Joseph Krist

Municipal Credit Consultant

HIGHER ED SECTOR DODGES A BULLET

This week, the Obama Administration announced that it was dropping its proposal  to change the 529 college savings plans held by millions of families. In his State of the Union address, the change was proposed as part of the President’s plan to simplify the tax code and help the middle class. The change would have eliminated  one of the 529 plan’s most attractive benefits: Money could no longer be withdrawn tax-free. (The new rules would have applied only to new contributions.) The money can continue to be withdrawn without payment of capital gains taxes as long as the proceeds are used for education expenses. Many states provide state income tax deductions for contributions as well.

Some say 529 plans disproportionately benefit the most affluent families, which can afford to save. More than 12 million accounts are in circulation, according to Strategic Insight, an investment consultant that tracks the industry. The Federal Reserve’s Survey of Consumer Finances, said that more than 70 percent of the account balances for 529 plans and another option known as Coverdell Education Savings Accounts are held by families with incomes over $200,000. (Those figures also include health savings accounts, but still provide a reasonable best estimate, the administration said.) A report from the Government Accountability Office found that a small percentage of families use 529 plans and Coverdell accounts and that their median income is three times the median income of families without the accounts.

The proposed changes — which were widely opposed in a Republican-controlled Congress — would have discouraged savers from using the accounts because the withdrawals would be taxed as ordinary income. As ordinary income it is also likely to reduce how much they may receive in federal financial aid. The average value of a 529 account is $19,774, according to Strategic Insight, while it estimates the average contribution to accounts that receive regular electronic contributions is about $175 a month.

A partial offset to expand and make permanent the American Opportunity Tax Credit, a credit for qualified education expenses for the first four years of higher education will still be pursued by the Administration. The maximum credit is $2,500, and phases out for married people filing joint returns who earn $160,000 to $180,000 and for single people earning $80,000 to $90,000. Forty percent of the credit is refundable, with a maximum of $1,000, which means that those who have no federal tax liability will still receive money back. The Obama plan would increase the refundable portion to a flat $1,500 and make it available for up to five years, as well as extend part of the break to part-time students.

EMERGENCY MANAGER FOR ATLANTIC CITY

Gov. Chris Christie signed an executive order appointing Kevin Lavin as emergency manager for Atlantic City. He also appointed Kevyn Orr, most recently the emergency manager of Detroit as a special adviser to the emergency manager. According to the Governor’s announcement of the executive order, Mr. Lavin has extensive credentials in restructuring both private and public underperforming entities, most recently as the leader of FTI Consulting’s Global Restructuring business unit. Mr. Lavin has played a key role in the turnaround or restructuring of over 150 companies around the globe and across a broad range of industries and has served in interim management roles as CEO, COO and CFO.

The Executive Order was in response to a recommendation of the Governor’s Advisory Commission on New Jersey Gaming, Sports and Entertainment that an “Emergency Manager” should be appointed immediately with extraordinary supervisory powers under the Local Government Supervision Act (legislative action may be required to augment the existing Statute). Initial recommendations of the Commission include: (i) tax reform; (ii) school reform; (iii) pension reform; (iv) regionalization or privatization / reduction of certain public services; and, (v) redirecting Atlantic City Alliance funding.

The City faces a number of hurdles. Total Atlantic City gaming resort revenues have fallen by a CAGR of -7.5% since 2006. Four properties (Atlantic Club, Showboat, Revel, Trump Plaza) closed in 2014. Property taxes represent over 81% of Atlantic City revenues in FY 2014, the Municipal tax rate is 1.75%, over 100 bps higher than the statewide average, and Total Property Assessment could be as low as $6.5 billion according to data from recent tax appeal rulings. Concurrently, Atlantic City municipal appropriations, less grants and the dedicated library tax levy, grew by a CAGR of 4.3% from 2006 – 2014. Departmental Appropriations (Police, Fire, Health and Human Services) grew by a CAGR of 0.8%, while non-departmental (pension, healthcare, debt service, bulk purchases, etc.) appropriations grew by a staggering 7.9% CAGR over this period.

The Commission also recommended that Atlantic City has upcoming pension payments of $22.8M in 2014, $23.2M in 2015 and $25.1M in 2016 and that the State should defer these payments for a period of up to three years to help balance the budget in the short term while other recommendations are being implemented.

While the City’s problems may be obvious, the solutions are not nor is the support for the proposed intervention at either the local or state levels. Many argue that additional legislative action is needed to enable the emergency manager to function as fully as the Governor envisions.

CUOMO PROPOSES FY 2016 BUDGET

New York Governor Andrew Cuomo proposed a $141.6 billion budget that would provide tax breaks for middle-class property owners and small businesses, and boost spending on rail and road projects. The fiscal 2016 spending plan was announced during Cuomo’s fifth State of the State address. It would raise spending by 2.8 percent according to documents provided by his office. The governor also seeks to set aside an $850 million share of a $5 billion surplus from legal settlements with banks for a reserve fund. New York is projected to end the current fiscal year on March 31 with a $525 million operating surplus.

Cuomo also wants to increase the number of charter schools allowed under state law to 560 from 460. He also wants to extend mayoral control of New York City’s schools beyond its 2015 expiration while allowing other cities to apply for the same power. Other proposals include raising the minimum wage to $10.50 an hour ($11.50 in New York City) from $8.75 and spending $450 million to build a train to LaGuardia Airport.

The budget would use a record $5 billion surplus from legal settlements with banks on a $1.5 billion economic development competition for seven upstate regions, $1.3 billion on the Thruway Authority and the Tappan Zee Bridge, and $500 million to bring high-speed Internet to rural areas. An additional $250 million from the surplus would be spent to help extend a Metro North commuter rail line to Manhattan’s Penn Station and provide $400 million to support debt restructuring and projects at rural hospitals, according to the documents. Also proposed was a $1.7 billion property-tax break for middle-class New Yorkers and a plan to lower the net income tax rate for 42,000 business to 2.5 percent from 6.5 percent by 2018, the lowest since 1917.

NASCAR DEAL CRASHES

Last week’s announcement that The Charlotte City Council in North Carolina has voted for an agreement to forgive more than $22 million in debt from the NASCAR Hall of Fame was not a surprise to high yield credit analysts. The bond issue is but one more example of a credit based on specialty facility admission charges that failed due to attendance shortfalls.

As has been the case with so many other museum and “amusement” type credits, attendance and revenues fell short of projections. In the case of this facility, attendance has been far less than expected. The hall was expected to attract about 400,000 visitors each year. Last year attendance was about 170,000.

All of the major stakeholders in the project lost. It is reported that Charlotte will pay Bank of America and Wells Fargo $5 million. They will write off nearly $18 million in debt. NASCAR will give up more than $3 million in royalties that it has been owed since the hall opened in 2010. The hall of fame has not been able to pay the royalties because it has lost more than $1 million each year.

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