Joseph Krist

Publisher

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ISSUE OF THE WEEK

$900,000,000

District of Columbia

General Obligation Bonds

Moody’s: Aaa  S&P: AA+

Those of us who go back far enough to remember when the District of Columbia could not borrow without outside credit support appreciate how high a hill the District had to climb to get to the level it has achieved. The rating reflects both improved management of the City and the benefits of the District’s development into a much more diverse and dynamic economy since the 1980’s. Its per capita income is higher than that of all 50 states, and its GDP is greater than that of17 states. In addition, the District is seen as having exemplary fiscal governance, and its updated four-year financial plan is its strongest ever. The District already has among the lowest pension liabilities of any large city, and has pre-funded its other postretirement benefits (OPEB) liability, which affords it significant financial flexibility.

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BRIGHTLINE FIGHT TO CONTINUE

The effort to deny the Virgin/Brightline consortium access to private activity bond financing continues. Indian River County, Florida, voted 4-1 Tuesday to spend up to $400,000 to appeal the denial of the county’s motion for summary judgment in a federal lawsuit it filed to challenge the Brightline project’s $1.15 billion of private activity bonds and federal agency environmental approvals. The consortium recently received another extension in the deadline to June 30 to issue private activity bonds to finance its continued expansion.

Indian River County’s action follows a decision on Dec. 24, 2018  by Federal Judge Christopher Cooper to grant motions for summary judgment sought by the USDOT and Brightline. The county’s appeal of Cooper’s ruling will be heard by the U.S. Court of Appeals for the District of Columbia Circuit. Ironically, the appeal comes as Brightline / Virgin Trains USA, is in the equity markets with an initial public offering as another way to finance the continued expansion of the private passenger train system. The IPO launch announced Jan. 30 and calls for the issuance of 28.3 million shares of common stock at $17 and $19 per share. The initial offering is expected to raise between $468 million and $540 million, depending on the price of shares. Fortress Investment Group LLC will retain majority ownership of the train company. The company will transition its consumer facing brand to Virgin Trains USA during this year.

The IPO raises legitimate issues as to the need for the project to rely on PAB financing. If they have access to equity, it undermines the case for the necessity of subsidized PAB financing. The continued effort to obtain the financing in spite of access to other sources of funding lends credence to the view that the project does not stand on its own economic viability without subsidies.

KC AIRPORT P3 MOVES FORWARD

The City of Kansas City, MO announced that it has reached a tentative airline agreement and a new $1.5 billion price tag for the Kansas City International Airport single-terminal modernization project.  The new $1.5 billion total does not include financing. According to the previous estimate, at the $1.64 billion price tag, the total cost with financing would be about $1.9 billion. The city expects six of the eight airlines to sign on  including Southwest, American, Delta, United, Alaska and Spirit. Frontier does not sign lease agreements of this nature, according to the City and Allegiant has indicated it does not plan to sign. Those airlines still can fly out of KCI, but they will pay a different rate than the airlines that sign the agreement.  

The project now awaits an environmental review. The City must now figure out how to fund initial project work such as demolition of an existing terminal. Bonds ultimately would fund much of the project but, the city needs roughly $90 becomes available. It has been publically pledged that “taxpayer monies” would not be used for the airport. Some local legislators take the view that allowing the City’s Aviation Project to use general fund monies, even if it would be repaid from bond proceeds would violate that pledge.

NEW YORK STATE

Local sales tax collections continued to climb in 2018, growing for the third year in a row, according to a report released today by State Comptroller Thomas P. DiNapoli. Collections across the state of $17.5 billion grew by $872 million, or 5.3%. “Local sales tax collections grew at a faster pace in 2018 than in recent years, boosting local revenues,” DiNapoli said. “Despite the good news, a slowdown in collection growth in the fourth quarter shows that sales tax revenue can be unpredictable. Local officials should keep a watchful eye on consumer spending and this revenue source and be prepared to react accordingly.”

Every region in the state has experienced an increased annual growth rate in sales tax collections in each of the last three years, with the exception of the Finger Lakes (which slowed from 4.9% in 2017 to 3.7% in 2018). Year-over-year growth was especially strong in several upstate regions. The Southern Tier saw the highest year-over-year increase at 6.8%, the strongest for the region since 2011. The North Country had the second highest (5.9%), followed by the Mohawk Valley (5.8%). Downstate, the Long Island and Mid-Hudson regions saw collections grow by 4.5% and 5.1% in 2018. Notably, Central New York has seen a significant turnaround in its collections, climbing 5.1% in 2018, having been the only region with a decline in collections (-0.9 %) in 2016.

New York City’s sales tax collections grew by 5.7%. The city’s increases have typically been robust over the past several years. For the 57 counties outside of New York City, collections grew in 55 of them. Sullivan County experienced the largest increase (16.4%), followed by Tioga and Hamilton counties (16.1%). Collections were down in 2018 in Cayuga (-1.3%) and Madison (-0.7%) counties.

All but one of the cities with their own sales tax experienced an increase in year-over-year collections in 2018. Gloversville had the strongest growth (17.8%), along with the cities of Norwich (12.8%) and Salamanca (8.3%). Oneida was the only city that saw its collections decrease (5.2%), mostly due to technical adjustments.

Two proposed changes to the state sales tax, including one related to the taxation of sales through online marketplaces – such as Amazon – have the potential to drive millions of dollars in additional sales tax revenues to local governments.

This will be important as the state is facing a $2.3 billion tax-revenue shortfall. Laying the blame primarily on the impact of federal tax law changes,  the state cited the move of wealthy individuals to other taxing jurisdictions (Florida?) as a cause of the lower revenue estimate. Other states which have historically benefitted from the SALT deduction are also reporting shortfalls in year-end income tax revenues. They include, unsurprisingly, California and New Jersey.

TOBACCO TARGETED AGAIN

An Arizona state lawmaker introduced the proposal that would increase the current $2-a-pack on cigarettes by an additional $1.50. A similar increase on vaping products is also a part of the proposal. The proceeds of the increased tax would generate funding for the state’s Board of Regents to award scholarships to residents who received A or B grades in each academic course required for graduation. The Arizona Legislature would have to agree to place the measure on the 2020 ballot.

In Hawaii, one legislator has introduced a bill which would raise the minimum smoking age incrementally each year to 30 in 2020, 40 in 2021, 50 in 2022, 60 in 2023 and 100 in 2024. The bill only addresses cigarettes while leaving e cigarette and vaping restrictions as is. The Hawaii Island lawmaker said he doesn’t think taxes or regulations are doing enough to stem their use. He wants to see them off store shelves all together.

A state senator introduced SB 887, which would increase the excise tax on cigarettes to 21 cents, instead of 16 cents, in July. It mandates revenue be used for health programs and research.

PG&E IMPACTS BEGIN TO EMERGE

A January 31 ruling from the judge overseeing the PG&E bankruptcy approved motions including an order to maintain existing arrangements between community choice aggregators (CCAs) and PG&E. CCAs are an emerging municipal credit sector especially in the California market. CCAs were established to provide electricity customers choice of generation supplier in the service areas of California’s investor-owned utilities. Once a CCA is formed, it becomes the default provider for generation services in the defined area. CCA customers have the option to opt-out and return to PG&E for their generation service but most customers elect to stay with the CCA. The CCA is unregulated on its cost recovery like municipal electric utilities and has a local governance role in power supply planning, local greenhouse gas reduction policies and customer choice.

In the case of PG&E, it has a contract with Marin Clean Energy (MCE), the first CCA to operate in California . Under that agreement, PG&E includes the charges for generation services provided by MCE on the monthly electricity bill that PG&E sends to customers. The customer pays the bill, and on a daily basis, PG&E transfers collected CCA generation revenues to MCE. So there was concern that revenues due to MCE which would, among other things, get tied up while the bankruptcy proceedings proceeded.

The judge’s order also included an acknowledgment that the revenues are not a part of PG&E’s estate; that PG&E must return to regular banking and billing operations, including remitting bill collections to CCAs; and that CCA revenues cannot have a lien placed against them by the debtor-in-possession lender. The positive effect on CCA finances stems primarily  from the increased stability to CCAs’ cash flow collections, which enables their power suppliers and other vendors to have greater certainty that CCA revenues and cash flow will remain unaffected by the utility’s bankruptcy filing.

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