses a broad swath of industries, businesses, and organizations throughout the State.

Almost 70,000 such loans were for less than $150,000. This was a critical component of Arizona’s employment resilience as small businesses are an especially prominent engine of the Arizona economy. The massive fiscal response of the Federal government to the Coronavirus Pandemic, and its implementation at the state and local level, helped employment at small businesses rebound dramatically.

When widespread lockdowns of state economies took place last April, employment at small businesses with 49 or fewer employees experienced a decline that was three times that of larger companies with over 500 employees. But by the end of September, after the sizeable fiscal relief was targeted to small business, employment of those small employers had shown the largest recovery:

The Labor Force is a Force

Employment has held up despite an acceleration in the growth of the State’s labor force, as Arizona’s population growth of 1.7% outpaced the U.S. growth rate of 0.5%.

An increasing share of population growth combined with an increasingly diversifying economy also contributed to Arizona’s ranking as a jobs creator. The five year annualized employment growth rate for the State of 1.2% through June 2020 ranked 4th highest in the country. This period includes the impacts in the second quarter of the Covid-19 economic shutdown.

Healthcare System and Economic Stresses: Arizona Finds a Balance

The past three months following the July spike in Covid-19 cases set the tone for the difficult balancing act of broadening the reopening of the economy by the Governor with the post-reopening surge in Covid-19 cases in Arizona.

From the end of March, the number of cases swelled from around 2,000 cases to 101,441 as of July 6th, and have since increased to 246,000 as of October 30th.

Arizona has been able to create some maneuverability in preventing the states healthcare infrastructure from being swamped. Medical facilities and resource utilization numbers had been climbing steadily and appeared to be reaching capacity in July. A closer look also reveals that Arizona has achieved a vital degree of flexibility through managing and optimizing its resources statewide.


While resource utilization seemed to approach capacity in July with the onset of 100,000 new cases in three months, the state was able to acquire and expand the additional resources and facilities needed to prevent the system from becoming overwhelmed. This was in stark contrast to other regions of the country where healthcare resources and providers were pushed to the limit. Since the peak in cases this summer, the state now has an increased supply of ventilators and ICU and emergency department bed capacity heading into the winter and flu season.

A closer look at ICU and inpatient bed usage shows a substantial decline in the amount of those beds filled by Covid-19 patients:


Arizona Muni Issuers Capitalize on Low Rates

Issuance of new municipal bonds in Arizona maintained a brisk pace in the third quarter ending September 30, 2020. The volume of new municipal bonds sold in Arizona surged 86% from the prior year period to $1.5 billion. This brought total year to date issuance to $4.559 billion, only 4% behind the $4.768 billion sold in the first nine months of 2019.

The surge was driven by the some of the State’s largest and most recognized issuers who took advantage of an interest rate environment where yields on the highest quality bonds reached generational lows at the end of July and remain suppressed.

Arizona Constituents Benefit

These attractive borrowing costs will benefit the constituents, customers, and taxpayers of these issuers. Locking in such low borrowing costs with only minimal credit spreads helps issuers lower the overall capital costs of their projects, minimize their overall capital structure costs, and free up revenues for future project investments.

Highlighted issues included:

$398 million issue in August from Phoenix Civic Improvement Authority (Aa2 Moody’s, AAA S&P), one of the highest quality issuers in the state. It took advantage of generational lows in market yield to lock in a 10-year maturity borrowing cost of 0.83% on its excise tax revenue bonds, a borrowing spread of only 24 basis points above comparable maturity AAA general obligation bonds.

$602 million issue sold by the Salt River Power (SRP) Authority (Aa1 Moody’s, AA+ S&P) at end of September. SRP is one of the most recognized and respected issuers in the entire municipal bond market. Its highly regarded credit quality contributed to the 7-year maturity yield it obtained of 0.65%, a very narrow 14 basis point borrowing spread above comparable maturity AAA general obligation bonds.

$249 million issue in August from Phoenix Children’s Hospital (PCH) (A1 Moody’s, A S&P). This issue attracted a whopping $5 billion in orders. The impressive 20 times amount of oversubscription for the issue enabled PCH to obtain a borrowing cost on a 10-year maturity of only 1.15%, resulting in borrowing spread of 60 basis points above comparable 10 Year maturity AAA general obligation bonds. This reflects the Hospital’s decade long recovery from the credit crisis and strong operating adjustment to the Coronavirus pandemic.

The reception Phoenix Children’s Hospital received from investors for its bonds reflects the important view that financial market participants have of the success Arizona is achieving in navigating the Coronavirus Pandemic. Municipal bond investors as a group are among the most discerning and risk-averse evaluators of fiscal stability. Their reading of the economic tea leaves can offer valuable insight into the effectiveness of Arizona’s ability to respond to the Coronavirus Pandemic in protecting the health of the population while simultaneously maintaining the economic security of the population.

Independent rating services (such as Standard & Poor’s, Moody’s and Fitch) assign ratings, which generally range from AAA (highest) to D (lowest), to indicate the credit worthiness of the underlying bonds in the portfolio. Where the independent rating services differ in the rating they assign to an issue, or do not provide a rating for an issue, the highest available rating is used in calculating allocations by rating. Pre-refunded/Escrowed bonds are issued for the purpose of retiring or redeeming an outstanding bond issue at a specified call date. Until the call date, the proceeds from the bond issuance are typically placed in a trust and invested in US Treasury bonds or state and local government securities. Non-rated bonds are holdings that have not been rated by a nationally recognized statistical rating organization.


Estimated Capital Gain Distributions as of September 30, 2020


The funds listed below may pay a capital gain distribution in December, 2020. The amount reflected represents a preliminary estimate as of the date indicated, and is based on information available as of September 30, 2020. Estimates are subject to change based on a number of factors, including changes in the number of shares outstanding, certain tax adjustments, market conditions, board approvals, and other circumstances. These factors may also result in year-end distributions being made by funds which show no estimate as of the date of this report. The amount and character of distributions will be finalized on the record dates.

Aquila Distributors LLC does not provide accounting, tax or legal advice. Shareholders should seek tax advice based upon their particular situation.

Aquila Three Peaks Opportunity Growth Fund: In the event that capital gains distributions are declared, the Fund is anticipated to have a record date of December 2, 2020, an ex-date of December 3, 2020, a payable date of December 3, 2020, and a reinvestment date of December 3, 2020.

Hawaiian Tax-Free Trust and all other Funds: In the event that capital gains distributions are declared, the funds are anticipated to have a record date of December 29, 2020, an ex-date of December 30, 2020, a payable date of December 30, 2020, and a reinvestment date of December 30, 2020.

Although the following funds could pay capital gains distributions in December, 2020, as of the date of this report, a capital gain distribution is not anticipated.

Aquila Tax-Free Trust of Arizona
Aquila Tax-Free Fund of Colorado
Aquila Churchill Tax-Free Fund of Kentucky
Aquila Narragansett Tax-Free Income Fund (RI)
Aquila Tax-Free Trust of Oregon
Aquila Tax-Free Fund For Utah
Aquila Three Peaks High Income Fund

Printable Version

1 Represents undistributed realized gains from fiscal year 2020 which must be distributed in 2020 and cannot be reduced.

Shares of the Funds may only be sold by offering the Funds’ Prospectus. Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available from your financial advisor, and when you call 800-437-1020 or visit www.aquilafunds.com.


Credit Research & The Risk of Unplanned Events


With wildfires consuming significant portions of western states, hurricanes impacting the Gulf and East Coast, and droughts and floods in-between, it is evident that climate risk and natural disasters have become an important consideration for investors.

These events are occurring with increasing frequency, and on larger scales. As a result, urban areas where large and typically higher rated municipal bond issuers are located have seen an increased risk of damage, which is only expected to grow.

As a municipal bond fund manager, knowing we can’t change the unpredictable nature of these events, we focus our credit research on finding municipal bond issuers that we believe are better prepared to withstand the financial challenges these events may pose.

Hurricanes, fires, floods, and other disasters present municipal bond issuers with a variety of risks including population declines threatening property tax revenues, revenue loss and increased operation and maintenance costs to maintain infrastructure.

Management of Aquila’s seven single-state municipal bond funds begins with the assessment of risk.

Although disclosure of natural disaster and climate related risks by municipalities remains minimal, we are able to focus our credit research efforts on examining the ability of local governments to respond to unforeseen incidents through a variety of criteria including: fund balance levels and policies, liquidity metrics, debt metrics and debt management policies, pension funding and other post-employment benefits exposure, and reviewing revenue concentrations.

Our credit reviews are performed with awareness of climate challenges faced by issuers, and prior occurrence of natural disasters, and we monitor holdings regularly for developments. Our local surveillance is one of the critical components of our process and includes a review of individual credit reports by our credit committees, which typically meet on a quarterly basis, and have been convening more frequently since the onset of COVID-19.

Although there are many differences between the global pandemic and the wildfires burning across the western states, both events were unforeseen and both have the potential to have an acute impact on local government finances. In this era of pandemics, pension crisis and various climate related threats, we believe credit research is more important than ever.


Before investing in the Fund, carefully read about and consider the investment objectives, risks, charges, expenses and other information found in the Fund perspective. The prospectus is available on this site, from your financial advisor or when you call (800) 437-1020.

Mutual fund investing involves risk. Loss of principle is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived the chronic decline in credit quality of the issuer, borrower, counterparty or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. Fund performance could be more volatile than that of funds with greater geographic diversification.


Pandemic Pressure on the Higher Education Sector in Colorado


The COVID-19 pandemic has caused the learning environment in Colorado’s higher education institutions to change dramatically. Students were forced to end the spring 2020 semester learning virtually, and Colorado universities plan on opening the fall 2020 semester learning on campus along with a hybrid approach of on campus and virtual learning.

According to Standard & Poor’s (S&P), “the COVID-19 pandemic and related economic and financial impacts exacerbate pressures already facing colleges and universities.” S&P’s ratings outlook has been negative for three straight years in the U.S. not-for-profit higher education sector. Moody’s lowered its rating outlook to negative for the higher education sector on March 18, 2020 due to “unprecedented enrollment uncertainty.”

To balance Colorado’s $3 billion revenue shortfall for its fiscal year 2020-21 budget, the state cut its support to the Department of Higher Education’s fiscal year 2020-21 budget by $493 million. However, the governor allocated $450 million from the Coronavirus Aid, Relief and Economic Stimulus Act (CARES) to the state’s public colleges and universities to help minimize the budget cuts.

Enrollment increased at most of Colorado’s universities in fiscal year 2020, but COVID-19 continues to present uncertainty for the fall semester. A resurgence of COVID-19 could reduce future enrollment at Colorado universities and impact revenues, as expenses increase due to a shift to an online learning environment. Currently, none of Colorado’s public universities have plans to raise tuition for fiscal year 2021.

Every institution of public higher education in Colorado was affected by the reduction in state funding. Public higher education institutions have instituted furloughs, hiring freezes, layoffs and other cost cutting strategies The one-time CARES support will soften the blow for fiscal year 2021, but fiscal year 2022 could be challenging if enrollments decline and state aid is further reduced. Currently, there are no plans for additional federal support to higher education institutions. The chart below demonstrates the current Fund holdings of higher education bonds and the amount of state aid reduction and CARES support received.

Higher education institutions represented 16% of Aquila Tax-Free Fund of Colorado’s portfolio as of June 30, 2020. Of this amount, almost 75% of the higher education bonds are insured, pre-refunded or part of the state’s intercept program, which makes debt service payments if the public higher education institution is unable. We will continue to monitor the Fund’s higher education portfolio holdings and their ability to withstand any potential uncertainty with a resurgence of COVID-19 and any future state aid reductions.

Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. All prospectuses are available on this site, from your financial advisor, and when you call 800-437-1020.

Information regarding holdings is subject to change and is not necessarily representative of the entire portfolio.

Mutual fund investing involves risk; loss of principal is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. Fund performance could be more volatile than that of funds with greater geographic diversification.


Tony Tanner, CFA® on Money Life with Chuck Jaffe


Tony Tanner

Tony Tanner

Tony Tanner, CFA®, Municipal Bond Fund Portfolio Manager with Aquila Group of Funds, was recently interviewed on Money Life with Chuck Jaffe.

During their conversation, Tony discussed how the troubled economy and lower interest rates will impact the bond market and may lead investors to diversify their fixed-income holdings. He notes that while he doesn’t anticipate a big wave of municipal defaults, credit-quality will be challenged.

Chuck Jaffe is a veteran financial journalist and nationally syndicated financial columnist whose work appears in newspapers from coast to coast. He started the Money Life podcast in 2012, and previously hosted Your Money and various podcasts for MarketWatch, where he was a senior columnist.

We hope you enjoy the interview.

Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. All prospectuses are available on this site, from your financial advisor, and when you call 800-437-1020.


Oregon Local Bond Measure Election Analysis


In the May 2020 election, Oregon residents approved almost $340 million of general obligation bonds, substantially more than the $180 million approved in May 2019, Although results have yet to be certified, and therefore still preliminary, the bonds approved by this election are in high demand as investors seek high quality tax-exempt investment alternatives.

There are four scheduled election dates in Oregon each year: the second Tuesday in March, the third Tuesday in May, the third Tuesday in September, and the Tuesday after the first Monday in November. In November 2008, Oregon voters approved Ballot Measure 56, which repealed a law requiring more than 50% of a county’s registered voters to vote in bond measure elections held in May and November. As a result, the May election has become an important election to follow for new bond measures.

By election measure 64% of the bond issues were approved; however, 75% of the total requested par amount was approved by voters. Oregon typically sees more ballot measures during general elections, which are held in November, of even-numbered years. Accordingly, the current election falls flat versus the 2019 November general election, which approved a healthy $820 million of new supply.

Read more “Oregon Local Bond Measure Election Analysis”


We recognize recently retired Trustee, B. J. Kobayashi


B. J. Kobayashi retired from the board of Hawaiian Tax-Free Trust on March 31, 2020. He served as a member of the Aquila Group of Funds Compliance, Risk and Insurance Oversight Committee through December 31, 2019 and formerly served as Trustee of Pacific Capital Funds of Cash Assets Trust (three money-market funds in the Aquila Group of Funds) from 2009-2012. His fellow Trustees, the Aquila Group of Funds and the staff of Aquila Investment Management LLC have benefited greatly from his personal integrity, considerable experience and valuable business insight, and we recognize and appreciate Mr. Kobayashi’s judgment, perseverance and skill throughout his service as an independent Trustee.

On behalf of Aquila Group of Funds, we express our sincere appreciation and gratitude for Mr. Kobayashi’s contributions and for his dedication to the interests of the Trust’s shareholders.


Chris Johns Covers the Current Municipal Bond Market in Asset TV Masterclass


Chris Johns, portfolio manager of Aquila Tax-Free Fund of Colorado and Aquila Tax-Free Trust of Oregon, was a panelist in the May 2020 Asset TV Municipal Bond Masterclass. The discussion covered how the coronavirus pandemic, historic volatility and the Fed’s response is creating a unique market environment for municipal bonds. The panelists examined the impact on local and state issuers, different municipal sectors and credit strength.


Chris Johns is Senior Vice President, Managing Director and Portfolio Manager with Davidson Fixed Income Management, sub-adviser to Aquila Tax-Free Fund of Colorado and Aquila Tax-Free Trust of Oregon. Joining Mr. Johns on the panel were JR Reiger, Owner of the Reiger Report, and Grant Dewey, Head of Municipal Capital Markets at Build America Mutual.

The full program linked above provides CE Credit. We hope you find the program informative.

Shares of the Funds may only be sold by offering the Funds’ Prospectus. Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available on this site, from your financial adviser, and when you call 800-437-1020.


Aquila Tax-Free Trust of Oregon Special Shareholder Meeting to be held Virtually


In light of public health concerns regarding the ongoing COVID-19 pandemic, Aquila Tax-Free Trust of Oregon announced on April 24, 2020 that the Fund’s Special Meeting of Shareholders, to be held on May 29, 2020, will be held as a virtual meeting. Shareholders will not be able to attend the meeting in person. This change has been made out of an abundance of caution and is intended to support the health and well-being of shareholders. The March 2, 2020 record date for determining shareholders entitled to vote at the meeting remains unchanged. For more information, please review the Press Release and Proxy, which is available on this website.


S&P Considers Kentucky Adequately Positioned for COVID-19 Pressures


Standard and Poor’s Global Ratings recently announced they consider the state of Kentucky “adequately positioned” to handle economic pressures brought on by the COVID-19 pandemic.

In an effort to effectively address the state’s rapidly changing needs, the Kentucky Legislature, which normally releases a biennial budget, passed House Bill 352 on April 15th, adopting an $11.4 billion one-year executive branch budget. The fiscal 2021 budget reduced the revenue forecast by $130 million, but S&P cited that they firmly believe Kentucky has sufficient near term liquidity to manage pressures brought on by economic hardships related to the pandemic. The bill also fully funds the teachers and state employees’ pension plans. Fiscal year 2021 will mark the second year in a row that Kentucky has made full contributions to those plans.

If excessive pressure does weigh on the state’s finances due to the current crisis, Kentucky also has the ability to issue Tax and Revenue Anticipation Notes (TRANs) amounting to 75% of estimated revenues anticipated throughout the year.

The recently passed Coronavirus Aid, Relief and Economic Security Act (CARES) created a Coronavirus Relief Fund for state and local governments which is expected to allocate $1.732 billion to Kentucky. Of that amount, $1.6 billion will go to the state, and $134 million will go to the city of Louisville and Jefferson County, the only local government under the law to quality for relief based on the number of residents. Kentucky will also receive approximately $410 million through CARES’ Education Stabilization Fund, which will fund K – 12 education and colleges and universities.

At Aquila Group of Funds, we have been monitoring Kentucky’s economic and credit strength since 1987. We have been pleasantly surprised recently by the resilience of sectors feeling the most stress. For example, the Louisville Jefferson County Airports have over $105 million of unencumbered investments in government agencies, and their annual budget is $75 million. We expect they will be able to withstand a fairly long reduction in revenue. We are also watching private colleges, and believe that they can handle the financial pressure due to their healthy endowments. We believe, through our ongoing analysis, that the state is well positioned to weather this storm with the recently passed budget and emergency government funding.

Before investing in one of the Aquila Group of Funds, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available on this site, from your financial advisor, or by calling 800-437-1020.