Rounding out our three-part Outlook series is the forecast for state and local government credit quality. After 18 months of surging taxes, a booming stock market, and multiple rounds of perhaps too-generous federal stimulus, governments have more cash than they know what to do with. As they scramble to draw up plans for overflowing reserve funds, rating agencies and investors have been busy celebrating their gains with more upgrades than we’ve seen in 13 years. Financing costs have touched all-time lows.
Although Omicron has tried to disrupt the jubilant attitude of investors, the market continues to swat it aside in favor of their optimistic view of municipal governments’ new status. Truthfully, the virus shouldn’t stand a chance against newly fortified financial positions and the wisdom gained in the first wave of the pandemic, but there will be a few exceptions. Among mainstay municipal sectors, the ones most vulnerable to fits and starts in the pandemic saga continue to be 501(c)(3) organizations whose institutional malaise pre-dated the pandemic and won’t be solved by a few hundred billion in federal handouts. Although this will be sure to offer occasional bargains for opportunistic investors, bond buyers that prefer a good night’s sleep will have no problem picking names that should allow them to rest easy this year.