Municipal revenues remain firm, even as operating income for some entities deteriorates. However, recession and resulting slower growth are potential risks.
Municipal Revenues Hold Up Well, But Watch for Slower Growth
Any question leading with “deteriorating” sets the stage. And we can discuss at length the effect of declining sales or property or income taxes on municipalities. But just not yet. The revenue side for municipalities has been holding up through 2023. For example, local sales tax collections in NY increased by 4% in August. The latest reporting from California shows that median single-family home prices are up slightly compared to 2022, but still, the trajectory is up. Employment is also up. Since states are responsible for paying unemployment benefits, rising employment is good for many reasons. Last month, Texas set a new record for the number of jobs, people employed, and the size of its civilian labor force.
So what has been deteriorating? Well, the net operating income for many tax-exempt entities has been deteriorating for some time. I am talking about rising labor costs for hospitals and senior living facilities and increasing costs of supplies and materials for transit authorities and land improvement districts. For now, the expense side is where we notice deterioration and consider the overall impact for borrowers.
So, for now, the inflation and growth hold up the revenue side, but with mounting projections of a slowdown, we might revisit the question of the deteriorating tax base. Then, we’ll talk about just how vast the universe of muni issuers is – and that the impact of declining tax revenues would differ significantly through this universe. And if I might add one last thought, that is where an active manager like Thornburg can and does play a significant role.
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