The Muni Credit News is moving its headquarters and will not publish this week. See you in April.

Joseph Krist

Publisher

________________________________________________________________

ISSUE OF THE WEEK

$120,000,000*

IOWA FINANCE AUTHORITY

Midwestern Disaster Area Revenue Refunding Bonds

(Iowa Fertilizer Company Project)

The Authority is issuing refunding bonds now that the facility is operational and has established at least a short-term financial track record. The Bond’s B- rating from Fitch was recently affirmed and its outlook was upgraded to positive. The Positive Outlook reflects the project’s successfully resolved ramp-up issues, and is operationally positioned to benefit from an improving pricing environment assuming it can maintain its operating profile and control costs while favorable pricing trends endure. 

Commodity pricing risk remains as an important credit dampener as IFCo sells its nitrogen products to farmers, distributors, wholesalers, cooperatives, truck stop operators and blenders at market prices. The project’s main products have historically exhibited considerable price volatility. The project’s ability to meet ongoing mandatory debt payments is vulnerable to product pricing remaining at current depressed levels on a sustained basis.  

The project has been operating for almost a year and a half, and after encountering some ramp-up issues has achieved higher than nameplate capacity on its production lines. The pricing of nitrogen products is somewhat correlated to the price of feedstock, which may be oil, coal or natural gas depending on the region and producer. In recent years, the substantial declines in oil and natural gas prices have driven nitrogen prices to levels approaching 10-year lows. In 2018 the project’s actual DSCR was 1.5x compared with last year’s base and rating case expectation at 2.3x and 1.5x for that year, although actual result is weighted down by early ramp-up issues in 2018. The project realized higher revenues but also incurred higher expenses.

The project has passed a key milestone with construction completion and operability achieved. Now the risk focus turns to the ability to maintain operating reliability and the achievement of assumed project results in the face of product price pressures.

__________________________________

CALIFORNIA

California’s total revenues of $5.51 billion in February were lower than forecasted in the governor’s proposed 2019-20 fiscal year budget by $1.34 billion, or 19.5 percent, and in the FY 2018-19 Budget Act by $2.01 billion, or 26.7 percent. Two-thirds of the way through FY 2018-19, total revenues of $79.93 billion were lower than expected in the proposed and enacted budgets by $4.20 billion and $3.33 billion, respectively. For the fiscal year to date, state revenues are 1.4 percent lower than the same time last year.

 Last month, sales and corporation taxes –– two of the state’s “big three” revenue sources –– came in higher than assumed in the governor’s proposed budget released in January. For February, personal income tax (PIT) receipts of $1.39 billion were $1.82 billion, or 56.6 percent, less than the Department of Finance forecasted in January; and they were $2.05 billion, or 59.5 percent, lower than assumed in the budget enacted last June. In the current fiscal year, PIT is 6.0 percent below the FY 2018-19 budget forecast. 

Sales tax receipts of $3.76 billion for February were $407.7 million higher than anticipated in the proposed FY 2019-20 budget but $58.3 million less than expected in the FY 2018-19 Budget Act. Corporation taxes of $258.4 million in February were 59.8 percent higher than estimates in the FY 2019-20 proposed budget and 78.5 percent higher than in the enacted FY 2018-19 budget.

AIRBNB UNDER THE TAX GUN

The ongoing battle between Airbnb, its clients, and those who use it to book rooms continues to rage. The company is fighting ongoing efforts by law enforcement in New York City to force property owners and renters to comply with various laws regulating short term rentals. Charges were recently filed against real estate brokers who were violating those regulations. Other municipalities are following a different tactical approach.

In New Jersey, the state enacted a tax on those who use internet based services to rent out their homes last fall. Anyone using short-term rental booking websites will have to collect the state’s 6.625% sales tax and the 5% hotel occupancy fee, in addition to any fees a municipality has in place. It is designed to level the playing field by imposing the same taxes and fees that hotels and motels currently must pay to the state on “transient accommodations,” or residences used as temporary lodging.

Miami Beach is undertaking a stricter level of enforcement of its laws covering short-term rentals. Currently, the city is taking a non-financial approach with code enforcement officers directly contacting individuals on either or both sides of an Airbnb transaction.

REAL ESTATE COULD FUND TRANSIT IN NEW YORK

The battle to find funding for needed repairs to New York’s battered mass transit system is opening on a new front. New York is poised to become the first US city to levy what is known as a pied-à-terre tax. A pied-à-terre tax would institute a yearly tax on homes worth $5 million or more, and would apply to homes that do not serve as the buyer’s primary residence. The office of the city comptroller, Scott M. Stringer, estimated that a pied-à-terre tax would bring in a minimum of $650 million annually if enacted today. 

Supporters would like to see the proceeds of the tax dedicated to funding mass transit. The revenue stream could be pledged to support bonds issued to finance capital projects. One version would establish a scale based on value. For properties valued between $5 million and $6 million, a 0.5% surcharge would be added on the value over $5 million. Fees and a higher surcharge would apply to homes that sold for more than $6 million, topping out at a $370,000 fee and a 4% surcharge for homes valued at more than $25 million.

The issue reflects the politics around a number of issues at the core of New York politics – income inequality, wealth concentration, real estate and housing prices, and the perception of diminishing housing affordability. The recent closing on the purchase of a $238 million apartment on Central Park South by a hedge fund billionaire with an estimated net worth of $10 billion, may have helped make the legislation more feasible.

MEDICAID WORK RESTRICTIONS COMING TO OHIO

Starting in 2021, Medicaid beneficiaries ages 19 through 49 in Ohio will need to work, attend school, volunteer or attend job training for at least 80 hours a month to remain in the health care program. Beneficiaries who do not meet the requirements for 60 days will lose their coverage. This continues the trend of conservative states seeking to restrict Medicaid spending by making it harder to expand.

There is one key difference on Ohio – people who lose coverage in Ohio will be allowed to immediately reapply for enrollment. Approval does not always result in the implementation of these changes. Only Arkansas has implemented their requirements. The backlash against the resulting cuts in enrollment have been widely criticized. In Ohio, the state estimated that just over 18,000 people — about half the people who will be subject to the work requirements— will lose coverage. The requirements won’t apply to adults who are disabled, pregnant women, children, caretakers or people living in parts of the state with high unemployment.

The approval of work requirements was expected with the appointment of a former aide to Vice President Mike Pence. The latest approval comes at the same time that a federal judge  who is overseeing court challenges to Arkansas and Kentucky’s work requirement scheme , said he will decide by April 1 whether to block further implementation in Arkansas and if the rules should be struck down in Kentucky.

FREE TUITION TAKES ANOTHER STEP

The state supported University of Tennessee will begin providing free tuition to students from low-income families. The policy will apply to students who are in-state and whose families make a combined annual income of less than $50,000 per year. The program is named UT Promise. Launching in fall 2020, this innovative last-dollar scholarship will guarantee free tuition and fees to qualifying Tennessee residents enrolling at UT campuses in Knoxville, Chattanooga and Martin. UT Promise is an expansion of scholarship offerings and does not replace existing scholarships.

Free tuition and fees (will be applied after all other financial aid is received) for in-state students meeting all of the following criteria which include meeting  the academic qualifications of the University.  As for the question of how this will be paid for, The University of Tennessee Foundation will simultaneously launch the UT Promise Endowment campaign to help fund this initiative. In the interim, the University will cover the cost.

CONSOLIDATION TO BE CONSIDERED ANEW

In many cases, analysts can effectively cite consolidation of government functions into county governments as transfers and/or partnerships have provided real efficiencies and savings. Now a new candidate is emerging to see if the idea could prove to be a major improvement to the fiscal structure of Puerto Rico. Puerto Rico Gov. Ricardo Rosselló announced that before the current legislative session goes into recess June 30, he will be introducing a measure to create counties on the island.

The governor’s office estimated that the proposal could result in about $800 million in savings. The approval process will be difficult however with entrenched interests in maintaining the status quo. Supporters cite the difficult financial position of many of the Commonwealth’s 78 municipalities. Nonetheless, many existing government officials fear the loss of position and the many “perks” that go with them.

UNIVERSITY OF PUERTO RICO – COLLATERAL DAMAGE

Among the many challenged quasi-governmental entities, the University of Puerto Rico stands out. The UPR’s 11 campuses are on show cause for lack of compliance with the Middle States Commission on Higher Education (MSCHE) Requirements of Affiliation 11 and 14, which address financial planning and documentation, and access to information, respectively. The UPR is also in non-compliance with the Standard of Accreditation VI, which pertains to financial resources.

While the requirements refer to apparent internal issues regarding long-term financial planning, as well as not submitting financial statements on time, for the Standard of Accreditation VI the Middle States has concerns about the ability of the UPR to have enough resources to fulfill its mission, given the budget cuts it has experienced and the ones expected in the fiscal plan approved Oct. 23, which drops its central government allocation from about $650 million for fiscal year 2019 to $441 million for fiscal 2023.

Middle States requested, among other documents, for “updated information on the impact of the Fiscal Oversight Management Board’s plan and proposed restructuring on the institution’s status and finances.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

__________________________________

NEW JERSEY BUDGET

Governor Phil Murphy released his second budget. It includes appropriations totaling $38.6 billion, with a projected surplus of $1.16 billion and projected savings of $1.1 billion.  The plan would increase funding for NJ TRANSIT, boost school funding, and provide local property tax relief through the Homestead Benefit Program. 

The Governor claims $1.1 billion in real and sustainable savings, including nearly $800 million in public employee health benefit cost savings and over $200 million in departmental savings. It reduces one-shot revenues to just 1.7% of the total budget, a reduction of $400 million from the current budget and half of the average of 3.4% under the previous administration. 

The budget includes an additional $100 million in General Fund support for NJ TRANSIT, for a total subsidy of $407.5 million. Of this, $75 million will replace diversions from other sources and $25 million represents new direct funding. In addition, NJ TRANSIT will not raise commuter fares in FY2020. 

The Governor proposed applying the millionaire’s tax enacted in FY 2019 to all millionaires. The budget projects a surplus of $1.2 billion for FY2020, and expects to close FY2019 with a surplus of more than $1 billion. The budget also counts on revenues from the legalization of recreational marijuana. Enactment has been much more difficult than originally expected (it was planned for January 1 of this year.)

NYC BUDGET

The NYC Independent Budget Office (IBO) has released its analysis of the Mayor’s proposed FY 2020 budget.Under the Mayor’s plan, the continued growth in the size of the budget is largely driven by three factors: debt service, salaries, and fringe benefits. The financial plan estimates obscure the total size of the budget in each year by not accounting for the use of $4.6 billion of 2018 resources to pay for 2019 expenses and the use of $3.2 billion of 2019 resources to prepay some 2020 expenses. Adjusted for prepayments, IBO project that the 2019 budget will total $93.7 billion (6.2% larger than the 2018 budget after adjustments) and the 2020 budget will reach $95.9 billion (an increase of 2.4% from 2019).

With revenues from the city’s tax on personal income rising nearly 21% in 2018, overall tax revenue growth was boosted to 8.5%. As expected, tax revenue growth has slowed and IBO now projects an increase of 3.6% this year, with collections net of refunds totaling $61.0 billion. Growth is expected to be slightly higher in 2020 (4.0%), yielding $63.5 billion. For the remaining three years of the financial plan IBO forecasts that growth in tax revenues will average 3.6% annually with revenue reaching $70.5 billion by 2023. Continued strength in the property tax and—to a lesser extent—growth in the general sales and unincorporated business taxes will offset weaker growth in the personal income tax (annual average of 1.4% between 2018 and 2023).

Based on the proposals included in the Mayor’s Preliminary Budget and IBO’s re-estimates of city spending and revenues, IBO projects that the budget for 2019 will end with a surplus of $3.4 billion and 2020 with a $722 million surplus. Assuming the 2020 surplus is used to prepay expenses in the following year, it forecasst budget gaps of $1.97 billion in 2021 (2.7% of projected city–funded expenditures), $1.84 billion in 2022 (2.4%), and $1.62 billion (2.1%) in 2023.

Between 2018 and the final year of the financial plan agency expenditures will increase an average of 2.1% annually. The large increase in agency spending between 2018 and 2019 is primarily due to the settlement of the city’s labor contracts. In June 2018 the city settled its labor contract with DC 37, which provided for 7.42% compounded wage increases over a 44-month period—2.0% for the first 12 months, 2.25% for the next 13 months, and 3.0% for the remaining 19 months. This contract set the wage increase pattern for the remaining city unions.

In order to fund this pattern the city added resources in 2019 through 2022 over and above what had previously been budgeted in the labor reserve for this round of settlements. The steep increase in 2019 agency costs reflects the cost of retroactive wages resulting from the settlement of these contracts as well as retroactive payments made for previous contracts, in particular for the United Federation of Teachers (UFT). After 2019, agency expenditure growth will average 1.0% annually.

In 2018 the city spent slightly under $10 billion in fringe benefit costs; in the current year these costs are expected to be $10.9 billion, and by 2023 they are estimated to increase to nearly $13.4 billion, an annual growth rate of 6.2%. IBO estimates that health care costs, by far the biggest component of fringe benefits, will grow at a rate of 5.8% during the same period, from $6.2 billion in 2018 to $8.2 billion by 2023. Debt service is projected to grow at an average annual rate of 8.4%, from $6.1 billion in 2018 to $9.1 billion in 2023, an increase of over $3.0 billion. In contrast, from 2014 through 2018 actual debt service costs increased by an average of 2.3% annually, from $5.5 billion to $6.1 billion. Debt service on new long-term bonds during the plan period is estimated to add approximately $2.0 billion in costs by 2023, net of any savings accrued from the retirement of older debt and refundings. $36.8 billion the total amount of new long-term debt the city plans to issue through 2023 would greatly exceed any previous five-year period.

Pension costs are often cited as a primary driver of expenditure growth, although in recent years they have accounted for less of the growth than debt service and fringe benefit costs. In 2018 the city spent $9.6 billion on pension costs. OMB estimates that the city’s pension costs will increase to $9.9 billion in 2019, $10.0 billion in 2020, and $11.1 billion by 2023, an average growth rate of 2.8% from 2018 through 2023. The current rate of growth in pension costs is greater than at this time last year, with the increase primarily attributable to the recent contract settlements. In the November plan an additional $1.1 billion was allocated for pension costs across the plan period to cover the pension costs associated with the salary increases included in the settlements. Excluding the pension increases attributable to the recent contract settlements, annual growth in city funded pension expenditures over the plan period would have averaged 1.5%.

GET THE LEAD OUT

Here’s a potential source of issuance going forward. The Minnesota Department of Health estimated last week that it could cost up to $4 billion over two decades to replace lead pipe from drinking systems. In 2012 the Centers for Disease Control and Prevention determined that there is no level of safe exposure. An estimated 100,000 old lead service lines remain across Minnesota primarily in Minneapolis (60,000), St. Paul (28,000) and Duluth (5,000).

The State is considering whether to finance the costs of pipe replacement through bonds issued for and secured by the Drinking Water State Revolving Fund. Funding the repairs will be important as replacing lead service lines can cost a homeowner anywhere from $2,500 to more than $8,000 per line. A program in Saint Paul covers half the cost of a residential replacement. Unfortunately, fewer than half of residents choose to pay the $3,000-$4,000 required to address their half of the work.

SMALL COLLEGE PRESSURES CONTINUE

The National Center for Education Statistics annually compiles statistics to project the demand for college enrollment in the US over an extended period. The newest report estimates demand through 2027. NCES is the primary federal entity for collecting, analyzing, and reporting data related to education in the United States and other nations. It fulfills a congressional mandate to collect, collate, analyze, and report full and complete statistics on the condition of education in the United States; conduct and publish reports and specialized analyses of the meaning and significance of such statistics; assist state and local education agencies in improving their statistical systems; and review and report on education activities in foreign countries.

Total public and private elementary and secondary school enrollment was 56 million in fall 2015, representing a 3% increase since fall 2002. Between fall 2015, the last year of actual public school data, and fall 2027, a further increase of 4% is expected. Both public and private school enrollments are projected to be higher in 2027 than in 2015. Public school enrollments are projected to be higher in 2027 than in 2015 for Blacks, Hispanics, Asians/Pacific Islanders, and students of Two or more races. Enrollment is projected to be lower for Whites and American Indians/Alaska Natives. Public school enrollments are projected to be higher in 2027 than in 2015 for the South and West, and to be lower for the Northeast and Midwest.

Enrollments are projected to be higher in 2027 than in 2015 for 33 states and the District of Columbia, with projected enrollments 5 % or more higher in 24 states and the District of Columbia; and  less than 5% higher in 9 states. Enrollments are projected to be lower in 2027 than in 2015 for 17 states, with projected enrollments 5% or more lower in 10 states; and less than 5% lower in 7 states. Public elementary and secondary enrollment is projected to decrease 4% between 2015 and 2027 for students in the Northeast; decrease 1% between 2015 and 2027 for students in the Midwest; increase 9% between 2015 and 2027 in the South; and  increase 2%between 2015 and 2027 in the West.

The data drives one to the conclusion that the pressure on small independent colleges will not abate. It also shows that the risk is likely to be geographically concentrated as well. Unsurprisingly, much of the risk is concentrated in New England and the Rust Belt. The locus of small colleges and declining overall demographics are bound to increase the competitive pressures for small colleges with limited scale or ability to attract students from outside their region. These overwhelmingly private tuition dependent institutions will be hard pressed to fund operations in the face of demand trends dampening demand.

CANNABIS LEGALIZATION

Efforts continue on two fronts to advance legalized marijuana through the legislative process rather than through the ballot process. Florida senators voted 34-4 to remove the current ban on smokable forms of medical marijuana. The law currently only allows patients to use cannabis oils and baked goods. In 2018 – the year following a ballot initiative which legalized medical marijuana – state lawmakers passed measures to ban the sale of smoking products, saying that patients could use medical marijuana through other methods, such as vaping, food and oils.

A Leon County Circuit Court Judge ruled that the ban was unconstitutional. The sponsor of the ban on smokable marijuana has said that it was “time to move on.” The Governor said that he will not would not appeal the decision if the state legislature passed a new law by March 15. 

In New Mexico, the House of Representatives voted to legalize marijuana for recreational purposes. The outlook for the bill in the State Senate remains uncertain. It is a compromise designed to address Senate concerns and it includes state-run marijuana stores, something that has not yet happened in other legalization states. 

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

________________________________________________________________

ISSUE OF THE WEEK

$173,500,000

FLORIDA DEVELOPMENT FINANCE CORPORATION

SOLID WASTE

DISPOSAL REVENUE BONDS

(SOUTHEAST RENEWABLE FUELS, LLC PROJECT)

Coming to a high yield portfolio of yours could be a piece of this issue. This meets all of the traits of a muni high yield deal complete with (for many investors) a less familiar technology and product, a bit of speculation, construction risk, commodity price risk, and operating risk.

The project is designed to convert waste fiber from a variety of sources: biomass, sugar cane waste, and sorghum. The plant will take the fiber product and convert it into pulp usable to produce certain forms of paper packaging. Currently, the technology is in operation in Asia and Europe but is still in the construction stage in the US.

Revenue for the project and ultimately payment of debt service will be produced through the sale of the final pulp product. A contract with an entity to distribute the product is in place and that party guarantees to purchase amounts equal to some 38% of the project’s capacity.

As is always the case with these projects, the risk is borne by the investor. It is a true project financing with the only revenue available for debt service derived from the operation of the facility and sale of the product. There some performance guarantees but there are no direct financial guarantees. All of this is reflected in the Limited Distribution to Qualified Investors and $100,000 minimum denominations.

In reality these Qualifies Investors will largely be representing retail investors who may or may not understand what they own.

__________________________________

AIRPORT BONDING NEEDS

The Airports Council International has released the results of a survey of the capital needs facing airports in the United States. In 2017, 1.7 billion passengers and 31.7 million metric tons of cargo traveled through U.S. airports. The Council estimates that America’s airports are facing more than $128 billion in new infrastructure needs across the system and a debt burden of $91.6 billion from past projects. That’s about a 28 percent bump up from ACI-NA’s last study. The Council uses their data to support increases in PFC’s. The Council cites the fact that the PFC cap – last adjusted in 2000 – has seen its purchasing power eroded by 50% in the past two decades.

The Council takes the position that modernizing the federal government’s PFC cap is the simplest and most free-market option for providing airports with the locally controlled self-help they need to finance vital infrastructure projects. They view PFCs as locally generated revenues used for “local” projects. The airline industry to say the least disagrees. Airlines for America takes the view that “PFCs are nothing more than a tax on travelers — a tax that isn’t needed considering there’s almost $7 billion in the Aviation Trust Fund which airports can access.”

The debate comes in parallel with the debate being played out in the Congress. The House Transportation Committee chair and Aviation Subcommittee co-chair are on the record in favor of an increase in the cap on PFCs. “A number of airports are bonded out, and in order to issue new bonds and do additional capacity or terminal work,” they need the cap raised, Chairman DeFazio said. “And we’re still working on the details of what that might be.” The subcommittee chair mentioned hiking the cap to $8.50. It’s now $4.50 per flight segment.

O’HARE HYPERLOOP DYING ON THE VINE

One immediate result of the Chicago mayoral race is that the future of the O’Hare hyperloop project was a loser along with the fifteen candidates who did not qualify for the runoff. In June, Musk and his Boring Co. were selected to build the underground tunnel system where passengers would be transported between Block 37 in the Loop and O’Hare Airport in just 12 minutes each way. On its website, Musk and The Boring Co. said that passengers would be transported by electric skates that can travel at speeds of up to 155 miles per hour. “It will take 12 minutes to travel from O’Hare to downtown. The Chicago Express Loop is three to four times faster than existing transportation systems between O’Hare Airport and downtown Chicago.” 

Neither of the two candidates remaining in the race is viewed as a supporter of the project. It is true that the project as proposed by Musk would be 100% privately funded. The reality is that the project is competing for political bandwidth along with issues like taxes, schools, public safety, and pension funding.

CANNABIS IN ILLINOIS

One of the sources of potential new revenue for the State of Illinois is the tax revenue which is expected to be generated from the legalization of recreational marijuana. Proponents were heartened by the release of the results of a survey commissioned by the state legislature. A private sector consultant has developed data around the issue of demand and the industry’s ability to meet that demand and enable the legal market to overtake the illicit market.

That study showed that demand could be as high as 550,000 pounds a year, far more than the state’s licensed growers can supply. The 16 licensed growers in the state would take issue with that. The study projects demand based on information generated from a survey of those who were willing to respond and ‘admit” current marijuana use. The survey says current growers could meet only 35 to 54 % of demand if recreational marijuana were legalized.

The study follows one conducted by Illinois NORML which says the state has the most expensive marijuana in the country and is already seeing shortages of some products for medical customers. That study suggested licensing more cultivators and allowing existing dispensaries to begin growing marijuana, since they have already been vetted and authorized by the state to handle the drug.

The findings will be seized upon by those who believe that the issues of incarceration resulting from past drug law enforcement should be addressed through the licensing of many smaller growers and distributors. If the expected market were fully met, the report says, the state could collect at least $440 million annually in tax revenue. Sponsors of a bill to legalize recreational cannabis have said they plan to introduce a proposal in March or April. If it becomes law, recreational sales might not start until 2020.

The issues at play in Illinois are being replicated across the country. The idea of conflating marijuana legalization with the issues of judicial and correctional reform, and the emerging issues of reparations has seriously compromised debate on the issue. These factors are holding up legalization for recreational purposes in New York and New Jersey.

THE CREDIT IMPACT OF THE DECLINE OF COAL

Much of the focus of public opinion on the issue of coal consumption and its role in climate change is on the environmental aspect of the issue. For municipal investors, the decline of coal has other consequences. The immediate impact of declining coal production is the decline in the level of revenues derived from severance taxes. In Kentucky, state government collects the coal severance tax and makes distributions to counties. Supported spending includes  road maintenance and construction of 11 regional industrial parks, education programs, mine safety research and workers’ compensation for injured miners, water and sewer infrastructure, and facilities like senior centers, community centers, and cemeteries. Localities also used a portion of the coal severance tax to pay for law enforcement, and waste management. 

Now the counties and localities are feeling the pinch. In 2012, Kentucky distributed $32.2 million back to 29 coal-producing counties. That amount fell to $12.4 million in 2018 — a 61% decline in six years. In Virginia, where severance taxes are levied on coal and natural gas producers, the Virginia Coalfield Economic Development Authority, funded by a portion of the coal and natural gas severance tax, saw the tax drop 62%  from 2011 to 2017. 

For localities, the cuts have been painful. The decline in production also lowers the value of the property used in coal production. The lower severance revenue represents a double whammy for localities which face both the cuts as well as a diminished tax base against which they can generate replacement revenues. They also generate population declines which diminishes the job base and the overall economic base which generates revenues.

MOODY’S SENDS MIXED SIGNALS ON NEW YORK CITY

When Amazon backed out of its deal with New York City and State, Moody’s was quick to describe the situation as credit negative for the city. They were concerned about what message the City was sending to the tech industry and whether the City was becoming less business friendly. They expressed concern about the City’s ability  to diversify its economy going forward. So now, just a couple of weeks later, Moody’s has taken the opportunity to revisit the credit. In the interim, the Amazon deal may be showing signs of resuscitation and the City is preparing for reduced revenue growth stemming from the late 2017 federal tax law changes.

So we question the basis for this week’s upgrade of the City’s GO credit. The Mayor’s supporters are latching onto this as proof that the Mayor is managing the City responsibly. The City still faces significant capital demands, directly for its public housing stock which is now being operated under a consent decree by a temporary manager. It can expect to be called upon to make significant additional funding actions to support the MTA’s massive capital plan.

The issues cited – strong financial management and steady improvement in its financial position that reflect greater flexibility to react to the next downturn – were questioned this week by the City’s Controller who questions the City’s reserve position in the face of a growing consensus around a recession occurring by 2020.  The report references lower benefit costs but simultaneously expresses concern about rising healthcare expenses.

It is confusing to say the least. Given where the State and City are in their budget processes, the upgrade might make more sense once those processes are completed and a clearer picture of the economic outlook emerges. It might also makes more sense if it did not accompany real questions about recent new spending on education and mental health which clearly did not and is not achieving its goals. The inability to show any tangible results for some $1 billion in new spending should be concerning to all.

EDUCATION: PUBLIC VS. CHARTER

The issue of charter schools versus public schools continues to be debated. Municipal bonds investors have the opportunity to invest in both as well as in one or the other. In determining whether to invest it is best to understand the continuing dynamic between the two school philosophies.

One of the issues which has often hindered the debate is the issue of standards and comparability. Now, California is poised to take the lead in the development of common sets of standards for both types. Last week, A proposal championed by Gov. Gavin Newsom to require new transparency standards for charter schools across California was passed by state legislators. Senate Bill 126 codifies a recent opinion from California Atty. Gen. Xavier Becerra that governing boards of charter schools should be subject to the same open-meetings laws and conflict-of-interest standards as public school districts. 

The California Teachers Assn. endorsed the measure and the charter school groups involved took a neutral position. Charter school supporters spent heavily in the 2018 election cycle in favor of opponents of the new Governor. Their lack of a position on this issue and support for two teacher job actions in large districts created the political dynamic that supported passage.

Now the state and its school systems must find ways to increase the funding needs stemming from settlement of the labor disputes.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.