Joseph Krist
joseph.krist@municreditnews.com
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THE HEADLINES…
KANSAS BUDGET VETO
MICHIGAN HOLDS THE LINE ON TAXES
INFRASTRUCTURE FOCUS – DAMS
PHILADELPHIA SODA TAX
SCRANTON KEEPS LOCAL SERVICE TAX
MORE PA. DISTRESSED CITY NEWS
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KANSAS BUDGET VETO
After years of declining revenues and lowered credit ratings, it appeared that the Kansas legislature might enact a package of tax increases to address a $364 million budget gap for the current fiscal year. Since 2010, the state has faced a stagnant economy which has not responded to the tax cut stimulus. Most recently, S&P Global Ratings issued a “negative” outlook for its credit rating for Kansas. Last summer, S&P downgraded Kansas’ credit rating, to AA-.
The hope that the state might rely on more than spending cuts was not realized as eighty-five of the 125 representatives — one more than was necessary to override a veto — voted to enact the plan over Mr. Brownback’s objections. But, the Senate voted 24 to 16 and sustained Mr. Brownback’s veto, falling three votes short of the minimum for an override. The proposal called for increased income tax rates, as well as the elimination of a controversial tax exemption that benefited business owners. It would have raised more than $1 billion over two years
The tax exemption has been the cornerstone of Governor Sam Brownback’s plan to create jobs. Mr. Brownback said that the proposal before the Legislature would hurt job creators. So now the legislature is expected to embark on a course of continuing to try to raise revenues as reliance on cuts would likely require additional cuts to local school aid which have proved highly unpopular. It is thought that an extended period of resubmitted legislation and vetoes will go on until a final resolution.
In light of recent ratings actions in places like West Virginia, we wonder how long the rating agencies will take to recognize the dysfunctionality of Kansas’ budget process and to downgrade the state’s credit. As long as the Governor clings to his ideologically based approach to the state’s finances, we see the state’s credit as a declining situation.
MICHIGAN HOLDS THE LINE ON TAXES
The Michigan House of Representatives voted down legislation to roll back the state’s income tax with 52 votes for and 55 against. House Bill 4001 would continue to cut the tax rate to 4.15 percent in 2018 and 4.05 percent in 2019. If the state’s Budget Stabilization Fund — more commonly known as the “rainy day fund” — was over $1 billion by 2020, the rate would drop to 3.95 percent. If that were still true in 2021, it would drop to 3.9 percent. There is currently $734 million in that fund.
The House Fiscal Agency estimated the rollback to 3.9 percent would result in incremental revenue loss to the state, reaching a $1.1 billion budget hole by Fiscal Year 2022, when fully phased in. The Michigan individual income tax is now the largest source of State tax revenue, with net revenue of approximately $8.0 billion in fiscal year (FY) 2013-14, representing 39% of combined State General Fund and School Aid Fund revenue. In FY 2013-14, the individual income tax provided 62.7% of General Fund/General Purpose revenue and 20.5% of School Aid Fund revenue.
According to the Senate Fiscal Agency, (Public Act 94 of 2007) which increased the individual income tax rate from 3.9% to 4.35% as of October 1, 2007. (An expansion of the use tax to certain services also was approved; however, the use tax expansion was repealed two months later, on the day that it was to take effect, and replaced with a Michigan Business Tax surcharge.)
The income tax rate was to remain at 4.35% for four years, then decline over six years back to 3.9%. Instead of the reduction from 4.35% to 3.9% over five years, Public Act 38 of 2011 made a single reduction from 4.35% to 4.25% as of January 1, 2013, although Public Act 223 of 2012 subsequently accelerated the rate reduction by three months, to October 1, 2012. the current tax rate of 4.25% is lower than the rate levied during most of the history of the individual income tax, including the 25 years between 1975 and 2000. Over the 48-year life of the individual income tax, the median average tax rate levied was 4.4%.
INFRASTRUCTURE FOCUS – DAMS
Infrastructure issues will be addressed in President Trump’s joint speech to Congress this week as well as in the budget. That will help to bring focus to an issue crying out for it. In 2016, the Association of State Dam Safety Officials estimated that it would cost $60 billion to rehabilitate all the dams that needed to be brought up to safe condition, with nearly $20 billion of that sum going toward repair of dams with a high potential for hazard. By 2020, 70 percent of the dams in the United States will be more than 50 years old, according to the American Society of Civil Engineers. In 2015, Representative Sean Patrick Maloney, Democrat of New York, introduced the Dam Rehabilitation and Repair Act, an amendment to the National Dam Safety Program Act, minimum safety standards. The bill is still pending, but it would not apply to a majority of the dams in the United States because more than half of them (69%) are privately owned.
There are 90,000 dams across the country, and more than 8,000 are classified as major dams by height or storage capacity, according to guidelines established by the United States Geological Survey. The average age of the dams in the U.S. is 52 years old. Other than 2,600 dams regulated by the Federal Energy Regulatory Commission, the rely on state dam safety programs for inspection.
Budgets for dam safety at the state level however, are not significant. They range from a high of $11.1 million in California to $0 in Alabama. State dam safety programs have primary responsibility and permitting, inspection, and enforcement authority for 80% of the nation’s dams. Therefore, state dam safety programs bear a large responsibility for public safety, but unfortunately, many state programs lack sufficient resources, and in some cases enough regulatory authority, to be effective. In fact, the average number of dams per state safety inspector totals 207. In South Carolina, just one and a half dam safety inspectors are responsible for the 2,380 dams that are spread throughout the state. Alabama remains the only state without a dam safety regulatory program.
So the problem will clearly require investment at both a state and federal level. It highlights the need to focus the discussion of infrastructure on maintenance of the existing infrastructure let alone its expansion. As for how much may be needed, $1 trillion may sound like a huge amount. But in the context of overall infrastructure needs, assuming every pipe would need to be replaced, the cost over the coming decades could reach more than $1 trillion, according to the American Water Works Association (AWWA). That is just for drinking water distribution. No dams, highways, roads, ports, or wastewater upgrades.
PHILADELPHIA SODA TAX
Is it the real thing? So far there is one month available on the tax on sugary drinks implemented as of January 1 in Philadelphia. The city is the first to put such a tax into effect. The tax is levied at a rate of 1.5 cents per ounce raising the wholesale price of the typical 2 liter bottle by about 50 cents. In January, the city collected $5.7 million some $91 million. That would require the city to collect the tax at a monthly rate of some $7.7 million.
The collections exceeded expectations even though the drop in sales by volume was well in excess of estimates. Supermarkets and distributors have claimed declines from 30 to 50%. The tax continues to be challenged in the courts. Three dozen state legislators filed a brief calling for the Commonwealth Court to overturn it. They contend that the tax is not constitutional, violates the law, and will result in lost sales tax revenue collection into the commonwealth’s general fund.
Opponents contend that successful implementation would spawn other efforts in Pennsylvania cities to tax sugar based products. They claim that other cash-strapped cities such as Harrisburg, Chester, and Williamsport will use the appellant’s tax as a way to increase their revenues. “It is not unrealistic to expect that next year there will be a ‘candy tax’ based upon volume in Philadelphia, a sweetened beverage tax based upon volume in Harrisburg, and a ‘snack/cookie tax’ based upon volume in another cash-strapped city.”
A city spokesman said the city’s “economist demonstrated that the PhillyBevTax would have little impact on state sales tax revenue and under certain circumstances could actually increase state sales tax revenue.” Boulder, CO voters approved a 2 cent per ounce tax last fall and voters approved “soda taxes” in the California cities of San Francisco, Oakland, and Albany.
SCRANTON KEEPS LOCAL SERVICE TAX
In the summer of 2016, the MCN discussed the efforts of local libertarian community activist Gary St. Fleur to legally challenge the collection of a local services tax by the City of Scranton, PA. Rejecting residents’ claims that Scranton violates a tax cap, visiting Senior Judge John Braxton of Philadelphia approved Scranton’s petition to levy the higher local services tax of $156 on anyone who works in the city and earns above $15,000.
Braxton approved Scranton’s tripled LST petitions for each of 2015 and 2016, up from the prior typical LST of $52 a year, as planks of the city’s Act 47 recovery plan. Neither of those petitions generated opposition. This time, however, eight residents formally opposed the city’s LST petition for 2017. They and their attorney, John McGovern, contended the city routinely goes way over a total cap on a group of taxes allowed under state Act 511, which includes the local services tax.
In a hearing on Feb. 13, city officials testified that while Act 511 allows the usual $52 levy the $104 LST increase. Braxton agreed with the city and rejected the residents’ claims. This means that eligible workers will continue to pay an LST of $3 week, or $156 this year, instead of $1 a week, or $52. The LST applies to about 32,000 people who work in Scranton.
Special counsel for the city, Kevin Conaboy, argued that the residents’ opposition was misplaced because they should have fought the tax on different grounds, called a mandamus action. Braxton agreed. He dismissed the opposition to the LST “without prejudice,” meaning the residents could pursue another avenue of attack. “Nothing in this order shall prevent respondents from objecting to the imposition of this tax at the appropriate time and through the proper procedural mechanisms,” the judge said in his one-page order.
So the issue may not be dead but for now Scranton can adopt a budget including those revenues as it continues its efforts to restore the city’s finances.
MORE PA. DISTRESSED CITY NEWS
Just to the south of Scranton, the City of Wilkes-Barre struggles with debt, budget, and infrastructure issues. Their project may not be large, bright, and shiny but it is of great importance to the city. The Solomon Creek wall repair would restore a flood control structure dating back to the 1930’s. Absent help from the state or federal governments, the city has pushed for a $5.5 million bond to pay for the repairs. As the transaction has been considered, the issue of whether or not to tie the project financing to a larger debt refinancing has been under consideration.
The restructuring would restructuring reduce upcoming annual long-term debt payments to make them more affordable in order to avoid possible distressed status and strict state oversight of spending under Act 47. The plan before the council was presented by the city’s consultant, PFM Financial Advisors LLC, of Harrisburg, and calls for lower payments this year and next. But the difference in payments is scooped up and tossed further along, leaving the city to pay higher amounts down the road. The city would refinance $3.9 million of its $86.2 million debt and issue $5.5 million in new money through a bond for the repairs. The debt payment would drop to $5.1 million from $5.4 million this year. Next year it would fall to $4.9 million from $7.6 million. But in 2019 and 2020, the payments climb to more than $8 million, decreasing to $1.7 million in 2036.
Final consideration of the plan has been postponed until March. This will provide more time for the city to consider alternatives including asset sales and renewed efforts to negotiate expense reductions associated with the city’s workforce.
P3 FOR PRIVATE COLLEGE DORMITORIES
Howard University is one of the leading historically black colleges and universities (HBCU) in the US. In spite of that status it faces many financial challenges as it attempts to remain competitive in a highly fluid environment. One of the challenges many schools face is in the renovation and expansion of on campus residential facilities. Howard has chosen a different course than the traditional tax exempt bond financed revenue bond model.
Howard Dormitory Holdings 1, LLC, a wholly-owned and title-holding company of Howard University (“Howard SPE”), Howard University (the “University”) and Corvias, a Rhode Island-based company, announced a 40-year partnership that will completely renovate and maintain two of the University’s largest residence halls and manage two additional halls. Corvias will renovate the East and West Towers of Howard’s Plaza Towers residence, located at 2251 Sherman Ave., N.W. and manage the University’s Drew and Cook residence halls, which are located on the north side of the main campus. The Howard Plaza Towers, and Drew and Cook residence halls were transferred by the University to the Howard SPE.
Corvias raised $144 million for the project from institutional investors. Proceeds will fund renovation and modernization, the retirement of some debt, transactions costs and the creation of a sizable reserve fund for future capital expenses. Corvias will manage the renovation and operations of the facilities on a day-to-day basis for a performance-based management fee, but all residual cash flow will flow to the University Parties. A portion of these funds will be dedicated to a reserve fund for reinvestment into the residence halls and a portion will be collected by the University Parties to fund other discretionary initiatives.
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