Joseph Krist

Publisher

NYC TAX GIMMICK

The average single family New York City homeowner pays $1,088 a year for water. Landlords pay for water, but pass along the costs to tenants. The increase, if it goes through, would amount to another $93 a year on water bills, according to a proposal acquired by The New York Times. We do not see this increase by the city as being a real credit issue. Rather, it is an indicator of the policy gap between the Mayor and the City Council. Neither want to raise taxes reflecting the sway of outer borough homeowners and the large commercial real estate interests which are heavy sources of campaign money.

It is a sign of the Mayor’s weakening political outlook and the fact that he is up for reelection in 18 months. He did get control of the schools from the legislature in an unexpected win for the Mayor. The period between now and the 2025 mayoral election will be a difficult one as COVID money will be effectively gone and the impact of migrants, homelessness and crime will continue to drive spending.

While the Mayor is proposing new taxes (no matter what he calls it), the NYC Independent Budget Office (IBO) has released data indicating that the City may have more money than it thinks. IBO estimates the City will spend $800 million less on Citywide staffing costs over the rest of FY 2024. This is the largest contributor to IBO’s $1.1 billion surplus projection. IBO’s estimates costs associated with asylum seeker services to be $3.3 billion less than what the Administration is projecting.

We are not arguing about whether the sky is falling. We just don’t see a stable current outlook for the city’s credit.

ILLINOIS BUDGET

The Civic Federation of Chicago has taken a look at the Governor of Illinois’ proposed budget. It notes that the proposed FY2025 budget represents the first year the State has had an initial budget deficit to close since the start of the pandemic. Based on current projections, the State’s revenues are expected to come in lower than projected expenditures in FY2025, resulting in a deficit of $970 million. The Governor’s proposal introduces a number of tax changes and enhancements that would close the budget deficit if approved by the General Assembly, thereby bringing the budget into technical balance. 

It is far from certain that the Legislature will support some new taxes. The Governor has asked agency leadership teams to prepare for a budget scenario with $800 million less in revenue. The $52.7 billion proposed General Funds operating budget is a 4.5% increase from estimated year-end FY2024 spending of approximately $50.4 billion—excluding FY2024 supplemental appropriations of $1.2 billion. Agency spending (excluding pension contributions and transfers out of the General Funds for debt service and other purposes) will increase by $1.9 billion, or 4.9%, from the FY2024 year-end estimate to $40.4 billion.

General Fund revenues are proposed at approximately $53.0 billion for FY2025, an increase of $779 million, or 1.5%, from the FY2024 year-end estimate of $52.2 billion. The State is projected to end FY2025 with a $128 million surplus after a proposed $170 million contribution to the rainy day fund. The Governor’s proposed budget fully meets the State’s 50-year pension funding plan by making the statutorily required General Funds pension contribution of $10.1 billion in FY2025. It also proposes increasing the 50-year funded ratio goal from 90% to 100%, which will add three additional years to the funding payment plan and extend its end date from FY2045 to FY2048. 

MISSISSIPPI MEDICAID

In February, the Mississippi House passed a bill that would offer coverage to people with incomes up to 138 percent of the federal poverty level, or just over $20,000 a year for a single person. The bill included a work requirement, but it also contained a provision ensuring that the expansion could move forward if the federal government rejected the work requirement. When the bill moved to the Senate, only a scaled back measure was approved.  The Senate version limit eligibility to people below the federal poverty line. The Senate version would have taken effect only if the Biden administration allowed the work requirement.

Early last week, an agreement between the chambers was released: Coverage would be extended to people with incomes up to 138 percent of the federal poverty level, as called for under the Affordable Care Act, but new recipients would be required to work at least 25 hours a week to get benefits. The work rule would likely have been a non-starter as has been the case in courts throughout the country. Nevertheless, it was clear that nothing would get through the Senate without work rules. This moved the House Speaker to announce that he wanted to put the question directly to voters. “It became apparent that opinions still differed on the best way to address our health care crisis,” he said in a statement.

He proposed a two-part ballot initiative that would ask residents if they supported Medicaid expansion, and if so, whether it should include a work requirement. But the suggestion was dismissed by state senators.

COLLEGES

As is often the case in the wild, it’s the smaller members of the herd who become prey. This is becoming increasingly true in the small private college sector.

On April 25, the University of Saint Katherine, an Orthodox Christian college in San Marcos, California will close at the end of the spring 2024 semester. Founded in 2010, its narrow focus limited demand. Those limits were amplified by the pandemic. Now, the institution was no longer able to meet its financial obligations due to “a steep shortfall in operating cash.”

And on April 29, Wells College in Aurora, New York revealed it would be closing at the end of the current semester, after 156 years of operation. Wells was for much of its history a women’s college. Enrollment had fallen from about 500 students several years ago to 357 in fall 2022, it lost money in five of the last 10 available fiscal years.

The cost pressures continue at institutions of all sizes. Pennsylvania State University is offering buyouts to employees at its Commonwealth Campuses. Staff that are eligible for the program include tenured or tenure-line faculty, academic administrators and staff who are full-time employees and not on fixed-term contracts. The primary reason for the offer is that “enrollment has declined significantly at the Commonwealth Campuses, in aggregate, over the past 10 or so years while the number of faculty and staff at the campuses has remained relatively flat.”  

CALIFORNIA WATER

The 2023 Water Year (WY) — which spanned from Oct. 1, 2022, through Sept. 30, 2023 — brought 4.1 million acre-feet of managed groundwater recharge and a total rise in groundwater storage of 8.7 million acre-feet, according to the California Department of Water Resources. The 4.1 million acre-feet recharge volume was equivalent to the entire storage capacity of Shasta Lake, the largest above-ground reservoir in California. Of the total recharge amount, 93 percent — or 3.8 million acre-feet — occurred in the agricultural center of the state – San Joaquin Valley.

Although WY 2023 ranked as the 8th wettest year in the last 50 years, with nearly 100 percent recovery of surface water reservoir levels, long-term groundwater storage in aquifers remains in a deficit due to decades of pumping that often exceeded the replenishment. In WY 2023, increased surface water supply led to a significant reduction in statewide groundwater extraction, amounting to a total annual extraction of 9.5 million acre-feet, a stark contrast to the 17 million acre-feet extracted in WY 2022.

CALIFORNIA TAX INITIATIVE

A ballot initiative, championed by the California Business Roundtable and funded largely by real estate interests, would require voters to approve taxes passed by the Legislature and would raise the voter-approval threshold for some local taxes to two-thirds. It would also dictate that the Legislature must approve fees that the administration can currently impose and could invalidate some already-passed taxes unless they are re-approved under new rules. The deadline to remove qualified measures is about seven weeks away.

CALIFORNIA BUDGET

Governor Gavin Newsom released his May Revision proposal. The Governor’s revised budget proposal closes both this year’s remaining $27.6 billion budget shortfall and next year’s projected $28.4 billion deficit. The revised balanced state budget cuts one-time spending by $19.1 billion and ongoing spending by $13.7 billion through 2025-26. This includes a nearly 8% cut to state operations and a targeted elimination of 10,000 unfilled state positions.

The Governor points to two primary factors pressuring the budget. First, the state’s revenue, heavily reliant on personal income taxes including capital gains, surged in 2021 due to a robust stock market but plummeted in 2022 following a market downturn. While the market bounced back by late 2023, the state continued to collect less tax revenue than projected in part due to something called “capital loss carryover,” which allows losses from previous years to reduce how much an individual is taxed.

Second, the IRS extended the tax filing deadline for most California taxpayers in 2023 following severe winter storms, delaying the revelation of reduced tax receipts. When these receipts were able to eventually be processed, they were 22% below expectations. Without the filing delay, the revenue drop would have been incorporated into last year’s budget and the shortfall this year would be significantly smaller.

The structure of the state’s tax scheme which depends on a few large earners and their capital gains has played a role in the deficit calculations. Capital gains tax revenues that exceed eight percent of total general fund revenues are deposited into its Budget Stabilization Account (BSA). In 2021 capital gains realizations hit an all-time high of $349 billion. Conversely, the May Revision forecast projects that capital gains realizations fell to approximately $156 billion in 2022 and $137 billion in 2023.

The May Revision maintains the Governor’s Budget withdrawal of approximately $12.2 billion from the BSA, as well as $900 million from the Safety Net Reserve. However, the May Revision spreads the use of the BSA withdrawal over two fiscal years, utilizing $3.3 billion in the 2024-25 fiscal year and $8.9 billion in the 2025-26 fiscal year. This will leave a balance of $22 billion in the BSA. Nonetheless, the Revision includes some $8.2 billion of spending cuts. They will generate negative responses especially for their impact on education

The Revision includes a reduction of $510 million in ongoing General Fund support for the Middle Class Scholarship program; reduction of one-time $72.3 million General Fund in 2023-24, $348.6 million General Fund in 2024-25, and $5 million General Fund in 2025-26 for school-linked health partnerships; an ongoing reduction of $80.6 million General Fund to reflect the deactivation of 46 housing units across 13 prisons, totaling approximately 4,600 beds. The May Revision includes additional and adjusted support from revenue sources and borrows internally from special funds.

ESG IN COURT

An Oklahoma County District Court Judge Sheila Stinson issued a temporary injunction blocking an Oklahoma state law which would prohibit state agencies from investing with financial firms that boycott energy companies for no “ordinary business purpose,” because the companies engage in “fossil-fuel-based energy” and do not intend to meet environmental standards.

NEW YORK STATE CANNABIS

It has been evident merely from empirical evidence that the rollout of the legalization of cannabis in New York State has been a “disaster”. A new report from the State Office of General Services documents exactly how much of a disaster it is. Some 90 percent of applicants for cannabis businesses had failed to secure licenses. There is a waiting list includes 1,200 business that submitted applications last fall.

Here’s where the process made things worse. In order to have an application reviewed, an applicant had to spend thousands of dollars to secure properties where they intended to set up shop. That 1,200 applicant waiting list was a huge hurdle as the cannabis agency had the capacity to vet only 75 applications at a time. The execution of the approval process was inept as the regulators also denied an additional 309 applications without telling the applicants, some of whom have waited almost two years for a decision.

The agency itself is a bureaucratic nightmare. The responsibility for vetting license applicants is spread across four units of the agency, each with its own spreadsheet for tracking applications. Most other agencies that deal with licensing have a single person assigned to each license. At least nine staff members touch each cannabis application. But no one is responsible for seeing them through to completion. There are eight senior officials who report directly to the executive director but enforcement and licensing, fall to just two of them.

It was announced that the current head of the agency would not have his appointment renewed.

CALIFORNIA AND FIXED ELECTRIC CHARGES

The California Public Utilities Commission approved a plan which will apply to the rates charged by investor-owned utilities. Starting next year, most customers of those companies will be required to pay a $24.15 monthly charge. Low-income customers will pay $6 to $12 a month. The revenue from the fixed charge would be paired with a roughly 20 percent reduction in rates.

The change comes in the wake of seriously reduced net metering payments which have negatively impacted growth of residential solar. The lowering of net billing and the imposition of fixed rates reflect the reality that the investor-owned utilities are transferring more financial risk to ratepayers and away from stockholders. It also coincides with an increasing number of findings of fault by the IUOs in association with wildfires.

DALLAS TRANSIT AND THE CITY’S BUDGET

Dallas Area Rapid Transit (DART) collects a 1% sales tax in all 13 of its member cities. The transit agency collected over $400 million in Dallas annually for the last two years, sales tax data shows. Now some Dallas City Council members are looking at that revenue stream and asking why it should not be used to fund general pension funding requirements.

The city faces a $3 billion shortfall in its police and fire fund, which administers the pension program for over 10,000 current and retired officers. The pension fund for civilian employees also suffers a $1 billion shortfall, according to city officials. In the past, city officials have considered liquidating more of its real estate portfolio to put more cash into the funds. They have also recommended seeking voter approval to change contribution rates for the employees’ retirement fund.

Pressure to address the pension problem stems from the fact that the City must present a plan to the State to fund the pension shortfalls over a thirty year period. The state legislation requiring the plan was passed in direct response to funding pressures which potentially would impact pension payments. Holding taxes down won’t fund the pension problem.

POPULATION

Large cities in the Northeast and Midwest grew in 2023, reversing earlier population declines, according to data released by the U.S. Census Bureau. Cities with populations of 50,000 or more grew by an average of 0.2% in the Northeast and 0.1% in the Midwest after declining an average of 0.3% and 0.2%, respectively, in 2022. Those in the West went up by an average of 0.2% from 2022 to 2023. Cities in the South grew the fastest – by an average 1.0%.

San Antonio, Texas, added more people (roughly 22,000) than any other city in 2023, reclaiming its No. 1 spot on the list of gainers and pushing it close to the 1.5 million population milestone. Detroit gained some 2,000 residents and while the absolute number is nit large, the breaking of a multi-decade trend is. In Chicago, losses continue but at a slowing rate. It remains the nation’s third largest city. New York, New York, remained the nation’s largest city as of July 1, 2023, with almost 8.3 million people, followed by Los Angeles, California, which reached nearly 4 million people.

The nation’s housing stock grew by about 1.6 million units between July 1, 2022, and July 1, 2023, reaching a total of 145.3 million. The 1.1% increase was nearly the same as the 1.2% increase between 2021 and 2022. California had the largest number of housing units (14.8 million), followed by Texas (12.4 million) and Florida (10.5 million). Falls Church, Virginia, was the fastest-growing county; its housing stock increased by 13.5% between July 1, 2022, and July 1, 2023, followed by Rich County, Utah (8.5%), and Jasper County, South Carolina (7.1%). Wasatch County, Utah, and Billings County, North Dakota, were tied for fourth place with 6.1%.

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