The Municipal Market in 2023, Hilltop’s Municipal Sector Credit Outlooks
There are more questions about the economic backdrop to begin 2023 compared to a year ago. This is despite the near-term positive economic tone we see to begin January.
The Golden Age of Public Finance will continue into 2023, but there are threats, some developing others already entrenched, stressing public finance sectors.
We are lowering our State Government outlook to “Stable” from “Positive.” We are not expecting credit deterioration, we simply believe most upgrades have occurred already.
Our Local Government sector outlook remains “Positive.” We believe public finance rating upgrades will outpace downgrades in 2023 and many of those upgrades will occur in this sector.
Healthy state balance sheets should keep K-12 funding steady even if recessionary conditions develop. We are watching legacy liabilities, operational and workforce factors closely in the School District sector as well.
Passenger enplanements are recovering but, labor and capacity constraints, combined with the potential for a softening economy could moderate the Airport sector’s revival.
Charter Schools have benefitted from increased enrollment and revenues which have muted the impact of expense pressures allowing for generally stable financial operations.
Our initial “Stable” outlook for the Community Facilities District sector is concentrated on activity in California, where property values remain relatively stable and housing demand endures.
The investment grade Health Care sector was experiencing fiscal pressures before the COVID crisis, and those pressures are likely to continue into 2023 and the near-term.
Sub and non-investment grade Health Care entities are more vulnerable to expense pressures given little revenue flexibility and generally less liquidity.
Sluggish operating revenue growth, declining student enrollment, changing consumer preferences, along with heightened inflationary & cost pressures challenge Higher Education.
We lowered our Housing sector outlook to “Stable” from “Positive,” because of a slowdown in activity. Downgrades are not likely in the sector. Margins will remain healthy.
The Public Power sector’s cash position and metrics are under pressure from rising costs.
Senior Living expenses have been pressured by wage and food increases while rental rate increases have been more muted resulting in margin compression and thus our “Negative” outlook.
The Tobacco securitization sector continues to experience consumption declines and event risk.
Toll Facilities activity is rebounding and we expect the recovery to be supported by stable-to-growing commercial vehicle traffic and a steady return of passenger travel.
Water and Sewer sector: Though an essential service, the rate of increase in consumers’ water bills has outstripped that of comparable services, personal real income and inflation for decades.