April 5, 2018 / 9:04 PM / a year ago

End of advance refundings seen hurting U.S. muni market -survey

NEW YORK, April 5 (Reuters) - Twenty-nine percent of municipal market analysts expect the elimination of advance refunding bonds to have the greatest impact of all new U.S. tax laws on the $3.8 trillion market in 2018, according to a survey released on Thursday.

The sweeping U.S. tax overhaul signed into law in December, which ended federal tax breaks for new advanced refunding bonds, has been expected to reduce bond supply in the coming year and leave municipalities with fewer options to issue debt.

The survey by PNC Capital Markets found 78 percent of bond credit specialists expect municipal debt issuance in 2018 to fall under $350 billion, down from $446 billion in 2017, the Pittsburgh-based investment bank said in a report.

More than one-third of analysts responded on March 12-28 that they were unhappy with President Donald Trump’s infrastructure proposal, which relies heavily on funding from state and local governments.

Public pensions remain the top issue facing the sector, with federal policy uncertainty coming in second as the Trump administration redesigns tax exemptions, health and immigration reform, and infrastructure spending. Pensions have remained the top issue since the annual survey began in 2015.

State government credit quality overtook declining investor trust in the municipal market as the third most important issue facing the municipal bond market this year as states grapple with balancing budgets amid rising fixed costs.

Only 3 percent of analysts in the survey believe state and local governments are “prepared” or “very prepared” for climate change.

PNC Managing Director Tom Kozlik said he was not surprised that state credit quality started to become a more important issue this year. Across the country, state governments are struggling as spending on Medicaid and pensions consume an increasing percentage of budgets.

Trump campaigned on a promise to boost infrastructure spending by $1 trillion, but a White House proposal released in February offers only $200 billion in federal funding and depends on private investors and state and local governments to make up the difference. (Reporting by Reade Levinson; Edited by Daniel Bases and Richard Chang)

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