• Economic activity in Colorado slowed during the pandemic, significantly impacted by the loss of sales tax revenues.
  • The State has since experienced economic growth, with sales tax revenues forecast to grow in fiscal years 2022 and 2023.
  • Most sales tax revenue bonds are secured by a Reserve Fund, and certain issues are additionally covered by bond insurance.
  • Reserve funds are a relatively common feature of municipal bonds, intended to provide added comfort to investors.
  • Economic activity in Colorado came to a screeching halt in March 2020 as unemployment surged, schools and businesses closed, and air travel slowed, as a stay-at-home order was issued by Governor Polis due to the pandemic. The food services, accommodation, travel and entertainment sectors all suffered, as ski resorts saw bookings drop and cancelations spike while tourism declined. The State’s sales tax revenues were expected to increase 1.4% in fiscal year 2020-21. Since the May 2020 quarterly economic forecasts, projections for economic activity have improved each subsequent quarterly economic forecast due to direct payments and enhanced unemployment benefits provided by the federal government during the pandemic as well as stronger than expected economic activity.

    Nationally, the pandemic caused dramatic reductions in retail spending, as most retail shopping malls, department stores and non-essential businesses were shuttered following stay-at-home orders. Most states and local governments rely on sales tax revenues as one of their major revenue streams. The efforts of state and local governments to implement lockdowns resulted in decreased economic activity for local businesses.

    Economic Growth Appears Strong

    Colorado ended 2019 with a strong 2.5% unemployment rate, its lowest rate on record. Meantime, sales tax revenues surged 4.7%, to $3.2 billion in fiscal year 2019-20. By the end of the first quarter of 2021, sales at restaurants and bars dipped 0.8% below January 2020 levels, and sales at hotels and motels dropped 7.0% below January 2020 levels. However, by June 2021, sales at restaurants and hotels exceeded pre-pandemic levels for the first time. Through October 2021, Colorado recovered 83.3% of jobs lost since the pandemic began. Sales tax revenues increased an impressive 7.0% in fiscal year 2020-21, to $3.4 billion on strong consumer activity. All retail sectors showed healthy growth throughout the state in 2021. Grand Junction and Pueblo are expected to see sales tax growth over 15.0%, and the mountain region and Kit Carson County are seeing a boon in tourism as people return to the outdoors.

    Federal stimulus measures, growing consumer sentiment, and easing pandemic conditions have strengthened the State’s consumer spending activity, along with a rebound in travel and tourism in Colorado’s mountain communities. According to the Colorado Legislative Council, sales tax revenues are forecast to grow 8.7%, to $3.7 billion in fiscal year 2022—and to continue growing 4.5% in fiscal year 2023 to $3.9 billion.

    Reserve Funds Help Provide Additional Support

    On average, approximately 55% of General Fund revenues are supported by sales taxes. In addition, most sales tax revenue bonds issued are secured by a Reserve Fund, and certain issues are additionally covered by bond insurance. Reserve funds are a relatively common feature of municipal bonds, which is intended to provide comfort to investors when faced with unexpected revenue interruptions.

    From a portfolio management standpoint, a significant component of our credit review process is to prepare a detailed credit report on each of the Fund’s holdings. These reports highlight the credit features and deficiencies that inform our investment decisions, particularly during volatile times. Security selection and sector exposure decisions are also determined as a result of our proprietary credit reports, which facilitate a more quantifiable determination of which risks we consider acceptable versus those without protection. We believe this enables the portfolio to avoid the assumption of investment risk without the commensurate reward of additional yield.

    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.

    The Fund seeks to provide as high a level of income exempt from state and federal income tax as is consistent with capital preservation. For certain investors, some dividends may be subject to federal and state taxes, including the Alternative Minimum Tax. Consult a tax professional.

    Information regarding holdings is subject to change and is not necessarily representative of the entire portfolio. It is for informational purposes only and not intended to represent a solicitation to buy or sell any particular security.

    Before investing in the 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, when you click here or call 800-437-1020.