Muni Credit News December 18, 2017

Joseph Krist

Publisher

joseph.krist@municreditnews.com

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ISSUE OF THE WEEK

Rather than focus on one new bond issue, we think that it is more appropriate for a pure opinion piece in this space. We recognize that our view may not be unique but it should be expressed nonetheless. For those of us who care about municipal credit from the investment standpoint or the policy standpoint, the tax reform package expected to be enacted this week borders on the pathetic. There is no reform here. It may be 1,000 pages, excruciatingly detailed and complex but it is not reform. One’s politics have nothing to do with the fact that the plan is at its core an effort to massively shift the tax base away from the corporate sector and onto the individual. Specifically, it is designed to shift the burden to the wage earner.

It would be one thing if there had been a clear electoral mandate to make such a change. We are not relitigating the 2016 here. It is clear that what those who voted for the current regime in the White House and in Congress did not vote to increase the individual tax burden. They did not vote to make wage income less attractive. They did not vote to make it harder for state and local government to provide the services they demand. And so, one does not have to be an old hippie retread to think that moneyed corporate interests managed to put one over on the working class this time.

If one is honest and looks at how ownership and management are compensated, there is no way to honestly argue intellectually that this plan will lead ownership and management to take their increased disposable income and shift it to the employee. Enlightened self interest, the bedrock of capitalist philosophy for over 200 years, dictates that ownership and management will enhance their own positions by increasing the value of their equity. That directly conflicts with trickling down the benefits of lower taxes on corporate income.

So where does this leave municipal credit? Certainly not better off. The package’s combination of reduced revenue demands, likely slowdowns in the growth of federal revenues (Kansas, e.g.), serious capital needs, and less and more expensive health insurance, create a potentially toxic brew of financial and economic pressures for state and local government. States will likely be at the forefront with the exact impact on individual governments below that level depending on the responses we see on a state by state basis.  

So we would expect the response to be much more reliance on revenue enhancements (tolls, fees, and the like) to make up for the negative impact of tax policy. That is before the expected attack on entitlements which the current majority has been virtually drooling at the thought of. Regardless of whether one thinks that entitlements need to be cut, the fact is that any successful effort will initially reduce incomes and tax bases especially in areas currently experiencing economic weakness (rural, formerly manufacturing centers, and areas depending on jobs requiring lesser skills and education). None of this is good for municipal credit.

TAX REFORM?

One would have thought that when the Congress gave birth to this bill, it would have looked much different than it does. Even stadium finance seems to have survived the attack on municipal bonds. It’s important to separate municipal bond impacts from the impact on state and local credit. We wish that we could be sanguine on the latter. The fact is that now that the dust has settled, there are clear losers in this process.

The biggest loser appears to be New Jersey. As a state characterized by a real estate market reliant on certain specific high income industries, aging demographics, and an inordinate reliance on local property taxes, the Garden State is particularly vulnerable to the loss of the SALT deduction. The demographic aspect is a concern as older populations typically waver in their support of property taxes for education.

With the limit of deductibility at $10,000, many residents will see a substantial increase in taxes as the result of this “reform”.  We suspect that residents will insist on a halt to steady increases in property taxes and will also look for a slowdown in spending growth. This will clash with a need to maintain the education system and help the State to deal with its ongoing pension issues. So the potential for difficult politics and finances really dampens the fiscal outlook for the entire range of tax backed credit in New Jersey.

Without a real yield premium, we see little advantage to owning New Jersey paper for other than New Jersey residents.

MILEAGE TAXES GET A BOOST

A four-month study in Colorado enlisted 150 drivers to evaluate the prospect of calculating state transportation funding based on the miles they drive.  CDOT released results Tuesday from its Road Usage Charge Pilot Program, which was conducted from December 2016 through April of this year. More than 90 percent of participants thought the system, which let drivers record and report their mileage manually or with a device plugged into their car, was accurate and easy to use.

And 81 percent of participants said a road usage charge is a “fair funding method” to address the glaring needs of a state. Colorado’s 22-cent gas tax last got a boost 26 years ago. The taxes are not indexed to inflation, so as prices for concrete and other construction materials rise, there is no equivalent rise in the value of the levy at the pump. CDOT estimates that it will see a $1 billion-a-year budgetary shortfall for the next 10 years, largely because an expected decline in gas taxes.

Concerns reflected in the survey included privacy.  Many drivers uncomfortable about the government knowing where they might be headed on any given day. So CDOT gave pilot program participants the option of reporting their mileage the old-school way — by snapping a picture of the odometer and submitting it online. For drivers comfortable with a plug-in data device, CDOT doesn’t track where people go — it just wants to know mileage. It works with a third-party data collection vendor, which destroys the information drivers send in after 30 days.

CDOT imposed a theoretical 1.2 cents-per-mile charge during the pilot program. Fuel-efficient vehicles that pay little tax at the gas pump will end up paying more under per-mile charge, while gas-guzzling SUVs will pay less. CDOT determine when a Colorado driver has left the state and is no longer on its road system. But trying to track and charge an out-of-state motorist for use of Colorado roads is a far harder proposition.

The state relies on 75 percent of its road construction and repair budget coming from the federal government, Lewis said, and the lack of funding is showing in the conditions of the state’s roads. As of June 2016, Colorado’s population had grown by 53 percent since 1990, while lane miles on the state’s highways only increased by 2 percent in the same time frame.

The $2.2 billion CDOT is looking to secure includes the $1.8 billion price of adding express lanes to the entirety of north I-25 — from downtown Denver to the Wyoming border — as well as an additional $400 million needed to add express lanes south of that project’s target area through Denver.

GATEWAY TUNNEL FINANCE AGREEMENT

Gov. Chris Christie and New York Gov. Andrew Cuomo announced commitments to fund 100 percent of their respective share of the new Gateway tunnel. The agreement for a combined $5.5 billion states that the State of New York will contribute $1.75 billion with NJ Transit committing $1.9 billion and the Port Authority contributing $1.9 billion. The federal government agreed to fund 50 percent of the project. Gov. Cuomo will propose in the state’s forthcoming executive budget an appropriation each year over a 35-year period to pay debt service on a $1.75 billion fixed-interest loan to the Gateway Development Corp. with a 35-year term under the US DOT’s Railroad Rehabilitation & Improvement Financing (RRIF) program.

The Port Authority, at the direction of the two governors, committed $2.7 billion in its ten-year capital plan, adopted in early 2017, for Gateway. This includes the Port Authority’s approximately $300 million commitment for the Portal North Bridge Project – another urgent element of the Gateway Program.  The remaining $2.4 billion is being dedicated to the new Gateway tunnel – which will net $1.9 billion towards construction after USDOT fees and accrued interest during construction.

New Jersey Transit will use fare surcharges to fund its portion of the Garden State’s share. It will initiate a per-trip fare increase for rail customers of 90 cents beginning in 2020. The cost would increase to $1.70 in 2028 and $2.20 in 2038.

The $12.7 billion Gateway Hudson Tunnel Project consists of three elements: (i) a new two-track tunnel, (ii) the Hudson Yards Concrete Casing and (iii) the rehabilitation of the existing Amtrak North River Tunnel. The commitments announced today include $1.9 billion by NJ Transit, $1.75 billion by the State of New York and $1.9 billion previously committed by the Port Authority of New York and New Jersey Board of Commissioners. Together these commitments totaling $5.55 billion fully fund 100 percent ‎of the local share for the most urgent, time sensitive elements of the Project: the construction of a new tunnel and the Hudson Yards Concrete Casing which total $11.1 billion of the $12.7 billion construction cost.

There is however, one huge caveat to this whole discussion. The Trump Administration is claiming both a higher cost estimate and that there is no formal agreement for Federal funding. Trump wants to scrap the grant program the states applied to and handle Gateway in its infrastructure initiative, which it plans to unveil next month. We try not to be too political but this situation highlights how incredibly stupid and shortsighted Chris Christie’s decision not to participate in the initial plan when it had a chance to actually was.

FARE INCREASE IN CHICAGO

It’s been nine years since the Chicago Transit Authority last voted to increase fares for public transportation users. The CTA did so on Wednesday as part of its 2018 budget. Starting January 7, the cost of a single fare bus ride on a Ventra card will go up from $2.00 to $2.25 and “L” and cash bus fares from $2.25 to $2.50. The cost of 30-day passes will increase from $100 to $105. All other fares and passes, including those for students, will remain the same. Free rides will remain free.

Starting January 7, the cost of a single fare bus ride on a Ventra card will go up from $2.00 to $2.25 and “L” and cash bus fares from $2.25 to $2.50. The cost of 30-day passes will increase from $100 to $105. All other fares and passes, including those for students, will remain the same. Free rides will remain free. The increase is designed in part to replace reduced funding from the State of illinois. The Civic Federation, a fiscal watchdog group, opposes the budget, which, they say, in addition to the fare hikes, relies on unrealistic expectations and short-term borrowing to make ends meet. The CTA’s budget must still be approved by the Regional Transit Authority. Once that happens, the fare hikes will go into effect on January 7. And it’s not just the CTA. Hit by the same cuts in state funding, Metra and PACE have already approved their own fare hikes for 2018.

TEXAS FOLLOWS THROUGH ON REDUCING THE ROLE OF TOLLS

After the Governor expressed a strong view against any additional use of tolls as a source of funding for highway expansion, the State awaited a decision from the Texas DOT regarding its Unified Transportation Program. Now that decision is in with implications for long term road development.

The Texas Transportation Commission has effectively removed plans to add four managed toll lanes on I-35. The commission, which is the governing body for the Texas Department of Transportation, approved an amendment to its 10-year planning document called the Unified Transportation Program that did not include managed toll lanes on I-35 in the Austin area or on I-635 in Dallas. The 2018 UTP now has no projects with any tolled elements.

Both the Governor and his Lieutenant Governor consistently pressured the Commission over not using propositions 1 and 7 funding on projects with tolled elements. The commission opted to side with the state’s top leadership instead of local officials. On Oct. 30, TxDOT announced a plan to add two managed toll lanes in each direction on I-35 from RM 1431 in Round Rock to SH 45 SE near Buda. Just a few weeks later on Nov. 16, Abbott and Patrick notified the transportation commission that they do not support TxDOT using propositions 1 and 7 money on projects that have tolled elements.

WATER WAR UPDATE

In the past we have cited a number of situations regarding various disputes over efforts to establish water rights on behalf of municipalities. These have included privatizations, public purchase of water systems, and the occasional legal battle. One of those stories involved a small northern California lumber town. The City of weed and its major economic entity a lumber company were embroiled in a dispute over who owned a spring which provided the community of 2700 residents with their drinking water.

The lumber company that it intended to retain its exclusive right to the water forcing the City to find another source for its residents. a group of residents sent a letter to the district water office asking to clarify the ownership of the municipal water. They also convinced the Weed City Council to back their request. Roseburg responded by suing the residents and the Weed City Council.

Attorneys for the individual residents asked a Superior Court Judge to dismiss the suit against the individuals on the grounds that it violated their freedom of speech. The lawyers invoked a California law that allows defendants to strike down lawsuits meant to silence criticism, cases known as strategic lawsuits against public participation, or SLAPP suits. Last week the judge ruled in favor of the residents.

The answer to the question of who owns the water is yet to be determined but now the effort to overpower the residents has been moved aside so that the merits of the ownership issue can be determined.

MERRY CHRISTMAS

After all of this good news it seems somewhat inconsistent to do so but we do wish our loyal readership a very Merry Christmas and a Happy New Year. 2017 was a year of consistent growth in our readership and we appreciate your loyalty and interest. And so, we will take a bit of a break at this special time of year and come back the first week of January to help to guide you through what we believe will a most challenging year in the world of municipal credit. Enjoy your families, be careful travelling, and enjoy the good feelings of the season.

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.

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