Joseph Krist

Publisher

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STATE OVERSIGHT SUCCESS

On October 24, the Massachusetts Executive Office of Administration and Finance announced that the state will end its financial oversight over the City of Lawrence . After 10 years of oversight, city management projects balanced operations with slight surpluses during fiscal 2020-24. Between 2008and 2011, the city accumulated over $27 million in operating deficits, equal to 10% of annual general fund revenue.  

The City’s financial difficulties led to the appointment of a fiscal overseer in fiscal 2010 as part of special legislation. With a fiscal overseer, Lawrence fell under the second most intense level of state oversight of municipalities in Massachusetts. The fiscal overseer has supervised all financial operations in consultation with the city’s financial management team. The city’s financial challenges before oversight stemmed from weak budget management, including managing financial obligations tied to collective bargaining agreements, combined with limited operating flexibility to absorb state aid cuts.

The special legislation also authorized the issuance of deficit financing notes ($16.4 million outstanding as of 30 June 2019) to cure the accumulated operating deficits from 2008-11. Over the period of supervision, a five-year budget forecast and capital plan were updated annually, as well as formally adopted financial policies

City management’s projected surpluses are modest at less than 1% of the city’s $321 million annual budget. Even with outside supervision, Lawrence faces practical constraints on raising property taxes with a tax base that has a median family income equal to 59% of the US average and a high 24% poverty rate. The city is heavily dependent on state aid, which has grown 3% annually over the past 10 years. Rising costs associated with education, health insurance and pension contributions will continue to exert hard to control pressures on the operating budget. Management projects that annual pension contributions will increase 3.3% annually over the next five years.

State aid represented 70% of fiscal 2018 general fund revenue, with property taxes the second largest revenue source at 20%. Education is the largest expenditure, comprising 62% of fiscal 2018 general fund expenses followed by public safety at 8%.

 Currently, the cities of Lynn (Baa1 stable) and Methuen (A3 negative) are each coordinating with a fiscal stability officer.

HOUSING IN CALIFORNIA

Apple announced a $2.5 billion plan to help address the housing crisis in California. The plan includes $1 billion for an affordable housing investment fund and another $1 billion to help first-time home buyers find mortgages. Facebook said last month that it would give $1 billion in a package of grants, and loans. In June, Google pledged $1 billion for a similar effort in California.

Apple’s plan is not just based on spending. Part of the $2.5 billion figure includes making available land it owns in San Jose, worth $300 million, for new affordable housing; $150 million to support affordable housing in the Bay Area, including long-term forgivable loans and grants; and $50 million to address the causes of homelessness in Silicon Valley.

Will all of this spending really put a dent in the State’s housing shortage? It is hard to say that this will be enough. The issues in California which lead to a housing shortage include issues of land availability relative to jobs, zoning issues which restrict the ability to develop affordable multifamily housing in coordination with transportation policies, and property tax policies which hinder movement. Only by addressing all of these issues in concert will California be able to make meaningful progress in the development of sufficient affordable housing in the state.

SALES TAXES ON THE BALLOT

A good test of the appetite for tax increases occurs in California as a number of localities are asking their voters to approve sales tax increases. In Irwindale, voters will decide on Measure I, a sales tax increase that will push the local rate to 10.25%, the state maximum. The tax increase could translate to an estimated $1.2 million annually and would help fund police protection, 911 emergency response and other public safety initiatives, senior citizen resources, parks, infrastructure and road improvements, transportation, recreation programs, maintaining library services and maintaining programs that create jobs and attract businesses.

In Monrovia, Voters will decide on Measure K, a sales tax increase that will push the local rate to 10.25%, the state maximum. If passed, Monrovia would yield about $4.5 million annually. It would be earmarked for projects that have been on hold. In Sierra Madre, voters will decide on Measure S, a sales tax increase that will push the local rate to 10.25%, the state maximum. Measure S may bring in a $225,000 a year, according to the L.A. County Registrar-Recorder. The potential monies would maintain police patrols, police, fire and paramedic response times, maintain emergency planning and response, maintain for parks, streets, sidewalks and parkway trees, maintain library services, recreation and senior programs and supplement general finances. In South Pasadena, voters will decide on Measure A, a sales tax increase that will push the local rate to 10.25%, the state maximum. The funds, if passed, would be used to maintain 911 emergency response times, focused on home break-ins and thefts, maintain neighborhood, school and park police patrols, fire and paramedic services, fire station operations and emergency preparedness, retain and attract local businesses, maintain streets and infrastructure and maintain general services and city finances.

In terms of property tax increases, in San Marino voters will decide on Measure SM, a parcel tax that is estimated to yield $3.4 million each year until 2025. The money would go for paramedic services, fire protection and prevention and police protection, according to the county registrar. Parcel taxes are a form of property taxes, based on the characteristics of the property — in San Marino’s case, primarily focused on zoning — instead of the value of it.

YONKERS

One of the historically troubled credits in New York State has been the City of Yonkers, located on New York City’s northern border. This proximity to the city has not yielded the benefits one might expect over the last half century. The city’s credit has reflected the decline of its jobs and housing base. It resulted in state oversight and the creation of security mechanisms for the City’s debt. It is this assistance which has maintained the City’s market access.

Now the City hopes to issue just under $100 million of debt. The City is rated A2 with a negative outlook by Moody’s. The credit was assigned a negative outlook. This despite the acknowledgement of a significant number of new multifamily rental and condominium complexes being built around the city’s mass transit centers. Moody’s notes that new high density complexes will bring a significant number of new residents which will increase income tax revenue and likely contribute to growth in sales tax revenue, two major revenue sources for the city. 

Nonetheless, the city’s narrow reserve position, above average long-term liabilities and below average wealth and income profile relative to regional averages weigh on the credit. This is offset to some degree by significant state oversight, including the segregation of funds into a lock box for the payment of debt service. This is a key mechanism which effectively directs first property tax collections to the payment of debt service. Additional security is provided under the New York State Section 99-b Intercept Program. 

The rating on the bonds reflects a quirk in the City’s security provisions. The bonds are secured by a General Obligation pledge as limited by New York State’s legislated Property Tax Cap (Chapter 97 (Part A) of the Laws of the State of New York, 2011) as well as by the city’s pledge of its faith and credit. However, the City’s rating does not get full credit for that pledge as Moody’s considers the current issues and the city’s outstanding debt to be GO Limited Tax because of limitations under New York State law on property tax levy increases. The absence of distinction between the GOLT rating and the Issuer rating reflects the city council’s ability to override the property tax cap and the faith and credit pledge in support of debt service.

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