A Muni Minute: Tit-for-Tat | Nasdaq

By Brett Adelglass, Sage Portfolio Management

Municipal investors often sift through a variety of issues, including underfunded pensions, a lack of market liquidity and inconsistent financial information. However, there is a new area of ​​concern that is causing indigestion among market participants: political and corporate agendas.

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On April 22, Florida Governor Ron DeSantis signed a bill dissolving a handful of special tax districts created before 1968, including the Reedy Creek Improvement District (Reedy Creek). This decision was significant since Reedy Creek allows The Walt Disney Company to exercise considerable self-government over the area in and around its nearly 25,000-acre theme park. Interestingly enough, the legislation was introduced not to provide any sort of societal or economic benefit, but to penalize Disney for speaking out against a controversial gender bill that was signed into law earlier this year.

While the ability of the district’s special legislation to withstand legal challenges remains unclear, questions remain regarding the treatment of nearly $1 billion in municipal bonds issued by Reedy Creek. State law states that outstanding bonds of a dissolved special district will be transferred to overlapping municipalities, which in this case largely includes Orange County, Florida. However, it’s unclear whether the county chooses to honor the obligations, which could create a bigger problem for the state and, more importantly, for investors.

More troubling is that this is not the first case where politics has collided with the municipal market. In 2018, several major financial institutions began implementing policies that restricted business relationships with certain firearms manufacturers. In response, Texas Governor Greg Abbott, along with the governors of several other states that derive significant economic activity from the gun industry, signed laws prohibiting municipalities from having dealings. contracts with companies that discriminate against the firearms industry. The Texas bill effectively barred Citi Group, the state’s largest municipal underwriter, from doing business with local municipalities. Both actions have raised concerns in capital markets, with the former showing the power large financial institutions can wield to effectively cut off funding from certain market sectors, and the latter effectively reducing competition among municipal underwriters, possibly leading to an increase in borrowing costs for public finance issuers.

Legislation and corporate actions fueled by political agendas that unnecessarily agitate capital markets represent political error, in our view, particularly when the measures effectively restrict consumer choice. Investors can refrain from investing in securities that do not meet their investment criteria, and issuers have the flexibility to work with the financial institution they believe will best help them achieve their goals. However, corporate policies and legislation that make these choices for the end user instead generally do more harm than good as they tend to limit competition, impose higher costs on consumers and usually face retaliatory measures.

While it’s nearly impossible to predict the next target of political attack, investors should be wary of municipalities that overly rely on a specific industry or business, potentially leaving them in the crosshairs of the political battle between American businesses and state legislatures. We do not anticipate any related issues with municipal sectors that rely on state appropriations for a significant portion of their funding, including K-12 schools and public institutions of higher learning. Indeed, education-related funding cuts are usually politically unpalatable and are usually only used when there is a state budget shortfall. Nonetheless, we view these politically charged disruptions as one-time events, and municipal bonds remain a great option for investors seeking tax-free income with very limited credit risk.

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Disclosures: This is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell any security, strategy or investment product. Although statements of fact, information, charts, analysis and data contained in this report have been obtained from and are based on sources that Sage believes to be reliable, we do not warrant their accuracy, and the information, data, Underlying Public Figures and Information The information available has not been verified or audited for accuracy or completeness by Sage. Further, we do not represent that the information, data, analysis and graphics are accurate or complete and, as such, should not be relied upon. All results included in this report constitute the opinions of Sage as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial situation. All investments involve risk and may lose value. Past performance is not indicative of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services to a variety of institutions and high net worth individuals. For more information about Sage and its investment management services, please visit our website at www.sageadvisory.com or view our Form ADV, which is available upon request by calling 512.327.5530.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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