Joseph Krist

Publisher

________________________________________________________________

JUNK LAWSUIT AGAINST ILLINOIS DEBT REJECTED

On Aug. 29, Sangamon County IL Associate Judge Jack D. Davis II denied a request by individual plaintiff John Tillman together with Warlander Asset Management LP, (the money behind the case) to file suit to block the state from continuing to pay off $14 billion in “structural debt” bonds issued in 2003 and 2017. The complaint sought to argue the state violated Section 9 by failing to identify a “specific purpose” for the debt when issuing the bonds at question in the case.

The lawsuit named as defendants Gov. JB Pritzker, state treasurer Michael Frerichs and state comptroller Susana Mendoza. None of them were in office when the bonds were issued. The judge found “the legislation stated with reasonable detail the specific purposes for the issuance of the bonds and assumption of the debt as well as the objectives to be accomplished by enactment of the legislation.” “Despite Tillman striving mightily to do so, he cannot ignore the plain language of the statutes in question,” the judge wrote. “Tillman’s proposed Complaint is chock-full of conclusory and argumentative statements describing the financial condition of the state that are irrelevant and which the court must disregard. Indeed, it resembles far more of a political stump speech than it does a legal pleading.”

The judge went further declaring that allowing lawsuit to proceed would “result in an unjustified interference with the application of public funds” and would lead to a court substituting its interpretation of the constitution for the will of the General Assembly and other elected officials, which the judge said was a “non-justiciable political question.” None of this is surprising. It has also been alleged that Warlander Asset Management LP was hoping to profit from a short position if the lawsuit succeeds.

It is a reflection of how continually annoying it is to hear how non-traditional investors keep trying to bring their “better way” of trading and investing to the municipal bond market. These aren’t corporate entities you’re messing with they are providers of public goods which by their very nature are often essential. Junk lawsuits to facilitate a short are one “improvement” this industry can do without.

CALIFORNIA REVENUES

After finishing fiscal year 2018-19 above the 2019-20 Budget Act forecast by $1.041 billion, preliminary General Fund agency cash for July, the first month of the 2019-20 fiscal year, was $533 million above the 2019-20 Budget Act forecast of $7.794 billion.  Personal income tax revenues for July were $364 million above the month’s forecast of $5.403 billion. Withholding receipts were $353 million above the forecast of $5.06 billion. Other receipts were $11 million higher than the forecast of $762 million. Refunds issued in July were $7 million lower than the expected $322 million.

Proposition 63 requires that 1.76 percent of total monthly personal income tax collections be transferred to the Mental Health Services Fund (MHSF). The amount transferred to the MHSF in July was $7 million higher than the forecast of $97 million.  Sales and use tax receipts for July were $25 million above the month’s forecast of $1.732 billion. July is the firstn month of the 2019-20 fiscal year and includes the final payment for second quarter taxable sales, which was due July 31.  Corporation tax revenues for July were $119 million above the month’s forecast of $357 million.

 Estimated payments were $146 million above the forecast of $290 million, and other payments were $63 million lower than the $162 million forecast. Total refunds for the month were $36 million lower than the forecast of $95 million.  Insurance tax cash receipts for July were $4 million above the month’s forecast of $22 million. Cash receipts fromn alcoholic beverage taxes, tobacco taxes, and pooled money interest were $15 million above the month’s forecast of $100 million. “Other” revenues were $6 million above the month’s forecast of $180 million.

STATE SELLING RAIL LINES

It is easy to forget that there was a long history of government participation in the local economy dating back to the early 1900’s. Cooperative farming entities and a strong mistrust of national institutions supported the notion that the state could have a role in directly supporting farm economies by providing access to markets. Long before the introduction of automobiles and the development of a serious road system, the primary source of transport for people and goods between markets was the railroad.

In reflection of that tradition, the approximately 533 miles for sale were purchased by the state four decades ago when railroad giant Milwaukee Road went bankrupt. Some lines were purchased and restored to service by other railroads once Milwaukee Road went under, but the state purchased the remaining essential lines that were not sold privately. The state is now looking for prospective buyers to take the rails off its hands with the ultimate goal of returning the rails to private sector ownership to boost traffic, tax revenues and job creation.

A total of six lines are for sale, and prospective buyers can propose to purchase a single line, combination of lines or portion of a line to the board. The longest stretch of rail for sale is the MRC Line, running 285 miles from Mitchell to Rapid City.  The segments are operated by different operators under leases and subleases. Any sale will need to be approved by the state railroad board, the Governor, and the federal Surface Transportation Board.

ROADS TO NOWHERE

For years, development proponents have supported state financed road building as a tool to support their projects. The relationship between roads and development is well established. In the municipal bond market, the experience with toll road development projects which were ultimately designed to generate new development has been mixed at best. Failed projects linked to development have been experienced in Colorado, Virginia, Florida, and South Carolina.

Now in spite of those experiences, the forces behind road development are taking another stab at things. For years, Florida governors and legislators have been loath to approve a major expansion of toll roads throughout the State. Development supporters have championed an effort to undertake major expansions (300 miles) of roads to generate development. The latest iteration of the would extend the Suncoast Parkway to Jefferson County, another would extend Florida’s Turnpike to the Suncoast Parkway up to the Georgia border and a third would build an entirely new toll road from Polk County to Collier County.

There is only one small problem with the effort. It apparently does not have support from any of the major non-real estate constituencies which would be impacted. These include elected representatives from four of the counties to be impacted as well as the Florida Trucking Association (FTA). The FTA notes that existing Interstate 10 has wide swaths and many interchanges with “zero economic development.” State transportation officials acknowledged afterward that they have basic questions to answer about the proposed roads. The Department of Transportation does not have data showing the roads were needed.

And that brings us to the credit aspects of the proposal. Too many of them fail even in the presence of data purporting to show need. “There’s some obvious things we know we need to take a look at — the economic feasibility, the environmental impacts, that’s obvious,” a department spokeswoman said. In an age of data driven decision and policy making, this proposal fails to meet minimum tests of practicality. The access to information and data to the public should be driving government decision makers towards better processes for developing, permitting, and executing capital projects. This proposal fails that test.

CAN FREE MASS TRANSIT WORK?

A monthly pass good for riding anywhere in Kansas City, Mo., and its neighboring communities in Missouri and Kansas costs $50 on the regional bus system. A daily ticket costs $3. That doesn’t seem to be too much but ridership tells a different story. On the buses, most run below capacity even at rush hour. On the other hand, the light rail system is looking at expansion to reflect high demand. And the light rail is free.

The Kansas City Area Transportation Authority has been willing to test out a variety of pricing approaches in an effort to boost utilization. Veterans now ride free, as do many K-12 and college students. Partnerships with businesses and local safety-net providers allow them to distribute free rides to their clients. In all, about 25 percent of KCATA riders don’t pay to ride.  

The light rail service which operates in downtown KC has a much better utilization rate. It is also free with operating costs covered through sales and property taxes levied in a special taxing district that extends for about a half-mile on either side of its route. As for the bus system, $8 million a year out of the KCATA’s $105 million operating budget is generated by fares. The city of KC, MO already collects two sales taxes that benefit transit, though not all of those funds are directed toward KCATA. About $2 million per year goes to the streetcar, and somewhere between $3–4 million goes to the city’s public works department. So right there is $6 out of the $8 million in potential “lost fares”.

Making up the remainder from other sources would seem to be feasible. The City of KC, MO already directs $17 million from the city’s general fund to subsidize parking garages. There is also the potential for more revenue from an expansion of light rail and the expansion of sales tax zones to fund the expansion as is the case with existing lines. There could be operational savings from the elimination of duplicative bus service along new light rail routes.

Were the KCATA to eliminate fares across the board, that would make Kansas City the first major city in the country—a few small college and resort towns have already done it—with a free transit system. 

RENT CONTROL IN CALIFORNIA

One clearly emerging trend in state legislature since 2019 has been their willingness to legislate solutions to the issue of housing costs and rents in particular. Under an agreement announced by Gov. Gavin Newsom and legislative leaders, Assembly Bill 1482, would limit rent increases statewide to 5% plus inflation per year for the next decade. The law would also include a provision to prevent some evictions without landlords first providing a reason.

Enactment is however, not a sure thing. The bill is a more stringent version of proposed legislation on the subject. The California Assn. of Realtors, a major source of lobbying influence at the Capitol, had agreed not to oppose a weaker version of the legislation that would have capped rents at a higher percentage for a shorter time. The organization said after the deal was announced that it would lobby lawmakers to vote against the bill. At the same time, the California Apartment Assn., which represents landlords in the state, notes that the announced deal includes an agreement by the organization to no longer do so.

The proposed rent caps have yet to be formally incorporated into the bill, would not apply to properties built in the last 15 years, nor would they apply to single-family home rentals unless they were owned by large corporations. It would not affect existing  rent control regulations, such as those in Los Angeles and San Francisco. The bill would extend caps to apartments in those cities not covered by the existing local measures.

The bill’s anti-eviction protections, which would limit evictions to lease violations or require relocation assistance, would take effect after a tenant has lived in an apartment for a year. A bill must be voted on by September 13.

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.