Joseph Krist

Publisher

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KENTUCKY CONSIDERS MARIJUANA

In the Bluegrass State, a medical marijuana legalization bill will be filed in the 2019 Regular Session. House Bill 136 will look to make medical marijuana available for up to 60,000 Kentuckians. “The intention of this legislation is not the generate tax revenue, but rather to provide relief to the thousands of Kentuckian who suffer from conditions that have not responded to traditional medicine,” according to the bill’s sponsor. The bill does not allow those using medical marijuana to “smoke in public”.  It would be up to the doctor to decide what form of cannabis patient would benefit from.

Requirements include a yearly licensing fee and limits on possession. The bill sponsors say the intention is strictly to give patients additional treatment options. Kentucky is already a producer of hemp used for medical marijuana purposes. It exports hemp for use in the production of the non-intoxicating CBD products sold in other states. Medical marijuana would be regulated by the Department of Public Protection’s Office of Alcoholic Beverage Control. The state-run system will issue licenses for cultivators, dispensaries, safety facilities, processors along with practitioners and patients.

PURPLE LINE BLUES

The long saga of Maryland’s Purple Line continues its twisted route to completion. After legal delays and other issues, Purple Line Transit Partners (PLTP), a team of companies building the 16-mile line and helping to finance its construction, has told the state the line won’t begin carrying passengers until February 2023.  That represents an 11 month delay from the most recent projection.

It comes as some State officials project an October 2022 opening. The problem is that the February 2023 opening date is possible only if work is accelerated  according to the contractor. Also, delays have added at least $215 million to the light-rail line’s cost.  The news comes amidst reporting from the Washington Post that the delays — and the potential for hundreds of millions in cost overruns — have been the subject of intense discussions between the state and PLTP for nearly two years, before construction even started.

Even the effort by the State adds to the confusion. “The Maryland Department of Transportation, Maryland Transit Administration and the Purple Line Transit Partners are still working on developing a recovery schedule to open the Purple Line for revenue service by the end of 2022.”  The delays add to the Line’s already controversial history. It also is not providing support for the P3 movement as the latest delays are attributable to construction issues as opposed to the many legal issues which slowed development.

THE LATEST FROM NYC

The mayor said a millionaire’s tax, a transportation bond act, and congestion pricing could be used to help fund the nation’s biggest subway and bus system. That is a turnaround from the mayor’s prior position against congestion fees. It is a reflection of how difficult the City’s transit situation is.

Millionaire’s taxes are becoming a more established feature of budget suggestions from “progressive” public officials and candidates. We see this proposal to have the least likelihood of success in the state legislature. It also is interesting that while the City fights calls to increase annual operating funding for the MTA, it has found funding for its attempt at universal healthcare.

All of these issues are arising at a point in the cycle where it is hard to argue that we are closer to the beginning than the end. The undertaking of these kind of significant initiatives at that point generate increased fiscal risks going forward.

GUAM – THE OTHER TERRITORY

After the Puerto Rico debt debacle, some investors sought to maintain the tax benefit of territorial debt by looking at credits in Guam. In the face of the continuing fiscal difficulties in Puerto Rico and the US Virgin Islands, it is refreshing to see ratings progress in at least one case. Last week, Moody’s maintained its Ba1 issuer rating but lifted the outlook to stable from negative.

The loss of income tax revenues triggered by federal tax cuts enacted in December 2017 led  Guam’s government to offset the lost revenue in fiscal 2018. It bolstered its liquidity with a temporary increase in the business privilege tax, one-time revenues from a tax amnesty program, and spending cuts. It offset the lost revenue in the fiscal 2019 budget with a permanent extension of the increase in the business privilege tax and a continuation of most of the previously enacted spending cuts.

The credits continue to reflect general fund deficits and debt levels which, while below those of other territories, are significantly above US state medians. Generally positive economic trends and a good economic outlook, and a favorable pension funding situation are also reflected in the rating.

The improved outlook for the general credit of Guam also benefits its other issuers. Guam Power Authority, Guam Waterworks Authority, and the Port Authority of Guam all saw the outlook on their ratings move from negative to stable.

BUDGET SEASON UNDERWAY

California has seen a proposed budget and New York will follow this week. The budget proposals for many other states have begun to emerge. There are a number of common areas of emphasis. Education is the leader with funding being proposed for better compensating teachers as well as universal pre-K. Energy is emerging as a point of emphasis with the expansion of alternative energy capacity is high on the list of many.

Another common theme seems to be transportation. Whether it be the expansion of current capacity, the maintenance of existing but aging infrastructure, or the application of “smart” road technology nearly every state of the state speech references the need to support infrastructure especially for transportation. The need to protect the environment (even if just for tourism development) is another priority given the change in policy in Washington. The current shutdown situation highlights how states view national parks and the vital economic role that some of these facilities play in those jurisdictions.

Overlaying all of this is the uncertainty surrounding the revenue outlook. It is clear that the impact of federal tax changes which led to an increase in state and local revenues has been significant. The concern is that the increases in state revenues seen in 2018 may not be permanent as taxpayers adjust behavior and the impact of changes such as the loss of the SALT deduction on economic behavior finally emerge.

There are also trends which suggest that a bit of caution is appropriate. As states report revenues through year end, there are multiple instances of drops in December’s revenue on a year over year basis. The debate over the tax cut did lead some tax payers to accelerate payments into calendar 2017 and also led to efforts to prepay 2018 taxes so that those payments could be deducted before the SALT deduction change went into effect.

IT ONCE WAS LOST BUT NOW IT’S FOUND

In 2017, a new financial management team in Philadelphia reviewed the City’s finance and accounting practices an records. This process resulted in the discovery of significant discrepancies in the City’s record keeping processes. It was said that the inability to reconcile records had led to the “loss” of $40 million. The solution was the creation of panel of officials to investigate the scope of the problem and seek ad/or implement changes to the City’s accounting practices.

The panel was led by Philadelphia’s Treasurer Rasheia Johnson and former City Controller Jonathan Saidel. It  announced last week it has fully reconciled 76 of 77 city bank accounts with reconciliation of the final account slated for early January. The efforts helped reduce the difference between Philadelphia’s city records and its bank accounts to $900,000 from $40 million identified in 2017.

It was easy to look at the situation as a significant negative. We took the view that the situation while not desirable was not a sign of impending crisis or an inability to service debt. Given the fact the problems reflected issues with a lack of technology and centralized bookkeeping, it was likely that the accounts would eventually be reconciled. And so now, what once was lost has now been found.

SHUTDOWN PAIN CENTERS

In Huntsville, Ala., the National Aeronautics and Space Administration and the U.S. Army are the two largest employers. In Chicago, the Chicago Federal Executive Board is the largest employer with nearly 50,000 employees affected by the shutdown. The Treasury Department is a major employer in both the Philadelphia and Kansas City metro regions.  Once you are outside major metropolitan areas, the story is perhaps more painful.

Rural states are among those with the highest percentage of their workforces employed by federal agencies that have shut down. Montana, Alaska, New Mexico, Wyoming and South Dakota are some of the most exposed. And it is not just the fact that people are forced out of work. These are often some of the best paying jobs in rural areas.

It’s not just rural areas that see this income effect. Metropolitan-area federal workers earn on average 50% more annually than nonfederal workers, according to 2017 data from the Labor Department. In El Paso the average federal wage is twice the local average and in Huntsville the scientists and engineers employed by NASA generate wages some 85% higher than the local average.

Other problems include holdups in home sales, distributions of monthly transit funding, issuance of Section 8 vouchers, payments to contractors. With each day, the negative impacts of lower spending related to the shutdown become greater and clearer. And pretty soon, Americans will learn about the multiplier effect as reduced spending and economic activity impact businesses which are based on their proximity to federal facilities.

PG&E

The announcement that Pacific Gas and Electric plans to enter into Chapter 11 proceedings is of interest to the municipal market. The timing of the move may have been the subject of some debate but the forces leading to the move have been obvious for some time. For owners of pollution control bonds backed by PG&E, the decision could have real ramifications.

The company, which is the largest investor-owned utility in California, said it faced an estimated $30 billion liability for damages from the 2017 and 2018 wildfires that killed scores in Northern California, a sum that would exceed its insurance and assets. The announcement was driven by state requirements that the company was required to give employees 15 days’ notice of such a move.

PG&E cited 50 complaints on behalf of at least 2,000 plaintiffs in connection with the Camp Fire, including six seeking to be litigated as a class action. It also cited 700 complaints on behalf of at least 3,600 plaintiffs related to 2017 wildfires, including five seeking to be certified as class actions.

We’ve been here before as PG&E went bankrupt early this century when a deregulation move by the state in 2000 and 2001 resulted in blackouts and soaring electricity rates.

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