Joseph Krist

Publisher

Last week marked the 300th edition of the municreditnews.com. Over the five years of its publication, we have tried to cover the entire range of issues which impact on the creditworthiness of state and local credits. We hope that you find our comments useful and informative. We appreciate your support. Let us know what you want to hear about.

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NORTH CAROLINA BUDGET

It isn’t a state normally in the news for budget trouble but these are not normal times. The North Carolina General Assembly adjourned without passing a biennial budget for fiscal 2019-21. The legislature could not overcome disagreements about teacher pay and Medicaid expansion among other things. The good news is that a full budget is not needed to ensure that things like debt service payments are made. A continuing appropriation and the passage of several standalone measures ensure that those payments will occur.

As a relatively state with historically stable finances, the ongoing budget dispute which played out in the summer did not garner much attention. It does however mark the second time in three bienniums that the state has not managed timely budget adoption. The direct impact on the state actually is most visible in its impact on programmatic implementation. One example is the fact that a planned launch of a  Medicaid managed care plan this month has been   delayed because of the budget impasse

The real losers in the dispute are the counties and localities in the state. Counties with new state funds included in the 2019-21 Appropriations Act may need to delay the start of intended capital projects. Counties could also find themselves under pressure to provide funding to local school districts. Counties routinely supplement the local BOEs’ operating budgets and are required by state law to provide for their capital needs. Local school districts may have to look to the counties to make up funding shortfalls. As a growing state, schools need to expand to keep up with demand. For those counties with already tight finances, school needs dictated by state law could run up against other expense requirements of the counties.

The dispute also comes at a time where the state’s steadily increasing exposure to climate change related capital demands is becoming more evident. The NC Department of Transportation (DOT)  has requested general fund support because of large expenses related to storm damages, including Hurricane Dorian in early September. DOT must also fund  settlements resulting from a state Supreme Court ruling that the DOT cannot reserve land for future roads without paying for the land. Landowners seeking compensation from the DOT have forced the DOT to find some additional funding to cover those costs estimated at up to $360 million.

To fund the settlement and storm related costs, legislation pending in the Legislature recommends transferring $360 million from the state’s general fund to help cover the settlements as well as another $300 million loan from the state’s savings reserve to help with projects delayed by Hurricane Dorian. The transfer of $360 million would equal about 1.5% of general revenue. At the same time, the Legislature passed two bills designed to reduce revenues to the state including a corporate franchise tax cut and increases in the standard deduction for income tax filers. At the same time,  all of the spending bills passed by the legislature to date would result in fiscal 2020 appropriations similar to those in the budget vetoed by the governor, totaling nearly $24 billion.

NEW YORK BUDGET SHORTFALL

A cash report released by NYS Comptroller Tom DiNapoli’s office is a preliminary warning sign that the state budget is under increasing pressure. ​ The source of that pressure is Medicaid spending. New York’s Medicaid program is on track for a $2.9 billion shortfall as the program has already spent more than 60 percent of its state-funded budget by the end of September, about $13.1 billion. That is only five months into the fiscal year.

The problem reflects both budget maneuvering and the realities of higher expenses tied to things like local minimum wage laws which are increasing costs for providers. The budget maneuver which benefitted FY 2019 results came from the Cuomo administration’s decision to delay $1.7 billion in Medicaid payments from the end of the 2018-19 fiscal year to the beginning of 2019-20. The impact was to  effectively double expenditures for April.

Medicaid has been running over budget for at least the past year, which should have triggered across-the-board payment cuts under the state’s “global cap” statute. Pressures from providers (a powerful lobby in the state) drove the maneuver. Now however, it is time to pay the piper. A real answer will not come until the release of the governor’s Executive Budget in January for the FY beginning April 1.

NEVADA HITS RATINGS JACKPOT

Ten years after the Silver State was at the center of the mortgage and financial crisis, the State is finally reaping the benefits of the long economic recovery. Moody’s announced that it has upgraded to Aa1 from Aa2 the rating on the State of Nevada’s approximately $1.2 billion of outstanding general obligation (GO) bonds, which includes all bonds issued by the state described as general obligation (limited tax). Moody’s cited the state’s strong and growing economy as demonstrated by robust employment and population growth and an increase in rainy day reserves. 

By all measures, the state economy has achieved consistently strong growth in both employment and income since the time of the financial crisis. It has a moderate debt and pension burden and favorable demographic trends. The state’s relatively favorable tax burden relative to states like its neighbor California continues to benefit the state and support current economic and employment trends. The significant role of the gaming/tourism industries does continue although the state has managed to attract a more diverse set of businesses attracted by relatively lower costs and the availability of land for distribution facilities for several online retailers. The reliance on the Las Vegas attractions is one potential concern but that would be more based in national trends in the economy rather than any action  by the state.

The only real concerns expressed in support of the rating action revolve around the need to manage the state’s reserves and the potential negative impacts from a prolonged decrease in tourism, reduced visitor spending or severe economic stagnation.

SALES TAXES AS A CREDIT INDICATOR

Historically, sales tax revenue trends have been a great current indicator of overall conditions and likely trends in state revenues. They reflect current activity as they are collected and remitted without much lag time so they can often be the credit equivalent of a canary in a coal mine. So we looked with interest at sales tax revenue trends in Texas.

Texas Comptroller Glenn Hegar has released totals for fiscal 2019 state revenues, in addition to announcing monthly state revenues for August. State sales tax revenue totaled $2.99 billion in August, 4 % more than in August 2018. Total sales tax revenue for the three months ending in August 2019 was up 3.9 percent compared to the same period a year ago. Growth in August state sales tax revenue was led by remittances from the construction, manufacturing and wholesale trade sectors.

The data points to continued positive economic growth even as its energy sector seems to slow a bit. This is reflected in individual category data for August. In August 2019, Texas collected the following revenue from motor vehicle sales and rental taxes — $488.3 million, up 0.3 percent from August 2018; motor fuel taxes — $327.1 million, up 5.7 percent from August 2018; natural gas production taxes — $102.3 million, down 19.2 percent from August 2018; and oil production taxes — $355.5 million, down 6.2 percent from August 2018.

FLOOD FUNDS IN TEXAS

Voters approved a constitutional amendment to provide for a source of funding for flood control projects in the state. Support for such a measure grew out of the state’s experiences after Hurricane Harvey in 2017. The largest city, Houston, saw whole neighborhoods inundated when waters were released onto properties which probably should not have been developed. The much higher number of residential and small community properties which are subject to flooding  from consistently heavier precipitation events created a broad base of support for the plan.

Proposition 8 authorizes the Flood Infrastructure Fund, which seeks to help the state recover from recent flooding while also preparing communities for future storms. It calls for the fund to receive a one-time, $800 million allocation from the state’s rainy day fund as a starting point, and lawmakers could refill it in the future. The author of the measure points to the fact that it creates a lockbox for those funds,” he said. This means future lawmakers can add to the fund, but they cannot drain it for other purposes, even if the money goes unused for multiple years.

The process would provide a source of state funding the use of which would not have to be reauthorized legislatively. This results from the State Legislature meeting only 60 days biennially. This extends the time between an event and the state’s ability to extend funding for projects. It is one of the weaknesses of the state’s legislative structure.

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.