Joseph Krist

Publisher

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ISSUE OF THE WEEK

The Village of Riverdale is located south of Chicago and like many smaller communities long supported by a manufacturing base it has struggled with economic and financial issues in recent years. These factors have depressed taxable values and incomes with an expected negative impact on the Village’s creditworthiness. The village’s population has declined by about 1% since 2010 and, while assessed value (AV) has increased over the last several years, it is still below its 2011 level. About 30% of the village’s residents live under the poverty level and income levels are well below the county, state, and national levels. Currently, the Village is rated CCC as a general obligation credit.

This has forced the Village to take the securitization route in order to maintain access to the capital markets. The Village is now coming to market with a BB rated credit secured by a first lien on the village’s local share of the statewide income tax. The pledged revenue includes all distributions under Section 2 of the State Revenue Sharing Act from the Local Government Distributive Fund of income tax amounts payable by the state of Illinois to the village.

The pledged revenues are secured by a “true sale” of the revenues to a bankruptcy-remote, statutorily defined issuer, the Riverdale Finance Corporation.  The state will direct all pledged income tax revenues to the trustee for benefit of corporation bondholders and the residual will flow to the village for any lawful purpose. The pledged income tax revenue is collected by the Illinois Department of Revenue, which certifies the amount collected to the state comptroller on a monthly basis. The comptroller must deposit the statutorily-dictated local share of the income tax revenue to the Local Government Distributive Fund (LGDF) no later than 60 days after the comptroller receives that certification.

The statewide income tax rate has changed several times since it was first established in 1969 and three times since 2011.  Historically, the state has offset the impact of rate changes by adjusting the local share percentage of total collections. Income tax receipts are allocated to the village based on its population as a proportion of the state population, meaning relative declines in population at a higher rate than the growth rate in state income tax revenue would lead to declines in the pledged revenue.

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CA REVENUES

State Controller Betty T. Yee reported California brought in less tax revenue than expected during the month of May. Total revenues of $8.25 billion were below monthly estimates in the governor’s FY 2018-19 updated budget proposal by $784.2 million, or 8.7 %. With one month left in the 2017-18 fiscal year that began in July, total revenues of $115.38 billion are $784.2 million less than estimates in the May budget revision, but $4.52 billion higher than expected in the enacted budget. Total fiscal year-to-date revenues are $10.10 billion higher than for the same period in FY 2016-17.

 

For May, personal income tax (PIT) receipts of $4.82 billion were $497.4 million, or 11.5 percent, higher than estimated in the governor’s May budget proposal. For the fiscal year, PIT receipts are $3.28 billion, or 4.2 percent, higher than projected in the 2017-18 Budget Act. May corporation taxes of $570.6 million were $79.2 million, or 12.2 percent, less than forecasted in the governor’s proposed budget unveiled last month. For the fiscal year to date, total corporation tax receipts are 15.9 percent above assumptions in the enacted budget. Sales tax receipts of $2.43 billion for May were $1.11 billion, or 31.4 percent, lower than anticipated in the governor’s FY 2018-19 amended budget proposal. For the fiscal year, sales tax receipts are 1.7 percent lower than expectations in the 2017-18 Budget Act.

Unused borrowable resources through May exceeded amended budget projections by 13.4 percent. Outstanding loans of $5.83 billion were $1.17 billion less than the governor’s May Revision expected the state would need by the end of May. The loans were financed entirely by borrowing from internal state funds.

WASHINGTON STATE SCHOOL FUNDING

The Washington Supreme Court declared the state had fully implemented its new school funding plan, lifted the contempt order and the $100,000-per-day sanctions, and ended their oversight of the case. In the McCleary decision in 2012, the Court had ruled that the state had violated its constitution by  underfunding K-12 schools. The issue has been a point of legislative contention ever since.

In 2017, legislators and the governor finally addressed the need for a plan to fund teacher and other school-worker salaries. That pay had been funded by local school district property-tax levies. The justices said the state needed to cover the full cost. The legislature passed a plan to raise the statewide tax rate in 2018 and phases in limits on future tax revenues collected by school districts through local levies.

This past Fall, the justices ruled that plan didn’t fully provide for schools by the September 2018 deadline established  by the court, and suggested lawmakers further increase education funding. To comply, lawmakers and the governor this spring provided an additional $776 million, and set aside another $105 million for the contempt fines.

In 2017, the Legislature committed to put $7.3 billion more in state funds into schools over the next four years through an increase of 81 cents per $1,000 of assessed value in the state property tax. State funding of education now represents more than 50 percent of the state budget for the first time since 1983.

THE FY 2019 BUDGET SEASON IS KIND TO STATE RATINGS

So far the budget season for fiscal 2019 is generating positive ratings news for some states. This past week, three states received positive changes in their ratings outlooks from Standard and Poor’s as the result of actions taken in association with adoption of budgets for the upcoming FY. S&P revised its outlook on Virginia’s general obligation (GO) rating and various issue credit ratings (ICRs) linked to its creditworthiness to stable from negative. It also affirmed its AAA rating on the state’s GO debt outstanding.

S&P also revised its outlook to stable from negative and affirmed its ‘AA’ rating on the state of Alaska’s GO debt outstanding. Adopted legislation (SB 26) outlines a percent of market value approach to use its Permanent Fund Earnings Reserve Account  (ERA) should allow for sustainable draws from the fund in future budgets.

S&P revised the outlook to stable from negative on its ‘AA’ issuer credit rating (ICR) on the state of Colorado. The revision follows the state’s adoption of pension reform in its 2018 legislative session. The state intends to reduce its unfunded liabilities and reach full funding within 30 years under the new bill, which incorporates automatic adjustments to contributions when needed to reach its goal. The liability remains underfunded by the adoption of a funding plan is a clear positive.

CA WATER UTILITY EARNS AN UPGRADE

Eastern Municipal Water District serves seven cities and unincorporated portions of the county and covers an area of 555 square miles, serving a population of over 816,000. The communities of Murrieta, Temecula, Hemet, Moreno Valley, Menifee and San Jacinto represent the district’s principal cities.  retail domestic accounts provide the majority of revenues. Revenue bonds are secured by the net revenues of the combined water and sewer enterprise. The rate covenant on the subordinate lien requires net revenues paid after O&M and senior lien debt service to be at least 1.15 times debt service. The additional bonds test is 1.15 times debt service on a 12-month look back over an 18-month period on outstanding bonds and proposed bonds. The subordinate lien bonds do not have a debt service reserve fund.

Moody’s Investors Service has upgraded Eastern Municipal Water District, CA’s senior lien water and wastewater revenue bonds to Aa1 from Aa2 and subordinate lien revenue bonds to Aa2 from Aa3. With only $13 million of senior bonds outstanding through 2021, subordinate debt is the District’s working lien. A cost-of-service rate methodology approved by the board in March 2017, encourages conservation as well as ensures a greater recovery of fixed costs from recurring, non volume related charges.

The District obtains nearly half of its water through the Metropolitan Water District of Southern California. This will require the District to shoulder a portion of MWDSC’s obligations in connection with the financing of the Delta Water Conveyance project.

UTILITY SUBSIDIES WHEN TAXES CAN’T BE RAISED

Voters in the City of long Beach, CA approved a change to the City Charter which would allow the city should be able to continue the practice of charging city-run utilities for access to rights of way, and then transferring those fees to the general fund. The practice had been carried out for decades but was recently challenged by two separate lawsuits against the city.

Measure M received some 53% support. The vote was presented as a choice between the subsidies or reduced city services. The vote can be viewed as a window onto the thinking of local residents in tax resistant California. City officials estimated that if Measure M had not passed that the general fund revenue loss —where the fees have been transferred at years’ end—could have amounted to about $18 million annually, meaning parks, road repairs, and other city services funded through the general fund could have faced cutbacks.

State law prohibits local utility providers from charging more than what it costs to provide a service and other laws prohibit municipalities from imposing taxes without voter consent. This vote serves as the required consent.

NEW JERSEY SCHOOL DEBT SUPPORT PROGRAM DOWNGRADED

Bonds issued under the program are secured by a pledge of all legally available funds of the state through replenishment provisions for the New Jersey Fund for the Support of the Free Public Schools, regardless of whether a specific budget appropriation has been made, as long as the state has enacted a budget. However, according to the state, New Jersey must enact a state budget for these guarantee funds to be available in the event a local school district misses a debt service payment. Once a state budget is enacted, money held in trust for the New Jersey Fund for the Support of the Free Public Schools is automatically available to pay debt service.

The New Jersey Fund for the Support of the Free Public Schools Program is authorized by Article VIII, Section 4 of the New Jersey Constitution. New Jersey Statutes 18A:56-19, as amended, require two reserve accounts to be maintained in the fund. The old school bond reserve account has been funded in an amount equal to at least 1.5% of aggregate school district debt issued by counties, municipalities, or school districts before July 1, 2003. The new school bond reserve account will be funded in an amount equal to at least 1% of aggregate school district debt issued on or after that date. In the event that the amounts in either the old school bond reserve account or the new school bond reserve account fall below the amount required to make payments on bonds, the amounts in both accounts are made available to make payments for bonds secured under the reserves. On or before Sept. 15 each year, fund

Trustees determine the aggregate amount of school purpose bonds outstanding and are responsible for maintaining appropriate reserve levels based on the market value of reserve investments. If at that time, the funds on deposit fall below the required levels, the state treasurer is required to appropriate and deposit into the school reserve such amounts as might be necessary to meet fund level requirements from all available state resources. To ensure sufficient liquidity, at least one-third of the obligations in the fund must be due within a year. Fund assets are direct or guaranteed U.S. government obligations and are valued annually. Funds in the trust are not available for interfund borrowing by the state.

Now the program has been downgraded by S&P to BBB+ from A-. The downgrade reflects the continued pressure on the State’s general obligation rating.

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