All Sectors But One Are Back To Stable

As 2021 winds down, all of our sector views in U.S. public finance (USPF) are stable except for higher education. A year ago when they were all negative. It's clear that the pandemic will remain pivotal to credit prospects in 2022 but to date it has not translated to major erosion in credit quality. The general direction of the economy will be important as inflation, supply chain disruptions, and labor shortages continue to weigh on economic growth. We are also following federal fiscal and policy developments as the debt ceiling and a long-term budget plan remain unresolved and the outcome and timing of both matter from a credit standpoint.

Finally, as we close out 2021 and look to the year ahead, we can say that the pandemic will have long lasting influence on public finance credit quality. How and when people return to the office, how students return to college campuses, how patients return to health care settings, how and where people travel--consumer behavior generally--will have revenue and expenditure implications across the municipal bond market from both short- and long-term perspectives. Federal stimulus will help with some of these challenges and may also present some opportunities to accelerate transformational plans and projects.

(We invite you to hear more about our forward-looking sector views at our 2022 Outlook Webinar Series; registration here.)

Economic Outlook: Cruising At A Lower Altitude

S&P Global's chief U.S. economist updated the forecast on Nov. 29 ("Economic Outlook U.S. Q1 2022: Cruising At A Lower Altitude"). Key takeaways include:

• GDP growth: As supply-chain disruptions continue, we've lowered our U.S. GDP growth forecast to 5.5% for 2021 and 3.9% for 2022 (from 5.7% and 4.1%, respectively). Despite the slowdown, GDP is still likely to rise to a 37-year high in 2021, with solid readings for 2022, on continued economic demand from healthy balance sheets.
• Supply chain: Supply-chain disruptions are the largest stumbling block for the U.S. economy. Although there are signs that supply-chain issues are easing, we expect price pressures to last well into 2022 and inflation to not reach the Fed's target until late 2023.
• Labor force: Unemployed workers are getting jobs at a fast pace. However, the decline in labor force participation, particularly prime-age workers, is an issue for productivity and growth.
• Unemployment: The unemployment rate, at 4.6%, is closer to pre-pandemic levels. When adjusted for the labor force exit, it is 6.4%. We expect the adjusted unemployment rate to reach its precrisis lows in first-quarter 2023.
• The Fed: The Fed began tapering asset purchases late this year at $15 billion a month. We expect the Fed to reduce monthly purchases by a greater amount next year to reach zero three months earlier in 2022 than at the current "$15 billion" pace, with the first rate hike a little later that year. Inflation should reach the Fed's 2% target by late 2023.
• Financial conditions: Financial conditions for households and nonfinancial corporations improved in the second quarter to a 10.5-year low, according to our Financial Fragility Index.
• Downside scenario: Risks that could lead to a slower growth downside scenario include the Fed being forced to tighten faster than it currently expects, disorderly reflation, repricing risk, distribution of COVID-19 vaccines, new COVID-19 variants, and increasing trade tensions with China.
• Upside scenario: A potential upside scenario would include a clearer path to additional stimulus and increased infrastructure spending.
• Recession: We assess recession risk at 10%-15%.

(See Appendix for the full economic forecast update.)

Federal Policy Issues We Are Watching

The federal fiscal and policy response to the pandemic insulated credit quality across U.S. public finance. The roughly $1 trillion ($550 billion in new funding) Infrastructure Investment and Jobs Act, signed into law last month, was another positive development and represents an important shift in funding U.S. infrastructure. It will relieve some pressure on state and local governments, which have shouldered an increasing share of funding over decades. The program will also provide economic benefits in terms of employment, income, and productivity. Despite these generally positive trends, the federal debt ceiling and temporary spending measures contribute to uncertainty.

Our current rating on the U.S. indicates our expectation that Congress will address the debt ceiling on time (likely raising it) and recent deliberations support this. During the last decade, Congress has passed legislation (and the president has signed it) to raise or suspend the debt ceiling on six occasions during periods of political impasse (in 2011, 2013, 2017, 2018, 2019, and October 2021).

Inaction on the U.S. debt ceiling and a default would have a broad range of economic, budget, liquidity and capital market implications across U.S. public finance that could lead to widespread credit deterioration.

There are many debt issues in U.S. public finance that are directly linked to the sovereign rating by our criteria such as municipal housing issues backed by the federal government or reliant on investment in U.S. government securities, government-related entities in the housing and public power sectors, federal leases, and defeased bonds that rely on investment in U.S. Treasury or agency securities for debt repayment.

For the remainder of public finance issuers, we do not directly link our ratings to the U.S. sovereign debt rating. However, the ability to be rated above the sovereign and the framework for determining the notching are outlined in our methodology "Ratings Above the Sovereign--Corporate and Government Ratings."

ESG: The Risks May Be More Material Next Year

Given the outsized role that ESG considerations have played in credit developments over the last two years, we published our first ESG focused outlook ("ESG In U.S. Public Finance Credit Ratings: 2022 Outlook And 2021 Recap") which highlights key risks we are focused on and provides an overview of all ESG related publishing for 2021. We believe certain risks may be more influential and material to creditworthiness for USPF issuers in 2022 and could lead to credit pressure.

Rating Performance

The rating distribution for U.S. public finance remains strong and the outlook distribution has improved throughout 2021 (see charts). Negative outlooks represent about 4% of total ratings compared to about 8% last year at this time and 2% of our outlooks are now positive and that was near zero last year at this time. The second quarter this year marked a shift in rating activity with upgrades slightly exceeding downgrades and this trend has continued which underscores the return to credit stability. We have started to publish a monthly list of rating activity that includes information on rating and outlook changes across all sectors including rating and outlook distributions by sector. (See "U.S. Public Finance Rating Activity, October 2021.")

Chart 1A

Chart 1B

A Look Across Sectors

General Public Finance

• ESG In U.S. Public Finance Credit Ratings: 2022 Outlook And 2021 Recap, Nov. 29
• Construction Ahead: Roughly $1 Trillion Infrastructure Act Tackles Backlog And Future Risks, Nov. 10
• Cryptocurrency: U.S. Public Finance Issuers Cautiously Consider Its Applications, Sept. 15

States

• U.S. States Weigh Risk Reduction In Managing Pension And OPEB Liabilities, Sept. 20
• U.S. States' And Transit Debt Hit Emergency Brake During Pandemic As Infrastructure Needs Accelerated, June 9
• U.S. Oil And Gas-Dependent States Are Out Of The Woods (For Now), April 15

Local Governments

• U.S. Big Box Retailers’ 'Dark Store' Practices Continue To Pressure Some Local Governments’ Finances, June 8
• The Top 10 Management Characteristics Of Highly Rated State And Local Borrowers: Through The ESG Lens, June 29
• Ten U.S. Cities Successfully Weathering The Pandemic Thanks To Strong Management, Federal Support, Aug. 19
• Pension Pressure Lingers For Largest U.S. Cities Despite Federal Stimulus, Nov. 29

Charter Schools

• U.S. Charter Schools Fiscal 2020 Medians: Despite Pandemic, Financial Metrics Continue Positive Trend, July 12
• Charter Schools Mid-Year Sector View: State Stability Supports School Stability, July 15

Not-For-Profit Health Care

• U.S. Not-For-Profit Acute Health Care 2020 Medians, Buoyed By Government Funding And Strong Investment Returns, Remain Largely Stable, Aug. 30
• U.S. Not-For Profit Senior Living Sector's Resilient And Decisive Management Gave Ratings Stability In 2020, Nov. 29
• The Health Care Credit Beat: $1.9 Trillion Stimulus Package Provides Temporary Boost To The Sector, March 17

Higher Education/Non-Traditional Not for Profits

• U.S. Not-For-Profit Public College And University Fiscal 2020 Median Ratios: The Pandemic Presents New Challenges In An Increasingly Competitive Landscape, June 23
• U.S. Not-For-Profit Private College And University Fiscal 2020 Median Ratios: Metrics Start To Demonstrate Effects Of The Pandemic, June 23
• A Tumultuous Year Presents A Major Test For U.S. Privatized Student Housing, March 8
• A New Dawn For Shuttered U.S. Nonprofits In 2021, May 13

Housing

• Missions Possible: How U.S. CDFIs Meet Financial And Social Missions, And The Rating Implications That Follow, June 10
• Despite Weaker Loan Performance, HFA Single-Family Program Ratings Remain Strong, Sept. 23
• U.S. Housing Finance Agency Ratings Hold Strong Despite Pandemic Pressure, Sept. 23
• Keeping The Wolf From The Door: U.S. HFA Multifamily Programs Perform Well During The Pandemic, Sept. 23

Public Power

• For U.S. Public Power And Electric Cooperatives, There Are Hurdles On The Path To Decarbonization, Nov. 8
• Texas Winter Storm Brought Downgrades And Spurred Response Among Public Power And Electric Cooperative Utilities, Nov. 1
• Credit FAQ: How Are California's Wildfire Risks Affecting Utility Credit Quality?, June 3

Transportation Infrastructure

• U.S. Transportation Infrastructure Sector Update And Medians: U.S. Airport Sector View Is Now Positive, Nov. 10
• Updated Activity Estimates For U.S. Transportation Infrastructure Show Recovery For Air Travel Demand Accelerating And Public Transit Lagging, July 29
• Too Much Of A Good Thing? U.S. Ports Are Stable In The Face Of Challenges, Oct. 20

Water/Wastewater Utilities

• Cyber Risk In A New Era: U.S. Utilities Are Cyber Targets And Need To Plan Accordingly, Nov. 3
• How The Western States Plan Is Critical To Ratings As Colorado River Flows Slow To A Trickle, Oct. 18

Appendix