Joseph Krist
Publisher
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NATIVE AMERICAN CASINOS
While the debate over the benefits of casinos operated by Native American tribes will continue, there has been a resolution of one long running dispute between a tribe and the communities which host Native American casinos. Recently, an arbitrator found that the Seneca of Nation of Indians in western New York were required to continue to make revenue sharing payments to host communities. The arbitration panel ruled the Senecas must continue to pay the state a percentage of the nation’s slot machine revenues, as well as nearly two years of back payments. Buffalo, Niagara Falls and Salamanca will all receive funding they have been due but were not receiving while this battle was being waged. The arbitration panel ruled the Senecas must continue to pay the state a percentage of the nation’s slot machine revenues, as well as nearly two years of back payments. Buffalo, Niagara Falls and Salamanca will all receive funding they have been due but were not receiving while this battle was being waged.
The decision has the most meaning for the City of Niagara Falls which relies heavily on these payments. The casino had been hailed as the most significant economic development project in the City for some time. The loss of these revenues put significant pressure on the City’s finances. While it was working from a stronger financial base, the town of Salamanca would also face negative financial impacts from the tribe’s withholding of revenue sharing payments. Moody’s has noted that “had the Seneca Nation won the arbitration and refused to make payments to these cities going forward, both cities would have faced significant financial uncertainty.”
Moody’s has declared that last week’s resolution in an arbitration between the state and the Seneca of Nation of Indians will have a positive financial impact on three Western New York cities.
COFINA REFINANCING
The Financial Oversight and Management Board has submitted its arguments in support of the pending restructuring agreement designed to refinance the Commonwealth’s outstanding $17.6 billion of Cofina’s debt. The judge overseeing the Commonwealth’s pending Title III proceedings had had asked for legal arguments to support the new Cofina structure amid concerns it would be a de facto rewrite of the commonwealth’s Constitution.
The concern comes from the provisions of the restructuring plan which effectively commit future legislatures to appropriate for debt service. The plan would also effectively change the definition of available resources, as Cofina will be given ownership of a portion of the sales and use tax revenue. Does that clash with constitutional provisions supporting general obligation debt as the first priority of payment?
The request does reflect the concern about the willingness to interpret the Constitution in opposite ways depending on the situation. If the judge’s concerns stand, the creditors would be seen as asking for some of the very provisions established to support investment in the bonds to now be inoperative in order to “save” the existing creditors.
The Board made some substantial claims in its arguments. The bond legislation is “valid and constitutional,” the board reiterated. In order to confirm a Title III plan, section 314 of Promesa requires that the court find the debtor is not prohibited by law from taking any action necessary to carry out the plan. The board asserted that, under Promesa, the court has jurisdiction over all property of the commonwealth and has held that the determination of the extent or validity of Cofina property is a mixed question of federal and state law.
For those of you who don’t follow the ins and outs of things, the restructuring of Cofina’s debt has two parts. In the first, commonwealth and Cofina bondholders settled their dispute over ownership of the sales and use tax by agreeing to divide the 5.5% portion of the 11.5% sales and use tax. From the 5.5% portion, Cofina will keep 53.6% and the commonwealth receives the rest. According to court documents, the split will result in the commonwealth receiving about $400 million a year from the sales and use tax over the next 40 years. Secondly, under the debt plan, Cofina bondholders will exchange their current bonds for new bonds whose value is being cut. Cofina senior bondholders will recover 93% of the value of their original bonds and junior bondholders 53%.
FOXCONN IN THE INCENTIVE COOP?
It is not often that something said at the World Economic Forum in Davos has direct meaning for municipal credit issues. One thing we saw did catch our attention as it dealt with a favorite topic – the use of tax incentives as a job generator.
Until Amazon held its competition between cities vying for the location of what they thought could be 50,000 jobs, the most significant use of tax incentives to lure jobs was the deal which the State of Wisconsin arrived at with Foxconn. Away from the sheer size of the package, the timeframe for recovery by the State of its “investment” was one of the primary sources of criticism of the plan.
The consensus is that the breakeven date for the return on investment was sometime in the mid 2040s. That assumed that the employment levels advertised to arise from this deal were based on certain assumptions including the types of jobs, the products to be made there, and the availability of workers. There was concern that previous experiences with Foxconn and its failure to follow through after receiving tax incentives put the benefits of the factory at risk.
Now, we have upper management from Foxconn participating in a discussion at Davos regarding automation and production. There Foxconn stated that their goal was to have 80% of its production accomplished through automation and artificial intelligence. The comments came at the same time that the company was fighting off a spotlight on the fact that it appears that Foxconn wants to import Chinese engineers to work in Wisconsin.
The comments have raised concerns that the employment to be generated for Wisconsin residents will be concentrated in lower skilled (and lower value) assembly jobs while the higher paying technical jobs will go to others. If that is indeed the case, the economics of the deal become less favorable. That will lead to lower than expected levels of economic activity, less tax revenue, and the opportunity cost of foregoing those revenues during a time of scarce resources across the country for governmental projects.
Hopefully, Amazon will be a more reliable partner at its new locations. The Virginia legislature is moving bills through which would approve state tax incentives of up to $750 million over the next 15 years for Amazon to build a headquarters facility in Arlington. The package would provide cash grants to the online retail giant on condition that the company create tens of thousands of jobs with average pay of at least $150,000 a year. The bill would also include giving grants of $22,000 per new full-time job for the first 25,000 jobs, for a maximum of $550 million. After that, grants of $15,564 per new job would be issued for up to 12,850 additional jobs, for a total of $200 million.
GAS TAXES ON THE DOCKET
Many state legislatures are looking at the prospect of raising gas taxes to finance infrastructure projects. The moves come amidst the lack of a federal program to fund infrastructure. States realize that they do not have a reliable federal partner so they are taking matters into their own hands.
The latest example is in Hawaii where measures introduced in both the state House and Senate would increase gas taxes and other vehicle fees to generate additional money for the State Highway Fund. The proposed legislation would increase the state gas tax from 16 cents to 21 cents per gallon on Hawaii Island and other neighbor islands, and to 22 cents on Oahu.
Other fees would be increased. The legislation also would increase annual vehicle registration fees by $5 — from $45 to $50 — and increase tax rates for each gallon of diesel oil, as well as gasoline or other aviation fuel used for airplanes, by 1 cent. The state vehicle weight tax also would increase. The state Department of Transportation estimates that an increase of 5 cents per gallon of gas would raise an extra $27.2 million in revenue. The proposed change to the vehicle weight tax is expected to generate an additional $10.12 million in revenue, while higher registration fees will generate nearly $5.6 million, for a total of $42.9 million in additional funds.
Not every state sees the same level of political support. A recent poll of Wisconsin voters showed that voters are reluctant to raise taxes and fees for roads and highways. The poll shows 52% prefer to keep gas taxes and fees where they are — while 42% favor increasing both.
TARIFFS BITE
We finally have an estimate of the economic impact of the Administration’s tariff wars. “On net, CBO estimates that the new tariffs on both imports and exports will reduce U.S. real GDP by about 0.1 percent, on average, through 2029.” The tariffs amounted to import taxes of 10-30% $284 billion of imported goods, amounting to 12% of all imported goods. In response, U.S. trade partners put tariffs of their own on $134 billion worth of American exports, equivalent to 9%.
Supporters of the trade policies behind tariffs to the fact that In 2018, the level of revenues collected from both pre-existing and new tariffs amounted to $41 billion, or 0.2 % of GDP. CBO projected that the level of duties would rise to 0.3% in 2019 and hover between 0.3 and 0.4 % of GDP over the next decade.
Imagine the reaction if a tax was imposed by say, a Democrat, which created a permanent drag on the economy of 0.4%. Economic drag is always the argument against regulation and other policies. So we note this self-inflicted wound which will have uneven impact throughout the economy.
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