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Stay informed and put recent portfolio performance in context with market themes and our investment outlook.

2022 Municipal Credit Outlook

Massive pandemic-related federal aid and growing income set a strong foundation for state and local governments in 2022.

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The federal government intervened on a massive scale to avoid widespread economic distress throughout the pandemic. This massive influx of cash along with robust revenue growth has put most state and local governments in a position of fiscal strength not seen in recent history.

Key tax streams should continue to benefit in 2022 from personal income growth driven by job security for high-income earners, strong consumer spending, as well as home price appreciation. Stock market gains have boosted endowment values and pushed pension funding to levels not seen in over a decade. Revenue sectors, including transportation, higher education and healthcare saw less resiliency in revenue collections during the pandemic. They remain largely stable with the help of federal aid and will continue to benefit from economic growth.

We expect municipal credit strength to moderate as inflation, wage and tax growth slows in late 2022 and stimulus dollars are spent without any expectations for more funding. While federal funds are propping up credit in the near term, it will not last forever and will not erase the long-term challenges that exist for certain credits and sectors. The impact of the pandemic remains a key risk case for our outlook.


Three key tax streams drive our strong tax-backed projections for 2022: income, sales and property.


The strong outlook is tied to projected strength in three key tax streams and receipt of second tranche of federal funds (ARPA) in May 2022.

  • Income tax collections will be supported by rising wages, corporate profits and strong stock market returns (2021 returns reflected in April 2022 collections). School districts will benefit from the strength of state budgets.
  • The growth in sales taxes supported by wage growth, return to work, increase in travel and continued economic reopening.
  • Local government entities benefit from property tax associated with realized home price appreciation. A subset of downtown-based property taxes are likely to recover more slowly due to extended work from home.
  • Tourism-based taxes will continue their recovery at a slower pace.


All-time high reserves support very strong resiliency moving into 2022. For 2023 and beyond, resiliency will likely wane, with the loss of federal cash infusions and less exceptional stock market returns to support elevated spending.

High yield

Government stimulus and reserve funds have provided support for project or tourism based high yield names, allowing for pandemic recovery. Chronically stressed issuers got band-aid, but no cure for long-term challenges associated with demographic changes, pension burdens, and inadequate spending controls.


Aided by return to campus, higher education will see short- term improvement - though shifting demographics still mean challenges in the long run.

The unprecedented levels of federal aid, strong market returns and a return to campuses bolster an improved, but still challenged outlook for the higher education sector in 2022.

  • Significant federal COVID-19 relief funding ($76.2 billion in total) supports stability, covering revenue losses and pandemic-related expenses through fiscal 2023.
  • Return to campus will support improvement in auxiliary revenues.
  • Strong revenue performance at state level will provide near-term stability in state aid for public universities.
  • Record endowment returns will support increased spending.
  • Demographic challenges will continue to pressure the sector over the medium to long-term.


Short-term sector resiliency is supported by federal aid, good budget management during the coronavirus pandemic. Strong market returns have bolstered balance sheets. Demographic shifts and notion of price/value remain longer-term hurdles.

High yield

Lower credit quality bonds face significant enrollment and pricing power pressure resulting in credit deterioration for many. Increased rate of closures expected in the medium term. Security selection is key.


The sector's anticipated challenges stem from dwindling stimulus effects, staffing squeezes and seasonal COVID spikes.

Margins expected to be lower in 2022 as federal stimulus wanes and expenses continue to rise.

  • Revenue likely to be squeezed as volumes remain challenged (seasonal COVID spikes disrupt higher-margin procedures) and the payor mix continues to shift towards lower-reimbursing governmental payors.
  • Higher labor costs, which make up 50% to-60% of expenses, will pressure Staffing pressures that were in place pre-COVID will be exacerbated, leading to burnout, higher turnover, wage inflation and an increase in overtime and temporary labor.
  • Liquidity likely to come down from all-time highs as hospitals pay back Medicare advanced payments that temporarily boosted balance sheets.


Hospitals have demonstrated their resilience through COVID and should continue to adjust to uncertainties. Margins are pressured while improved liquidity provides a cushion.

High yield

The senior living sector will be stressed as occupancy is still recovering and adjusting to COVID. The sector also struggles with similar staffing issues as hospitals.


As the workforce prepares for a mass return to office, transportation should continue to rebound and move closer to pre-pandemic levels.

Airport and toll road revenues rebounded in 2021. Recovery should continue in 2022, but growth will likely taper. Mass transit fare revenues should be bolstered by return to work progression, but remain below peak volume. Infrastructure legislation provides additional support.

  • Airports continue to benefit from unexpended federal funds (ARPA) and a slow, but steady recovery in business and international travel.
  • Continued growth in return to work will boost toll road transaction Higher revenue from increased toll rates, many of which are indexed to inflation, will provide further support.
  • Liquidity for both toll roads and airports should remain strong, as many quickly cut operating and capital costs in response to the COVID-19 pandemic.


Both airports and toll roads remain resilient, supported by essentiality, healthy liquidity and federal stimulus. Continued traffic and enplanement recoveries, although at a slower pace, will help maintain positive momentum in the sectors.


Utilities are poised to perform well in 2022, bolstered by liquidity and federal focus on infrastructure.

Public utilities are well positioned in 2022 due to healthy liquidity and strong federal infrastructure spending.

  • Debt service coverage and liquidity to remain healthy despite pandemic pressures.
  • Automatic fuel cost adjustments will insulate many electricity providers from volatility in generation resource (i.e. natural gas) prices.
  • Renewed federal focus on climate change, along with recently passed infrastructure legislation including funds for renewable sources and grid resiliency will likely increase the already rapid pace of shifting away from coal to greener electric generating sources such as solar and wind.


Utilities demonstrated their resilience through COVID. They are supported by their often monopolistic status with very high barriers to entry, inelastic demand, strong liquidity, healthy coverage and independent rate setting authority.

High yield

Growing investment in alternative power and new recycling technologies represent small, but increasing share of high yield issuance.


An improved job market and increasing home prices means the housing sector will likely see increased stability from improved loan performance despite a low interest environment.

Increasing home prices, the improving job market, and declining share of mortgages in forbearance will improve loan performance and provide stability to the sector. High demand for affordable housing benefits Housing Finance Agencies, but lack of supply will continue to limit loan origination.

  • The low interest environment is driving an increase in loan origination (but limited supply) while also squeezing margins due to low investment Margins have been impacted by an uptick in delinquencies and foreclosures, but the rebound in the economy and job market will likely be supportive.
  • Asset-to-debt ratios are currently solid, but are expected to modestly decline due to reduced interest income, limited loan origination and debt being refinanced by commercial banks. Federal loan modifications on delinquent borrowers will likely reduce mortgage revenue, but agencies have adequate resources to absorb the losses.


Most HFAs have continued to strengthen their portfolios by adding MBS and government insurance, which can withstand potential loan losses in the near term. Strong liquidity and overcollateralization supports resiliency.

High yield

Low interest rates continue to drive housing demand and growth of development projects across the nation. Key risk is slowdown in demand due to inflated construction costs and home prices. Retail, office and commercial development districts remain stressed, as occupancy is still recovering and adjusting to pandemic changes.


Outlook: The outlook for each municipal sector reflects our opinion on whether key macroeconomic and sector-specific factors will be predominantly supportive or challenging for the sector’s fiscal health in the next 12 to 18 months. Individual outlooks reflect our base case expectation — modest general economic growth in the short term — as well as unique sector-specific factors and trends. The outlook does not reflect an issuer’s ability to navigate these macro factors, nor does it suggest credit trajectory or rating movement for any individual issuer. The sector outlook considers all issuers in the sector, but is also weighted by market presence. For example, the state of California (the largest issuer in the market) will affect the state outlook more than Nebraska (one of the smallest issuers in the market).

Resiliency: Resiliency reflects a sector’s relative ability to withstand a material economic downturn within the outlook’s timeframe. This view specifically considers historical and projected revenue volatility, elasticity of market demand, flexibility of operating costs, fixed cost burden and current reserve position relative to projected need.

IMPORTANT INFORMATION. For Asia-Pacific markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. Information is subject to change based on market or other conditions.

Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.

Past performance is no guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by Northern Trust. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2a of the Form ADV or consult a Northern Trust representative.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

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