Joseph Krist

Publisher

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CALIFORNIA BUDGET  REVISION

California Governor Gavin Newsome released his revised budget proposal. The May Revision reflects the following changes: it now includes a portion of the Proposition 98 settle-up that was not reflected in the Budget. This marks the first time in over a decade that all budgetary debts are completely paid off. An additional $1.2 billion deposit into the Rainy Day Fund brings the reserve to $16.5 billion in 2019-20. The Rainy Day Fund is now expected to reach its constitutional cap of 10 percent of General Fund Revenues in 2020-21—two years earlier than predicted in January. By the end of 2022-23, the Rainy Day Fund balance is projected to be $18.7 billion. In addition, for the first time, $389 million in Proposition 98 funding is reserved in the Public School System Stabilization Account. This transfer is required by Proposition 2.

The total budget for the year is proposed at $219 billion of which $150 billion is in the General Fund. Overall, revenues are projected to increase by some 3.1%. The budget remains subject to California’s continued reliance on the income tax, especially at the higher end of the income spectrum. Personal income taxes are estimated at $102 billion. Education remains a high priority. The May Revision includes total funding of $101.8 billion ($58.9 billion General Fund and $42.9 billion other funds) for all K-12 education programs. Some of that is driven by Proposition 98 requirements imposed by the voters. Total K-14 Proposition 98 funding at May Revision is $75.6 billion in 2017-18, $78.1 billion in 2018-19, and $81.1 billion in 2019-20.

On pensions, another area of concern to investors, The Governor’s Budget proposed funding to reduce employer contributions to CalSTRS from 18.13 percent to 17.1 percent in 2019-20, based on current assumptions. The May Revision adds $150 million one-time non-Proposition 98 General Fund to reduce the employer contribution rate to 16.7 percent in 2019-20.

Recent negotiations with teachers in Los Angeles highlighted many issues confronting education funding in the state. Those concerns are reflected in this proposal. In addition to providing money, the budget also reflects the current tide running against charter schools in  the state. The budget would require charters to abide by new requirements including prohibiting charter schools from discouraging students from enrolling in a charter school or encouraging students to disenroll from a charter school on the basis of academic performance or student characteristic, such as special education status. It would also prohibit charter schools from requesting a pupil’s academic records or requiring that a pupil’s records be submitted to the charter school prior to enrollment.

FLORIDA TOLL ROAD POLITICAL BACKUP

The Florida Legislature approved a bill which would set up a new organization called the Greater Miami Expressway Agency to replace the Miami-Dade Expressway Authority (MDX) It would freeze toll rates until 2029. Current MDX members would be blocked from serving on the new agency. The law responds to political pressures which stem from a view that too much of the Authority’s toll revenue does not benefit county residents.

The bill would replace the MDX on July 1 with a new toll agency with a similar governing structure and the same toll rates. Provisions call for a 10-year freeze on tolls, but allow the board of the new Greater Miami Expressway Agency to overrule that rule with super-majority votes. Other changes in the bill include a 25% rebate for Miami-Dade County residents who utilize the toll system frequently. Once a Miami-Dade SunPass holder incurs $12.50 in tolls each month, they become eligible for the rebate. MDX officials have already indicated they will file a lawsuit challenging the legislation.

MDX calls the bill an unconstitutional unwinding of a 1996 agreement creating the agency, when it paid $91 million for the five former state expressways that make up its toll system. Along with the 112 and the 836 (the Dolphin), the MDX expressways include the Don Shula, the Gratigny and the Snapper Creek. The Authority became less popular in 2014 when it ended toll-free stretches along its busiest expressway, the 836, and one to the north, the 112. 

The mechanics of the bill which allegedly protect the interests of the Authority’s holders of outstanding debt are overwhelmed by the politics behind the move. Simply reconstituting the board without addressing its pressing debt needs more resembles meddling than oversight.  The S&P move to downgrade the Authority’s debt reflects real concerns about the willingness of a new board to adjust tolls appropriately given the politics behind the move.

STADIUM GAMES

For their time, the Oakland A’s had the coolest uniforms but the worst stadium in Major League Baseball (MLB). Their finances, along with those of the City of Oakland, have not always been the healthiest. This has hindered any plan for a new stadium. Effectively, the A’s have been searching for a new home for some two decades.

Now the City through the Port of Oakland appears ready to sign a four-year term sheet to lease the Howard Terminal waterfront property to the team for construction of a new waterfront ballpark.  The A’s will pay the Port $100,000 for the right to continue negotiations over the purchase of the 50-acre property located west of Jack London Square. The team hopes to build a 35,000-seat ballpark on the site that also includes 3,000 housing units and retail.

Under terms of the agreement, the A’s would pay an additional $150,000 to the Port if a deal is not consummated after one year; $200,000 after two years; and $250,000 after three years. Legislation that would help the City of Oakland finance infrastructure and transportation projects for the ballpark was approved by the State Senate on a 34-0 vote. The bill would allow Oakland to create an infrastructure financing district. Funding of the actual stadium is expected to be privately financed. A portion of any tax increment revenue generated would be allocated to the Oakland School District which helped to blunt opposition to the legislation.

In a reverse of the Oakland situation, the Village of Bridgeview, IL approved a memorandum of understanding with the Chicago Fire of Major League Soccer to end the team’s lease. Ending the lease would free the club to move back to Chicago and most likely Soldier Field. The Fire are expected to pay $60.5 million to leave SeatGeek Stadium. The lease runs through 2036.

The Fire will pay Bridgeview $60.5 million over 15 years — $10 million of it upfront . A team in the women’s professional soccer league will still play at the Bridgeview venue. The funds will be used to pay down the debt service remaining on the venue, and avoid raising property taxes. Bridgeview sold $134.6 million of bonds in 2005 to finance the project. But development in the area — and the projected revenues — failed to materialize creating a financial burden for the Village.

PORTS GETTING INFRASTRUCTURE HELP?

The House Transportation and Infrastructure Committee was scheduled to approve the “Full Utilization of the Harbor Maintenance Trust Fund Act,” H.R. 2396. It is designed to unlock federal money collected in the fund, which currently has a $9.3 billion balance. The fund is backed by a tax of 0.125% on the value of commercial cargo loaded at federally funded ports.

Harbor maintenance funds have previously been used to offset the federal deficit rather than being spent on actual port projects. The bill would enable spending of $34 billion over the next 10 years by making it easier for Congress to appropriate both the trust fund’s current balance and new revenue collected during the next decade. That would enable the Army Corps of Engineers to address a $20.5 billion backlog in harbor dredging projects, as well as other needed navigation work.

THE COST OF NATURAL DISASTER

“At a time of constrained budgets, it is fiscally prudent to understand the amount and the scope of the Federal Government’s involvement in providing disaster-related assistance to communities in need. The Federal Government does not provide a single, publicly available estimate of the amount it is spending on disaster-related assistance.  Because recovery is a long-term process, providing disaster-related assistance requires significant Federal resources to support a multi-agency, multi-year restoration of infrastructure and commerce in affected communities.”

“Understanding the expenditures of individual Federal agencies for disaster-related assistance will help better inform the congressional appropriations process, as well as presidential budget requests. (5) Knowledge about disaster-related expenses will illustrate opportunities for reducing these expenses through efforts to reduce vulnerabilities to future natural disasters. Disaster-related assistance encompasses Federal obligations related to disaster response, recovery, and mitigation efforts, as well as administrative costs associated with these activities.”

It is one of the great frustrations of a municipal bond analysts life that there is so little coherent data available against which to test one’s assumptions. Much of it is proprietary and subject to the whims of finance officers. This stuff is public information which in any normal decision making process should be available to all stakeholders. Better information leads to better results.

ANOTHER NUKE BITES THE DUST

Exelon Corp. said it will close Three Mile Island Nuclear Generating Station in September.  Efforts to obtain what were effectively government subsidies to support plant economics for the plant are falling short. A pair of bills that would have helped nuclear by allowing facilities to qualify for Pennsylvania’s alternative energy standard. Climate concerns in part drove the NYS legislature to approve operating subsidies for non- carbon emitting nuclear plants.

Following the Sept. 30 end date, the TMI site will begin its decommissioning phase. The utility has already filed a decommissioning plan with the Nuclear Regulatory Commission, which entails a cooling period during which the site will sit mothballed for nearly 50 years as some of the radioactivity wears out. Known as SAFSTOR, the decommissioning strategy will delay teardown of the plant until 2074.

RESILIENCE – A CREDIT ISSUE

One of the leading federal voices calling for resiliency projects and funding has been the Department of defense (DOD). DOD has previously identified 79 bases on its “mission assurance priority installation” list. Congress sought additional and more granular data including the 10 most at risk facilities for each service. Now the Air Force has produced such a list.

Southern California’s Vandenberg Air Force Base takes the top spot while Florida bases take up six spots on the new list. The other three spots went to bases located in Virginia, Delaware and South Carolina. The most endangered Navy base was Naval Air Station at Key West, Florida, and the most endangered Army base is Fort Hood in Texas.

The risks projected to stem from climate change were flooding, drought, desertification and wildfires. Declining permafrost is an issue for maintaining and siting training facilities. The inability to fully utilize facilities diminishes their attractiveness and reduces the resources put into the facilities and their surrounding communities.

HOW PUERTO RICO IMPACTS THE MARKET (THE WRONG WAY)

The uproar over the decision of the Court overseeing Puerto Rico’s financial restructuring is beginning to cast its ripple effect across the revenue bond market. In light of the decision allowing the Commonwealth of Puerto Rico to apply PR Highway Authority revenues to pay direct Commonwealth debt instead of highway bond debt, investors are reevaluating the legal strength of the pledges securing their bonds from other issuers.

The credit agencies have taken notice as well. Moody’s Investors Service has placed the Aa3 rating of the Illinois State Toll Highway Authority (ISTHA) under review for downgrade. ISTHA has approximately $6.1 billion of bonds outstanding. Moody’s specifically cited the decision. “The rating action is driven by the recent US Court of Appeals for the 1st Circuit ruling related to the Puerto Rico Highways and Transportation Authority (PRHTA) bonds, which calls into question the strength of credit separations between a general government and its enterprises and component units. The review will consider economic, governance, and financial interdependencies between ISTHA and the State of Illinois (Baa3 Stable) and the extent that, in light of the afore-mentioned court ruling, and such interdependencies pose risks to ISTHA that could have an impact on its credit quality.”

It makes sense that an entity similar in construct to PRHTA in the weakest state financially should come under this scrutiny. At the same time, we view the Puerto Rico situation to be somewhat unique. The politics of the island are not comparable, there are cultural issues contributing to intransigence, and there are risks associated with being in the hurricane zone which do not necessarily translate when comparing situations and credits.

Nevertheless, Puerto Rico does not exist in a vacuum so what happens in Puerto Rico does not necessarily stay in Puerto Rico. What does translate is that economics always matter. At the end of the day, economically sustainable fiscal and borrowing policies will always be more important than politics or legal protections. Legals do not matter when a project is not economically viable.

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