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Smith's Political Event Risk Grading Alert:
U.S. Sanctuary Cities (-1)

     Smith's Political Event Risk Grading Alert was issued the first week of February for U.S. Sanctuary Cities (-1).
     Smith's Research & Gradings (SRG) publishes its SRG Political Event Risk Grading whenever Smith's Sentinel System triggers a predetermined response.
     Smith's Research & Gradings was founded in 1992 to provide principles-based, independent, conflict-free (Paid By Investor/Stakeholder) analysis. One of the principles is to provide credit analytics that are "Universal" so investors can compare risks across all classes of investments.
Smith's Gradings have three components: 1) long-term payment probability gradings 2) recovery gradings, 3) event risk gradings.Upgrades
     Smith’s reported a Political Event Risk Alert for the United States Treasury Debt at Smith's Affordable Housing Conference in March of 2011. “Probability of Sovereign Debt Crisis Now Escalating to Over 40%”, according to Terence M. Smith, CEO, SRG. He noted the "Weak US$ Policy vs. Weak Chinese Yuan".
     Smith’s Political Event Risk Covers (classes):
1) Currency inconvertibility (CI) and exchange transfer (FX);
2) Confiscation, expropriation and nationalization (CEN);
3) Political Violence (PV) or War (including revolution, insurrection, politically motivated civil strife, terrorism);
4) Breach of Contract, Contract Frustration (CF), Contract Repudiation.
5) Wrongful Call of a Guarantee (WCG).

Fitch Disagrees With Moody's on Chicago Public Schools

     Moody's Investor Services issued a report discussing:
     Legal options available to the Chicago Public Schools (CPS) to address its operating deficit, suggesting CPS can divert state aid to support operations to get around a restriction on a certain tax levy; and
     Bondholder protections provided by CPS' dedicated capital improvement tax bonds series 2016 (CIT bonds), minimizing the special revenue status while crediting a 'lock box' device as a real enhancement.
     Fitch Ratings disagrees with Moody's on both points.

State Aid Not Available for Budget Relief Downgrades
     Moody's report "Chicago Public Schools, IL Frequently Asked Questions", released on Jan. 12, states "the district could elect to use unrestricted [general state aid] GSA for operations instead of debt service" on alternate bonds issued under the Illinois Local Government Debt Reform Act (the Act). Unless by 'elect' Moody's is referring to a successful ballot referendum, a plain reading of the Act indicates this is not the case. Section 15(e) of the Act clearly indicates that CPS must apply available alternate revenues {state aid} to debt service. As there is no option in the law to apply alternate revenues to operations, Fitch believes any attempt to do it would draw a successful challenge in litigation opposing an attempt to levy taxes while alternate revenues were available for debt service.
     Amy Lasky, Managing Director at Fitch Ratings said, "The law (Section 15(e)) is pretty clear in our opinion." Itstates: "[t]he ...revenue source ..shall be in fact pledged to the payment of the alternate bonds; and the governing body shall covenant, to the extent it is empowered to do so, to provide for, collect AND APPLY [emphasis added] such ...revenue source ...to the payment of the alternate bonds."


S&P Global State and Local Government Outlook

     The S&P Global Ratings Public Finance Group recently held a live Webcast and Q&A to discuss their 2017 US State and Local Government Credit Outlook.
     Key areas of discussion included S&P's view of how slow economic growth and low interest rates over a protracted period of time have resulted in elevated credit stress across the state sector, and the direct impact of these factors on the local level.
In addition to addressing those challenges, as well as other uncertainties facing local governments in 2017, the program highlighted what S&P believes are the main areas of risk and opportunity facing both sectors in the year ahead.

State Outlook
     Credit pressure across the U.S. state sector is likely to remain elevated throughout 2017 as slow tax revenue growth compounded by growing pension contribution requirements and Medicaid expenditures is contributing to fiscal strain for many states. A more pronounced slowdown in state tax revenue growth that began in mid-2015 persisted through 2016 and, following bouts of stock market volatility, is seen in the performance of many states' fiscal 2017 revenues. In the coming year, revenue growth is likely to remain slow and below the rates at which key expenditures are growing. Some of these pressures, years in the making, are already evident in state financial and credit profiles.

Local Governments Have Inherent Strengths
     Municipal issuers' autonomy and revenue raising capabilities, institutional framework, and governance protections are some of the credit aspects that will help local governments address the risks they will face in 2017, and to take advantage of the opportunities that may arise, according to S&P Global.
     Budget pressures from a continued slow growth economy will present challenges for local governments as state budgets are likely to be squeezed even tighter in 2017.

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Fitch Ratings: Stable Outlook for U.S. Public Finance

     Fitch's Rating Outlook for Public Finance is Stable for All Sectors, according to Fitch Ratings Outlooks in 2017. In addition, Fitch anticipates that most rating actions in 2017 will be affirmations. "Steady U.S. economic growth should support revenue growth and stability, although certain fiscal, economic and regulatory pressures remain," according to Laura Porter, Managing Director of Fitch.

Sector Outlooks
     The sector outlook for seven of the eight sectors in Fitch's U.S. public finance group are stable. The sectors with a stable outlook are: U.S. local governments, U.S. states, nonprofit continuing care retirement communities, U.S. public power and electric cooperatives, water and sewer, U.S. colleges and universities, and U.S. transportation infrastructure.


Wells Fargo Housing Bond Outlook

     Mortgage rates have continued to rise of late, prompting concerns about the viability of homeownership growth, according to Roy Eappen, Senior Analyst at Wells Fargo.
     He noted the application survey from the Mortgage Bankers Association for the week of Dec. 16, indicated an average contract interest rate for the 30-year fixed-rate mortgage at 4.41%, a high not seen since May 2014.
     Similarly, rates for the 30-year fixed-rate Federal Housing Administration (FHA) mortgage reached a high of 4.15%, not seen since April 2014.
     Mr. Eappen said, "FHA mortgages are typically geared to low and moderate-income homebuyers. While higher rates have focused the affordability conversation, concerns about the lack of housing supply, and the home price appreciation that has followed, have been immediate concerns."



Moody's Pays $864 Mln. To Justice Dept. For Inflated Sub-Prime Ratings   
    The sharp pivot in municipal mutual fund flows right after the presidential election makes sense when you consider the different tax policies each candidate promoted, according to Natalie Cohen, the first-team All-Star Director of Research at Wells Fargo.
     For more than a year, pollsters and media favored candidate Clinton who openly proposed higher taxes on high earners. President-elect Trump proposed significantly lower tax rates for high earners and corporations. She noted that the Ryan/Brady proposal suggests a top rate for investment earnings and gains of all kinds of 16.5%, 50% of the top 33% income tax rate. Ms. Cohen said, "As soon as Mr. Trump was elected, investors had less reason to maintain positions in tax free municipal bonds. In addition, equity markets soared on expectations that tax and spending policies would favor economic growth, presenting an attractive alternative." Exhibit 1 illustrates this pivot. Corporate bond and Treasury funds also suffered outflows but this is more likely due to anticipation of the federal reserve rate hike than tax policy. The rate hike preys on the minds of municipal bond investors too, but the prospect of lower tax rates is what accounts for the relatively poorer performance of municipals.

















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