PNC 2024 Outlook: Public Finance

The series of interest rate hikes that took place throughout 2023 had a marked impact on the financial performance of organizations in the government, higher education, and non-profit sectors. The rapid rise in rates has required organizations to evaluate new and different approaches to effectively manage their assets and liabilities.

“A lot of organizations are still adjusting to how higher rates impact their finances. They’re essentially having to reset from the conditions of the past 15 years, when interest rates were low and there was a lot of available stimulus and liquidity,” said Rob Dailey, head of PNC Public Finance. “Now, they need to rethink how to optimize their assets, given the opportunity the higher rates present for investing operating cash and strategic reserves, and they also have to consider the implications of what type of debt they take on, whether bank debt or municipal securities debt. It’s a new environment that organizations will have to continue to adapt to throughout 2024. This additional dynamic adds to the challenge our clients face in day-to-day operations, as they look to improve efficiency, streamline costs, avoid cyber fraud, and catch up to advances in banking operations and treasury management.”

Bond Market Conditions and Implications for Issuers

In the bond market, the interest rate backdrop has created new opportunities. There are different issuance products in play now, beyond simple long-term fixed-rate bonds, and organizations may find significant value in tailoring their debt portfolios based on the broader range of debt products. Issuing and managing debt will require taking a close look at the broader set of variables in the environment.

For issuers of municipal securities, the ongoing volatility continues to drive challenges. With rates moving in large increments quickly, issuers need to plan issuances thoroughly and carefully, focusing on the quality of execution and communicating clearly with the market and with investors. Issuers may also face constraints on projects and funding, stemming from inflation and federal restrictions on how the funds may be used.

Rate Implications for Borrowers

The prolonged inverted yield curve, in which longer-term bonds have a lower yield than short-term debt instruments, has led some institutions, including PNC, to predict a mild economic recession in mid-2024. However, if the yield curve begins to show signs of normalizing in the latter half of the year, this may lead to an uptick in both municipal securities and bank activity, as organizations reevaluate which debt products and structures best meet business needs. In the meantime, financing at short-term rather than long-term rates may present a more appealing option for public, non-profit, and higher education organizations.

Implications for Government Entities

Among government entities, there are concerns about an impending “fiscal cliff,” as governments continue to spend COVID-19 relief and other stimulus dollars issued by the federal government. As a large portion of the overall stimulus funds currently remains unspent, many state and city governments have become accustomed to having the federal funds as part of their operating budget. When the funds eventually roll off these entities’ balance sheets, they will be forced to adjust to the drop in revenue through raising taxes, cutting expenses, or making other challenging policy decisions.

Spending on infrastructure projects, such as building or improving roads, bridges, and water systems, is likely to ramp up over the next five years, as governments look to spend allocated federal funding. Federal infrastructure spending will likely spur complementary projects driven by state and local governments. This may lead to an increase in demand for project debt, as surpluses within state budgets are depleted.

Volatility Sets the Tone

The financial stability of governments, higher education institutions, and non-profit organizations may be particularly vulnerable to the impact of interest rate changes and other macroeconomic factors. But it’s important to remember that there are ways to adapt to the current economic cycle, according to Dailey. “There is a lot of uncertainty right now, but eventually things will stabilize,” Dailey said. “In the meantime, it’s important for organizations to pay close attention to all of the variables in play and develop strategies to stay nimble.”

Ready to Help

PNC Public Finance is committed to serving the financial needs of public sector entities of all types and sizes. Reach out to your Relationship Manager to learn more, or contact us.

Additional Disclosure:

FINRA BrokerCheck

Check the background of PNC Capital Markets LLC on FINRA's BrokerCheck.
Learn More »

Schedule an appointment

SCHEDULE NOW

Find a branch near you

FIND NOW

Important Legal Disclosures and Information

Municipal Advisor and G-17 Disclosure

PNC Capital Markets LLC (“PNCCM”) is providing the information contained in this document for discussion purposes only in anticipation of serving as an underwriter to the person to whom this document is addressed. The information provided herein is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934, as amended (“Exchange Act”), unless such information is provided (i) within the scope of an underwriting of an issuance of municipal securities for which PNCCM is acting or seeking to act as underwriter, (ii) to a person that is separately advised by an independent registered municipal advisor, pursuant to the requirements of Exchange Act Rule 15Ba1-1(d)(3)(vi), or (iii) in response to a written or oral request for proposals or qualifications. PNCCM is not acting as a municipal advisor, and is not subject to the fiduciary duty established in Section 15B(c)(1) of the Exchange Act, with respect to this communication or any related municipal financial product or issuance of municipal securities. PNCCM is not recommending any action to any municipal entity or obligated person and such entity should discuss any information and material contained in this communication with any and all internal or external advisors and experts that the municipal entity or obligated person deems appropriate before acting on this information or material.

The following disclosures are required by Municipal Securities Rulemaking Board (“MSRB”) Rule G-17, as PNCCM proposes to serve as an underwriter, and not as a financial advisor, municipal advisor or fiduciary to any person or entity, in connection with the issuance and sale of securities for the person to whom this is addressed:

(i) MSRB Rule G-17 requires an underwriter to deal fairly at all times with all persons, including both municipal issuers and investors.

(ii) An underwriter’s primary role is to purchase securities with a view to distribution in an arm’s-length commercial transaction with an issuer; and an underwriter has financial and other interests that differ from those of such an issuer.

(iii) Unlike a municipal advisor, an underwriter does not have a fiduciary duty to an issuer under the federal securities laws and is, therefore, not required by federal law to act in the best interests of that issuer without regard to its own financial or other interests.

(iv) An underwriter has a duty to purchase securities from an issuer at a fair and reasonable price, but must balance that duty with its duty to sell those securities to investors at prices that are fair and reasonable.

(v) The issuer may choose to engage the services of a municipal advisor with a fiduciary obligation to represent the issuer’s interest in the transaction

(vi) An underwriter will review the official statement, if any, for those securities in accordance with, and as part of, its responsibilities to investors under the federal securities laws, as applied to the facts and circumstances of the transaction.

PNC General Disclosure https://www.pnc.com/en/corporate-and-institutional/pnc-general-disclosure.html

PNC Capital Markets LLC ("PNCCM"), member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. (“PNC”) and affiliate of PNC Bank, National Association (“PNC Bank”). PNCCM is not a bank or thrift, but rather, it is a separate and distinct corporate entity from its bank affiliate.

This document is for informational purposes only. No part of this document may be reproduced in any manner without the prior written permission of PNCCM. The information contained herein is based on information PNCCM believes to be reliable and accurate, however, no representation is being made that this document is accurate or complete and it should not be relied upon as such. Neither PNCCM nor its affiliates make any guaranty or warranty as to the accuracy or completeness of the data set forth herein. Opinions expressed herein are subject to change without notice.

PNC Capital Markets is the marketing name used for investment banking and capital markets activities conducted by PNC through its subsidiaries PNC Bank and PNCCM. Securities underwriting, sales and trading services are provided by PNCCM. Foreign exchange and derivative products are obligations of PNC Bank, National Association.

PNC Capital Markets Disclosure

PNC Capital Markets LLC (“PNCCM”), member of FINRA and SIPC, is an affiliate of PNC Bank, National Association (“PNC Bank”). PNC Bank and PNCCM are subsidiaries of The PNC Financial Services Group, Inc. (“PNC”).

Important Investor Information – Securities, insurance, foreign exchange, and derivative products are:
Not FDIC Insured • Not Bank Guaranteed • Not A Deposit
• Not Insured By Any Federal Government Agency • May Lose Value

Swap Dealer Disclosure

“PNC” is a registered mark of The PNC Financial Services Group, Inc.