Joseph Krist

Publisher

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NEW YORK UTILITIES DIMMING CREDIT OUTLOOK

Over recent months, National Grid has been engaged in a serious fight over its efforts to secure permits for natural gas pipeline expansion. In an effort to generate pressure on state politicians and regulators, National Grid decided to stop new natural gas connections in and around the New York metropolitan area. This is generating significant pressure from developers and potential business operators.

The state and the Governor in particular have maintained their opposition to the pipeline project. Now in the face of a continued moratorium on hookups, the governor has significantly raised the ante in the dispute. He has suggested that the franchise from the state under which National Grid is permitted to operate its gas facilities could be revoked.

The next step is not clear but at least one rating agency has weighed in on the impact of the Governor’s move. Moody’s has issued a warning that all the utilities operating under state franchises are now at risk of revocation. That is indeed technically true. It is also true that the risk of revocation is significantly higher for National Grid relative to the other utilities. Moody’s referenced a perception by the New York governor that NG did not look at finding alternative (short and medium term) measures to manage the supply constraints, absent the pipeline, such that the moratorium could be lifted; and its poor handling of the moratorium with its customers.

While the method may be different now, the state can arguably be said to be doing something it has done before. In many cases, the regulatory ratemaking process accomplished sufficient pressure as to lead to the eventual dismantling of the Long Island Lighting Company. It was succeeded by the public agency, the Long island Power Authority. We do not believe that the state’s ultimate goal is to revoke the franchise but it is a bold escalation of the conflict. Moody’s views political intervention as a material credit negative, especially when the intervention emanates from a governor’s or attorney general’s office.

AUTONOMOUS VEHICLES

The National Transportation Safety Board called upon federal regulators Tuesday to create a review process before allowing automated test vehicles to operate on public roads, based upon the agency’s investigation of a fatal collision between an Uber automated test vehicle and a pedestrian. The March 18, 2018, nighttime fatal collision between an Uber automated test vehicle and a pedestrian has focused much attention on both the technology but more importantly on the approach taken by the AV industry towards government’s role in managing its streets. The NTSB said an Uber Technologies Inc. division’s “inadequate safety culture” contributed to the crash.

The NTSB determined that the immediate cause of the collision was the failure of the Uber ATG operator to closely monitor the road and the operation of the automated driving system because the operator was visually distracted throughout the trip by a personal cell phone. Contributing to the crash was Uber ATG’s inadequate safety risk assessment procedures, ineffective oversight of the vehicle operators and a lack of adequate mechanisms for addressing operators’ automation complacency – all consequences of the division’s inadequate safety culture. “The collision was the last link of a long chain of actions and decisions made by an organization that unfortunately did not make safety the top priority.”

The really sad/annoying part of this is that the attitude towards safety takes us back over half a century to the days of the rear engine Corvairs and the arguments against seat belts. We are asked time and time again by companies like Uber to trust them or to learn how to think of things in different ways or to think outside of the box. So when you see the NTSB conclusions you can see why these companies whether they be AV producers or ride share companies cannot be trusted.

“The Uber ATG automated driving system detected the pedestrian 5.6 seconds before impact. Although the system continued to track the pedestrian until the crash, it never accurately identified the object crossing the road as a pedestrian — or predicted its path. Had the vehicle operator been attentive, the operator would likely have had enough time to detect and react to the crossing pedestrian to avoid the crash or mitigate the impact. While Uber ATG managers had the ability to retroactively monitor the behavior of vehicle operators, they rarely did so. The company’s ineffective oversight was exacerbated by its decision to remove a second operator from the vehicle during testing of the automated driving system.

SOUND TRANSIT

Sound Transit will continue to collect car-tab taxes Sound Transit will continue to collect car-tab taxes even after the success of Initiative 976, approved by voters statewide this month. Cities and counties, including Seattle, have already sued to challenge I-976, claiming it’s a “poorly drafted hodgepodge that violates multiple provisions of the Constitution,” including a ban on multiple-subject initiatives.

They’ve sought an injunction to block I-976 before Dec. 5, when much of the initiative is expected to go into effect. it would cut state funding  for multimodal projects, ferries and state troopers; revoke city car-tab fees such as the $80 in Seattle for added bus service and roadwork; and remove 11% of Sound Transit’s roughly $2 billion yearly income. Sound Transit has pledged tax proceeds to the repayment of debt issued to finance the capital needs of the regional district which serves the greater Seattle metropolitan area.

Does it mean bondholders are at risk? Previous efforts to cut funding for Sound Transit through initiatives have succeeded at the ballot box but have not been able to stop tax collections related to bonds. The state Supreme Court agreed bond contracts signed in 1999 allowed the agency to collect the taxes until 2028 when those bonds expired.

Without court intervention, drivers whose vehicle registrations renew on or after Dec. 5 will see a tax cut —. They don’t have to pay city transportation-benefit district fees ranging from $20 to $80, such as Seattle’s voter-approved charges for extra bus service. Contrary to the image many have of Seattle as a progressive bastion, support for the car taxes in the metro area is far from unanimous. Unlike King County voters, majorities in both Snohomish and Pierce counties supported the initiative.

PUERTO RICO FACES DAUNTING CHALLENGE

The American Society of Civil Engineers (ASCE) Committee on America’s Infrastructure, made up of expert civil engineers, assigns grades using the following criteria: capacity, condition, funding, future need, operation and maintenance, public safety, resilience and innovation. It has also included Puerto Rico in its assessment and the results of its study show the scale of the capital finance challenges facing the Commonwealth.

The ASCE Puerto Rico Section announced a near failing grade of a ‘D-‘ for the island’s infrastructure. The Report Card graded eight categories of infrastructure: bridges (D+), dams (D+), drinking water (D), energy (F), ports (D), roads (D-), solid waste (D-), and wastewater (D+). None of this is a surprise in the aftermath of Hurricane Maria. Energy received the lowest grade of ‘F,’ meaning the system’s infrastructure is in unacceptable condition and has widespread advanced signs of deterioration.

The Puerto Rico Electric Power Authority (PREPA) proposed a $20 billion plan to renovate the energy grid on the island. How to finance and fund the needs is a different story. According to ASCE, “If the island wants to rebuild and modernize its infrastructure, it must increase received investment by $1.23 billion to $2.3 billion annually—or $13 to $23 billion over 10 years. However, when considering deferred maintenance and hurricane-related recovery projects, the investment gap is even larger. There is a dire need for the island to rebuild smarter by building to adequate codes and standards, acquiring funding from all levels of government, and incorporating resilience into infrastructure plans by using climate-resilient materials.”

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

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ASCENSION CAUGHT UP IN TECH DISPUTE

The Department of Health and Human Service’s Office for Civil Rights, the federal agency that enforces HIPAA, would “like to learn more information about this mass collection of individuals’ medical records with respect to the implications for patient privacy under HIPAA,” associated with “Project Nightingale”.

“Project Nightingale” is a project that Google launched last year. It analyses health data from patients who received care at St. Louis-based Ascension, one of the nation’s largest health systems. Ascension is a large issuing presence in the municipal bond space. Data reportedly includes patients’ lab results, medications and diagnoses. Google’s partnership with Ascension also involves a commercial contract to move Ascension’s on-premise data centers to Google’s cloud-computing system.

Here’s the problem, one not unlike many of the tech industry’s disputes with government. Ascension patients were not notified about the partnership with Google so they did not get a chance to opt out. According to Google the intended goal is to use Google’s artificial intelligence tools to recommend changes to a patient’s care, such as different treatment plans, diagnostic tests or additional physicians, as well as to flag unexpected deviations in the patient’s care.

Google has struck similar partnerships with the health systems of Stanford University, the University of Chicago and the University of California at San Francisco. The concern is that a higher level of detail is being analyzed under the arrangement with Ascension. The University of Chicago is being sued by a patient over its sharing thousands of medical records with Google for a research project on predicting patient outcomes, claiming that the health system had not properly de-identified patient information. Google and UChicago Medicine have maintained that they followed regulations, including HIPAA.

It is difficult to deal with the single mindedness of the tech entities in terms of their use of data. It’s the modern equivalent of and ends justifies the means approach whether is the management of public streets and roadways or whether it’s over issues of patient privacy. There just seems to be a lack of common sense manifested in the industry’s inability to see the concerns of the other parties they interact with.

Until the scale of the issues can be determined, it’s not possible to assess the level of risk to the Ascension credit if violations of HIPPA have occurred. Only then can the potential scale of the potential costs of any resulting litigation be determined. There should be some sort of trust penalty associated with Ascension. It seems inconsistent for a religiously based system that deigns to use its beliefs to deny certain medical services should have entered into such an arrangement with Google on what appears to be a secretive basis.

HIGHER EDUCATION REMAINS UNDER PRESURE

For some time we have commented on the potential for credit problems in the higher education sector. There have been several defaults and closures of institutions. So we are interested in comments made this week by Moody’s Investors Service based on its tenth annual tuition survey.

The data is stark. Median net tuition revenue will grow 1.0% and 2.3% for public and private universities, respectively, for fiscal 2020, according to the results. The continued trend of softening net tuition revenue growth for both public and private universities reflects enrollment and pricing challenges. Moody’s also cited factors we have been concerned about including flat numbers of high school graduates, a favorable economy drawing students into the workforce, and some declines in international student enrollment. These factors are not one offs but are rather reflective of trends.

The report highlights issues more specific to the private schools The median growth in net tuition revenue among private universities is likely to soften slightly, partially because of increasing competition reflected in continuously rising discount rates. » The first-year discount rate at private universities rose slightly to 51% for students entering in fall 2019. Overall, nearly one quarter of private university survey respondents reported a first-year tuition discount of 60% or higher, an indicator that private universities will struggle to sustain net tuition revenue growth.

Other more specific points include some focusing on the public universities.  Among public universities, the median annual growth in net tuition revenue in fiscal 2020 is projected at 1%. This represents a decrease from 1.8% in fiscal 2019, due in part to relatively flat enrollment.  Nearly two-thirds of public universities are projected to grow overall net tuition revenue at under 3% for fiscal 2020, our proxy for inflation in the higher education sector. This is almost double the level five years ago.  Continued declines in the number of international students also contribute to more constrained revenue growth. Among our public university survey respondents, the median decline in international students for fall 2019 was 3.7%.

Overall, the public schools offer more safety. They have a larger constituency, the provide much research and support for economic drivers in state economies, they are the low or lower cost alternative for a larger segment of demand. They also have more a more diversified mix of undergraduate, graduate and professional programs. That drives demand as well.

MORE MONEY RAINS ON THE PRAIRIE

We have expressed concerns about the potential impact on state credits in the farm belt resulting from the ongoing trade war, primarily with China. early on the trump Administration disbursed aid to farmers for 50% of their estimated losses resulting from reduced demand for US agricultural products. Now as the trade disputes have dragged on well after previously announced potential settlement dates, the federal Agriculture Department will begin distributing another round of tariff relief payments next week to farmers and ranchers.

The aid payments have been coming across two years. The Administration has already paid farmers at least $6.7 billion for their 2019 production. It paid $8.6 billion for last year’s production and additional trade relief efforts like commodity purchases and marketing assistance. The first set of 2019 payments covered 50% of a farmer’s eligible production; the new funds announced will cover an additional 25%. 

Hog and dairy farmers have been the primary recipients. They are on the front lines of the trade war but coincidentally are in areas key to the president’s reelection hopes so the additional funding is not a surprise. And they do help to mitigate the credit impact on the agricultural states. They are nonetheless a band aid. They also to some extent insult farmers. As one said to the Boston Globe, “I don’t know what socialism is if it’s not receiving a check from the government.” 

TIME TO PAY FOR THE CPS CONTRACT

The news out of Chicago about the city’s ability to fund its recently negotiated labor contracts not good. – especially the one for the CPS teachers – was not good. It puts the already beleaguered tax base supporting both the City and CPS under even more pressure. The situation augers poorly for the ratings of the City and its associated underlying taxing entities. Mayor Lori Lightfoot and Chicago Public Schools leaders have agreed on where the funds to pay for the first year of new union contracts will be found. The problem is that some of those revenues are not recurring leaving a significant hole in future budgets.

The district is relying on the state to keep its pledge to increase school funding, which can change year to year. CPS also is relying on its own ability to significantly raise property taxes. The additional contract costs for the current school year total $137 million: $115 million for the CTU contract and $22 million for the SEIU contract. In addition, the district has to pay $60 million or so in teacher pension contributions formerly paid by the city.

CPS already budgeted $89 million to cover higher personnel costs clearly not enough to cover the full cost increase. By the fifth year of the CTU contract, CPS will need $504 million more a year to cover the added costs. For SEIU, that cost will be at least $54 million. That comes to $558 million in additional costs by the 2024 budget year — about 8% more than the $7 billion that the district spent last year.

PROPOSITION 13 CHALLENGE

When it was passed 40 years ago, there were many doom and gloom predictions about the credit impact of the limitations on property taxes enacted under Proposition 13 in California. As it turns out, Prop. 13 has not become an issue in terms generally of state and local credit in the Golden State. That does not mean that it is universally supported. The law’s reliance of assessed value based on the purchase price of the home has created inequities between the taxes paid by owners on property for which ownership has been extended versus those paid by properties which have recently turned over. Essentially, two very similar properties directly adjacent to each other may have significantly different tax bills. Now, this situation is generating more and more concern.

An effort is underway to address some of the perceived shortcomings of the law. Efforts are underway to place an initiative on the November, 2020 ballot which would allow county assessors to split their tax rolls into two lists. Homeowners and some small businesses would still receive the full Proposition 13 benefits: a 1% tax based on a property’s purchase value and annual tax increases of no more than 2%.

Commercial and industrial property owners would be subject to different rules. While their tax rates wouldn’t change, beginning in 2022 the levy would be based on the current market value of the real estate. Business property values would have to be updated by county assessors at least every three years. Some of California’s most powerful public employee unions — including Service Employees International Union, the California Teachers Assn. and the California Federation of Teachers. They represent those at the forefront of the affordable housing debate in California.

Proponents want to include provisions directing the application of the additional revenue to be derived from the proposed taxing changes. Schools would receive most of the new tax revenue while municipalities also would receive a share of the new property tax revenue. The allocation is not accidental. Initiative supporters see a connection in that public support for the idea of loosening the property tax limits on businesses increases in polls by as much as 10 percentage points if voters are told the money will go to education.

The ballot initiative will be strongly challenged and if on the ballot strongly opposed by the commercial business interests which will be impacted. The California Business Roundtable has promised California Business Roundtable an “aggressive” campaign to kill it. They suggest that the tax will create just another cost to retailers which will be passed onto consumers. The president of the nonpartisan Public Policy Institute of California offers some sage advice for handicapping this one. “Initiative campaigns often focus on the idea of unintended consequences,” he said. “To me, that’s what this is going to be all about. You’re going to hear that from both sides. And the voters will have to decide.”

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

Last week marked the 300th edition of the municreditnews.com. Over the five years of its publication, we have tried to cover the entire range of issues which impact on the creditworthiness of state and local credits. We hope that you find our comments useful and informative. We appreciate your support. Let us know what you want to hear about.

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NORTH CAROLINA BUDGET

It isn’t a state normally in the news for budget trouble but these are not normal times. The North Carolina General Assembly adjourned without passing a biennial budget for fiscal 2019-21. The legislature could not overcome disagreements about teacher pay and Medicaid expansion among other things. The good news is that a full budget is not needed to ensure that things like debt service payments are made. A continuing appropriation and the passage of several standalone measures ensure that those payments will occur.

As a relatively state with historically stable finances, the ongoing budget dispute which played out in the summer did not garner much attention. It does however mark the second time in three bienniums that the state has not managed timely budget adoption. The direct impact on the state actually is most visible in its impact on programmatic implementation. One example is the fact that a planned launch of a  Medicaid managed care plan this month has been   delayed because of the budget impasse

The real losers in the dispute are the counties and localities in the state. Counties with new state funds included in the 2019-21 Appropriations Act may need to delay the start of intended capital projects. Counties could also find themselves under pressure to provide funding to local school districts. Counties routinely supplement the local BOEs’ operating budgets and are required by state law to provide for their capital needs. Local school districts may have to look to the counties to make up funding shortfalls. As a growing state, schools need to expand to keep up with demand. For those counties with already tight finances, school needs dictated by state law could run up against other expense requirements of the counties.

The dispute also comes at a time where the state’s steadily increasing exposure to climate change related capital demands is becoming more evident. The NC Department of Transportation (DOT)  has requested general fund support because of large expenses related to storm damages, including Hurricane Dorian in early September. DOT must also fund  settlements resulting from a state Supreme Court ruling that the DOT cannot reserve land for future roads without paying for the land. Landowners seeking compensation from the DOT have forced the DOT to find some additional funding to cover those costs estimated at up to $360 million.

To fund the settlement and storm related costs, legislation pending in the Legislature recommends transferring $360 million from the state’s general fund to help cover the settlements as well as another $300 million loan from the state’s savings reserve to help with projects delayed by Hurricane Dorian. The transfer of $360 million would equal about 1.5% of general revenue. At the same time, the Legislature passed two bills designed to reduce revenues to the state including a corporate franchise tax cut and increases in the standard deduction for income tax filers. At the same time,  all of the spending bills passed by the legislature to date would result in fiscal 2020 appropriations similar to those in the budget vetoed by the governor, totaling nearly $24 billion.

NEW YORK BUDGET SHORTFALL

A cash report released by NYS Comptroller Tom DiNapoli’s office is a preliminary warning sign that the state budget is under increasing pressure. ​ The source of that pressure is Medicaid spending. New York’s Medicaid program is on track for a $2.9 billion shortfall as the program has already spent more than 60 percent of its state-funded budget by the end of September, about $13.1 billion. That is only five months into the fiscal year.

The problem reflects both budget maneuvering and the realities of higher expenses tied to things like local minimum wage laws which are increasing costs for providers. The budget maneuver which benefitted FY 2019 results came from the Cuomo administration’s decision to delay $1.7 billion in Medicaid payments from the end of the 2018-19 fiscal year to the beginning of 2019-20. The impact was to  effectively double expenditures for April.

Medicaid has been running over budget for at least the past year, which should have triggered across-the-board payment cuts under the state’s “global cap” statute. Pressures from providers (a powerful lobby in the state) drove the maneuver. Now however, it is time to pay the piper. A real answer will not come until the release of the governor’s Executive Budget in January for the FY beginning April 1.

NEVADA HITS RATINGS JACKPOT

Ten years after the Silver State was at the center of the mortgage and financial crisis, the State is finally reaping the benefits of the long economic recovery. Moody’s announced that it has upgraded to Aa1 from Aa2 the rating on the State of Nevada’s approximately $1.2 billion of outstanding general obligation (GO) bonds, which includes all bonds issued by the state described as general obligation (limited tax). Moody’s cited the state’s strong and growing economy as demonstrated by robust employment and population growth and an increase in rainy day reserves. 

By all measures, the state economy has achieved consistently strong growth in both employment and income since the time of the financial crisis. It has a moderate debt and pension burden and favorable demographic trends. The state’s relatively favorable tax burden relative to states like its neighbor California continues to benefit the state and support current economic and employment trends. The significant role of the gaming/tourism industries does continue although the state has managed to attract a more diverse set of businesses attracted by relatively lower costs and the availability of land for distribution facilities for several online retailers. The reliance on the Las Vegas attractions is one potential concern but that would be more based in national trends in the economy rather than any action  by the state.

The only real concerns expressed in support of the rating action revolve around the need to manage the state’s reserves and the potential negative impacts from a prolonged decrease in tourism, reduced visitor spending or severe economic stagnation.

SALES TAXES AS A CREDIT INDICATOR

Historically, sales tax revenue trends have been a great current indicator of overall conditions and likely trends in state revenues. They reflect current activity as they are collected and remitted without much lag time so they can often be the credit equivalent of a canary in a coal mine. So we looked with interest at sales tax revenue trends in Texas.

Texas Comptroller Glenn Hegar has released totals for fiscal 2019 state revenues, in addition to announcing monthly state revenues for August. State sales tax revenue totaled $2.99 billion in August, 4 % more than in August 2018. Total sales tax revenue for the three months ending in August 2019 was up 3.9 percent compared to the same period a year ago. Growth in August state sales tax revenue was led by remittances from the construction, manufacturing and wholesale trade sectors.

The data points to continued positive economic growth even as its energy sector seems to slow a bit. This is reflected in individual category data for August. In August 2019, Texas collected the following revenue from motor vehicle sales and rental taxes — $488.3 million, up 0.3 percent from August 2018; motor fuel taxes — $327.1 million, up 5.7 percent from August 2018; natural gas production taxes — $102.3 million, down 19.2 percent from August 2018; and oil production taxes — $355.5 million, down 6.2 percent from August 2018.

FLOOD FUNDS IN TEXAS

Voters approved a constitutional amendment to provide for a source of funding for flood control projects in the state. Support for such a measure grew out of the state’s experiences after Hurricane Harvey in 2017. The largest city, Houston, saw whole neighborhoods inundated when waters were released onto properties which probably should not have been developed. The much higher number of residential and small community properties which are subject to flooding  from consistently heavier precipitation events created a broad base of support for the plan.

Proposition 8 authorizes the Flood Infrastructure Fund, which seeks to help the state recover from recent flooding while also preparing communities for future storms. It calls for the fund to receive a one-time, $800 million allocation from the state’s rainy day fund as a starting point, and lawmakers could refill it in the future. The author of the measure points to the fact that it creates a lockbox for those funds,” he said. This means future lawmakers can add to the fund, but they cannot drain it for other purposes, even if the money goes unused for multiple years.

The process would provide a source of state funding the use of which would not have to be reauthorized legislatively. This results from the State Legislature meeting only 60 days biennially. This extends the time between an event and the state’s ability to extend funding for projects. It is one of the weaknesses of the state’s legislative structure.

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

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STATE OVERSIGHT SUCCESS

On October 24, the Massachusetts Executive Office of Administration and Finance announced that the state will end its financial oversight over the City of Lawrence . After 10 years of oversight, city management projects balanced operations with slight surpluses during fiscal 2020-24. Between 2008and 2011, the city accumulated over $27 million in operating deficits, equal to 10% of annual general fund revenue.  

The City’s financial difficulties led to the appointment of a fiscal overseer in fiscal 2010 as part of special legislation. With a fiscal overseer, Lawrence fell under the second most intense level of state oversight of municipalities in Massachusetts. The fiscal overseer has supervised all financial operations in consultation with the city’s financial management team. The city’s financial challenges before oversight stemmed from weak budget management, including managing financial obligations tied to collective bargaining agreements, combined with limited operating flexibility to absorb state aid cuts.

The special legislation also authorized the issuance of deficit financing notes ($16.4 million outstanding as of 30 June 2019) to cure the accumulated operating deficits from 2008-11. Over the period of supervision, a five-year budget forecast and capital plan were updated annually, as well as formally adopted financial policies

City management’s projected surpluses are modest at less than 1% of the city’s $321 million annual budget. Even with outside supervision, Lawrence faces practical constraints on raising property taxes with a tax base that has a median family income equal to 59% of the US average and a high 24% poverty rate. The city is heavily dependent on state aid, which has grown 3% annually over the past 10 years. Rising costs associated with education, health insurance and pension contributions will continue to exert hard to control pressures on the operating budget. Management projects that annual pension contributions will increase 3.3% annually over the next five years.

State aid represented 70% of fiscal 2018 general fund revenue, with property taxes the second largest revenue source at 20%. Education is the largest expenditure, comprising 62% of fiscal 2018 general fund expenses followed by public safety at 8%.

 Currently, the cities of Lynn (Baa1 stable) and Methuen (A3 negative) are each coordinating with a fiscal stability officer.

HOUSING IN CALIFORNIA

Apple announced a $2.5 billion plan to help address the housing crisis in California. The plan includes $1 billion for an affordable housing investment fund and another $1 billion to help first-time home buyers find mortgages. Facebook said last month that it would give $1 billion in a package of grants, and loans. In June, Google pledged $1 billion for a similar effort in California.

Apple’s plan is not just based on spending. Part of the $2.5 billion figure includes making available land it owns in San Jose, worth $300 million, for new affordable housing; $150 million to support affordable housing in the Bay Area, including long-term forgivable loans and grants; and $50 million to address the causes of homelessness in Silicon Valley.

Will all of this spending really put a dent in the State’s housing shortage? It is hard to say that this will be enough. The issues in California which lead to a housing shortage include issues of land availability relative to jobs, zoning issues which restrict the ability to develop affordable multifamily housing in coordination with transportation policies, and property tax policies which hinder movement. Only by addressing all of these issues in concert will California be able to make meaningful progress in the development of sufficient affordable housing in the state.

SALES TAXES ON THE BALLOT

A good test of the appetite for tax increases occurs in California as a number of localities are asking their voters to approve sales tax increases. In Irwindale, voters will decide on Measure I, a sales tax increase that will push the local rate to 10.25%, the state maximum. The tax increase could translate to an estimated $1.2 million annually and would help fund police protection, 911 emergency response and other public safety initiatives, senior citizen resources, parks, infrastructure and road improvements, transportation, recreation programs, maintaining library services and maintaining programs that create jobs and attract businesses.

In Monrovia, Voters will decide on Measure K, a sales tax increase that will push the local rate to 10.25%, the state maximum. If passed, Monrovia would yield about $4.5 million annually. It would be earmarked for projects that have been on hold. In Sierra Madre, voters will decide on Measure S, a sales tax increase that will push the local rate to 10.25%, the state maximum. Measure S may bring in a $225,000 a year, according to the L.A. County Registrar-Recorder. The potential monies would maintain police patrols, police, fire and paramedic response times, maintain emergency planning and response, maintain for parks, streets, sidewalks and parkway trees, maintain library services, recreation and senior programs and supplement general finances. In South Pasadena, voters will decide on Measure A, a sales tax increase that will push the local rate to 10.25%, the state maximum. The funds, if passed, would be used to maintain 911 emergency response times, focused on home break-ins and thefts, maintain neighborhood, school and park police patrols, fire and paramedic services, fire station operations and emergency preparedness, retain and attract local businesses, maintain streets and infrastructure and maintain general services and city finances.

In terms of property tax increases, in San Marino voters will decide on Measure SM, a parcel tax that is estimated to yield $3.4 million each year until 2025. The money would go for paramedic services, fire protection and prevention and police protection, according to the county registrar. Parcel taxes are a form of property taxes, based on the characteristics of the property — in San Marino’s case, primarily focused on zoning — instead of the value of it.

YONKERS

One of the historically troubled credits in New York State has been the City of Yonkers, located on New York City’s northern border. This proximity to the city has not yielded the benefits one might expect over the last half century. The city’s credit has reflected the decline of its jobs and housing base. It resulted in state oversight and the creation of security mechanisms for the City’s debt. It is this assistance which has maintained the City’s market access.

Now the City hopes to issue just under $100 million of debt. The City is rated A2 with a negative outlook by Moody’s. The credit was assigned a negative outlook. This despite the acknowledgement of a significant number of new multifamily rental and condominium complexes being built around the city’s mass transit centers. Moody’s notes that new high density complexes will bring a significant number of new residents which will increase income tax revenue and likely contribute to growth in sales tax revenue, two major revenue sources for the city. 

Nonetheless, the city’s narrow reserve position, above average long-term liabilities and below average wealth and income profile relative to regional averages weigh on the credit. This is offset to some degree by significant state oversight, including the segregation of funds into a lock box for the payment of debt service. This is a key mechanism which effectively directs first property tax collections to the payment of debt service. Additional security is provided under the New York State Section 99-b Intercept Program. 

The rating on the bonds reflects a quirk in the City’s security provisions. The bonds are secured by a General Obligation pledge as limited by New York State’s legislated Property Tax Cap (Chapter 97 (Part A) of the Laws of the State of New York, 2011) as well as by the city’s pledge of its faith and credit. However, the City’s rating does not get full credit for that pledge as Moody’s considers the current issues and the city’s outstanding debt to be GO Limited Tax because of limitations under New York State law on property tax levy increases. The absence of distinction between the GOLT rating and the Issuer rating reflects the city council’s ability to override the property tax cap and the faith and credit pledge in support of debt service.

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