Joseph Krist

Publisher

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ISSUE OF THE WEEK

$898,070,000

Sales Tax Securitization Corporation

Sales Tax Securitization Bonds, Series 2018A

S&P: “AA-Stable”     Fitch: “AAA-Stable”

It may be a holiday shortened week but that does not mean it lacks for interesting deals. In this case it is the issue from Illinois’ Sales Tax Securitization Corporation which has attracted significant analytical interest. At a time when the City of Chicago continues to face rating pressure primarily due to its ongoing pension funding issues, efforts to access the capital markets for the City’s financing needs have become paramount.

The bonds being sold are secured by revenues derived under a first lien on the state-collected portion of the city’s home rule sales and use taxes and the local share of the state-wide sales and use taxes, net of an administrative fee imposed by the state.  Pledged revenues include the portions of the city’s home rule sales taxes that are collected by the state as well as its local share of state sales taxes, some of which are subject to state appropriation. The pledged home rule sales and use taxes comprise three separate taxes: a 1.25% Home Rule Municipal Retailers’ Occupation Tax on most non-titled tangible personal property, a 1.25% Home Rule Municipal Service Occupation Tax on tangible personal property purchased from a service provider, and a 1.25% Home Rule Municipal Use Tax on Titled Personal Property. There is no legal limit to the rate the city may impose for these. Some of the pledged revenues collected by the state are net of a 2% administrative fee imposed by the state.

The details of the taxes are the Illinois Retailers’ Occupation Tax (city portion is currently equivalent to 1% of sales within the city), Illinois Service Occupation Tax (city portion is currently equivalent to 1% of sales within the city), Illinois Use Tax (city receives 4% of net receipts of a 6.25% tax on most non-titled personal property purchased outside of the state and 20% of a state-wide 1% tax on grocery food, drugs and medical appliances purchased out of state), and the Illinois Service Use Tax (city receives 4% of net receipts of a state-wide 6.25% tax on most tangible personal property purchased from a service provider and 20% of a state-wide 1% tax on grocery food, drugs and medical appliances purchased from a service provider).

In the end the ratings, substantially better than that of the City’s general obligation debt, are based on the legal structure. The sale of the revenues by the City to the Corporation is characterized as a “true sale”. This is key to the rating. It complements the bankruptcy-remote, statutorily defined nature of the issuer and a bond structure involving a perfected first lien security interest in the sales tax revenues. The authorizing act assures that the state “will not limit or alter the basis on which transferred receipts are to be paid to the issuing entity as provided in this Article, or the use of such funds,
so as to impair the terms of any such contract.” The importance of the existence of state authorizing legislation is a key consideration.

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CA REVENUES THROUGH DECEMBER

California’s total revenues of $16.25 billion for December were $2.79 billion above June’s budget expectations. Personal income taxes (PIT) and corporation taxes, two of the “big three” sources of General Fund dollars, exceeded projections for the month. All three, including retail sales and use taxes, are ahead of fiscal year-to-date estimates. For the first half of the 2017-18 fiscal year, total revenues of $57.21 billion are higher than budget projections by 7.1 percent and 10.6 percent higher than the same period in 2016-17.  For December, PIT receipts, the state’s largest revenue source, were $11.50 billion, or 25.0 percent above projections. While a portion of the variance may be due to taxpayer behavior, it is likely to be offset by reductions in future months’ receipts.

For the fiscal year, PIT receipts of $39.10 billion are higher than budget estimates by $2.28 billion or 6.2 percent. Corporation taxes for December of $2.47 billion were $699.0 million or 39.6 percent higher than expected. For the fiscal year to date, total corporation tax receipts of $4.26 billion are $932.2 million, 28.0 percent, above assumptions in the 2017-18 Budget Act. Sales tax receipts of $1.86 billion for December were $272.4 million lower than anticipated in the budget. However, for the fiscal year, sales tax receipts of $12.03 billion are $461.0 million or 4.0 percent above budget estimates.

Unused borrowable resources through December exceeded projections by $6.88 billion, or 33.9 percent. Outstanding loans of $16.11 billion at the end of December were $2.45 billion less than 2017‑18 Budget Act estimates.

TEXAS REVENUE TRENDS POST HARVEY

We have always maintained that natural disasters are not usually a harbinger of credit disasters let alone significant credit damage. Recent news from Texas provides quantitative evidence to support that view. The Texas Comptroller announced that state sales tax collections, the state’s largest general operating revenue, had increased 12.3% in December over the prior year and are up 10.2% cumulatively for the first four months of fiscal 2018, which ends 31 August 2018. Post-storm sales taxes surged as insurance proceeds and federal aid spurred rebuilding and replacement of lost property.

The energy sector is also contributing. According to the Railroad Commission of Texas (which regulates the energy industry in the state), new well permits issued in 2017 were 55% greater than the prior year. The sales tax, however, comprises 62% and is applied to a broad base of most tangible personal property and some services, including equipment used in the energy industry. This has generated an increase in taxable purchasing to supply the activity associated with increased well operation. West Texas Intermediate prices averaged nearly $51 per barrel in 2017 after falling to a low of $43 per barrel a year earlier, according to the US Energy Information Administration (EIA). Texas produces more crude oil than any other US state and accounts for 30% of all US petroleum refining, according to the EIA.

TOLLS ARE EXPANDING

Florida will open two new toll roads in the Jacksonville area: express lanes along I-295, and State Road 23, known as the First Coast Expressway, which will extend south from Jacksonville into suburban Clay County. In Texas, the North Texas Tollway Authority in the Dallas region will begin operation of the 360 Tollway, a 9.7-mile toll road. It will have four lanes, two in each direction.

In Seattle, tolls on the State Highway 99 tunnel under its downtown are scheduled to go into effect this year, but a long ramp-up period is expected once the state transportation commission settles on the fees. Proposals include tolls that would vary during the day, from $1 overnight to a top rate of $2.50 for an afternoon trip.

New Hampshire has begun a process to increase tolls on the major state highways. The cash toll rate on I-93 in Hooksett would go from $1.00 to $1.50. On the Spaulding Turnpike, the Dover and Rochester tolls would rise to $1.00 from $0.75. In Hampton, the Interstate 95 toll would increase from $2.00 to $2.50. EZ Pass users would still enjoy a 30-percent discount. The plan would also give a discount to in-state commuters, who would receive 10 free rides after passing through the tollbooths 40 times during a calendar month.

CONNECTICUT CONSIDERS PRIVATE OPERATORS FOR AIRPORTS

The tide of privatization continues to roll with the Nutmeg State looking at private operators for airports. The Connecticut Airport Authority is considering outsourcing operations of three of its five general aviation airports in an attempt to save money and narrow multimillion-dollar losses on the facilities. The Authority has announced its negotiation with Dulles, Va.-based AFCO AvPORTS Management LLC involves Hartford-Brainard, Waterbury-Oxford and Groton-New London airports and could include a phased-in operations contract. The proposal also does not include Hartford’s Bradley International Airport.

The five general aviation airports reported cumulative operating losses, excluding depreciation, of about $3 million in fiscal 2016 and $2.7 million in fiscal 2017. AvPORTS manages commercial airports that include Albany (N.Y.) International, Newark (N.J.) Liberty International, Stewart International (New Windsor, N.Y.) and Westchester County (N.Y.). On the general aviation side, it lists Gary/Chicago International, Republic (Farmingdale, N.Y.), Rhode Island Airport Corp. (for five general aviation airports in the state) and Teterboro (N.J.).

SANTA ROSA BAY BRIDGE BAILOUT UNDER CONSIDERATION

Bondholders may finally see some resolution to the six year long default on bonds issued by The Santa Rosa Bay Bridge Authority for the Garcon Point Bridge. The Authority issued approximately $95.0 million of revenue bonds in 1996 and the actual toll revenues generated by the Bridge have been significantly lower than projected since opening in 1999. As a result, the Bridge almost immediately faced financial difficulties, and by Fiscal Year 2002 the Authority was forced to begin using bond reserves to make debt service payments. The bond reserves were fully depleted in Fiscal Year 2011, and the Authority defaulted on the July 1, 2011 debt service payment.

The revenues from toll collections continue to fall short of required debt service payments and so the aggregate amount owed on the Bonds continues to increase. The amount owed on the Bonds is currently $135.2 million as of June 30, 2017. The trustee for the Bondholders has declared the Bonds to be in default which accelerates all amounts payable on the Bonds including all principal and unpaid interest. Interest continues to accrue on the outstanding bonds at rates ranging between 6.25% and 6.80%.

So now the Florida Legislature is being called upon again to consider what if any involvement the State of Florida should have in rescuing the investors in the bonds. A feasibility study was commissioned and has been completed in support of those efforts. It suggests acquisition of the bridge via one of two options. A restructuring of the debt on the Bridge could be effectuated in two ways, both of which would require legislative action. The first alternative would be for the Turnpike to issue bonds that would replace the Authority’s bonds in exchange for transfer of the Bridge directly to the Turnpike. The second alternative would be for the Turnpike to acquire the Bridge by purchasing the outstanding Authority bonds in the open market at a discount or via a tender offer.

The acquisition through the Turnpike is suggested to be structured in a way that gives the Legislature cover against charges of a bailout. according to the study, the acquisition of the Bridge by Turnpike at a price calculated by reference to toll collections would not be a “bailout” because the price paid would be no more than the amount that the existing Bondholders are currently legally entitled to receive based on the actual revenues of the Bridge. The Bondholders would receive no guarantee that they would recoup their entire investment in the Authority’s Bonds.

The State Legislature would need to adopt legislation authorizing the acquisition. After being authorized by the Legislature, DBF and FDOT would enter into negotiations with the Trustee or existing Bondholders regarding the price and terms of the acquisition. Finally, if negotiations were successful, the Turnpike would issue bonds to pay the agreed upon price to existing Bondholders and take full control of the Bridge.

So the stage has been set for the bailout which was never supposed to happen. Regardless of which method is chosen, residents and users of transportation facilities throughout Florida will wind up paying for a supposedly public/private project that in reality was built to fulfill a private developers dream. Another example of the fallibility of public/private financings.

KANSAS FINANCES ALMOST AN AFTERTHOUGHT FOR DEPARTING? GOVERNOR

To the surprise of many, Sam Brownback was still around to deliver this year’s State of the State Address. He was supposed to off to a diplomatic job with the federal government but a delayed confirmation has delayed his resignation. So this ultimate lame duck delivered a minimal discussion of the State’s budget and school financing outlook. “So, let me address the biggest issue of the session, school finance. We have received the decree of the Kansas Supreme Court and are putting forth a proposal to comply, as we have done with the prior decisions. My budget recommendation includes an additional six-hundred million dollars in funding over the next five years.  This multi-year approach will provide the time necessary for school districts to plan and spend this additional money more effectively. My proposal does not include a tax increase.”

So that’s it. No funding source, no suggestions for one, just a hope. And a recommendation that the legislature to put a Constitutional amendment on the ballot this year  addressing our school finance system. Some would call this a punt. We think it is more like a drop kick. And it does nothing to improve our long time negative on the State’s finances and credit ratings. Hopefully, a more detailed and thoughtful budget proposal will follow.

 

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