Joseph Krist

Publisher

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ISSUE OF THE WEEK

$120,000,000*

IOWA FINANCE AUTHORITY

Midwestern Disaster Area Revenue Refunding Bonds

(Iowa Fertilizer Company Project)

The Authority is issuing refunding bonds now that the facility is operational and has established at least a short-term financial track record. The Bond’s B- rating from Fitch was recently affirmed and its outlook was upgraded to positive. The Positive Outlook reflects the project’s successfully resolved ramp-up issues, and is operationally positioned to benefit from an improving pricing environment assuming it can maintain its operating profile and control costs while favorable pricing trends endure. 

Commodity pricing risk remains as an important credit dampener as IFCo sells its nitrogen products to farmers, distributors, wholesalers, cooperatives, truck stop operators and blenders at market prices. The project’s main products have historically exhibited considerable price volatility. The project’s ability to meet ongoing mandatory debt payments is vulnerable to product pricing remaining at current depressed levels on a sustained basis.  

The project has been operating for almost a year and a half, and after encountering some ramp-up issues has achieved higher than nameplate capacity on its production lines. The pricing of nitrogen products is somewhat correlated to the price of feedstock, which may be oil, coal or natural gas depending on the region and producer. In recent years, the substantial declines in oil and natural gas prices have driven nitrogen prices to levels approaching 10-year lows. In 2018 the project’s actual DSCR was 1.5x compared with last year’s base and rating case expectation at 2.3x and 1.5x for that year, although actual result is weighted down by early ramp-up issues in 2018. The project realized higher revenues but also incurred higher expenses.

The project has passed a key milestone with construction completion and operability achieved. Now the risk focus turns to the ability to maintain operating reliability and the achievement of assumed project results in the face of product price pressures.

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CALIFORNIA

California’s total revenues of $5.51 billion in February were lower than forecasted in the governor’s proposed 2019-20 fiscal year budget by $1.34 billion, or 19.5 percent, and in the FY 2018-19 Budget Act by $2.01 billion, or 26.7 percent. Two-thirds of the way through FY 2018-19, total revenues of $79.93 billion were lower than expected in the proposed and enacted budgets by $4.20 billion and $3.33 billion, respectively. For the fiscal year to date, state revenues are 1.4 percent lower than the same time last year.

 Last month, sales and corporation taxes –– two of the state’s “big three” revenue sources –– came in higher than assumed in the governor’s proposed budget released in January. For February, personal income tax (PIT) receipts of $1.39 billion were $1.82 billion, or 56.6 percent, less than the Department of Finance forecasted in January; and they were $2.05 billion, or 59.5 percent, lower than assumed in the budget enacted last June. In the current fiscal year, PIT is 6.0 percent below the FY 2018-19 budget forecast. 

Sales tax receipts of $3.76 billion for February were $407.7 million higher than anticipated in the proposed FY 2019-20 budget but $58.3 million less than expected in the FY 2018-19 Budget Act. Corporation taxes of $258.4 million in February were 59.8 percent higher than estimates in the FY 2019-20 proposed budget and 78.5 percent higher than in the enacted FY 2018-19 budget.

AIRBNB UNDER THE TAX GUN

The ongoing battle between Airbnb, its clients, and those who use it to book rooms continues to rage. The company is fighting ongoing efforts by law enforcement in New York City to force property owners and renters to comply with various laws regulating short term rentals. Charges were recently filed against real estate brokers who were violating those regulations. Other municipalities are following a different tactical approach.

In New Jersey, the state enacted a tax on those who use internet based services to rent out their homes last fall. Anyone using short-term rental booking websites will have to collect the state’s 6.625% sales tax and the 5% hotel occupancy fee, in addition to any fees a municipality has in place. It is designed to level the playing field by imposing the same taxes and fees that hotels and motels currently must pay to the state on “transient accommodations,” or residences used as temporary lodging.

Miami Beach is undertaking a stricter level of enforcement of its laws covering short-term rentals. Currently, the city is taking a non-financial approach with code enforcement officers directly contacting individuals on either or both sides of an Airbnb transaction.

REAL ESTATE COULD FUND TRANSIT IN NEW YORK

The battle to find funding for needed repairs to New York’s battered mass transit system is opening on a new front. New York is poised to become the first US city to levy what is known as a pied-à-terre tax. A pied-à-terre tax would institute a yearly tax on homes worth $5 million or more, and would apply to homes that do not serve as the buyer’s primary residence. The office of the city comptroller, Scott M. Stringer, estimated that a pied-à-terre tax would bring in a minimum of $650 million annually if enacted today. 

Supporters would like to see the proceeds of the tax dedicated to funding mass transit. The revenue stream could be pledged to support bonds issued to finance capital projects. One version would establish a scale based on value. For properties valued between $5 million and $6 million, a 0.5% surcharge would be added on the value over $5 million. Fees and a higher surcharge would apply to homes that sold for more than $6 million, topping out at a $370,000 fee and a 4% surcharge for homes valued at more than $25 million.

The issue reflects the politics around a number of issues at the core of New York politics – income inequality, wealth concentration, real estate and housing prices, and the perception of diminishing housing affordability. The recent closing on the purchase of a $238 million apartment on Central Park South by a hedge fund billionaire with an estimated net worth of $10 billion, may have helped make the legislation more feasible.

MEDICAID WORK RESTRICTIONS COMING TO OHIO

Starting in 2021, Medicaid beneficiaries ages 19 through 49 in Ohio will need to work, attend school, volunteer or attend job training for at least 80 hours a month to remain in the health care program. Beneficiaries who do not meet the requirements for 60 days will lose their coverage. This continues the trend of conservative states seeking to restrict Medicaid spending by making it harder to expand.

There is one key difference on Ohio – people who lose coverage in Ohio will be allowed to immediately reapply for enrollment. Approval does not always result in the implementation of these changes. Only Arkansas has implemented their requirements. The backlash against the resulting cuts in enrollment have been widely criticized. In Ohio, the state estimated that just over 18,000 people — about half the people who will be subject to the work requirements— will lose coverage. The requirements won’t apply to adults who are disabled, pregnant women, children, caretakers or people living in parts of the state with high unemployment.

The approval of work requirements was expected with the appointment of a former aide to Vice President Mike Pence. The latest approval comes at the same time that a federal judge  who is overseeing court challenges to Arkansas and Kentucky’s work requirement scheme , said he will decide by April 1 whether to block further implementation in Arkansas and if the rules should be struck down in Kentucky.

FREE TUITION TAKES ANOTHER STEP

The state supported University of Tennessee will begin providing free tuition to students from low-income families. The policy will apply to students who are in-state and whose families make a combined annual income of less than $50,000 per year. The program is named UT Promise. Launching in fall 2020, this innovative last-dollar scholarship will guarantee free tuition and fees to qualifying Tennessee residents enrolling at UT campuses in Knoxville, Chattanooga and Martin. UT Promise is an expansion of scholarship offerings and does not replace existing scholarships.

Free tuition and fees (will be applied after all other financial aid is received) for in-state students meeting all of the following criteria which include meeting  the academic qualifications of the University.  As for the question of how this will be paid for, The University of Tennessee Foundation will simultaneously launch the UT Promise Endowment campaign to help fund this initiative. In the interim, the University will cover the cost.

CONSOLIDATION TO BE CONSIDERED ANEW

In many cases, analysts can effectively cite consolidation of government functions into county governments as transfers and/or partnerships have provided real efficiencies and savings. Now a new candidate is emerging to see if the idea could prove to be a major improvement to the fiscal structure of Puerto Rico. Puerto Rico Gov. Ricardo Rosselló announced that before the current legislative session goes into recess June 30, he will be introducing a measure to create counties on the island.

The governor’s office estimated that the proposal could result in about $800 million in savings. The approval process will be difficult however with entrenched interests in maintaining the status quo. Supporters cite the difficult financial position of many of the Commonwealth’s 78 municipalities. Nonetheless, many existing government officials fear the loss of position and the many “perks” that go with them.

UNIVERSITY OF PUERTO RICO – COLLATERAL DAMAGE

Among the many challenged quasi-governmental entities, the University of Puerto Rico stands out. The UPR’s 11 campuses are on show cause for lack of compliance with the Middle States Commission on Higher Education (MSCHE) Requirements of Affiliation 11 and 14, which address financial planning and documentation, and access to information, respectively. The UPR is also in non-compliance with the Standard of Accreditation VI, which pertains to financial resources.

While the requirements refer to apparent internal issues regarding long-term financial planning, as well as not submitting financial statements on time, for the Standard of Accreditation VI the Middle States has concerns about the ability of the UPR to have enough resources to fulfill its mission, given the budget cuts it has experienced and the ones expected in the fiscal plan approved Oct. 23, which drops its central government allocation from about $650 million for fiscal year 2019 to $441 million for fiscal 2023.

Middle States requested, among other documents, for “updated information on the impact of the Fiscal Oversight Management Board’s plan and proposed restructuring on the institution’s status and finances.

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