Joseph Krist
Publisher
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ISSUE OF THE WEEK
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
LIMITED PROJECT REVENUE BONDS
$739,195,000 Tax Exempt
$94,865,000 Taxable
Moody’s: “Aa3” S&P: “AA-” Fitch: “AA-”
GENERAL REVENUE BONDS
$946,580,000 Tax Exempt
$283,415,000 Taxable
Moody’s: “Aa2” S&P: “AA” Fitch: “AA”
The General Revenue Bonds are the broadest pledge of the university. The bonds are secured by a pledge and lien on gross student tuition and fees, indirect cost recovery from grants and contracts, net sales and service revenue, net auxiliary revenue, and unrestricted investment income. In addition, under recently enacted legislation the Regents can pledge its annual General Fund support appropriation, less the amount required to fund general obligation debt service payments for the portion of state general obligation bonds funded for university projects. UC reported $16.2 billion of General Revenues for fiscal 2017. Proceeds from the Series 2018 General Revenue AZ and BA bonds will finance projects across nine campuses. The proceeds will also be used to refund bond, pay-down $450 million of commercial paper and pay issuance costs.
The LPRBs are secured by the gross revenues generated by the projects. The pledged revenues also include any other revenues, receipts, income or miscellaneous funds designated by The Regents for the payment of principal of and interest on the bonds. Certain pledged revenues are dependent upon completion of the projects funded from the proceeds of the 2018 Bonds. There is a 1.1x rate covenant and no debt service reserve fund. In fiscal 2017, pledged revenues provided over 4x maximum annual debt service coverage. Limited Project Revenue bonds will finance housing, dining, and parking projects across seven campuses. The proceeds will also be used to refund bonds, pay-down $140 million of commercial paper and pay issuance costs.
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NYC BUDGET REVIEWED BY INDEPENDENT BUDGET OFFICE
The IBO has released its review of Mayor bill deBlasio’s FY 2019 Executive Budget. According to IBO, the Executive Budget for 2018 and Financial Plan Through 2022 is reactive, with increased spending and increased revenues the product of forces largely outside the city’s control. Compared with his Preliminary Budget, the Mayor’s latest plan includes approximately $1 billion in additional city revenue in the current year, much of which results from one-time responses by business owners and investors to changes in federal tax law. We see this as a point of concern. Fortunately for the City, IBO projects that the city will end the current fiscal year with $774 million more in tax revenue than the de Blasio Administration estimates.
IBO’s current forecast for total 2018 tax revenues has increased since its March outlook by $882 million, or 1.5 percent. It projects that near-term strength in the U.S. and local economies will be followed by weaker growth over the next couple of years. As a result, it is expected that growth in city tax revenues will also slow, from an estimated 8.4 percent increase this year to a 3.2 percent rise in 2019, when collections will reach $60.8 billion. IBO’s property tax forecast exceeds the Mayor’s projections by $210 million in 2018, rising to $1.0 billion in 2022, mostly due to the Mayor’s office carrying larger allowances for refunds, delinquencies, and cancellations. IBO’s estimates for the personal income tax and the general corporation tax are also consistently higher each year than the Mayor’s from 2018 through 2022.
Debt service and fringe benefit costs are the two largest drivers of overall expenditure growth, growing by an average of 8.4 percent and 7.0 percent annually from 2018 through 2022. Department of Education spending is expected to grow by $2.7 billion from 2018 through 2022, the largest increase in agency expenditure in dollar terms in the plan. IBO’s economic forecast for the city anticipates a slowing of the pace of job creation throughout the plan period, accompanied, however, by low unemployment rates and an uptick in wage growth. The outlook for Wall Street profits— though not for financial sector job growth—is strong. While the commercial real estate market is recovering from its recent doldrums, the residential market has been weakening and at best moderate growth is projected for both.
IBO’s city economic forecast anticipates a slowing of the pace of job creation throughout the plan period, accompanied, however, by low unemployment rates and an uptick in wage growth. IBO expects the pace of New York City job creation to moderate in 2018 and then decelerate over the next three years. The health care forecast, and indeed the entire city employment forecast, depends on whether home health care services sustains its recent pace of growth. Home health care employment has doubled in New York City in just six years, from 82,100 in the first quarter of 2012 to 165,500 in the first quarter of 2018, accounting for nearly a third of all the reported job growth in this sector in the entire country.
Taxable real estate sales in New York City were $93.2 billion in 2017, the lowest level since 2012. Commercial sales were $37.8 billion, less than half their 2015 peak. Residential sales, however, were $55.4 billion, the highest level ever recorded before adjusting for inflation. Last year was the first year since 2010 that the value of residential sales in New York City exceeded that of commercial sales. IBO expects residential sales to drop over 10 percent in 2018, with the greatest decline in Manhattan. On the residential side, higher mortgage rates and recent policy changes that reduce the tax advantages of home ownership will exert downward pressure on sales growth.
So how does IBO think that that all of this will impact the City’s budget? Tax revenue is now expected to total $58.9 billion in 2018, $882 million more than in our forecast from two months ago, and $60.8 billion in 2019, up $553 million since March. The federal effect fades further in 2020 through 2022. By the final year of our forecast (2022), tax revenues are projected to total $69.0 billion, only $63 million higher than in our March forecast. For 2019 and subsequent years, the forecasts for all taxes other than personal income, unincorporated business, and sales have either been revised down or had only minor positive changes since March.
IBO projects that revenue growth will average 3.7 annually from 2018 through 2022, which would be the slowest four year annual average since the end of the Great Recession. Since the recession, the four-year average has ranged from a low of 4.9 percent (2013-2017) to a high of 6.6 percent (2009-2013). The real property tax is expected to show the steadiest and strongest growth, averaging 5.5 percent annually from 2018 through 2022. No other tax is projected to average more than 4.3 percent annually, with several—including the personal income tax—expected to average less than 2.0 percent annual growth between 2018 and 2022.
This gets us back to the issue of whether the deBlasio administrations practice of steadily increasing City spending is sustainable. IBO projects total city spending will be $90.1 billion in 2019 under the contours of the Mayor’s latest budget plan—$900 million more than the $89.2 billion we estimate spending will total this year. We project total spending will rise to $93.3 billion in 2020 and reach $98.3 billion in 2022. Adjusting for the use of prior budget surpluses to prepay some expenses for upcoming years, IBO anticipates total city spending will increase from $89.0 billion in 2018 to $92.9 billion next year and grow to $94.8 billion in 2020.
Much of the growth in spending the next four years is driven by increased spending in two areas: fringe benefits for city employees and debt service (note that most fringe benefits and all debt service are not carried within the budgets of city agencies). IBO estimates that in 2018 the city’s expenditure on debt service and fringe benefits will comprise 18.2 percent of the total budget. By 2022 these two expenses will make up 21.2 percent of the entire city budget. These are somewhat dangerous levels driven by discretionary actions of the last two administrations and they leave the City’s budget vulnerable in the event of a significant economic downturn. we remained concerned about this risk going forward in terms of the ongoing value of the City’s debt.
NEW YORK AND MINNESOTA SETTLE FEDERAL MEDICAID LAWSUIT
Earlier this month, a federal judge signed off on an agreement that dismisses a lawsuit undertaken by the states of Minnesota and New York and directs federal officials to consult with Minnesota and New York over a new funding formula for what is called a Basic Health Plan (BHP) under the federal Affordable Care Act. The judge’s order said if the states disagree with the new formula developed by the Trump administration, they have until Aug. 1 to ask that a court reopen the case for litigation.
The Affordable Care Act (ACA) provides tax credits for individuals at certain income levels who buy private health insurance via government-run exchanges. States that create a Basic Health Plan as an alternative for these consumers can tap a large chunk of the value of tax credits individuals would receive to purchase coverage on the exchange.
In January, Minnesota Attorney General Lori Swanson filed suit to stop a Trump administration decision that would terminate an estimated $130 million in annual payments to the state. Federal funds, including those targeted by the lawsuit, have been covering most of MinnesotaCare’s costs with the rest coming from enrollee premiums and state funding.
INITIAL RATINGS IMPACT OF FOXCONN PLANT IS NEGATIVE
Racine County, WI will be the location of the much ballyhooed Foxconn manufacturing facility which will benefit from many tax incentives from the State of Wisconsin. The location of the plant may in the long term have a positive credit impact on the nearby localities, the initial effect has been negative. This week, Moody’s announced that it was lowering its outlook on Racine County’s GO credit from stable to negative.
In taking the action, Moody’s cited the significant amount ($147 million) of short-term debt coming due on December 1, 2020. this reflects two issues of b the significant amount ($147 million) of short-term debt coming due on December 1, 2020. This reflects issuance of two bond anticipation notes to finance the purchase of land for the new Foxconn development. This is outside of any tax incentive. This amount of short-term debt is very high in Moody’s view relative to the county’s total outstanding debt (73% of the county’s debt) and the county’s available internal liquidity ($46 million as of fiscal year end 2016). These risk factors also contributed to the negative outlook on the county’s long-term debt.
The negative outlook reflects a view that the county has taken on substantial short-term leverage that could pressure the GO rating should the county experience difficulty in securing take-out financing for the BANs. The rating could also be lowered if revenue generated directly or indirectly by the Foxconn development falls short of county expectations.
GEORGIA DEANNEXATION EFFORT COULD HAVE WIDE RANGING IMPACT
When Georgia Governor Nathan Deal said legislation he signed that would de-annex parts of Stockbridge to create a new, more affluent municipality was unlikely to influence the state’s AAA bond rating, he left local ratings outside of that view. That’s a good thing as Moody’s weighed in with an opinion.
Moody’s released a four-page analysis this week that found the plan to create a new Eagles Landing would be “credit negative” to more than just Stockbridge. “The bills are also credit negative for local governments in Georgia because they establish a precedent that the state can act to divide local tax bases, potentially lowering the credit quality of one city for the benefit of the other,” according to Moody’s.
Stockbridge has $13 million of tax backed bank debt outstanding and $1.5 million of revenue bonds. The legislation did not address the issue of reallocation of the responsibility for that debt to either Eagles Landing or Henry County so it appears that the City will be stuck with those obligations in spite of a significant reduction in its tax base.
It is bad policy from any perspective and it would seem to violate the state’s moral obligation not to take any action which would undermine the ability of any of its underlying entities to meet their debt obligations.
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