Nevada, Wyoming, and Texas received high marks in a Morningstar report on how state permanent fund programs affect the fundamental credit analysis of individual bonds.
The permanent fund programs offered by state governments to municipalities are one of four types of state credit enhancement programs that act as debt assurance programs.
In Morningstar's report released Tuesday, the municipal credit research team examined the credit quality of the three main state permanent fund programs available in the United States: Nevada Permanent School Fund Bond Guarantee Program, Texas Permanent School Fund Bond Guarantee Program, and Wyoming School District Bond Guarantee Program.
Morningstar rated the overall credit strength of the state permanent fund programs as "good" on a scale of good, fair, and poor.
"We undertook this research to better inform investors about how the credit quality of state credit enhancement programs affects the credit quality of local municipalities, most often public school districts," said Elizabeth Foos, municipal credit analyst for Morningstar.
Morningstar found that permanent fund programs were among the strongest types of state credit enhancement programs, Foos said. The three state programs provide a significant degree of additional security to bondholders through their strong legal security pledge, clear and efficient operating procedures, and stable financial resources, according to the report.
Many investors are exposed to these programs because public school debt is a popular holding across both individual bondholders and municipal bond fund shareholders, Foos said.
"These enhancement programs provide bondholders with an additional level of security and lower the cost of financing for municipal bond issuers, yet the programs vary widely across the 28 states that offer them," she added.
Morningstar's municipal credit research team plans to publish research reports about state guarantee programs, state appropriation programs, and state intercept programs later this year.