Joseph Krist

Publisher

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GETTING ON OUR SOAPBOX

I saw an opinion piece this week that suggested that any additional stimulus aid to states and localities be contingent on accepting requirements as to how the state and local governments spend the money. That is fine as states and localities have handled grant, aid, and leveraging programs in the past. These include matching fund and other financial requirements. Those are normal policy decisions are made ostensibly for economy and efficiency. Tying healthcare funding under the ACA to funding by states for healthcare make sense, for example.

In particular, the article suggested that Congress require states to build and maintain rainy days funds of certain sizes and proportions. It is further suggested that the reason that states have needed aid to fight the worst and most mismanaged pandemic in history is not because of that but because of their unfunded pension obligations. We find that view ridiculous.

All of the argument seems to revolve around only two parts of the actual public fiscal management equation. Pension funding is a function of good management, responsible legislation, and a supportive electorate. The arguments seem to revolve around whether one should blame the legislatures or the workers. The fact that the pension funding difficulties currently in the spotlight developed over decades under the administrations of both parties and under a variety of economic and fiscal theories does not seem to matter.

What we are seeing today is a reflection of the starve the beast, cut revenue philosophy which has broadly characterized Republican fiscal policy for four decades. Its anti-revenue stance contributes as much as the allegedly greedy public workers backed by the Democratic side. The body politic has been convinced that the only good spending by government is no spending. In this case, it is reasonably easy to identify pandemic related spending and direct any monies generated by Congress to remedy the extraordinary expenses of the pandemic.

Conflating a long history of bad pension management with the problems caused by the extraordinary conditions of the pandemic is ridiculous. The pension expenses plaguing government at present would be the same with or without the pandemic. What is a variable in the equation is the role of the federal government in managing (or more correctly mismanaging) the pandemic response. States could only take steps within their own states to manage restrictions on activity. I’m sure that people in New York State would have loved to have been able to cancel the annual rally in Sturgis, SD which many believe was a catalyst for the ongoing disaster underway in the Plains.

Taken to its logical conclusion, there is as much a case to be made to deny the states currently under a pandemic siege due to the refusals of their governors to impose preventive restrictions any aid as there is to deny states with underfunded pensions assistance. Connecticut. Illinois. New Jersey – blue states. South Carolina, Kentucky, Kansas – red states. They all have badly managed and underfunded pension systems. Chronically so. Going further down a logical path, are pensions more of a problem than irresponsible development subsidized by federal flood insurance? Would FEMA have to pay less if development was restricted in flood zones and wildfire areas? Would states and cities be penalized for issuing ineffective but expensive tax breaks to subsidize business?

In the end, the conflation of current expense demands generated by extraordinary circumstances with the pension funding problem is ludicrous. It’s the sort of ideologically based argument that we have long cautioned against from either party. It’s not constructive and most importantly doesn’t contribute to solving the problem. The states and local governments are asking for help with the pandemic, not for a pension bailout. Let state and local government get through the pandemic and get the red herrings out of the way.

ACA OUTLOOK IMPROVES

We are always wary of trying to read the tealeaves when it comes to issues before the Supreme Court. Nonetheless, it would be a mistake not to note the overwhelming consensus reaction to the arguments heard this week at the Court in the California v Texas case challenging the ACA. By all accounts, the notion of severability – the idea that one portion of a law may be invalidated without invalidating the whole law – seems to be one that will save the Act.

At least two justices clearly expressed the view that the mandate provisions of the law were severable from other provisions of the act. Now that the political firestorm over the appointment of the most recent justice is receding, it is easier to more objectively prognosticate about the expected final result of the case. If we have to make a prediction, we believe that the mandate may be invalidated but that the basics of the ACA including the expansion of Medicaid will be upheld.

Such a result would be credit positive for the major governmental players. The likelihood that the basic terms of the ACA are upheld is increased lessens a significant source of uncertainty for not just providers but also for providers as well as state and local government funders.

ELECTION TAKEAWAYS

So much of the focus has been rightfully on the implications of the Presidential election in the days after its completion. It is true that certain expected federal policy changes will have implications for state and local government. We take the view that local decisions as expressed through the ballot box will have more of a current impact than changes in federal law or policy will.

In Arizona, Proposition 208, an income tax increase to fund teacher salaries increases income taxes through a surcharge on taxable income for single earners who make more than $250,000 and dual earners who make more than $500,000. The Arizona Joint Legislative Budget Committee estimates the surcharge will raise $827 million in revenue, with approximately $702.95 million to be distributed to schools, another $99.2 million available in grants for schools with career technical education programs and $24.8 million that will go towards teacher education throughout the state. The direct funding to districts represents a funding increase of 12.6% in the state’s $5.6 billion general fund expenditure on K-12 education in 2021.

In Los Angeles, Measure RR authorized the Los Angeles Unified School District to issue up to $7 billion in general obligation (GO) bonds. Voters in the SF USD approved Proposition J, which introduces a $288 per parcel tax starting in fiscal year 2022. The tax will generate around $48.1 million annually (equivalent to around 5% of fiscal 2021 budgeted general fund revenue) and allow the district to maintain 7% salary increases negotiated in 2018. The increased revenue is needed as the district drew $40.0 million and $20.0 million, respectively, from its share of the city’s rainy day reserve to fund the pay raises.

In Maryland, voters in Montgomery County approved a charter amendment on property tax limitations that enables the county to raise property tax rates without revenue constraints. The ballot item replaces the existing limit and enables a unanimous vote by County Council to adopt a tax rate on real property that can exceed the rate from the previous year. The county’s previous charter limit, a self-imposed tax cap that was enacted in 1990, limited property tax revenue growth to the rate of inflation (CPI index) and an amount based on new construction. Reinforcing the support for County operations, second charter amendment on the ballot (Question B) was rejected: it aimed to remove the county’s ability to increase revenue above inflation.

THE REAL IMPACT OF PROPOSITION 22

Much will be written and said about the success of the transportation network companies (TNC) in defeating a ballot initiative aimed at reclassifying gig workers as employees. While so much focus on that aspect of the initiative is driving debate, one troublesome aspect of the initiative should draw much more concern. Other initiatives have attempted to make it hard for a legislature to override a voted change by requiring supermajorities for repeal.

I have trouble with supermajority requirements philosophically but to date the required percentages have not exceeded two thirds. That’s manageable. In the case of Proposition 22, the initiative included language which requires a 7/8 majority in the legislature in order for the initiative to be overridden. That effectively prevents any change in the law going forward. It would be dangerous to see a significant body of voter initiatives include such excessive supermajority requirements.

In this case, an exceedingly well funded campaign supported overwhelmingly by the TNCs was more successful than a more thought out and debated legislative process. From our standpoint it’s yet another example of the TNCs adversary approach towards government which hinders its long term goal of replacing public transportation. It also reinforces the view that their long term profitability relies on fully autonomous vehicles. And when that comes, Proposition 22 will be why the unemployed drivers can’t claim unemployment insurance. 

NEW JERSEY

S&P Global Ratings has lowered its rating on the State of New Jersey’s general obligation (GO) bonds to ‘BBB+’ from ‘A-‘, as well as lowered its long-term and underlying ratings to ‘BBB’ from ‘BBB+’ on various other bonds secured by annual appropriations from the state. “The downgrade reflects our view that New Jersey will continue to have a significant structural deficit that will be difficult to close in the coming years because of decreased revenues as a result of the COVID-19 pandemic, combined with high and increasing debt, pension, and other postemployment benefit liabilities.”

The path back from the credit declines experienced under the Christie administration became longer and more twisted as a result of the pandemic. S&P looks at the history of pension underfunding by the State, the decline in available revenues, and the continued need to increase pension funding and concludes that the state will have a large fiscal 2021 structural deficit of 15.9% of budgeted appropriations. 

MBTA

As the most significant example of the difficulties in which large city public transit agencies, we have rightly devoted significant space to the ongoing troubles at the New York MTA. Nevertheless, other northeastern agencies are beginning to reveal their plans for coping with pandemic related declines in ridership and revenues.

Boston’s public transit agency – the Massachusetts Bay Transit Authority – is the latest to announce plans to cope. The plan would take $130 million from spending on service. The reductions in service would be 15% on buses, 30% on subways and 35% on commuter rail.  The proposal includes the elimination of all weekend commuter rail service, 25 bus routes, ferry service, or any rapid transit after midnight.  The T already exhausted about $827 million from the CARES Act to close gaps in fiscal years 2020 and 2021.

The proposal represents the impacts of eight months of state of emergency restrictions on ridership. Current levels of ridership reflect huge declines compared to pre-pandemic crowds — an average of about 40% on buses, 25% on subways, and 13% on the commuter rail. Those declines significantly reduced fare revenue, which typically makes up about a third of the agency’s budget. Officials now expect they will face a $579 million gap in fiscal year 2022, if you believe the most pessimistic end of earlier estimates.

P3 CHANGES HANDS

In 2012, two major players in the public/private partnership arena, Skanska and Macquarie, partnered with Virginia in 2012 to rebuild and expand the Downtown and Midtown tunnels between Norfolk and Portsmouth. The entities were paid to expand the capacity of the tunnels and an extension of  Martin Luther King Boulevard to Interstate 264. These private partners contributed $1.6 billion of project costs with $550 million paid by the Commonwealth of Virginia. A concession was awarded allowing the operator to collect tolls to an entity owned by the partners known as Elizabeth River Crossings.

Toll collections commenced in 2014 and the private operator immediately ran into criticism over its collection of tolls and financial penalties assessed to non-payers. Within three years, the agreement between the concessionaire and the Commonwealth was renegotiated. Macquarie and Skanska offered to settle for lower amounts and to pay $500,000 annually for 10 years toward a toll-relief program for eligible residents of Norfolk and Portsmouth, among other changes.

Tolling and their collections remain a political sticking point.  Gov. Ralph Northam tasked the Virginia Department of Transportation to “evaluate opportunities to mitigate the financial burden on the commuting public.” Work on the study began in May 2019 and was nearing completion this summer. So the private partners clearly reevaluated their investment.

Now the partners have announced that that the legal entity which operates the facilities, Elizabeth River Crossings, has been sold to a Spanish toll road operator and the John Hancock Life Insurance Co. for more than $2 billion. The sale will generate an annual  5.4% return on asset over the eight year period of ownership to the Macquarie/Skanska partnership. That just doesn’t cut it for these investors relative to their perceived risk.

The new buyer is Abertis, a Spanish toll road company, and Manulife Investment Management, which did so on behalf of John Hancock Life Insurance Company, a division of Manulife Financial Corp. If approved, the project would be Abertis’ first toll road operation in the United States. Under the existing terms governing operation of the facilities, the operator would have the concession for another 50 years. It would be limited to annual increases of 3.5% for tolls.

MORE ON TOLL ROADS

More traditionally financed and operated toll roads are facing issues related to their toll collection practices, especially the use of accumulating additional penalties in the event of non-timely payment of delinquent fees. The Transportation Corridor Agencies, operator of the San Joaquin toll roads, has made a motion in the California courts to settle litigation regarding Transportation Corridor Agencies and its tolling practices.  The Transportation Corridor Agencies and 3M have approved a deal worth nearly $176 million to end a lawsuit filed by a class of millions of motorists who traveled the toll roads. The settlement includes nearly $41 million in cash awards and $135 million in penalty forgiveness.

The lawsuit alleges that Southern California toll companies for tolls on state Routes 73, 133, 241, 261, and the 91 Express Lanes improperly shared personally identifiable information of motorists to third parties. The agencies will provide $135 million worth of penalty forgiveness to members with outstanding penalties. Those eligible will receive the lesser of the total of their outstanding penalties or $57.50. Any remaining funds will go toward those with the oldest outstanding penalties to the newest.

Who gets the money? Class members include anyone whose personally identifiable information was provided by the Transportation Corridor Agencies to any other individual or entity between April 13, 2015, and 30 days after the court issues a preliminary approval order.

In the Bay Area, The Golden Gate Bridge, Highway and Transportation District oversees the bridge, buses and ferries in the Bay Area. It has been relying on federal stimulus assistance to keep paying its employees even in face of significantly reduced traffic. Now those funds are essentially gone and no subsequent stimulus appears on the horizon.

This has led the District to pose a choice to its stakeholders in the absence of any additional stimulus. The District faces a $48 million revenue shortfall. To deal with that gap, the District has proposed either reducing headcount by half or raising tolls. The transit district has experienced about a $2 million a week drop in tolls and fares throughout the pandemic

Golden Gate Bridge traffic is still down 30%, bus ridership dropped 75% and ferry ridership plummeted 96%.  cutting staff would save an ongoing $26.7 million a year until the positions are refilled. One option, which would avert layoffs, is to temporarily raise the toll by $2, from the current range of $7.70 to $8.70 for a car depending on whether a driver pays with FasTrak or by mail. Another option is a hybrid model that would raise the toll by $1.25 and furlough staff one day a week. 

CLIMATE

The powerful derecho that swept through the Midwest in August, focusing its destruction on central Iowa, is officially the most costly thunderstorm event in recorded U.S. history. According to NOAA, an estimated 90% of structures in Cedar Rapids were damaged by the storm, and more than 1,000 homes were destroyed. the U.S. Department of Agriculture estimates that 850,000 crop acres were lost — 50% more than originally estimated.

As of November 2, 2020, more than 200,000 claims have been reported.  Of those claims, nearly 160,000 claims totaling more than $1.6 billion have been paid already.  Insurance companies are holding more than a billion in reserves to be used for the remaining claims. Iowa Gov. Kim Reynolds requested nearly $4 billion in federal aid to help the state’s agricultural industry.

This all comes as the state has come later to the pandemic’s wrath but is now facing its full pressure. The daily case tally has just reached nearly 5,500 and 27 deaths. The total is 162,000 sick and some 1900 dead. It all adds up to additional pressure on the State.

On the positive climate front, green jobs can even spring from the auto industry. One of the fears of local economies is that existing manufacturing locations may not survive the ultimate conversion to electric vehicles. Ford just announced it will add 150 workers at its Kansas City Assembly Plant in Claycomo, Missouri, to build the new E-Transit full-size van that will go on sale late next year. Another 200 workers will be hired at Ford’s Rouge Electric Vehicle Center in Dearborn, Michigan, which will build an all-electric F-150 pickup starting in mid-2022.

Ford will spend about $150 million at a transmission plant in Sterling Heights, Michigan, to make electric motors and transaxles for new electric vehicles. No new jobs will be added but the investment will help keep 225 positions. Automakers sold just over 236,000 fully electric vehicles in 2019, up 36% from 2018. That is a mere 1.4% of all new vehicles sold in the country.

This news comes as the Federal Reserve made its clearest statement to date regarding the potential impact of climate change on the global financial system. “Acute hazards, such as storms, floods, or wildfires, may cause investors to update their perceptions of the value of real or financial assets suddenly…slow increases in mean temperatures or sea levels, or a gradual change in investor sentiment about those risks, introduce the possibility of abrupt tipping points or significant swings in sentiment.” Lost in much of the politics driven debate over climate change is the fact that two of the more objective entities in the federal government – the military and the Federal Reserve – have made clear policy statements in support of a view that climate change is real and is happening. That moves the debate forward.

PUERTO RICO

This week’s news that nearly 200 boxes of uncounted votes have surfaced in Puerto Rico is just the sort of thing that makes statehood a pipedream. Officials acknowledged that the votes could change the results of particularly narrow races that had already been preliminarily certified. Two city mayoral elections are currently decided by margins of under ten votes.

In spite of the hopes of activists and others, the election was already marred by the fact that the winning gubernatorial candidate won with only one-third of the vote.  The president of Puerto Rico’s State Electoral Council, Francisco Rosado Colomer, acknowledged that it could be between 3,000 and 4,000 votes which have been “found”.

The exact circumstances behind the “loss” and “discovery” of the votes are not clear. What is clear is that the perception of the government and politics of Puerto Rico as being incompetent is only enhanced by events like these. It weakens the value of the vote on issues like status. Add this to the narrowing of the partisan breakdown of the U.S. Congress and the outlook for statehood significantly weakens.

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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As we go to press on this Friday morning, a certified election result will not occur for the presidential election. Nonetheless, elections for state offices have produced some trends. There was the smallest shift in the partisan make up of state legislators in many election cycles. The implications of these results is that in spite of the apparent loss by President Trump, Republicans still dominate statehouses.

This has significant implications for the decennial redistricting process which could further entrench the party at the state level and keep the makeup of the House relatively closely split. This has implications for spending by the federal government and how it will deal with things like healthcare, especially if the Supreme Court rules against the ACA. So the uncertainty that confronts sectors like transportation and healthcare is likely to continue. With that as context, here are what we see as the significant issues from the week.

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MTA

The MTA announced that it is preparing to borrow the final $2.9 billion available to it from the Federal Reserve’s Municipal Liquidity Facility (MLF). The decision comes in  the face of continuing impacts on ridership and pressure on its ratings from the limits imposed by the pandemic. Unsurprisingly, the decision has been received negatively by the rating agencies but that seems to more on the basis of the long term view of the Authority’s finances. In announcing its view that the move to borrow was credit negative, Moody’s noted that their view is rooted in their assumptions about the post-pandemic ridership trends.

Moody’s sees a scenario where even when the economy returns to a more normal performance. It expects MTA ridership to permanently remain 10% below its pre-corona virus level – establishing a “new normal” – largely because of an increase in work-from home flexibility. Restoration of demand to 90%of pre-pandemic levels would be a significant improvement from the currently diminished demand. On  October 28, the MTA’s estimated subway ridership was down 69.7% from the same day in 2019 and Metro-North ridership was down 78%.

It should be noted that the new round of borrowing will be secured by secured by dedicated taxes and paid before the outstanding transportation revenue bonds. Eventually, these borrowings will become a part of the Authority’s long term debt structure as the likely source of the note repayment will be a long term refinancing.

The election has reduced the likelihood that the MTA will get as much as it needs in any future stimulus given the resulting split in the Senate. Should the Republicans retain their majority, another stimulus is likely but the mood against aiding state and local governments directly does not seem to have improved. Broadly generalizing, Republicans have backed roads over mass transit and the Democrats have favored mass transit in previous funding debates.

ELECTIONS

The bid to convert Illinois’ income tax regime from a flat rate to a progressive rate went down to defeat. Revenues would likely have increased under such a plan at a time when the state could certainly use them in its quest for structural balance. The defeat of the proposal is credit negative for the State and Chicago as well. The defeat reflects the continuing resistance to taxes to address the State’s structural budget problems. The results were definitive with 55% against and 45% for in a vote which required 60% approval to meet the constitutional threshold for amendments.

Moody’s outlined some alternative revenue steps which might be taken by the Legislature. They would only require a simple majority and include Alternatives include increasing the 4.95% flat tax that applies to individual income or broadening the state sales tax to more services. Raising the flat income tax by 70 basis points, to 5.65%, would generate about $3 billion of additional revenue, the same as had been projected for the first full year under graduated income tax rates that the state had devised in connection with the proposed constitutional amendment.  

In California, Proposition 22 which would have altered the status of “gig” employees went down to defeat after a $200 million investment in support of the proposition. Uber and Lyft had said that they could not operate in the State if they were forced to treat their drivers as employees. Proposition 22 would have shifted local property tax burdens from the residential sector to the commercial sector by lifting the limits on property taxes imposed by Proposition 13 for commercial property. It was seen as a potential significant revenue generator for localities. Proposition 19, a generous new property tax break for older California homeowners, partly paid for by removing a low-tax guarantee for those who inherit a home from a parent or grandparent was winning as we went to press but the outcome was still in doubt..

Legal recreational marijuana was approved by voters in New Jersey, Montana,  and Arizona. In South Dakota, voters legalized medical use. Mississippi did as well but on a more limited basis. Arizona voters approved a ballot question (Proposition 207 ) to legalize recreational pot for people ages 21 and older with a 16% excise tax on retail sales. Montana approved two measures. One (Initiative 190 ) to legalize recreational marijuana with a 20% tax and let people convicted of marijuana offenses apply for resentencing or records expungement, and the other (Constitutional Initiative 118) to let the Legislature set the age for buying, using, and possessing marijuana at 21.

South Dakota voters passed Constitutional Amendment A and Initiated Measure 26 to legalize recreational and medical cannabis. New Jersey said yes to Public Question No. 1 to legalize recreational cannabis for people ages 21 and older and subject it to state sales tax. Local taxes would have to be approved by the Legislature.  Mississippi voters passed Initiative 65to legalize medical marijuana and rejected an alternative added by legislators to let lawmakers regulate a more restrictive program.

Arizona voters looked likely to approve Proposition 208, a measure that would raise revenue for education by applying a 3.5% surcharge on taxable annual incomes above $250,000, for individuals, or above $500,000 for joint filers.

The wildfires in Colorado should probably get some credit for generating support for a 1/4 cent increase in the local sales tax in Denver. The stated purpose of the tax is to reduce the City’s carbon footprint. The City has goals for reducing C02 emissions by 40% by 2025, by 60% by 2030 and by 100% by 2040. In combination with a similar increase to be dedicated to homelessness issues, the local sales tax in Denver will reach 8.81%.

Austin voters overwhelmingly approved Proposition A, which would raise property taxes in the City of Austin to help pay for the Project Connect transit improvement plan. The plan includes two new light rail lines, a new commuter rail line, and a new bus rapid transit line  that would run in its own right-of-way so it doesn’t mix with traffic. A new downtown transit tunnel would also be built. Proposition B, which would allow the city to borrow $460 million for a host of infrastructure improvements, including new sidewalks, bikeways and street repairs was also approved by two thirds of the voters.

Seattle voters have approved a six-year measure which enacts a tax of 0.15%, or 15 cents on a $100 purchase, to generate $42 million a year. That money, to be collected starting April 1, replaces existing taxes that expire this Dec. 31, of .10% plus a $60 car fee. Total sales tax within Seattle will reach 10.15% including state, county and transit-agency shares. To the south, Portland metropolitan area voters rejected Measure 26-218 which proposed a tax of up to 0.75% on private employers with 25 or more workers. Similar efforts to impose such a tax had been attempted in Seattle unsuccessfully as well.  

PUERTO RICO

First the debt restructuring news. U.S. District Judge Laura Taylor Swain denied a motion asking the court for an independent investigation into trading activity and possible violations of the confidentiality order by several creditors including bond insurer National Public Finance Guarantee Corp. in the mediation process of the Puerto Rico debt’s restructuring. The judge also decided that by Feb. 10, the Commonwealth’s Financial Oversight and Management Board (FOMB) must submit “at a minimum an informative motion comprising of a term sheet disclosing the material economic and structural features of a Commonwealth and PBA [Public Building Administration] plan of adjustment [POA].”

The proposal for an investigation would have an independent investigator look into insider trading claims rather than the New York Attorney General and the SEC. Judge Swain stated that Promesa “does not explicitly authorize the Court to order to initiate an independent investigation” like the one in National’s motion and added that National did not provide a viable option. An additional motion made by the PSA creditors, which comprises the Ad Hoc Group of Constitutional Debtholders, the Ad Hoc Group of General Obligation Bondholders, the  Lawful Constitutional Debt Coalition (LCDC) and the QTCB Noteholder Group was also rejected.

The court actions highlight the divide between the creditor groups. National contends that some creditors have used their participation in the restructuring process to trade certain contested bonds from the Commonwealth and obtain profits for themselves. National was concerned that it would be left “holding the bag” to cover any losses to investors in bonds it insured.

As for the election, the former two-term resident commissioner—from 2009 to 2016 – Pedro Pierluisi was elected Governor by the narrowest of margins. The percentage difference in votes between the two top candidates for governor was less than 1 percent. The election also included a yes-or-no plebiscite on whether Puerto Rico should be admitted as the 51st state of the United States. Statehood prevailed in the political status referendum, with 52.29 percent voting “yes” to statehood, and 47.71 percent voting against, with 88.34 percent of units reporting.

One of the difficulties with the debate over statehood vs. the status quo is the consistent history of a true split in the electorate. There has never been a question on the ballot regarding Puerto Rico’s status that generated a clear and convincing result one way or another. It’s one of the prime hurdles for statehood proponents to overcome. That lack of political consensus continues to hold back efforts to resuscitate the Commonwealth economy.  And low voter participation of just over 50% of eligible voters reduces the value of these status votes.

Proponents of statehood are already making their case in the mainland press. The problem is that while a majority of voters opted for statehood, it was a small majority. In essence, proponents are claiming a mandate on the basis of the expressed view of 25% of eligible voters. Opponents can seize on that to say that new real mandate in support of either the status quo or statehood resulted.

CASINOS ON THE BALLOT

In Virginia, voters in four cities – Bristol, Danville, Norfolk, and Portsmouth  voted to allow for the construction of proposed casino developments in those cities. The casinos are tentatively slated to open in 2023. In the meantime, they are expected to add construction employment and repurpose old industrial and commercial sites in the respective cities. Each city will benefit from the payment by the casinos of all applicable local fees and taxes, including property, sales, hotel occupancy and meal taxes and each city will receive a portion of the gaming tax revenue to be collected by the state.

The Commonwealth will levy a gross receipts tax on casino activities, a portion of which will be allocated to host cities according to a formula. With the exception of Bristol, the cities will keep their full share of local revenues. Bristol is one of the significant stops on the NASCAR circuit. Races can draw some 165,00 spectators who then generate significant local revenue in the City especially in connection with race days. Bristol’s local revenues would be directed to a Regional Improvement Commission which would distribute them evenly among the city and the 12 counties within the Virginia Department of Transportation’s Bristol service district which includes Bland, Buchanan, Dickenson, Grayson, Lee, Russell, Scott, Smyth, Tazewell, Washington, Wise and Wythe counties.

Moody’s views the approvals as credit positive for the localities. They cite the potential to generate increased local tax revenues and create significant numbers of jobs. Norfolk estimates that the development will bring it $25- $45 million in recurring tax revenues when it is open. Bristol projects it will generate about $16 million in new recurring local tax revenue. Danville would be able to transfer ownership of a blighted industrial site and get a $20 million upfront payment. Virginia was one of nine states that prohibited casino gambling. Gaming taxes will be imposed at rates of 18%, 23% and 30% for casinos’ adjusted gross receipts of the first $200 million, between $200 and $400 million, and in excess of $400 million, respectively.

These gaming taxes will be held for appropriation by the General Assembly pursuant to formula host cities will receive 6%, 7%, and 8% of adjusted gross receipts. 0.8%  would go to the Problem Gambling Treatment and Support, 0.2% would go to the Family and Children’s Trust Fund. For the one casino operated by an Indian tribe (the one in Norfolk), 1% will go to the Virginia Indigenous People’s Trust Fund. Any residual would be available for appropriation for programs established to address public school construction, renovations or upgrades throughout the state.

UTAH NUCLEAR

A nuclear generating facility actually planned to be physically located in Idaho but to be paid for by sales to Utah municipal utilities is losing participants. The decision to withdraw follows announced cost increases by the Utah Associated Municipal Power Systems (UAMPS), which was the primary intended buyer for capacity from the proposed plant. Completion of the project would be delayed by 3 years to 2030. It also estimates the cost would climb from $4.2 billion to $6.1 billion.

NuScale is an entity which was spun out of Oregon State University in 2007. It is their plant design that will be used for the plant. It’s efforts to promote nuclear power have benefited from DOE support cost sharing agreements whereby DOE would cover some $1.4 billion of construction and development costs. The attraction of the facility is its small modular design the company says will be safer, cheaper, and more flexible that a conventional gigawatt power reactor. Each of NuScale’s little reactors would produce 60 MW. A plant would contain 12 of the modular reactors, which would be built in a factory and shipped to the plant site. 

This would allow the generator to serve as a peaking facility much in the way a similar sized fossil fueled facility might serve. The proposed project still has many rivers to cross even as it passed a key milestone in the NRC review process, receiving its safety evaluation report. It expects to receive a final “design certification” to come next year. 

UAMPS contends, in an effort to deal with a poor track record for nuclear generating development and construction, that construction will not be commenced until the full output of the plant is sold. That process is a long way from completion. It’s a concern that another municipal utility is being challenged to participate in not just a nuclear facility, but a nuclear facility of a new design. Too often our market is taken advantage of because of our lower cost of financing and need for yield. This could become another example of this phenomenon.

INTERNET SALES TAXES

Once the Supreme Court ruled in favor of states seeking to tax sales of products through the internet, many states began imposing such taxes. Now we are beginning to see data about how much revenue these taxes generate. Recently, Arizona completed its first year of collections and released updated collection information.

Under a state law that took effect on October 1, 2019, out-of-state businesses that do not have a physical presence in Arizona and meet certain economic thresholds must collect and remit transaction privilege tax in Arizona. The Arizona Department of Revenue has seen a steady rise in transaction privilege tax collection. Since October 1, 2019, the Arizona Department of Revenue (ADOR) has brought in more than $467 million in transaction privilege tax from over 4,500 remote sellers and marketplace facilitators. In fiscal year 2020 (September 1, 2019 – June 30, 2020), the department collected over $278.7 million and over $128.6 million towards the General Fund.

Now it’s not clear as to whether these sorts of results will be sustainable. It is likely that collections of sales taxes from internet sales in 2020 may be a bit of an aberration as the impact of the pandemic on local economic activity drove significant demand to purchase on line rather than in person.  So it is difficult to use this past performance under unusual conditions as a basis for predicting future results.

OPOIOD LITIGATION

I have fielded many inquiries about whether ongoing litigation against manufacturers and distributors of opioids would be the next securitization candidate for the municipal bond market. Settlement talks have been ongoing for at least the past year. A proposed settlement was rejected in 2019 due to a variety of factors.

Now it looks like a settlement of the litigation may be at hand. According to press reports, a settlement involving a $26 billion payout is likely to be approved. Three major drug distributors and a large drug manufacturer – McKesson, Cardinal Health, AmerisourceBergen and Johnson & Johnson – have indicated that they would support such a settlement.  The distributors will collectively pay about $21 billion over 18 years, with $8 billion paid by McKesson alone. J&J would contribute $5 billion. The move is being motivated by the existence of two suits – one in New York and one in West Virginia – scheduled to begin in January, 2021. The WV case is being brought by the local governments in the state as prior settlements in WV were only with the State.

Each state would determine how it would distribute settlement money. The amount each state would receive is expected to be determined by four factors: state population, overdose deaths, diagnoses of substance use disorders and volume of pills sold. The distribution formula has been the source of much conflict among the plaintiffs and has been hampered by arguments over attorney compensation.  The settlement would provide $2 billion for the lawyers which is expected to be paid out over seven years.

Significant differences between this and the tobacco settlement. First, there is much less money involved and the payments in this suit will occur under a fixed timeline with a final date certain. The tobacco settlement provided for payments in perpetuity. That allowed for longer amortizations and greater flexibility in terms of managing cash flows in support of any bonds issued. Other differences include the fact that annual payment amounts are not based on ongoing consumption or sales of the product as is the case with tobacco bonds.

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