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PENNSYLVANIA BUDGET IMPASSE ENDS WITH A WHIMPER
After nearly nine months, Pennsylvania’s state budget impasse ground to an end Wednesday, with Gov. Tom Wolf saying he would allow a Republican-crafted appropriations bill to become law without his signature. Mr. Wolf said he believes the budget is not balanced, but that by releasing the approximately $6 billion in state funding without his signature, schools will be able to stay open through the end of the year. Mr. Wolf, who has pressed for tax increases to boost education funding and close a structural deficit, made clear he does not believe the final appropriations bill is properly funded. “The money it claims to provide really doesn’t exist,” he said.
The appropriations bill became law at 12:01 a.m. Monday, after Mr. Wolf refrained from acting on it through Sunday, his office said, completing a budget of about $30 billion. The governor and legislative leaders said work on the next state budget, for the year that begins July 1, will start next week. To get through the first half of the year, before they received state money, school districts and the intermediate units that provide them services borrowed about $1 billion, incurring $40 million to $50 million in interest and fees, according to state Auditor General Eugene DePasquale.
But for all the relief that will be felt by school districts there was little evidence that the governor and legislators are closer to resolving the differences that dragged this year’s state budget nearly three-quarters of a year past its June 30 deadline. House and Senate Republican leaders plan to continue resisting tax increases and pushing for changes to the retirement system for state and public school workers and to the system of wine and liquor sales.
Mr. Wolf said he would also allow bills to deliver state money to the state-related universities, which include the University of Pittsburgh and Penn State University, to become law without his signature. But he said he would veto the fiscal code, a bill that implements the budget. The governor’s spokesman said there were numerous problems with the fiscal code, including what he called intrusion into the authority of the executive.
The appropriations bill that became law Monday delivers more than $3 billion in additional money for the main K-12 education funding line, combining with the funding approved in December to total an increase of $150 million from the previous year. Providers of human debt service incurred because of the impasse for years, and that nonprofits are concerned the politics of the 2016 election year will cause another budget delay.
So what was the point? The state system of funding education remains heavily dependent upon rising and unpopular local proper taxes. The natural gas bounty underneath the Commonwealth remains relatively immune from direct production or severance taxes. The pension and liquor store issues remain unsatisfactorily addressed. This leads to continuation in the decline of the Commonwealth’s credit metrics and the loss of an additional year of potential benefit to the Commonwealth from an improved economy. It is a lose/lose all around with the outlook being for more of the same through the fall election period.
PRIDE GOETH BEFORE THE FALL
We’ve been pretty consistent in our view that the Puerto Rican government is its own worst enemy as its debt crisis unfolds. The reaction to a draft of legislation that would give PR 18 months of debt relief and a right to impose a cramdown on debt holders, in exchange for outside oversight was met with childish contempt. The consistent role of pride on the part of the island’s politicians in the face of continuing corruption, incompetence, and inadequate financial disclosure continues to erode the willingness of creditors and legislators to assist the Commonwealth government. What was good enough for Washington, D.C., Philadelphia, and New York is apparently too much of an adult concept for PR to grasp.
The federal legislation that would impose a federal oversight board for Puerto Rico is expected to be introduced April 11, followed by a hearing two days later. The legislation would create a five-member federal control board that would be empowered to balance budgets, securitize revenue, guarantee payment and hold accounts for future commonwealth bond issuances, as well as provide a restructuring mechanism outside the bankruptcy law. Island lawmakers would be required to approve a budget in which expenditures are in line with revenues, and if that does not happen, the board would have the power to balance the budget for them.
Another example occurred this week when a federal judge in San Juan on Monday threw out a new tax that Puerto Rico had tried to impose on the American retailing giant Walmart, calling it unlawful. Walmart had argued that the new tax would confiscate more than 100 percent of its profit from operations in Puerto Rico. The judge, José Antonio Fusté of the United States District Court in Puerto Rico, said in his opinion on Monday that it gave him no pleasure to throw out the tax, considering the commonwealth’s dire financial condition. said it was unlawful and that Puerto Rico’s crisis was not an excuse “to take revenue that it’s not entitled to, to pay for essential services.” The new tax was more than triple the old rate, he said, “designed to capture Walmart Puerto Rico, the biggest fish in the pond.” If Walmart paid it on time, and waited to get a refund through the usual channels, it would most likely never see the money again, he added.
Walmart is Puerto Rico’s largest employer outside the government and is also the island’s biggest remitter of tax revenue. Comprising Walmart Supercenters, Walmart Discount Stores, Supermercados Amigo, Sam’s Clubs, and, until earlier this year, Super Ahorros, it operates 48 stores on the island, employing some 14,300 residents. Each store employee receives a minimum wage of at least $10 an hour, $2.75 higher than the minimum wage set by law in Puerto Rico. Wal-Mart Puerto Rico sells about $3 billion worth of merchandise each year and remits more sales tax to the commonwealth than any other retailer. It buys around $1.6 billion in inventory from local vendors and suppliers each year. About $15 billion of Puerto Rico’s outstanding debt is backed by a dedicated sales tax that Walmart helps to collect.
The company did not explicitly threaten to leave Puerto Rico if it did not prevail, but it did argue in court that no business could operate for long in a place that confiscated all of its profit.
VICTORY FOR PUBLIC SECTOR UNIONS
The Supreme Court announced that it had reached no decision, meaning that the judgment of a lower court below was affirmed in Friedrichs v. California Teachers Association. The case was an appeal filed by nonunion public sector workers who objected to paying fees to unions basically for collective bargaining efforts taken on their behalf. The requirement has been a target for conservative politicians for quite a while.
This is the first case the court has handed down in which Justice Antonin Scalia’s death last month has seriously impacted the legal landscape. When the case was argued earlier this year it seemed clear that the five conservative justices on the court were extremely receptive to an argument that would have effectively crippled unions across the land. California, along with 22 other states, requires all public employees represented by unions to pay a “fair-share” or “agency” fee, which is directed toward the union’s collective-bargaining activities, even if they do not belong to the unions. This has been approved by the Supreme Court for nearly 40 years and allows those who benefit from union activities to opt out of a union’s political efforts without being free riders. The arrangement was challenged by ten California teachers as an unconstitutional form of compelled speech.
The ruling means that union agency shop fees in the public sector are still constitutional, for now. Petitioners’ counsel has already announced, though, that they intend to seek a rehearing next term by the full court.
OREGON POT TAXES ARE A BETTER HIGH THAN EXPECTED
Oregon has offered the first look at how much pot is moving through the state’s newly regulated retail market. It announced that it had collected $3.48 million in taxes from recreational marijuana sales in January, far outpacing estimates. Oregon dispensaries sold at least $14 million worth of recreational marijuana in January alone. That figure doesn’t take into account medical marijuana sales, which remain untaxed.
The collections for a single month exceed state economists’ projections for the entire year. Officials expected between $2 million to $3 million after the state paid for the costs associated with regulation. A senior economist with Oregon’s Legislative Revenue Office, called the first round of marijuana tax collections “healthy,” but cautioned that sales may fluctuate as will the tax rate. The state also hasn’t calculated the expense of regulating the new market.
The Oregon Department of Revenue said it collected the January taxes from 253 dispensaries between Feb. 1 and March 4. The number of dispensaries that paid the tax is lower than the 309 registered with the Oregon Health Authority. The Revenue Department is contacting dispensaries that didn’t make a tax payment to “make sure they are aware of the requirement to file and pay,”.
Some may have only sold medical marijuana in January even though they’re listed on the health authority’s directory as selling recreational pot. The health authority regulates medical marijuana dispensaries. Oregon’s medical marijuana stores have been allowed to sell a limited amount of cannabis flowers, as well as starter marijuana plants and seeds, to anyone 21 and older since last October. The state’s temporary 25 percent tax didn’t kick in until Jan. 1. That tax will eventually be replaced with one ranging from 17 percent to 20 percent once the Oregon Liquor Control Commission assumes control over recreational marijuana sales later this year. The Legislature set the base tax rate at 17 percent, but cities and counties may adopt ordinances that add up to 3 percent more.
Next year, the first full year of sales under the liquor commission, state economists project recreational cannabis sales to generate $10.75 million in tax revenue after the state covers startup costs. That number is expected to climb to $62.42 million for the 2017-2019 biennium. Dispensaries are required to file a tax return every quarter, but they must make payments each month. The monthly payment requirement stems from concerns about dispensaries keeping too much cash on hand. Dispensaries that don’t pay their taxes face the same penalty as other delinquent taxpayers: 5 percent of what they owe would be tacked onto their bill. By law, dispensaries are allowed to keep 2 percent of the tax to offset the costs related to collection. The Revenue Department also keeps some to cover the cost of administering the tax. The liquor commission, too, gets some to pay for the expense of regulating the market.
After that, the law says 40 percent goes to thestate’s Common School Fund, 20 percent to mental health, alcoholism and drug services, 15 percent to Oregon State Police, 10 percent for city law enforcement, 10 percent for county law enforcement and 5 percent to the Oregon Health Authority for alcohol and drug abuse prevention, early intervention and treatment services. The 19 counties and 80 cities that have opted out of recreational marijuana sales don’t get a share of the tax revenue.
PENSIONS STILL AN ISSUE IN SPITE OF ALL THE ALARM
Moody’s Investors Service has released its findings from a recent survey of public pension plan funding. It used available fiscal 2015 accounting disclosures of 56 public plans and found that recent market volatility has negatively affected the asset performance of several large US pension plans, and could be an early signal that fiscal 2016 returns will fall short of assumed targets for the second consecutive year and erase funding improvements seen in FY 2013 and 2014.
Moody’s projects unfunded pension liabilities on a reported basis will grow by at least 10% in fiscal 2016 under even its most optimistic return scenario. It also projects an alternate scenario of negative 10% returns where a 59% increase in reported-basis unfunded liabilities are estimated. Moody’s adjusted net pension liabilities (ANPLs) will grow up to 29% under the same return scenarios.
Moody’s also found that 55% of pension plans in its sample are not receiving contributions from state or local governments that cover current benefit accruals and interest on existing unfunded liabilities. That, combined with poor investment performance, will make pension plan liabilities even larger. It estimates that unfunded pension liabilities could reach a four-year high relative to payroll in all but the most optimistic scenario.
Exposure to market volatility across public plans varies widely among individual states and local governments. While unfunded pension liability growth is anticipated in 2016, the capacity of individual governments to absorb increasing pension costs depends on revenue growth and the ability to control other expenditures.
The sample comprises slightly more than half of all public defined benefit pension assets and mostly includes plans with June 30 fiscal year-ends. The finding bodes poorly for credits like Illinois, Chicago, Pennsylvania, New Jersey, and Connecticut just to name a few. It means that even more aggressive must be taken in the form of funding from current contributions if the funding gap is to be reduced.
NYC BUDGET OUTLOOK
The Independent Budget Office expects the city will end the current fiscal year with a surplus of $2.5 billion, $216 million more than the de Blasio Administration’s estimate. It projects the city will end 2017 with a surplus of $490 million; projections for the subsequent years of the financial plan find relatively modest shortfalls of less than $2 billion a year, budget gaps that are very small relative to city– generated revenues and could be substantially offset with funds currently held as general reserves. Of the nearly $2.0 billion in growth it projects in tax revenues in fiscal year 2017, $1.6 billion is expected to come from increased property tax collections. By 2020, it estimates that property taxes will account for 46 percent of the city’s tax revenues—in 2008, when income and property transfer taxes peaked, the property tax comprised 35 percent of city tax revenues.
In calendar 2014 and 2015 the city added more than 100,000 jobs annually, IBO projects the job gain will dip to about 77,500 this year. The number of new jobs is expected to fall even further in 2017 through 2020, averaging about 50,000 annually. Jobs in professional and business services and in health care services are expected to together account for about half the new jobs created in the city during the forecast period. Despite the strong dollar and overseas economic turbulence, it is anticipated tourism will remain an important driver of the local economy. As in the recent past, Wall Street’s role in fueling the city’s economy will continue to be diminished.
Tax revenues are projected to increase by $2.0 billion in fiscal year 2017 to reach $54.9 billion, $603 million more than the de Blasio Administration’s estimate. Over the 2016-2020 forecast period, it is projected tax revenues will increase at an average annual rate of 4.5 percent, rising from $52.9 billion in 2016 to $63.0 billion in 2020. New expenditure is needed to increase the city’s pension contribution by about $600 million annually beginning this year and through 2020. The additional city contribution results from actuarial changes such as estimates that retired city employees are living longer and therefore receiving pension payments for more years than in past projections. Spending on pensions for the municipal workforce is now expected to increase by a total of about $800 million over the financial plan period, growing from $9.3 billion in 2016 to $10.1 billion in 2020, an average annual increase of 2.0 percent.
Debt service is expected to grow from $6.3 billion this year to $8.1 billion in 2020, an annual average increase of 6.5 percent after adjusting for the use of budget surpluses to make prepayments.
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