Looking More In-Depth at Key Trends

Market strengths

Liquidity. Strong liquidity continues to anchor public finance credit quality (See Figure 1). Most cities, counties, and school districts reported strong reserves in audited fiscal year 2022 (FY22) financial statements.¹ States added to record balances per their unaudited FY23 figures (not shown below).² In the revenue sectors, toll road and airport issuers also remain very liquid, given prudent budgeting and normalizing traffic patterns.³ In most major U.S. airports, enplanements are now nearly at or above pre-pandemic levels. 

A less stressed hospital sector. The nonprofit hospital sector remains pressured and is alone among major sectors in terms of reporting a meaningful decline in liquidity.⁴ Nonetheless, operating performance may stabilize a bit in 2024.⁵ Moody’s Investors Service (Moody’s) removed its negative outlook on the hospital sector in November 2023.⁶ Sector wide, margins turned positive in Spring 2023 (See Figure 2).⁷ Higher insurer reimbursements are expected to offset labor pressures next year.⁸

Low debt. Municipal debt continues to decline as a percentage of the economy. In 2023, many issuers used large reserve balances to prepay debt, reduce planned bond issuance to fund capital projects, or to redeem debt in the open market via tender offers.⁹ Inflation helped lessen the real burden of debt, as well. Figure 3 illustrates the geographic breadth of the trend: the municipal debt-to-personal income ratio fell in all but two states (Alabama and New Hampshire) from January 2020 to November 2023.

Sturdier pension fundamentals. Public sector unfunded pension liabilities continue to decline as a percentage of the economy (See Figure 4). Plan liabilities have been repriced lower as interest rates have risen, while asset values remain generally in good shape. The aggregate funded ratio for the country’s largest plans will reach 78 percent in 2023, up from 73 percent in 2019.¹⁰
 

Plans also have benefitted from better funding discipline. Underperformers like Kentucky and New Jersey have prioritized full contributions in recent budgets.¹¹ California and Connecticut have recently made extra payments to their plans.¹² Return assumptions have declined from a median of 8 percent in 2009 to 7 percent in 2022,¹³ and plans have de-risked, a bit, adding more fixed income exposure amid higher interest rates (See Figure 5).

Some issuers still face high pension contribution rates and remain exposed to asset-price shocks. Others may find that newly struck deals with labor unions eventually flow through to higher benefit costs (See our note on wages below). One-third of public plans remain below 70 percent funded. Still, overall, the sector’s pension health is meaningfully more stable than a decade ago.

Still strong backdrop for property tax collections. Ninety-three (93) of 100 metropolitan areas reported year-over-year price increases in 3Q23 (third quarter 2023) compared to 3Q22.¹⁴ Sustained home-price appreciation suggests the backdrop for property taxes, which directly or indirectly back most local bonds, will remain strong. Commercial real estate values continue to fall, but at a slower pace.¹⁵ To date, in most jurisdictions, the rise in residential prices have mitigated lower commercial prices.

Ratings uplift. The market’s overall credit health has buoyed ratings. Through October, public finance upgrades outpaced downgrades at Standard & Poor’s (S&P) by 3:1. The ratio for Moody’s was 4:1.

Several large issuers were upgraded from the BBB to A category during the year. Illinois’ general obligation bond rating rose to A-/A3 at both agencies. New Jersey’s appropriation rating and the New York Metropolitan Transportation Authority (NYMTA) were upgraded to the A category by S&P. Six states now carry a “positive outlook” from S&P.

Only two sectors exhibit ratings weakness: hospitals and private higher education. (Hospitals are discussed above.) Private colleges remain pressured by declining enrollment and competition. Sector-wide, enrollment has declined by 8 percent since spring 2019. Private liberal arts colleges seem particularly vulnerable. Students are prioritizing tuition affordability and long-term job security over “soft” majors like sociology, history, or English.¹⁶

The rating profile of the broad market index underscores recent positive trends (See Figure 6).

Low default rates. Consistent with ratings trends, municipal default rates remained low in 2023. There were 49 monetary defaults through November (See Figure 7). The monetary default rate is on track to be among the lowest since 2010. “Impairments,” which include non-monetary defaults like covenant violations and draws on bond insurance policies, comprise 1 percent of market par.¹⁷ This is in-line with recent years. The riskiest bonds in 2023 were again retirement care centers and industrial development bond financings. These nonessential sectors reported 15 and 11 defaults, respectively.

Market Risks

Notwithstanding the market’s strong near-term fundamentals, a turn in credit quality is possible in 2024 for the following reasons.

Muni “excess savings” may have peaked. National accounts data show that the state and local government sector has run surplus operations equal to 0.3 percent of gross domestic product (GDP) since 2020. This compares to an average deficit of 1 percent during the 2000 to 2019 period.¹⁸ The difference between these rates is a proxy for the muni sector’s “excess savings” since the pandemic. It can be analogized to the “excess savings” of the household sector over the same period.¹⁹ The data suggests that state and local governments’ multi-year run of strong budget performance is reaching a peak (See Figure 8). It also suggests, as we noted last year, that governance and management factors will increasingly influence the trajectory of state and local government credit quality and ratings.

Some issuers are already beginning to report deficits. California officials anticipate $68 billion in deficits over the FY23 to FY25 period.²⁰ New York City announced 5 percent across-the-board spending cuts to balance FY24 operations and expects a $7 billion deficit for next year.²¹ Chicago estimates a $500 million deficit for this year and a $700 million deficit for next year (FY25).²²

These deficits and others stem from a mix of factors, including:

• Wage pressure. Public sector wages have recovered more slowly from the pandemic than private sector wages (See Figure 9). This dynamic is now changing. Issuers are resetting expiring collective bargaining agreements with higher salaries.²³ Labor costs typically comprise 43 percent of local operating expenditures.²⁴

K-12 public schools seem particularly exposed. Public school employment remains below its pre-pandemic level while Covid-related learning loss has left districts with more spending needs (see: Is It Time To Go Back To School on K-12 Public School Credit Fundamentals?).²⁵

Issuers with public safety needs are also vulnerable to unexpectedly high growth in salaries. Public safety positions have been very hard to fill in recent years. Public safety employment declined in several of the Nation’s largest cities from 2019 to 2022 (See Figure 10).

• Slowing revenue and (potentially slower) economic growth. State and local tax revenue from the “big four” tax sources (personal and corporate income, sales, and property) fell by 0.7 percent in real terms from 3Q22 to 3Q-23.²⁶ The decline reflects one-time pandemic inflation in 2022 related to elevated goods prices and wages. However, the revenue base in many states has also shrunk. Twenty-five (25) states financed income tax cuts using the temporary revenue boost from the Covid-era.²⁷
  
  Revenue declines also reflect a slowing economy. In October, eight states reported unemployment rates consistent with an impending recession per the “Sahm Rule” (AZ, CA, CO, ID, IN, NJ, WI, and WV).²⁸
  
  State general fund revenue is expected to drop by nearly 2 percent in 2024 (See Figure 11).  

• Migration. Budget officials in New York City estimate $11 billion in migrant-related costs in FY24 to FY25.²⁹ Chicago’s deficit results, in part, from migrant-related programs.³⁰ Massachusetts officials also attribute new costs to a recent influx of migrants.³¹
  
  Regional economies tend to benefit from immigrants, over the long-term.³² However, the short-term budget stress associated with immigration is real and may prove longer lasting for some issuers. Migration flows are at a multi-decade high (See Figure 12). Policy reforms seem unlikely given political polarization around the issue, and reduced immigration is sometimes difficult to achieve even after legislation has been passed. Migrant flows in Europe remain a consistent challenge despite many countries instituting stricter immigration laws. Elevated migration is a global phenomenon influenced by growing global disorder. We note that immigration flows doubled in 2019 during the less immigration-friendly Trump administration before dropping during Covid and re-accelerating during President Biden’s term as illustrated in Figure 12.

• “Willingness” risk. Reduced public support for new programs or taxes also seems likely. The recent bout of high inflation has eroded residents’ real wages (See Figure 13). Sustained and high levels of immigration are also known to reduce public willingness to finance new or existing programs.³³

Secular Trends

Apart from these immediate drivers of budget strain, secular risks associated with climate change, the federal government, and municipal bankrutpcy also warrant monitoring. 

Climate change. Breckinridge continues to find no evidence for a “physical climate risk” pricing penalty in the muni market. However, we continue to believe one will materialize, eventually. There were at least three salient climate-related muni credit developments to highlight from 2023. 

First, the evidence that physical climate risk can directly translate to credit risk continues to grow. In 2023, tax-exempt bonds issued by Hawaiian Electric Co. were downgraded from BBB to B- after the company was identified as potentially liable for the Lahaina, Hawaii wildfire.³⁴ The Paradise, California Redevelopment Agency (RDA) defaulted on bonds impacted by the 2018 Camp Fire.³⁵ Both events highlight that bond repayment norms, after a natural disaster, may be changing.³⁶

Second, it is becoming clearer that physical climate risk can translate into economic development risk. In June, Arizona officials stopped issuing residential building permits in areas of Maricopa County with limited ground water resources.³⁷ In California and Florida, premiums for home insurance increased, in part, because some large private insurers ceased (or curtailed) underwriting policies in areas with outsize natural disaster exposure.³⁸

Third, transition risk may be increasingly relevant. In December, a United Nations climate agreement (COP28), for the first time, called for a reduction in fossil fuel use as part of a global transition toward clean-energy systems.³⁹ This suggests that the energy transition will continue apace and, along with it, stranded asset risk (a time-honored worry for muni investors). Of note, in 2023 a major offshore wind project financed with New Jersey appropriation bonds was delayed indefinitely after the developer withdrew from the project.⁴⁰ In addition, California enacted two laws to require large organizations to track and disclose their Scope 1, 2, and 3 greenhouse gas emissions.⁴¹

These risks may eventually translate into lower bond ratings, on the margin. Figure 14 illustrates that a meaningful portion of FL, LA, TX, and SC bonds in the Main Muni Index exhibit elevated physical risk.

Federal risks. Weakening federal finances continue to increase credit and tax risk for muni investors.

With regard to credit, Congress may modestly trim aid to muni issuers as soon as next year. The federal deficit is historically large at a time of full employment. It is projected to rise dramatically absent structural changes to spending or taxing (See Figure 15). Congress struggled to pass ordinary continuing resolutions in 2023, and several appopriation bills require renewal in early 2024.⁴² One of the first bills passed out of new Speaker Mike Johnson’s House included cutting baseline funding for clean and drinking water state revolving fund grants.⁴³

Tax risk may also begin to rise late in 2024. November’s elections will determine the mix of lawmakers who decide how (and whether) to replace sunsetting rules in 2017 TCJA. These provisions⁴⁴:

• Eliminated tax-exempt advance refundings; 
• Capped the state and local tax deduction (SALT) at $10,000 per filer; 
• Lowered the top personal marginal income tax rate from 39.6 percent to 37 percent; 
• Lowered the federal corporate income tax rate from 35 percent to 21 percent; 
• Expanded (indirectly) the income tax base in states that “piggy back” off of the federal code; and
• Increased the exemption for the alternative minimum tax (AMT).

The TCJA also reduced federal revenue by $1.5 trillion over 10 years relative to the pre-2018 baseline. 

Currently, we have a low conviction view on the outcome of the election. Recent polls suggests Republicans have a strong chance of retaking the presidency and controlling both chambers of Congress.⁴⁵ However, polling could change significantly from now to election day. Cooling inflation coupled with an economic “soft landing” may improve President Biden’s low approval ratings. Also, redistricting may increase Democrats chances of winning a majority in the House of Representatives.⁴⁶

The table (See Figure 16) below highlights directional outcomes for select tax risk-related issues, based on the partisan composition of Congress and presidency.

Municipal bankruptcy. There were two unwelcome municipal bankruptcy precedents of note in 2023. Each case may trigger weaker sentiment for “special revenue” bonds in a future downturn. In Puerto Rico, a court invalidated bondholders’ lien in net revenues of the Puerto Rico Electric Power Authority (PREPA).⁴⁷ In Chester, PA, casino payments owed to bondholders were deemed available for general fund creditors.⁴⁸ Both cases highlight that issuers can more easily pierce legal structures intended to be insulated from bankruptcy risk. 

Technicals 

Demand. Demand is likely to grow faster than supply in 2023.

In 2023, demand for municipals remained generally strong, but shifted across segments and investment vehicles. Retail demand offset net sales from banks and insurance companies. This pressured M/T ratios lower (See Figure 17).

Banks trimmed municipal purchases at an aggressive pace beginning in Spring 2023, after the failures of Silicon Valley Bank and First Republic Bank.⁴⁹ Insurers reduced their participation based on better after-tax yields in other markets.⁵⁰

Within the retail segment, demand from SMAs and ETFs offset outflows from open- and closed-end mutual funds (See Figure 18). Investors sold mutual fund positions to harvest losses for tax purposes or to take advantage of benefits provided by ETFs and SMAs (see: Considering the Municipal Bond Implications of ETF Asset Growth).  

Retail demand is likely to remain strong in 2024 given aging demographics. Retail investors comprise 71 percent of municipal holders. Most are middle-aged or older,⁵¹ and each day 10,000 Americans turn 65.⁵²

The potential for higher federal tax rates should also drive demand. Congress may allow the TCJA to expire at the end of 2025, driving top marginal rates higher. It may also raise federal tax rates, outright.

Supply. The municipal market shrunk modestly again in 2023. Gross issuance declined for the third consecutive year (See Figure 19). The market now comprises $4.04 trillion in debt compared to $4.07 trillion in 3Q21.⁵³ As we suggested might occur in last year’s Outlook, issuers financed capital projects with reserves. Projects were also downsized or delayed on account of higher interest rates and inflation.

An uptick in supply is possible in 2024. Construction inflation has cooled, and interest rates appear to have settled in a range that gives public sector debt managers more confidence to issue bonds.⁵⁴ There remains a large backlog of infrastructure needs across several major sectors (See Figure 20). As we have noted in prior work, eventually these needs may require financing in the bond markets.

Valuations

M/T ratios are likely to remain on the low side, consistent with the M/T ratio range since passage of the TCJA in 2017. That law eliminated tax-exempt advance refundings and decreased overall supply (and M/T ratios relative to their pre-2018 range). 

In December, the 10-year M/T ratio reached a very low sub-60 level. This level is unlikely to be sustained. However, it underscores the likelihood that demand outpaces supply in 2024 for most periods during the year (See Figure 21).

Municipal credit spreads also seem likely to remain low. The credit environment is a bit more pressured than it has been in the last few years, but it remains stable, overall. If the economy slows, investors may rotate into investment grade (IG) municipals for safety. If the Federal Reserve lowers interest rates but a recession is avoided, investors may rotate into IG fixed income assets, generally, to find yield. If interest rates rise on account of rapid growth, spreads should also remain reasonably tight. We note that spreads declined dramatically toward year-end on technical imbalances, alongside falling M/T ratios (See Figure 22).

Breckinridge remains up-in-quality in the event of an economic downturn..

Notwithstanding low-ish M/T ratios and spreads, investors focused on after-tax yields, particularly those in high-tax states, should continue to find some value in municipals. Yields are meaningfully higher than they were during the 2019 to 2022 period (See Figure 23). It is a new environment for bonds, generally (See: Changing Landscape in Bond Investing).

BCAI-12292023-ngntixqo (1/11/2024)

[1] A sample of FY23 audits suggests no material change, in aggregate, for local government issuer liquidity through June 2023. The data in figure 1 is based on at least 800 observations for cities, counties, and school districts each year. Less than 100 such governments have reported their FY23 financials, as of this writing but the initial averages suggest stable liquidity.

[2] Brian Sigritz, “Most states end fiscal year 2023 with a budget surplus as revenue exceed forecasts,” National Association of State Budget Officers, August 1, 2023.

[3] Fitch Ratings US Airport and Toll Road Traffic Monitor. The pandemic traffic volume recovery was complete for most issuers in Q2 2023.

[4] Data for the private higher education sector is not shown.

[5] Some portion of this drop likely reflects depressed investment values that are likely to show improvement when FY23 figures are made available.

[6] Not-for-Profit and Public Healthcare – US: “2024 Outlook – Revised to stable as financial recovery gains momentum,” Moody’s Investors Service, November 7, 2023.

[7] The downturn in January 2022 reflects on the onset of the Omicron wave which reduced outpatient demand at many hospitals and exacerbated the national nursing shortage, resulting in pressured operating performance.

[8] Not-for-Profit and Public Healthcare – US: “2024 Outlook – Revised to stable as financial recovery gains momentum,” Moody’s Investors Service, November 7, 2023

[9] For example, since February 2022, the State of New Jersey has defeased $2.25 billion in bonds and repurposed reserves for capital projects (see Moody’s Investors Service April 2023 Update to Credit Analysis). Through July 2023, there had been over $14 billion in municipal tender offers, far exceeding the $4 billion in 2021 and 2022 (https://www.bondbuyer.com/news/in-a-post-tcja-world-tenders-are-a-continuing-trend).

[10] Aubry and Yin, “Public Pension Funded Levels Improve Amidst Rising Interest Rates,” Boston College Center for Retirement Research, July 2023.

[11] Fitch Ratings, 2023 State Liability Report, November 2023.

[12] Ibid.

[13] Boston College Center for Retirement Research, Public Plans Database and Breckinridge calculations.

[14] Breckinridge analysis of Federal Housing Finance Agency data.

[15] See Greenstreet Commercial Property Price Index, December 6, 2023.

[16] Gephardt, Raimes, Fitzgerald, “College and universities face adjustments in program offerings to boost enrollment,” Moody’s Investors Service, October 2023.

[17] Breckinridge analysis of Municipal Market Advisors and Bloomberg data.

[18] Average from 2000-2019 per Bureau of Economic Analysis National Income and Product Accounts, Table 3.3.

[19] For one estimate of “excess household savings” see: https://www.frbsf.org/our-district/about/sf-fed-blog/excess-no-more-dwindling-pandemic-savings/.

[20] Note that a portion of this deficit relates to the state’s forecasting miss for FY 23 taxes for which collections were delayed. To the extent future forecasts will be more accurate (which is likely), investors should not necessarily expect quite as large mid-year revision, moving forward. California’s Fiscal Outlook. Available at: https://lao.ca.gov/Publications/Report/4819.

[21] Katie Honan, “budget cuts Hit preschools, cops, libraries as Mayor Blames Migrants,” The City, November 16, 2023, and New York City November 2023 Financial Plan.

[22] Chicago’s 2024 budget forecast, September 13, 2023.

[23] “As governments fill vacancies, higher labor expenses will persist even as inflation slows,” Moody’s Investors Service, November 3, 2023.

[24] 2021 Census of Governments, analysis by Breckinridge. The figure for school districts is often higher.

[25] As of November 2023, k-12 public school employment remained 0.6 percent below its pre-pandemic. See also New York Times Editorial Board, “The Starling Evidence on Learning Loss Is In,” New York Times, November 18, 2023.

[26] Quarterly Summary of State and Local Taxes, US Census, and Breckinridge analysis, deflated by the GDP price deflator for state and local expenditures.

[27] Katherine Loughead, “State Tax Reform and Relief Trend Continues in 2023,” Tax Foundation, June 8, 2023.

[28] The Sahm Rule is an empirical economic finding. It states that a recession occurs whenever the three-month moving average of the national unemployment rate is at least 0.5% higher than the three-month moving average in the prior 12 months. The finding may or may not be applicable to state economies given noisier state economic data. Nonetheless, as of October, the rule characterized the employment picture in eight (8) states: AZ, CA, CO, ID, IN, NJ, WI, and WV. Source: Breckinridge analysis of Bureau of Labor Statistics data.

[29] See: https://www.nyc.gov/office-of-the-mayor/news/875-23/mayor-adams-releases-november-2023-financial-plan-update.

[30] Fran Spielman, “Chicago faces 2024 budget shortfall of $538 million – more than one-third of it tied to migrant crisis,” Chicago Sun Times, September 12, 2023.

[31] Michael P. Norton, “Mariano: NO end in sight as migrant crisis costs pile up,” WWLP.com, October 16, 2023. Available at: https://www.nyc.gov/office-of-the-mayor/news/875-23/mayor-adams-releases-november-2023-financial-plan-update

[32] George Borjas, Immigration and Economic Growth, NBER Working Paper Series, 2019. Available at: https://www.nber.org/system/files/working_papers/w25836/w25836.pdf

[33] Gabreile Magni, “Boundaries of Solidarity: Immigrants, Economic Contributions, and Welfare Attitudes,” American Journal of Political Science, April 11, 2022.

[34] Standard & Poor’s, Hawaiian Electric Industries Inc. and Subsidiaries Downgraded to B- on CreditWatch Negative,” August 24, 20223.

[35] Standard & Poor’s, “Paradise Redevelopment Agency, CA Series 2009 Refunding Tax Allocation Bond Rating Lowered to ‘D’ on Payment Default,” June 1, 2023.

[36] For example, the State of California subsidized Paridise’s property tax levy for three years after the Camp Fire. However, it’s now clear that investors cannot always rely on similar extraordinary support from a state. See issuer Comment, Paradise (Town of) CA, “Wildfire creates financial turmoil for Paradise, CA redevelopment district,” Moody’s Investors Service, July 21, 2022.

[37] Christopher Flavelle and Jack Healy, “Arizona Limits Construction Around Phoenix as Its Water Supply Dwindles,” New York Times, June 1, 2023.

[38] Liz Farmer, “How California and Florida are trying to stave off the home insurance crisis,” RouteFifty, November 1, 2023.

[39] Matthew Dalton, Stacy Meichtry, and Sha Hua, “Nations at COP28 Agree for First Time to Transition from Fossil Fuels,” Wall Street Journal, December 13, 2023.

[40] Tom Johnson, “What happens to NJ’s plans for offshore wind after Orsted?”, NJ Spotlight News, November 2, 2203.

[41] Senate Bill 253 requires public and private companies that exceed $1 billion in annual revenue and that do business in California to begin disclosing their GHG emissions in 2027 (Scope 1 and 2 emissions will be required by 2026). Senate Bill 261 requires companies doing business in CA and earning revenue exceeding $500 million to report on their climate-related financial risks by 2026. https://www.whitecase.com/insight-alert/california-bills-require-greenhouse-gas-emissions-reporting-companies-doing-busines.

[42] Committee for a Responsible Federal Budget,” Appropriations Watch: FY 2024, December 6, 2023.

[43] Caitlin Devitt, “House bill chops water funds to states,” The Bond Buyer, November 3, 2023.

[44] CRS Report, “Expiring Provision in the Tax Cuts and Jobs Act,” November 21, 2023.

[45] For example, President Biden’s approval rating is below President Trump’s at the same point in his presidency. In head-to-head match ups with the likely Republican nominee (Trump), Biden is behind both nationally and in key swing states. Also, in the Senate, Republicans are favored to win 50 seats based on polling and states’ partisan “leans” while three seats currently held by Democratic senators are “toss-up” races. Lastly, the generic ballot for the House of Representatives shows Republicans with a slight lead. (See: Sabato’s Crystal Ball for Senate, FiveThirtyEight for Biden-Trump match-up polling and generic ballot, and Sienna-NYT poll for “key swing state” polling November 5, 2023.

[46] On net, courts have ruled in Democrats favor (or established the potential for it) as it relates to House district maps in several states. See: Zach Montellaro and Ally Mutnick, “Dems inch toward House majority with recent court wins,” Politico.com, September 11, 2023.

[47] The case was decided based on the plain language of the bond contract as opposed to an interpretation of bankruptcy law, but it establishes a precedent that the language of some tradtiional revenue bond indentures may be insufficient to protect a revenue bondholder from willful impairment in a future insolvency. Fin. Oversight & Mgmt. Bd. For P.R. v. U.S Bank Nat’l Assoc., 649 B.R. 381, March 22, 2023.

[48] The case suggests that fee-backed financings (other than certain special assessment financings) are unlikely to win protection in future municipal insolvencies and that governments may more aggressively attack agreements supported by statutory liens in future bankruptcies. City of Chester v. PHCC LLC (In re City of Chester), 2023 Bankr. LEXIS 2678.

[49] Caitlin Devitt, Christine Albano, “JPMorgan buys First Republic’s sizable muni book, easing concerns,” The Bond Buyer, May 1, 2023.

[50] Insurers tend to buy taxable municipals as they are subject to low effective tax rates for municipal bonds based on proration rules, 6.3% for life insurers and 5.25% for property and casualty insurers.

[51] For example, the mean value of bond exposure rises with age. See Survey of Consumer Finances, Table 6 (mean), 2022.

[52] American Association of Retired Persons. Available at: https://www.aarpinternational.org/initiatives/aging-readiness-competitiveness-arc/united-states.

[53] Federal Reserve Flow of Funds, Table. L. 212.

[54] The producer price index for government construction fell to 1% on a year-over-year basis in October 2023. Bureau of Labor Statistics and Breckinridge calculation.

Disclosures:

This material provides general and/or educational information and should not be construed as a solicitation or offer of Breckinridge services or products or as legal, tax or investment advice. The content is current as of the time of writing or as designated within the material. All information, including the opinions and views of Breckinridge, is subject to change without notice.

Any estimates, targets, and projections are based on Breckinridge research, analysis, and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.

Past performance is not a guarantee of future results. Breckinridge makes no assurances, warranties or representations that any strategies described herein will meet their investment objectives or incur any profits. Any index results shown are for illustrative purposes and do not represent the performance of any specific investment. Indices are unmanaged and investors cannot directly invest in them. They do not reflect any management, custody, transaction or other expenses, and generally assume reinvestment of dividends, income and capital gains. Performance of indices may be more or less volatile than any investment strategy.

Performance results for Breckinridge’s investment strategies include the reinvestment of interest and any other earnings, but do not reflect any brokerage or trading costs a client would have paid. Results may not reflect the impact that any material market or economic factors would have had on the accounts during the time period. Due to differences in client restrictions, objectives, cash flows, and other such factors, individual client account performance may differ substantially from the performance presented.

All investments involve risk, including loss of principal. Diversification cannot assure a profit or protect against loss. Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Income from municipal bonds can be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the IRS or state tax authorities, or noncompliant conduct of a bond issuer.

Breckinridge believes that the assessment of ESG risks, including those associated with climate change, can improve overall risk analysis. When integrating ESG analysis with traditional financial analysis, Breckinridge’s investment team will consider ESG factors but may conclude that other attributes outweigh the ESG considerations when making investment decisions.

There is no guarantee that integrating ESG analysis will improve risk-adjusted returns, lower portfolio volatility over any specific time period, or outperform the broader market or other strategies that do not utilize ESG analysis when selecting investments. The consideration of ESG factors may limit investment opportunities available to a portfolio. In addition, ESG data often lacks standardization, consistency and transparency and for certain companies such data may not be available, complete or accurate.

Breckinridge’s ESG analysis is based on third party data and Breckinridge analysts’ internal analysis. Analysts will review a variety of sources such as corporate sustainability reports, data subscriptions, and research reports to obtain available metrics for internally developed ESG frameworks. Qualitative ESG information is obtained from corporate sustainability reports, engagement discussion with corporate management teams, among others. A high sustainability rating does not mean it will be included in a portfolio, nor does it mean that a bond will provide profits or avoid losses.

Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.

The effectiveness of any tax management strategy is largely dependent on each client’s entire tax and investment profile, including investments made outside of Breckinridge’s advisory services. As such, there is a risk that the strategy used to reduce the tax liability of the client is not the most effective for every client. Breckinridge is not a tax advisor and does not provide personal tax advice. Investors should consult with their tax professionals regarding tax strategies and associated consequences.

Federal and local tax laws can change at any time. These changes can impact tax consequences for investors, who should consult with a tax professional before making any decisions.

Some information has been taken directly from unaffiliated third-party sources. Breckinridge believes the data provided by unaffiliated third parties to be reliable but investors should conduct their own independent verification prior to use. Some economic and market conditions contained herein have been obtained from published sources and/or prepared by third parties, and in certain cases have not been updated through the date hereof. All information contained herein is subject to revision. Any third-party websites included in the content has been provided for reference only.

Certain third parties require us to include the following language when using their information:

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg does not approve or endorse this material or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.