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Municipal Bonds

Municipal credit: continuing to rebound from Covid

Municipal Credit Research Team
Experienced sector specialists represent one of the industry’s largest credit research teams dedicated to municipal investing.
A staircase inside a glass building

States, local governments and school districts are entering 2022 in good financial shape, with New York, California and New Jersey showing significant positive turnarounds. Pandemics and economic downturns affect stadium bonds, but not because of decreased ticket sales.

MuniNotes highlights


Credit Report

Credit conditions improve

States, local governments and school districts are generally starting out 2022 in good financial shape due to the strong rebound in tax revenues in 2021 combined with unanticipated federal stimulus aid from numerous packages. Nearly all states (47) saw general fund revenues come in ahead of budget in fiscal year (FY) 2021, with total state revenues up 14.5% over FY20. Year-to-date FY22 tax revenue collections are coming in ahead of plan for the majority of states. At the same time, state spending is projected to be up 9.3% in FY22.

We expect tax-backed credits to see positive momentum through the first half of the year, and the upcoming budget cycle should be easier for most governments. State rainy day fund balances reached record levels at the end of FY21 due to strong revenue growth. 35 states reported increased reserves, with the median reserve balance reaching 9.4% of general fund expenditures. On the expenditure side, state and local government payrolls remain nearly 5% below pre-pandemic levels, driven in part by public sector retirements. Many states will likely continue to be challenged by teacher and other labor shortages.

For local governments, appreciating home values signal that residential property tax revenues should remain stable to strong through the next year. The S&P CoreLogic Case-Shiller 20-city national home price index showed home prices up 18.8% year-over-year in November 2021. Home values in suburban areas have seen stronger growth trends than in urban areas.

Tax bases with a significant commercial component may face more uncertainty as continued remote work impacts demand for office space. Commercial real estate values may see some future weakness, though it’s too early to determine whether reassessments will impact property tax collections. Rising labor, material and commodity costs present some budgetary pressures, but should be manageable. Pension expenses and climate risk mitigation efforts remain longer-term challenges to maintaining budgetary balance.

Moody’s upgrades outpaced downgrades for municipal bonds in the third quarter of 2021. This was the third consecutive quarter that credit upgrades exceeded the number of downgrades, an indication credit quality continues to strengthen across the U.S. This period of improvement follows an interlude of downgrades exceeding upgrades for much of 2020 when governments were impacted by stringent economic shutdown. As the economy reopened, tax revenues improved and the trend reversed. There were 115 upgrades to 30 downgrades in the third quarter of last year. Downgrades impacted only 1.2% of total rated municipal obligors. Most upgrades occurred at the local government level, accounting for 82% of ratings movement, followed by higher education at 6.2% and states at 5.5%.

Three large issuers show positive turnaround

New York

New York State credit has held up well despite being hit harder by the pandemic than most, and its recovery has lagged the nation. New York State suffered a 20.2% decline in non-farm payrolls between February and April 2020, compared to the national decline of 14.7%. Through December 2021, New York State regained approximately 63% of jobs lost, while the national figure was 84%. New York State’s unemployment rate stood at 6.2% in December 2021, well above the national average of 3.9%, placing it fourth worst among the 50 states.

New York State’s finances have held up reasonably well. The state’s general fund posted an $8.6 billion surplus in FY21, equal to 12.6% of general fund revenues. This is due to the federal assistance the state received under various federal Covid relief bills and tax revenues coming in ahead of estimates. FY22 is also projected to end with a surplus. The state’s pensions are well funded, with a combined funded ratio of 99.3%.

New York State’s proposed FY23 budget is 1.9% higher than the adopted FY22 budget. And unlike last year, it includes no major tax hikes. Positively, Governor Hochul aims to increase the state’s principal reserves to 15% of projected state operating funds spending by FY25.

New York is a high debt state. New York State’s debt per capita ($3,614) stands at three times the Moody’s median ($1,039), placing it fifth highest in the nation. New York trails only California in the amount of tax-supported debt outstanding. However, given the size of the state budget, debt service represented a modest 3.1% of total governmental funds expenditures in FY21.

The New York municipal market is dominated by a number of large issuers. Municipal bonds in New York tend to have strong bondholder protections. The state’s largest borrowing program is the New York State Personal Income Tax Bonds, representing approximately 70% of New York’s bonded debt. These bonds are secured by 50% of the personal income taxes (PIT) levied on individuals throughout New York State. Strong set-aside mechanisms are built into this program to protect bondholders. PIT revenues must first pay debt service before excess funds can be used by the state for other purposes. Coverage of current debt service on PIT Bonds in FY22 is projected to be a solid 6.4x.


California paper sets a benchmark for much of the municipal market, and comprised nearly 20% of all municipal bond issuance in 2021. Prior to the pandemic, California’s budget and economic picture was strong, as the state had spent years building reserves and funding retirement liabilities. The state’s first pandemic budget anticipated a large deficit assuming a steep drop in personal income taxes, which provide about 60% of revenues. Instead, revenue collections exceeded projections as high wage earners switched to remote work, providing a stable income tax revenue stream.

For the current year FY22, the budget is projected to have a $47 billion surplus due to federal stimulus aid and improved revenues. Through the first half of the fiscal year, revenues from the state’s three largest sources (personal and corporate income, and sales taxes) were nearly 30% ahead of projections.

By some measures, California’s economy has not recovered as fast as that of the rest of the nation.

California’s FY22 budget is projected to have a $47 billion surplus due to federal stimulus aid and improved revenues.

Through December 2021, the state had recovered only 70% of the 2.7 million jobs lost in March and April 2020. In comparison, the overall national recovery has been much stronger with more than 80% of jobs recovered. California’s unemployment rate was 6.5% as of December 2021, the highest in the nation and exceeding the nation’s much lower 3.9% rate.

The state’s proposed general fund budget for FY23 reflects an 8.5% spending increase without raising taxes, and a significant $45.7 billion surplus by year end. Total reserves are projected to reach $34.6 billion, which includes $20.9 billion in rainy day funds (the state’s constitutional max at 10% of general fund revenues). Some surplus dollars will be allocated to one-time spending. The budget also includes the continued pay-down of state retirement liabilities. In addition, the budget proposal exceeds statutory appropriation limits, which will now require excess funds to be split between school funding and a tax refund.

New Jersey

The state of New Jersey credit has improved despite being one of the worst-positioned states going into the pandemic, with persistent structural budget deficits, limited reserves, and high debt and pension burdens. Early in the pandemic, the state projected a large budget gap for FY21 and issued emergency deficit-financing bonds to close the gap. However, by the middle of the fiscal year the state revised its revenue projections upward by $3.4 billion, or 9.4%, compared to budget.

Better-than-anticipated tax receipts in the latter months of FY21, coupled with additional onetime sources, pushed revenues to an all-time high of more than $44 billion, which was 21% above original budget. As a result, the state amassed a substantial $10.4 billion surplus in FY21, representing, historically, the largest influx of cash for the Garden State. As a result, the state did not need to use proceeds from the deficit-financing bonds. In addition to the large surplus, the state received more than $6.2 billion in federal stimulus funds from the American Rescue Plan Act.

Thus, New Jersey opened FY22 on stronger footing. The state created a $3.7 billion reserve for debt defeasement from the unused deficit-financing bond proceeds and made a $5.8 billion lump-sum contribution toward its pensions. The state also plans to make an additional $1.1 billion pension contribution in FY22, which means the state would not only meet but exceed its actuarially determined contribution for the first time since 1996. The state’s pension funds realized their highest return in more than two decades for FY21, increasing by about 29%. Despite these positive one-time measures, the state’s long-term liabilities remain among the highest in the nation

Governor Murphy’s FY22 budget includes $46.4 billion in appropriations, or an increase of 12.0% over the prior year. The increased spending results in a structural budget gap of $4.3 billion. To close this gap, general fund reserves will be reduced to $2.4 billion, or roughly 5.7% of revenues. However, stronger revenue performance could also reduce the deficit. In fact, through the first six months of FY22, major revenue streams totaled $18.1 billion, or a 30.4% increase over prior year-to-date revenues.

New Jersey’s long-term pension liabilities remain among the highest in the nation.

Stadium bonds: It’s not about attendance

Pandemics and economic downturns affect stadium bonds, but not in the way you might think. Conventional wisdom might assume that ticket sales and game-day attendance are important. But if you’re a bondholder, the number of fans in the seats is irrelevant because debt service payments on stadium bonds have nothing to do with attendance on game day.

In fact, professional sports teams occasionally relocate, leaving behind empty stadiums. Yet, debt service payments on the bonds continue to be made, as revenues that secure stadium bonds typically come from broad-based excise taxes or lease appropriations made by a city, county and/ or state. For example, the St. Louis Regional Convention and Sports Complex Authority issued bonds to construct the Edward Jones Dome, previously home to the St. Louis Rams from 1995 to 2015. When the Rams moved to Los Angeles in 2016, some of the St. Louis stadium bonds remained outstanding. The city and the state continued to appropriate the necessary funds until the debt was retired in 2021.

However, some stadium bonds are secured by a narrower and inherently more volatile revenue source, such as taxes levied on hotel stays and rental cars. These stadium bonds are at greater risk, as they are more dependent on tourismrelated activity. The Covid pandemic upended the tourism industry and highlighted the vulnerability of tourism-related taxes. Hotel occupancy plunged in 2020 and 2021. Just as hotels were starting to bounce back in the latter part of 2021, the Omicron variant emerged and sent occupancy rates plummeting once again.

None of this is good news for stadium bonds supported by economically sensitive taxes. For example, Las Vegas’ Clark County tapped the debt service reserve (DSR) fund twice in the past year to make payments on the bonds for Allegiant Stadium. Likewise, the Atlanta Development Authority had to use its DSR fund in 2021 to make debt service payments on the bonds issued to construct the new Georgia Dome.

Drawing on reserve funds indicates the severity of the decline in hotel tax revenue. DSR funds work as an additional security measure for bondholders: if there are brief economic downturns or other unexpected events that might affect pledged revenues, timely debt service payments continue to be made without disruption. Naturally, default risk increases when in a prolonged crisis, since reserve funds will eventually run out.

Another stadium-related development that might concern investors is the Chicago Bears’ recent interest in purchasing a suburban site, signaling a possible future move from their lakefront stadium, Soldier Field. The current stadium was renovated in 2003 with $432 million of bonds issued through the Illinois Sports Facility Authority (ISFA). The ISFA bonds are ultimately secured by hotel taxes. However, a state pledge to appropriate from statewide hotel taxes provides a stronger revenue base. Even though hotel taxes fell substantially in Illinois in 2021, the broader base of pledged revenues has more than met the amount required for debt service. If the Chicago Bears should ever leave Soldier Field, local fans and businesses might suffer, but the stadium bonds should not be impacted.

If the Chicago Bears should ever leave Soldier Field, stadium bonds should not be impacted.

Market statistics

Figure 1: Muni treasuries table
figure 2: bonds chart
Figure 3: Muni yields table
Figure 4: TR sector table
Figure 5: Char returns table
Figure 6: Credit spread chart
Figure 7: Treasury ratios chart
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California Department of Finance, “Finance Bulletin, December 2021”.

Bureau of Labor Statistics (www.bls.gov)

Electronic Municipal Market Access (“EMMA”)

“Governor’s Budget Summary: Gavin Newson, Governor, State of California-2022-2023”, 10 Jan 2022.

The Bond Buyer, “St. Louis, county and state prepare to divide Rams lawsuit settlement,” 7 Dec 2021.

Las Vegas Review-Journal, “County won’t need to tap reserve fund for upcoming stadium bond payment,” 16 Nov 2021.

The Wall Street Journal, “As Covid-19 Closes Stadiums, Municipalities Struggle with Billions in Debt,” 4 Jun 2020.

NJ Spotlight News: Boom Year for NJ Pension Fund, But One Big Question (Dec. 27, 2021)

NJ Department of Treasury

State of New York FY 2021 CAFR

US Census, Quarterly Summary of State and Local Government Tax Revenue for Third Quarter 2021, December 16, 2021


NASBO, Fall 2021 Fiscal Survey of the States


Fitch Ratings, State and Local ARPA Uses Illustrate Broad Budgetary Flexibility, 18 Jan 2022


S&P Dow Jones Indices



This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals. The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.

A word on risk

Investing involves risk; principal loss is possible. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments. This information should not replace an investor’s consultation with a financial professional regarding their tax situation. Nuveen is not a tax advisor. Investors should contact a tax professional regarding the appropriateness of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.

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