MuniLand Snaps: April 20
The Detroit Works Project is a wonderful example of a community working to revitalize itself. Good luck to the Motor City and its citizens.
Good Links
Grattan Institute: Humans are social animals, so cities should be social
Center on Budget and Policy Priorities: States are cutting $3 for every $1 of tax increase
NYT: State tax collections finally surpass pre-recession highs
State and Local Government Excellence: State and local government workforce: 2012 trends
Boston funds publicly, while Chicago goes private
Two major American cities are embarking on large capital programs, but in very different ways. Boston Mayor Thomas Menino has a $1.8 billion, five-year plan that he will fund with municipal bonds, while Chicago Mayor Rahm Emanuel is trying to push a $7 billion plan, which will be paid for by private investors, through the city council. It would be hard to find to two more dissimilar approaches to rebuilding America’s urban infrastructure or two more different lists of who will reap the monetary benefit of the improvements.
Boston approaches its infrastructure needs with a rolling five-year schedule of projects that is updated on an annual basis. This allows for more controlled expensing and planning. In contrast, Chicago’s Emanuel announced his infrastructure privatization plan in January with very few details and buy-in only from the private investors who will benefit from their involvement. The Chicago proposal gives control of infrastructure decisions to a panel of four private citizens and one city council member with no ability for the city council to have oversight on projects and contracts. Chicago has a terrible history of leaving taxpayer money on the table in its privatization efforts. In 2008 the city’s parking meters were leased out to private investors for a tiny sum:
Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008.
Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners may earn a profit of $9.58 billion before interest, taxes and depreciation, according to documents for a $500 million private note sale by their Chicago Parking Meters LLC venture. That is equivalent to 80 cents per dollar of projected revenue.
Chicago, with a population of 2.7 million, is over four times larger than Boston, with 617,000 residents. But Boston will be spending about $2,900 per resident compared with Chicago’s $2,597 without privatizing any of the work. Boston does have lower funding costs because it is viewed more favorably by bond markets, with a rating of Aaa from Moody’s, its highest rating. Chicago comes in three notches lower at Aa3, or what Moody’s terms “high quality and very low credit risk.” Bond markets do make Chicago pay more, and its bond* due 2024 traded at 3.32 percent Thursday, while a comparable Boston bond,** due 2024, traded at 2.28 percent, according to the Municipal Securities Rulemaking Board’s EMMA system.
The additional 1.04 percentage points Chicago pays to borrow versus Boston is a much lower cost for Chicago than what it will pay to private investors through Mayor Emanuel’s proposed infrastructure trust. America’s urban areas need revitalization, but taxpayers should not have to transfer the benefits of their city’s rebuilding to private investors. Boston Mayor Menino has the right approach and should be a model for Chicago Mayor Emanuel.
The Virginia tunnel goldmine
The battle to privatize America’s public assets had a big win when the Newport News Daily Press reported:
The governor of Virginia, Bob McDonnell announced Monday that a deal with private construction consortium Elizabeth River Crossings to build a new Midtown Tunnel tube; refurbish the existing facility along with the Downtown Tunnel; and expand the Martin Luther King Freeway has reached a financial close.
The project, which is now owned by Australian infrastructure company Macquarie, will add another tunnel under the Elizabeth River to relieve congestion in the Norfolk and Hampton Roads area. Getting control of the project will bring in rich rewards for Macquarie and its construction partner Skanska. For an equity investment of $208 million, Macquarie stands to realize over $5 billion in cash flow over the 58-year concession after repayment of bonds, loans and mandated capital expenditures.
Total building costs are estimated to be $2.1 billion. Fitch Ratings laid out who will provide the money for the cost of building the tunnel in its Apr. 5 report (page eight):
Funding sources include: equity from Macquarie and Skanska including contingent equity (12% of total sources); Private Activity Bonds (32%); Transportation Infrastructure Finance and Innovation Act (federal government) loan (22%); Virginia Department of Transportation contribution (17%); and toll revenue during construction (17.5%).
MuniLand Snaps: April 19
The FBI’s National Law Enforcement Data Exchange brings together data from law enforcement agencies throughout the United States, including incident and case reports, booking and incarceration data, and parole and probation information. They make extensive data available for public use.
Good Links
IFR Asia: Cheiljedang creates the first South Korean muni bond in the U.S.
Bond Buyer: D.C. folks don’t understand munis
Bloomberg: New Jersey voters pass 90 percent of school districts’ budget proposals
Chicago Tribune: Chicago mayor to wait on controversial infrastructure trust vote
MuniLand Snaps: April 18
The Tax Foundation brings us a useful map of state tax collections per capita.
Good Links
Financial News: European privatization of public assets is less successful than you might think.
Gensler on Cities: U.S. airports are fully self-funding.
IFR: South Korean food company issues tax-free U.S. municipal bond.
News Is My Business: Moody’s places $16 billion in Puerto Rico debt under review.
Detroit’s derivatives slip through the net
If you were thinking of buying some of the city of Detroit’s bonds, you might want to tread lightly. Although the city was able to come to terms with the state and avoid the appointment of an emergency manager, it still faces enormous challenges. The biggest threat to Detroit’s fiscal stability is the risk that its derivatives counterparties will activate triggers in their interest rate swaps. If this happens, the counterparties will force a lump-sum payment, draining cash from an already shaky situation.
From the outside it’s difficult to know exactly what is happening in the city. A recent Moody’s report says that counterparties may have already activated these triggers, but it’s impossible to get any public information from the city. There is a big regulatory gap or loophole that shields Detroit from having to tell investors, or their citizens, the status of these derivatives contracts.
Here is how I described the situation facing Detroit on Mar. 24:
Detroit has about $3.8 billion in interest-rate swaps outstanding, according to its most recent public filing (CAFR of June 30, 2011, page 113). These Wall Street weapons of mass destruction were sold to the city in a series of transactions since 1997, allegedly to hedge interest-rate risk….
Detroit’s derivatives could blow up the city because many contain “termination” clauses that require accelerated payments to the dealer on the other side of the transaction. The terms vary by contract, and public documents don’t give us much detail. But if the credit rating of Detroit or its bond insurers (MBIA and Assured) falls below a certain level, then an accelerated lump-sum payment must be made to the dealer…. It’s a dangerous standoff, and we don’t know how to decipher the situation, since the information is not publicly disclosed.
What I feared for Detroit back then has happened. Moody’s disclosed in an Apr. 9 report downgrading Detroit water and sewer bonds that a termination event had been triggered for the city’s certificates of participation (COP) interest-rate swaps. Although the Moody’s report gave no details, the interest-rate swaps were $297 million “out-of-the-money” on June 30, 2011, the most recent public information we have for the derivatives (CAFR of June 30, 2011, page 113).
So, in a worst-case scenario for Detroit, the city could be forced to pay $297 million in cash to the bank on the other side of the swap. We know that Detroit’s counterparties are Citigroup, JPMorgan, Loop Capital, Morgan Stanley, SBS and UBS, but we don’t know which one is involved with the COPs.
I tried to reach Cheryl Johnson, Detroit’s finance director, over a number of days, but she didn’t return calls. I wondered if Detroit had a responsibility to disclose the swap termination event, because it seems material to the city’s finances. After a call with the chief legal officer of the MSRB, Ernesto Lanza, I learned that there is no specific requirement to disclose derivatives events like the one Detroit is having. MSRB 152c-12, the rule that mandates disclosure of “material’ events for issuers, does not have a category for derivatives, a private contract between Detroit and the banks. Lanza said that there had been fewer than 10 voluntary disclosure filings related to derivatives, hardly a stampede to transparency.
MuniLand Snaps: April 17
From Philly.com:
The newsroom of the Philadelphia Inquirer erupts as the news breaks that the paper has won the 2012 Pulitzer Prize for public service journalism, the highest honor in U.S. journalism. They won for their “Assault on Learning” series. The seven-part series revealed that violence in city schools was widespread and underreported, with 30,000 serious incidents over the last five school years. Those findings were later corroborated by a Philadelphia School District blue-ribbon panel on safety, spurred an overhaul of incident reporting in the district, and prompted the hiring of a state-funded safe-schools advocate.
Cheers to the Philadelphia Inquirer and all other finalists!
Good Links
The Economist: Bankers and the public sector may both be enemies of growth
Philly Fed: Rebuilding older communities conference
Illinois says non-profit does not mean tax-exempt
In a series of decisions that may affect healthcare nationally, Illinois is tightening the noose on hospitals that claim tax-exempt, non-profit status. What began as the denial of a property tax exemption by the Champaign County Board of Review for one hospital system in 2002 has become a state-wide analysis of how much actual “charity care” hospitals are providing.
The immediate implication is that hospitals’ property tax exemptions could be revoked and vital revenues could be collected. However, this raises a broader structural question around the use of tax-exempt municipal bonds for entities that may be passive vehicles for for-profit activity.
Becker’s Hospital Review has the specifics:
[T]he Illinois Department of Revenue’s crackdown on Illinois non-profit hospital tax-exempt statuses came on the heels of an Illinois Supreme Court ruling from last year. In 2010, the Illinois Supreme Court ruled that Provena Covenant Medical Center in Urbana, Ill., could not qualify for property tax-exempt status because it did not provide enough charity care to its community, although Provena argued that it provided millions of dollars in other free care and community benefits.
The microscope on Illinois non-profit hospitals does not end there. Chicago Mayor Rahm Emanuel also recently proposed cutting free water and sewage services for city non-profits in October, and Moody’s Investors Service recently released a report that said the revocation of Illinois hospitals’ property tax-exempt statuses could be debilitating to the sector’s finances. “This has implications beyond property taxes,” Mr. Dunn says. “A not-for-profit status is, by virtue, about the level of charity work they do, and this could jeopardize their 501(c)(3) statuses.”
Fitch Ratings had a report today that gave some color on the legal and legislative processes:
Although Illinois Department of Revenue’s decision is based on the grounds that these hospitals do not provide enough charity care to qualify for the exemption, the exact criteria or standards for the IDOR’s decision were not disclosed. Subsequent to the IDOR’s announcement, Illinois Governor Pat Quinn announced that the state would postpone its review of these exemptions until the state legislature had the opportunity to craft legislation that specifies qualifications for the exemption. In March, Governor Quinn ordered the IDOR to continue its reviews as the legislature was unable to resolve the issue.
As the legislative and executive branches thrash out the exact standard for how much charity care a hospital must provide, the deeper issue of for-profit entities using most of the physical space in a tax-exempt, non-profit building needs more attention. The original county review that sparked Illinois to look more closely at non-profit hospitals, that of the Provena Covenant Medical Center, detailed the extent of for-profit activity in the system:
Real Estate Tax Appeal
Every one want to exemption from taxes, property tax is a major crucial issue because burden of property taxes is bigger then other taxes so that for prevent from the taxes need a right consultant that have a market and property law knowledge. Its my opinion i read your blog post and i admire this post that help to property tax knowledge gainer thanks for reveal this post.
MuniLand Snaps: April 16
Seattle is starting construction on the First Hill Streetcar this month with plans to begin operation in early 2014. Hat tip: Seattle Bike Blog.
Good Links
Reuters: Tax collection up in all 50 states in 2011: Census
Barrons: Only 34 percent of municipal bond issuance is “new money;” the majority is refunding old bonds
Reuters: U.S. muni funds report first outflows in four months
AP: South Dakota judge upholds cut in annual pension increases
The promise and peril of energy tax revenues
Of the $763 billion in tax revenues that states collected in 2011, only $14.6 billion – less than 2 percent – came from severance taxes on coal, gas and oil. Energy production is very concentrated in the United States: Just nine states receive over 5 percent of their tax revenues from energy producers. Currently, the bulk of severance revenues comes from oil production. Alaska, a state floating on an ocean of oil, gets 76 percent of its revenues from a handful of big oil companies that have drilling rights on the North Slope of the state.
Although there has always been natural gas production in America, hydraulic fracking has given rise to substantial drilling activity in several Northeastern states along the Marcellus and Utica shale formations. Pennsylvania, West Virginia and Ohio have substantial reservoirs of natural gas, but the impact this boom will have on state finances is not yet known. These new supplies have come to market when demand is down and have swamped the nation’s usage and storage capacity, driving gas prices down to record lows. States that rely on, or plan for, revenues from energy severance taxes will face a lot of volatility from demand and price changes. Natalie Cohen, head of municipal research at Wells Fargo, sketched it out in a recent report:
Wyoming, for example, collects severance tax based on the taxable value of current-year production. With the drop in natural gas prices, it has had to reduce its forecast on severance tax revenue. The state is now looking to cut 4% out of next year’s budget, despite a current-year budget surplus. According to the state’s Economic Analysis Division, each dollar drop in natural gas prices costs the state about $226 million in revenue.
[...]
State severance taxes may be volume-based, value-based, or a hybrid of the two. When prices are high and the demand for commodities like oil and gas is robust, it is no coincidence that states with rich mineral deposits that tax extraction have weathered the economic downturn better than others.
Texas has managed to survive price fluctuations over the years and is one of the few states that does not impose an income tax. Texas, like New Mexico and Alaska, has created an endowment that was originally based on mineral lands to support K-12 and higher education. Some of the “newer” shale gas states, such as Pennsylvania and Ohio are concerned that severance taxes might chase away producers. But, high severance taxes have not hampered exploration in Texas, which levies the highest tax rate.
It is difficult for any state to forecast revenues accurately for future periods because so much is dependent on the general state of the economy. Most states derive the bulk of their revenues from sales and personal income taxes, which are very sensitive to economic conditions. But states like Alaska, North Dakota, New Mexico and Oklahoma rise and fall with the energy demand cycle. It’s unlikely in the near term that Pennsylvania, West Virginia and Ohio will see big windfalls from their gas production.
Further:
Kroll Bond Ratings: Potential Impact of Natural Gas Fracking on Municipal Bond Issuers
For a really nauseating time, research how that Severance Tax money is actually distributed and spent by the different Local Government agencies in the various states. “Education” turns out to have a remarkably fungible definition when money is concerned.
-
Resident Muniland expert
-
