Joseph Krist

Publisher

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PUBLIC HIGHER ED GETTING MORE EXPENSIVE

Two headlines last week caught our eye. higher education and its cost have been in the spotlight during the campaign for the democratic presidential nomination. Promises to forgive student loans and plans for free tuition to public universities have  are among the most prominent. In addition, proposals to emphasize technical and vocational training have been offered. The headlines I refer to help to make the case for some of these proposals.

For the first time in six years, tuition will be going up for in-state students attending University of Illinois schools. Trustees unanimously approved a proposal that will raise base tuition for Illinoisans by 1.8% at the campuses at Urbana-Champaign and Chicago, and by 1% in Springfield. That means tuition for Illinois freshmen in fall 2020 will be $12,254 at Urbana-Champaign, $10,776 at Chicago and $9,502.50 at Springfield.

At the same time, the University of California Board of Regents is considering a tuition increase for in-state students. Ironically, it uses the University of Illinois as a basis for comparison in terms of the rate of tuition increases over the years since 2011.  One of the justification for the tuition increases is the need to maintain the University’s ability to offer financial aid. 

Both of these proposals highlight the fact that state schools are no longer the bargain they once were on an absolute basis. Yes, UC is still a bargain compared to somewhere like Stanford but is that the measuring stick for assessing public policy?

PUBLIC POWER COTINUES TO LEAD ON COAL

Tri-State Generation and Transmission is the power generator to 43 energy co-ops which distribute power across the Mountain West. It has announced that the cooperative will also pursue a 90% reduction in carbon dioxide emissions from Colorado-based generation by 2030, based on 2005 emission levels. As a part of that program, closing the Escalante and Craig coal power plants in New Mexico and Colorado and the Colowyo mine in Colorado ahead of schedule and canceling the proposed Holcomb Station coal plant project in Kansas.

It is another example of public power taking a leadership role in the move towards clean energy. To replace that power, Tri State will add over 1 GW of solar and wind generation by 2024 — raising its overall renewable energy mix to over 50% of generation. Tri-State already achieves roughly 30% renewable generation from solar, wind and hydroelectric, with hydro representing the majority of that mix. The updated plan calls for six projects set to go on line by 2023 to combine for 715 MW capacity, nearly 10 times more solar than has been put on-line by the cooperative so far (85 MW).

It reflects what its customers want. Two of its retail distribution co-ops asked Colorado regulators to establish a fair fee for them to exit from their wholesale power contracts with Tri-State. Both co-ops expressed an interest in increasing renewable generation while keeping customer costs down as reasons to exit. asked Colorado regulators to establish a fair fee for them to exit from their wholesale power contracts with Tri-State. Both co-ops expressed an interest in increasing renewable generation while keeping customer costs down as reasons to exit.

Proponents of the move to renewables are bolstered by a Rocky Mountain Institute study which found that retiring 1.8 GW of coal and replacing it with 2.5 GW of solar and wind power would save the association and its members $600 million through 2030. This move shows that locally driven demand for clean power can be effective. One former co-op customer will derive nearly 1/3 of the co-op’s annual electricity demand from renewables, while saving its members from $50 million to $70 million.

Tri State is rated A- by S&P.

 NEW YORK STATE SCHOOL DISTRICTS

Each year, the New York state comptroller announces the rate of growth for the cap on tax increases under which New York school districts operate for the next fiscal year. The rate of growth is limited to the lesser of 2% or the rate of inflation. This year the rate of growth for fiscal 2021will be 1.8%. That will pressure the districts in their effort to raise revenues. Property taxes are usually the largest source of locally generated revenues. To override the cap, districts must receive a 60% voter supermajority, which is rare. So, districts will have to rely on a combination of cost restrictions and drawing down of reserves to manage their finances.

As a result, Moody’s has announced that in its view, the lower cap is credit negative for New York school districts because it limits their revenue-raising ability – property taxes are their largest revenue source – and reduces financial flexibility. That does not necessarily act as a predictor of rating downgrades. Moody’s notes that New York school districts maintained similar levels of financial reserves to what exist now on an overall basis from fiscal 2013, when the tax levy cap took effect, through fiscal 2019, even as the cap fluctuated and dipped as low as 0.12% in fiscal 2017.

Moody’s notes that New York school districts generally choose not to pursue the 60% supermajority voter approval required to pierce the tax levy growth cap and opt to submit budgets with increases permissible under the cap. The experience of FY 2020 is telling. 18 of the state’s approximately 730 school districts sought a cap override, and 10 of those received voter permission (1.4% of all districts). In no year since the imposition of the cap, has the number of districts obtaining supermajority override approval exceed 2%. Without approval, districts choose between a new budget, which is usually within the cap, or otherwise risk the automatic adoption of the previous year’s budget and no tax levy increase.

We do not expect wholesale changes in ratings as result of the lower rate but it does put the districts in a difficult position. Many of the cost savings (like changes in employee benefits like healthcare) have already be implemented. The next logical step has always been to turn to Albany for increased state aid. This year the state is facing its own budget problems. A $6 billion budget gap for FY 2021has made the prospect of increased state aid somewhat problematic. So it will remain a significant credit concern.

ARIZONA TAX INCREASE FOR TRANSIT UPHELD IN COURT

In 2015 the Regional Transportation Authority was established by the Pinal County Board of Supervisors to be a public improvement and taxing subdivision of the state of Arizona to coordinate multi-jurisdictional transportation planning, improvements and funding. The RTA adopted the Regional Transportation Plan in June 2017 (Proposition 416), which identified key roadway and transportation projects to be developed over the next 20 years.

In November 2017, Pinal County, AZ voters approved Proposition 416 to adopt a regional transportation plan and Proposition 417 to enact an excise tax to fund the plan. Shortly afterwards, legal action was brought by the Goldwater Institute and a court ruling froze all monies related to the excise tax. Now, the AZ Supreme Court has ruled that “We find the Prop 417 tax to be valid. The RTA’s authorizing resolution does not change the substance of the question posed to and approved by the voters; the tax, by its terms, applies across all transaction privilege tax classifications; and the tax includes a valid, constitutional modified rate as applied to the retail sales classification. Accordingly, we reverse the order invalidating the tax.”

Pinal County has already levied a half-cent excise tax for road and street improvements(the Road Tax). The tax was passed by the electorate in 1986 and renewed in 2005. Revenues from the Pinal County Road Tax are generated from a number of different tax categories. Retail sales approach nearly one-half of the total Road Tax receipts while utilities, contracting and restaurants/bars comprise 41% of total revenue. Tax revenue is primarily driven by the resident population of the County; tourism currently contributes little revenue in the way of hotel/motel sales. When the tax plan was submitted to the voters, the RTA estimated that in FY 2020 the proposed sales tax would generate $19.6 million in the current fiscal year.

We think that the ability of voters (and potentially also the folks paying the taxes) to express their will and see it implemented is important. These sort of legal challenges are not particularly useful. In the long run, they usually fail and extend the time of implementation and/or raise the cost of individual projects.

PUERTO RICO

The incredible string of bad luck which has befallen Puerto Rico has obvious negative credit effects. No matter what one thinks about the honesty or competence of the political establishment, few places have been asked to cope with this level of natural disaster over such a compressed time period. It would be difficult for any entity with the level of fiscal distress which faces Puerto Rico to successfully recover. The earthquakes have revictimized some survivors of Hurricane Maria, damaged recently repaired infrastructure, and increased the long term financial burdens facing the Commonwealth.

So it was especially unhelpful to see the news that the Secretary of the Department of Housing, the secretary of the Department of the Family, and the commissioner of the Bureau of Emergency Management and Disaster Management (NMEAD) were fired after the existence of several warehouses with provisions stored since Hurricane Maria was revealed. It gave support to the views of those who feel the Commonwealth is not trustworthy to receive and manage aid funds while at the same time feeding the fears of residents that corruption rules the day.

As for the earthquakes, the impact is obvious. Greater aid needs, slower and less successful economic recovery, and a greater impetus to leave the island all result. Unfortunately, the earthquakes accompanied some economic and demographic good news. Population was up slightly in 2019 and real economic output grew for the second straight year. Total non-farm employment also grew in 2019, along with manufacturing employment. 

Now the exposure to earthquake risk has become a reality. There are concerns that corporations would be deterred from investing in the island due to the natural disaster risk at the same time the US Treasury Department announced its intention to phase out a favorable business tax credit for American corporations based in Puerto Rico. Given the Trump Administration’s efforts to withhold or hinder the distribution of recovery funds, this continues a policy bias against the Commonwealth which has hindered recovery. The federal government has declared an emergency. It is then enabled to  cover 75% of equipment and resources necessary for emergency recovery costs. Given the track record after Hurricane Maria – Congress approved $20 billion in Community Development Block Grant Disaster Recovery assistance in 2018 to help rebuild after the 2017 hurricanes. Only $1.5 billion has been released by the US Department of Housing and Urban Development (HUD) – we make no predictions about timing and use of any federal funds.

As for PREPA, the road to recovery and restructuring of its debt took a significant hit from the earthquakes. One of its largest power plants, Costa Sur, which is nearly 50 years old and located in the Southwest corner of the island, suffered material damage and it will take time to bring it back online. Fortunately, a 454-megawatt coal fired cogeneration facility owned by AES Corporation, did not suffer damage during the earthquake and its aftershocks, but did go temporarily offline. In other forums, we have advocated for using the hurricanes and earthquakes to rethink the island’s power system. The island benefits from abundant sun and wind resources on a year round basis. The potential for more localized generation and distribution is even clearer in the face of recent events.

As the island attempts to recover from its later natural disaster setback, the U.S. Supreme Court declined to review lower court rulings dismissing lawsuits by bond insurance companies Assured Guaranty Corporation and Ambac Assurance Corporation that sued the federally created financial oversight board that is trying to restructure about $120 billion of Puerto Rico’s debt. 

MARYLAND P3 MOVES FORWARD

A controversial plan to expand capacity on Interstate 270 in Maryland has been approved by the Maryland Public Works Board after changes were made to reflect opposition to tolls and perceived underfunding of mass transit. the Maryland Department of Transportation agreed to limit the first phase of construction to the Beltway between the Virginia side of the American Legion Bridge and the Interstate 270 spur, and to the lower part of I-270 between the Beltway and Interstate 370.

The future of the Beltway section  between I-270 and Interstate 95, where widening could destroy homes and public parkland  will be decided at a later, unspecified date.  The  changes also delays toll lanes for the northern part of I-270 between I-370 and Frederick because the environmental study for that portion is further behind.

The project’s contracts are estimated to be worth more than $9 billion creating one of the largest public-private partnerships in the country. Participating contractors will be expected to build up to four lanes on each highway and finance their construction in exchange for keeping most of the toll revenue long-term. The existing lanes would be rebuilt and remain free. The toll lanes would incorporate demand based rates designed to maintain certain average speeds.

To address the concerns of mass transit advocates, the state had agreed to allot 10% of its share of net toll revenue to transit.

NEW YORK STATE BUDGET

Gov. Andrew Cuomo proposed a $178 billion budget Tuesday that closes a $6 billion deficit through reducing the growth in Medicaid, limiting aid to local programs and expecting tax revenue to grow by $2 billion. The budget would increase school aid, legalize recreational marijuana, expand a new child tax credit, reduce business taxes and continue an already planned tax cut for the middle class. The proposal comes as the state faces an estimated $6 billion gap for fiscal 2021.

The Governor proposed several steps to address the gap. They include $2.5 billion through Medicaid restructuring based on recommendations from a Medicaid Redesign Team, $2 billion in expected additional tax receipts, and $1.8 billion in reduced spending to local assistance programs from “targeted actions and the continuation of prior-year cost containment.” Planned tax cuts will continue. Under the new rates, tax rate will drop to 6.09% in the $43,000-$161,550 income bracket, and 6.41% in the $161,550-$323,200 income bracket. Businesses will also get a tax break. The income tax rate would drop from 6.5% to 4% for businesses with 100 or fewer employees and with net income below $390,000.

Opposition is expected from the state’s powerful and politically and financially active hospital industry to the proposed Medicaid cuts. Legalized marijuana will face the demands of “social equity” proponents. Other issues will get support such as expansion of the state’s child care tax credit. New York is one of only six states providing a state-specific credit, and it has been equal to 33% of the pre-2018 Federal Child Tax Credit, or $100 per qualifying child aged 4 to 16, whichever is greater. The budget would expand the credit to include children under age 4. It would aid nearly 400,000 families whose income is $50,000 or less.

Education will remain as it always does front and center in any budget negotiations. Overall, school aid would grow to $28.5 billion — by far the most per capita in the nation. The Governor wants 80% of the money to go to poorer districts. He proposed to overhaul the school-aid formula so less goes to wealthy school districts that rely mainly on property taxes to fund their schools.

If all of this sounds familiar, it is. We expect that absent some farfetched proposals that the budget will be credit neutral.

WHO OWNS THE STREETS?

A recent story caught our eye as the fraught relationship between cities and the rideshare industry continues to play out. The Baltimore Finance Department reports that revenues in the last two years from the city’s parking tax, meters and city-owned garages, meanwhile, have declined a collective $4.1 million, or about 6%. The city attributes the decline to the growth of the rideshare industry in the city. The city also admits that Baltimore has collected no taxes on an estimated 9 million Uber and Lyft rides per year despite a 2015 state law enabling it to do so.

It was clearly a policy choice but it reflects the need for governments to be flexible and nimble as they deal with developments in transportation. Uber, in fact charged Baltimore riders 25 cents extra for nearly a year in anticipation of having to pay a similar tax. When that did not occur, Uber began crediting impacted customers with Uber Cash in recent weeks for a “city-specific fee” that was “ultimately not collected by the city.”

There does not seem to be a legal impediment to the imposition or collection of such a tax by Maryland municipalities. In fact, Annapolis, Brunswick, Frederick, Montgomery County, Prince George’s County and Ocean City successfully collect a 25-cent tax on each ride originating in those jurisdictions. In the case of Baltimore, the disruption resulting from the resignation of the mayor about a year ago seems to have derailed efforts to impose such a tax in Baltimore.

A bill that would have allowed the city to begin taxing Uber and Lyft rides was not introduced until January 2019. It then languished without a hearing for the past year in the council’s Taxation, Finance and Economic Development committee.  Finally, the bill will be considered by the Baltimore City Council.

When Uber and Lyft established service in the city in 2013, officials passed a 25-cent “taxi tax,” the only one of its kind in the state at the time, for any trip originating or ending in the city, but the law initially did not include rideshare. The state passed a law enabling such taxes to include the rideshare companies beginning in January 2015. Baltimore was exempted from a 25-cent cap on the tax. Somehow, the City Council was unaware that it was not collecting such a tax until 2018.

There really has not been offered a good explanation for why the City could not get its act together on an issue which resulted in multi-million dollar revenue losses. This is exactly the kind of situation and response that tech companies count on and highlights the risk associated with governments unprepared to deal nimbly with the challenges of emerging technologies. It is not credit positive when a city effectively ignores an opportunity to tax an entity which is already collecting the revenue and is not objecting to a tax.

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