Joseph Krist

Publisher

________________________________________________________________

ISSUE OF THE WEEK

$850,000,000

State of Connecticut

Special Tax Bonds

Pledged revenues include taxes and fees on motor vehicle fuel, casual vehicle sales and licenses. All taxes on oil companies’ gross earnings and a designated portion of the statewide sales tax are now deposited directly to the State Transportation Fund (STF) and pledged to bondholders; the sales tax deposit was phased in through fiscal 2018. The 2018 legislature accelerated by two years the five-year phase-in of the sales tax on motor vehicle purchases at dealerships deposited to the STF, which had been agreed to in a 2017 special session, and changed the rate of the deposits to the fund. The phase-in began in fiscal 2019, from the earlier fiscal 2021, and will reach 100% in fiscal 2023.

The state estimates a beginning $29 million addition to the STF in fiscal 2019, escalating over the phase-in period to $368 million in fiscal 2023. In 2017, the legislature also referred a constitutional amendment for voter consideration in November 2018 that would ensure that all monies once deposited to the STF are solely applied to transportation purposes, including debt repayment. The legislature would retain the ability to adjust rates and revenue allocations prior to pledged revenues deposit to the STF.

The issue sells as the State faces continuing financial pressure and continuing pressure to maintain if not lower current tax rates. As of fiscal 2018 estimates, the major revenues in the STF consist of motor fuels tax (30%), motor vehicle receipts (15%), oil company tax (19%), license, permit and fee revenues (8%), and a portion of statewide sales tax (20%). Sales tax revenue as a component of the STF is expected to increase to 32% in fiscal 2022 as part of the most recent agreement.

The ballot initiative comes as the state faces significant choices as it attempts to maintain infrastructure (Let’s Go CT), stop erosion of the economic base, and work to reduce its significant unfunded pension liability. With some uncertainty about the economic outlook, investors should recall that interdependence with the state general fund has led to revenue or cost shifts during periods of general fund fiscal stress, most recently in fiscal 2016. Although the “Let’s Go CT!” initiative included the statutory designation of the STF as a perpetual fund, limiting the use of resources to only transportation, the new designation did not prevent the state from delaying the originally planned sales tax allocation phase-in to address general fund revenue underperformance.

__________________________________

MEAG DISPUTE HITS JACKSONVILLE RATING

The City of Jacksonville is caught between a rock and a hard place as it attempts to deal with the fallout of its decision to sue MEAG in the face of the decision to plunge forward with the Votgle nuclear plant upgrade. That fallout includes Moody’s announcement that it was reducing its rating on the City’s $2.1 billion of debt. The action was directly attributed to the MEAG dispute.

The city is a participant as a plaintiff in litigation with JEA, a component unit of the city, against Municipal Energy Authority of Georgia (MEAG), in which JEA and the city are seeking to have a Florida state court invalidate a “take-or-pay” power contract between JEA and MEAG. The city’s action calls into question its willingness to support an absolute and unconditional obligation of its largest municipal enterprise, which weakens the city’s creditworthiness on all of its debt and is not consistent with the prior Aa rating category. The contract in question was signed in 2008 and is the sole source of repayment for $1.4 billion of outstanding MEAG Power Project J debt bonds.

JEA continues to make payments in full and on time for amounts billed by MEAG Power under the PPA and intends to do so unless and until a court invalidates the PPA. So it must be frustrating to the City to see that its only potential avenue to rid itself of the obligation to pay for what seems more and more of a failed project. Perhaps the involvement in the project should have been more of as rating issue since the risks and factors which were associated with participation in a nuclear power plant construction were pretty clear from the start.

ILLINOIS PENSION WOES CLAIM ANOTHER LOCAL CREDIT

The Village of Oak Lawn’s current pension contributions are not in compliance with state law and therefore state revenues could be diverted if requested by the local pension boards. While such a diversion is reportedly not imminent, such risk is heightened by the village’s limited reserve position. The village does have a degree of budgetary flexibility given declining debt service costs and certain operating revenues designated for capital that could be redirected to operations.

The situation led Moody’s to downgrade the City’s debt from Baa2 to Baa3. The outlook was listed as negative. Village actions to increase pension funding will slow the rate at which unfunded liabilities are growing, plan status will continue to worsen and potentially strain the village’s budget over the next several years. The outlook also considers the direct risk to liquidity created by current funding levels given the village is not in compliance with state law.

We will see more of these actions without significant improvement in the overall state and local pension situation.

PHILADELPHIA

The last time the City Controller commented on the City’s financial management those comments concentrated on what was described as lost or unaccounted for cash. Now the Controller has released the results of a review which paint a more positive picture of the City’s cash position. The Office of the City Controller released its first Cash Report, a quarterly review of Philadelphia government’s cash position (available liquid assets). This interactive report focused on the City’s cash position at the end of the fourth quarter of fiscal year 2018 (FY18), as of June 30, 2018, comparing the City’s end-of-fiscal year cash balances to end-of-fiscal year data back to fiscal year 2007. The report shows the City’s cash position as historically strong.

In FY18, the City saw substantial gains to its cash balances. It was the first time in the last ten years that the General Fund, Grants Fund and Capital Fund all saw increases in their end-of-fiscal year balances. The General Fund, with revenues generated primarily from local taxes and costs including employee payroll and benefits, pension payments, purchases of service and equipment and supplies, had a cash balance of $769 million, the highest balance in a decade. This is attributable to continued economic growth and tax rate increases.

The General Fund balance ($769 million) represents 18% of annual cash expenditures, or a little over two months-worth of General Fund expenditures. The combined total of these three major funds, plus some additional smaller funds, make up the Consolidated Cash account balance, which was also noteworthy in FY18. After the largest single-year increase since 2007, Consolidated Cash had a fiscal year closing balance of $993 million – the highest balance since before the Great Recession.

PORTLAND OR MULLS PENSION BOND

In late June, Portland Community College’s elected board approved the issuance of $200 million in new pension obligation bonds, an amount that would roughly equal its entire unfunded liability with Oregon’s pension system. Since it’s not a general obligation bond, and no new taxes are being imposed to repay it, the additional debt does not require voter approval.

Last year, PCC’s total pension outlay was $23.5 million, or more than 10.5 percent of its total expenditures. Come July, those costs will increase by another $6 million annually. The idea to use pension bonds is being pushed hard by bankers who the local press notes have become the major source of pension funding advice. We see no need to harp on the obvious conflict of interest associated with relying on a banker for policy advice. We will note that with rates rising there is some timing pressure on potential issuers. At the same time as they evaluate the rate risk associated with waiting, the recent week’s action in the equity markets should give any investor pause. While the recent year’s results in  the stock market have been favorable, we note that we are likely closer to the end of the cycle than the beginning. This does introduce an element of risk for the District as they will need to get their assumptions right as they also cope with potential market risk.

It should come as no surprise to regular readers that we look askance at the plan.

CALIFORNIA REVENUE UPDATE

State Controller Betty T. Yee reported the state received $12.10 billion in revenue in September, exceeding projections in the 2018-19 fiscal year budget by 5.1 percent, or $582.4 million.  This month, all of the “big three” revenue sources –– personal income tax (PIT), corporation tax, and sales tax –– came in higher than assumed in the enacted budget.

For the first quarter of the 2018-19 fiscal year, revenues of $28.71 billion are 5.2 percent ($1.43 billion) higher than projected in the budget enacted at the end of June. Total revenues for FY 2018-19 thus far are 10.8 percent ($2.79 billion) higher than for the first quarter of FY 2017-18.
For September, PIT receipts of $8.44 billion were 3.7 percent ($297.4 million) more than expected in the FY 2018-19 Budget Act.

September corporation taxes of $1.30 billion were 11.2 percent ($130.9 million) above FY 2018-19 Budget Act estimates. Sales tax receipts of $2.00 billion for September were 10.6 percent ($191.9 million) more than anticipated in the FY 2018-19 budget.

SALT LAKE CITY AIRPORT

Salt Lake City is planning to finance the latest airport modernization and expansion. SLC is considering issuing approximately $875 million of tax-exempt fixed-rate Airport Revenue Bonds. Bonds will be payable from and secured by a pledge of Net Revenues of the Airport. The project is being funded by user fees–primarily by airlines serving SLC–as well as savings, car rental fees, passenger facility charges and airport revenue bonds. No local tax dollars are being spent on the project.

SLC is the 23rd busiest airport in North America and the 85th busiest in the world. More than 340 flights depart daily to 95 nonstop destinations. (SLC) serves more than 24 million passengers a year. The proposed expansion includes new terminals as well as new parking and car rental facilities. In that sense it represents the current “state of the art”.

It is notable that the only real nod to the coming impact of technology on transportation is that Salt Lake City International Airport has installed 24 electric vehicle (EV) charging ports for public and employee use. The 12 EV charging stations are dual port, Level 2 with standard connectors to accommodate all models of electric vehicles. Each port supplies up to 7.2 kilowatts of power and there is no charge to use the stations. Thanks to Rocky Mountain Power is covering 50% of the project costs.

HOUSTON MOVES ON TAXES BEFORE THE BALLOT

Houston City Council approved a nominal increase in the city’s property tax rate, the first rate hike at City Hall in two decades. The increase comes as the City faces a potentially  turbulent Election Day. A battle over whether to grant firefighters the same salaries as police of corresponding rank and seniority — the “parity” referendum is Proposition B on the Nov. 6 ballot.

The mayor, who has sheparded pension reform through the local and state legislatures says that passage of the parity measure would cost the city more than $100 million a year and force the layoff of as many as 1,000 city employees, including firefighters and police. The firefighters union disputes that cost and has called the layoff estimates a scare tactic

The City continues to send mixed signals. It has instituted a hiring freeze, saying there is no point hiring people who would be laid off if the parity measure passes. At the same time, the mayor and council approved a new police contract this month that will give officers a 7% raise over the coming two years and another 2% raise the following year if a new deal is not struck by the end of 2020 — raises that would drive up the costs of Prop. B.

All of this must happen within the limits of the voter approved property tax cap limiting the City’s ability to raise taxes.

 

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.