09 11 17 CSGPerspective
COURT STREET GROUP Research LLC
September 8, 2017
THE WEEKLY MUNICIPAL PERSPECTIVE Executive Summary: Managing Partner, George Friedlander, notes two major sources of uncertainty for the bond markets remained through Friday: the unknown but probably severe impact of Irma, and confusion as to what the debt ceiling/Harvey deal would mean for other legislation, especially including tax reform or a tax cut. He also notes that inflation is going to stay structurally low, despite Fed protestations to the contrary. In our Credit Focus, Partner, Joseph Krist, gives an update on the situation in Texas after Harvey, noting that the state will require a massive infusion of outside funds to rebuild and we expect that municipal bonds will play a prominent role. He also covers the stalling Federal infrastructure legislation; Minnesota’s healthcare reinsurance plan to hold down premiums; Connecticut’s budget fight trickles down to hurt its municipalities; Iowa may need cash-flow borrowing; Updates on transportation ideas in Wisconsin and Washington State; and more.
IT BECAME DIFFICULT FOR THE MUNI MARKET TO STAY FOCUSED AS IRMA APPROACHED THE MAINLAND: by George Friedlander, Managing Partner 10-Yr AAA Muni to UST (Source: Bloomberg) This Labor Day week was one 2.8 with an unusual number of 2.6 potential market-moving events, led by the stunning Trump/ 2.4 Democratic deal to delay the debt 2.2 ceiling deadline by 3 months and 2 provide some funding for 1.8 Hurricane Harvey. The muni 1.6 market firmed again this week on 1.4 the back of a much stronger tone 1.2 in Treasuries on Thursday, and an expectation of continued light 1 5/2/16 6/2/16 7/2/16 8/2/16 9/2/16 10/2/16 11/2/16 12/2/16 1/2/17 2/2/17 3/2/17 4/2/17 5/2/17 6/2/17 7/2/17 8/2/17 9/2/17 supply. The Treasury market rallied MUNI 10YR UST 10YR Thursday at least in part due to the economic risks coming out of the imminent landfall from Hurricane Irma. By day’s end, 10- and 30-year yields were down 6 basis points, after bouncing nearly half that much the day before, after the deal to delay the debt ceiling issue into mid-
Court Street Group Research
1
COURT STREET GROUP Research LLC
September 8, 2017
December. For the week ended Thursday, Treasury yields were off only slightly more, after bouncing around considerably on a day-to-day basis. Two major sources of uncertainty for the bond markets remained through Friday: the unknown but probably severe impact of Irma, and confusion as to what the debt ceiling/Harvey deal would mean for other legislation, especially including tax reform or a tax cut. At this point, we think that this is an important distinction: tax cuts remain quite possible, but full-blown tax reform seems increasingly unlikely. What this means for the muni market depends very much on the breadth and depth of any tax cuts. AAA 30-Yr Muni to UST (Source: Bloomberg) 3.5 3.4 3.3 3.2 3.1 3.0 2.9 2.8 2.7 2.6 2.5 11/30/16
12/31/16
1/31/17
2/28/17
3/31/17 30yr AAA Muni
4/30/17 30yr UST
5/31/17
6/30/17
7/31/17
8/31/17
As we have discussed several times, substantial tax cuts on corporations, pass-throughs and on taxable bond interest would likely lead to a “bear flattener” in the muni market, but we cannot be certain that tax cuts of sufficient magnitude to cause this outcome are still on the table. And, with the Administration and Republicans in Congress now in an increasingly wary relationship, revenue neutral tax reform that would qualify for treatment under Budget Reconciliation may be extremely difficult to accomplish.
Without Reconciliation treatment, a tax cut would require 60 votes, and that seems highly unlikely except possibly on a very modest package. To be sure, there is some cross-aisle support for at least a modest cut in the maximum statutory rate on Subchapter C corporations. However, other major tax cuts that don’t focus largely on the middle class—and we don’t see what such cuts would look like-- may be very heavy lifting. In addition, it seems increasingly unlikely that any kind of comprehensive infrastructure package will be enacted before Congress moves into election mode. And, of course, the need for considerably more storm-related funding for both Texas and the Southeast seems quite likely. Meanwhile, benchmark yields on munis couldn’t quite keep pace with the rally in Treasuries, but the light post-holiday calendar helped generate at least a modest rally in the benchmark curve, and the lack of supply helped tighten credit spreads. There has been increasing differentiation in the outcome on high-grades based upon what the budget picture in a given state has looked like. Budgetary success has led to tighter spreads against the curve, while the recent problem states such as New Jersey and Connecticut have widened. And now, the focus turns to the damage from Irma, the cost of rebuilding and repair from Harvey and Irma, and
Court Street Group Research
2
COURT STREET GROUP Research LLC
Court Street Group Research
September 8, 2017
3
COURT STREET GROUP Research LLC
September 8, 2017
implications for the Property and Casualty sector, specifically. Although P and C’s haven’t been net buyers of munis over the last several years—holdings have been flat, almost to the dollar, at $345 billion—they could easily turn into net sellers if the blow to their profits from the two major storms is too severe. 10-Yr AAA Muni to UST (Source: Bloomberg) 2.8
2.6
2.4
THIS WEEK’S NEW DEALS FROM AROUND THE COUNTRY: 2.2
2
1.8
1.6
1.4
1.2
1 5/2/16
6/2/16
7/2/16
8/2/16
9/2/16
10/2/16
11/2/16
12/2/16
MUNI 10YR
1/2/17
2/2/17
3/2/17
4/2/17
5/2/17
6/2/17
7/2/17
UST 10YR
$855 million of general obligation bonds for the City of New York, Aa2/AA/AA. Siebert Cisneros Shank & Co. LLC is lead underwriter. A retail order period is expected for 9/12 and 9/13 with pricing for institutions on 9/14. $424 million of tax-exempt and taxable general obligation bonds for the Regents of the University of Minnesota, Aa1/AA/NR. RBC Capital Markets is head underwriter and it's set to price on 9/13. $402 million of taxable and tax-exempt higher educational facilities second program bonds for the Tennessee State School Bond Authority, Aa1/AA+/AA+. Citigroup Global Markets Inc is lead underwriter and the deal is set for 9/12. $250 million of revenue financing system bonds for the Board of Regents of the University of Texas System, Aaa/AAA/AAA. Bank of America Merrill Lynch is head underwriter and the deal is
set for 9/14. $237 million of utilities system refunding revenue bonds for the City of Colorado Springs, Aa2/AA/AA.
Barclays Capital Inc. and the deal is set for 9/13. Meanwhile, new-issue supply remains muted, off 15.2% over the first eight months versus last year, and we cannot envision a reversal of that trend any time soon. Year-to-date, new-money supply is up 3.5%, but refundings are down a sharp 39.8%, and for reasons we have discussed, we don’t envision a rebound in refundings for years. So-called “combined” issuance is essentially unchanged on the year, but we suspect that the proportion of combined issues that are composed of new-money issuance has increased, and the refunding component has dwindled, for the same reasons as the drop in pure refundings. In any event, volume next week appears to be in the $7 billion range after some hurricane related postponements, and that level could take another hit depending upon the weekend’s events. Much more to discuss next week when we will have a much better picture of the legislative outlook, postdeal, and the new Fed quarterly data will be out, and we will get to take a look at the post-storm outlook. We detail the progress so far in Texas below. For now, we just wish our southeastern friends the best possible outlook in a very challenging weather environment.
Inflation going to stay structurally low, despite Fed protestations to the contrary. In a talk given in New York on Thursday, Federal Reserve Bank of New York President William Dudley, reiterated the need to continue raising interest rates while conceding that the U.S. central bank’s inflation
Court Street Group Research
4
COURT STREET GROUP Research LLC
September 8, 2017
model may need to be modified. We confer, to a degree, but still believe that senior Fed officials, as brilliant as many of them are, may not be seeing the forest for the trees. Dudley stated in his written remarks that, “I expect that the U.S. economy will continue to perform quite well, with slightly above-trend growth leading to further gradual tightening of the U.S. labor market. As this occurs, I would anticipate that wage growth will firm and that price inflation will gradually rise. In response, I expect that we will continue to gradually remove monetary policy accommodation.” He also noted that he has been “surprised by the persistence of the shortfall from the FOMC’s 2% long-run (inflation) objective. While some of this year’s shortfall can be explained by one-off factors, such as the sharp fall in prices for cellular phone service, its persistence suggests that more fundamental structural changes may also be playing a role.” Of course, any tightening in Fed policy, if it occurs, will include a gradual unwinding of the Fed’s $4.5 trillion asset portfolio but will include only a very gradual increase in Fed Funds, if any. So do we disagree with the premise? Well, yes. We cannot get away from the idea that accelerating technological change is going to completely change the labor cost model, increase the output gap, and keep inflation structurally low for the foreseeable future—essentially, forever, because technology inputs will only continue to expand at a growing pace. Indeed, we are of the view that the current economic cycle, with SOME labor tightening and SOME increase in inflation, may well be the last of its kind, ever. Beyond this cycle, we strongly believe that the futurists such as Peter Diamandis (of “Abundance” fame), Brynjolfsson and Mcafee (Of “Second Machine Age” fame) and Osborne and Frye at Oxford (in a series written with Citigroup on “Technology at Work”) will be correct: technological change will create increasing competition with human labor and downward pressure on labor costs. With respect to the output gap, technology will ultimately sharply increase capacity to create “stuff ” relative to cost, while limiting disposable income available to buy the “stuff.” That’s a growing output gap, which means lower trend line inflation. Dudley finally notes that “If it turns out that structural changes have played a significant role, I would generally view this as a positive, rather than negative, development. It would imply that the U.S. economy could operate at a higher level of labor resource utilization without generating a troublesome large rise in inflation.” However, this view doesn’t seem to consider the intermediate to long-term pressures on labor as automated solutions become a larger part of our economy. That is a highly complex set of policy issues, that we will discuss at a later date. So, would there still be a need for some monetary tightening under our scenario? Eventually yes, we think. The reason is two words: asset bubbles. Very low inflation combined with decent, technology-enhanced economic growth and low short-term rates is a great formula for asset bubbles of all kinds. So, we do expect some monetary tightening from time to time. We just aren’t sure as yet how that would translate into higher long-term rates. By the way, we also suggest that the current stubbornly low level of Treasury yields means that the bond market, in its unconscious wisdom, may already be “getting the joke” faster than many individual observers. Court Street Group Research
5
COURT STREET GROUP Research LLC
September 8, 2017
CREDIT FOCUS: HURRICANE HARVEY UPDATE, FEDERAL INFRASTRUCTURE STALLS, CONNECTICUTS’ KNOCK-ON EFFECT FOR LOCALITIES, AND MORE: by Joseph Krist, Partner TEXAS MOVES FORWARD Following the devastation from Hurricane Harvey, Texas will require a massive infusion of outside funds to rebuild. We expect that municipal bonds will play a prominent role, as was the case after 9/11 and Hurricane Katrina. It is too early to assess the impact on ratings that will result from the storm, though rating agencies are likely beginning to plan their actions. Here’s what we do know more than, a week on from Harvey: PORT OF HOUSTON: One of the city’s main economic drivers, the Port of Houston, came back online September 1. The port closed Friday, August 25, at noon, and reopened to some container ships. As it gets back up to speed over the next few days, shipping activities will be limited to daylight hours, and parts of the shipping channel will stay closed. Houston’s port is the country’s second-busiest by tonnage after the Port of South Louisiana, and plays a key role in the U.S.’s oil, gas, petroleum, and chemical industries. It is also handles more foreign shipping, by weight, than any other U.S. port. The port’s governing body estimates it contributes more than $600 billion to U.S. economic activity a year. Houston ships more gasoline than any other U.S. port, accounting for some 38% of overall U.S. gasoline exports, or more than $14 billion worth in the first half of this year. It is the No. 1 container port on the U.S. Gulf of Mexico, and ranked No. 7 in the nation in number of containers handled; servicing all major trading lanes. It is the major container gateway for Houston, for Texas, and for the 100 million people who live between the Mississippi River and the Rocky Mountains. Its Foreign Trade Zone (FTZ 84) ranks first in the country in total merchandise received. The Port of Houston said there had been “no evidence of flooding on terminal. No visible damage to containers, cranes, or other terminal equipment.” SCHOOLS: The first day of school for Houston Independent School District students will be Monday, Sept. 11, weather and facility conditions permitting. The District operates 245 campuses that HISD Facilities Services had reached to assess by Saturday morning. Of those, 115 schools can be deep-cleaned and ready for the scheduled first day of school on Sept. 11. Fifty-three have “major” damage, while 22 have “extensive” damage. The district is still working to assess 32 schools, as well as in-district charter campuses, but accessibility has been hampered by flooding. 10,000 to 12,000 students from HISD schools will need to be temporarily moved to other campuses during the restoration process, and the possibility remains that the first day of school will be postponed beyond Sept. 11. DRINKING WATER: The city's drinking water system was not affected, but the wastewater system was impacted and the City has requested that use be minimized. The fact that drinking water has been available will mitigate some of the financial impact of Harvey, as its is usually water usage on which sewer rates are based. The Houston Combined Utility System is the primary regional water provider for an area
Court Street Group Research
6
COURT STREET GROUP Research LLC
September 8, 2017
with estimated population of more than 6 million including the City of Houston with a population of 2.2 million. MUNICIPALITIES: The federal Community Disaster Loan (CDL) Program provides operational funding to help local governments that have incurred a significant loss in revenue, due to a major disaster, that has or will adversely affect their ability to provide essential municipal services. The CDL Program provide funds to any eligible jurisdiction in a designated area. Loans not to exceed 25% of the local government's annual operating budget for the fiscal year in which the major disaster occurs, up to a maximum of $5 million. The Federal Emergency Management Agency (FEMA) has just $541 million left for disaster management related to Hurricane Harvey. The House passed an initial disaster relief bill of nearly $8 billion, $7.4 billion of which would go toward FEMA's disaster fund. Other disaster funding is accomplished through the Small Business Administration. Through its Office of Disaster Assistance, the SBA made more than $11 billion in loans after Hurricane Katrina, and more than $2 billion after Superstorm Sandy—most of those to distressed homeowners with no business claims at all. Since its inception in 1953, it has issued more than 2 million loans for more than $54 billion. Historically, the program has been characterized by long delays in implementation which negatively impact economic and related tax revenue recovery. The Texas Windstorm Insurance Association (TWIA), established by the Texas Legislature in response to regional market conditions following Hurricane Celia in August 1970, provides windstorm and hail insurance in the Texas seacoast. TWIA is governed by Chapter 2210 of the Insurance Code (Chapter 2210). It is a residual insurer of last resort and is not a direct competitor in the voluntary insurance market. It provides coverage to residential and commercial properties in certain designated portions of the Texas seacoast territory. The designated catastrophe area is that portion of the seacoast territory where the Commissioner of Insurance has found that windstorm and hail insurance is not reasonably available. TWIA is not a state agency and does not receive General Revenue funds or any other state funds for operations. Losses and operating expenses are paid from the following funding sources: TWIA premiums and other revenue, the Catastrophe Reserve Trust Fund (CRTF), public securities, company assessments, and reinsurance. Funding for the 2017 hurricane season is about $4.9 billion. In the end, Texas will require a massive infusion of outside funds and munis will likely play some role. A first step occurred when the Congress approved $15 billion in disaster aid. The measure would continue government funding through Dec. 8, and extend the debt limit for the same period. It would also extend the National Flood Insurance Program, which is to expire on Sept. 30, for the same duration. After 9/11 there were Liberty bonds. After Katrina, there were Gulf Opportunity Zone bonds. We would expect a similar program for the area of damage from Harvey. These are just some examples of how the bond market lends itself to state and local governments.
Court Street Group Research
7
COURT STREET GROUP Research LLC
September 8, 2017
FEDERAL INFRASTRUCTURE FUNDING SEEMS FARTHER AWAY Meanwhile, it’s becoming clearer that despite promises of federal funding for infrastructure, the plan really counts on locally-generated funding. Mick Mulvaney, director of the Office of Management and Budget, said to a gathering of 150 state and local transportation leaders: “we’re trying to figure out how to use a little bit of [federal] money to generate a lot of money, to give state and locals the incentives to do stuff you might not otherwise do.” We think that the emphasis should be on the “little” part. Mulvaney and Transportation Secretary Elaine Chao have talked of funding to put existing projects "over the top" and lots of talk about leveraging. In a time of constrained state budgets, that does not provide much for new projects or maintenance related spending. It is precisely these areas that issuers and likely voters were looking to when they heard the President touting infrastructure during the campaign. This would be especially true for rural projects whether they be for roads, electric grids, or broadband. Trump’s budget proposals have called for cuts in transportation spending, particularly grants to launch new transit systems and other big-ticket projects. So far the only tangible details consist of an executive order to encourage agencies to speed up their decision-making, by, for example, issuing rulings on environmental issues within two years, on average. The order also instructs the government to designate one lead federal agency to shepherd all of the needed approvals for a project and come up with a single federal decision on whether it can proceed. In addition to the lack of detail, the emphasis on privatization and the use of loans rather than grants will be discouraging in some sections of the country. This is especially true of rural areas. Now the plans are likely to be delayed or derailed by the lack of time and attention on the part of Congress. The debt ceiling, tax reform, hurricane relief, and now immigration will all likely have political priority over an infrastructure bill. As for municipal bonds, none of this is good news. The ongoing uncertainty complicates planning, delays projects, makes projects more expensive, and dampens issuance. It is positive for neither the market nor for credit. MINNESOTA ADOPTS REINSURANCE PLAN TO HOLD DOWN ACA PREMIUMS Minnesota has enacted a new law that creates the Minnesota Premium Security Plan, a state-based reinsurance program to stabilize premiums in Minnesota’s individual health insurance market in 2018 and beyond. The new law authorizes $271 million per year for the reinsurance program in 2018 and 2019. These funds would be used to partially reimburse insurers for especially high-cost claims. Specifically, reinsurance would cover 80% of an individual’s annual claims costs between $50,000 and $250,000. As a result of this financial protection against high-cost claims, insurers would be able to reduce premiums for all consumers in Minnesota’s individual health insurance market.
Court Street Group Research
8
COURT STREET GROUP Research LLC
September 8, 2017
The State does need federal approval for the program to commence. Section 1332 of the Affordable Care Act permits a state to apply for a State Innovation Waiver to pursue innovative strategies to provide access to more affordable health insurance while retaining the basic protections of the Affordable Care Act. The new state law calls for the Minnesota Commerce Department to submit a waiver application to the federal government for the Minnesota Premium Security Plan. If approved, the waiver would allow Minnesota to obtain federal funding for the new reinsurance program, without affecting the federal funding that helps support the MinnesotaCare public health insurance program. In a letter to governors in March, Tom Price, the secretary of health and human services, said the Trump administration would be receptive to such state initiatives. The Minnesota plan was a Republican initiative. Most Democrats voted against the bill, and Governor Dayton allowed it to become law without his signature. The state is counting on the federal government to pay about half of the cost for the reinsurance program, using money the federal government is expected to save because of lower premiums here. CONNECTICUT BUDGET FIGHT LEAKS DOWN TO THE LOCALITIES Recent plans to eliminate Education Cost Sharing funding for 85 Connecticut school districts and reduce funding for another 54 if no state budget is adopted before the first week of October are meeting with significant pushback from localities. The Connecticut Council of Small Towns, which represents about 110 communities with populations less than 30,000, wrote the governor a letter questioning whether towns were being unfairly penalized for managing their finances better than the state has. Grants to the 30 lowest-performing school systems, also known as Alliance Districts, would remain unchanged. 54 districts would face a reduction in ECS aid in October, but not lose it entirely. The cuts would range from 40% to 90%. A Superior Court Judge ruled last September that Connecticut’s method of distributing local education aid is irrational and violates the state Constitution. The state Supreme Court is scheduled to hear an appeal of that decision on September 28. In the meantime, the administration says, it will not be holding town to minimum spending requirements. The inability to pass a budget has already had a clear impact in the State. A $30 million road repair grant normally paid in July and a sales tax revenue-sharing grant that was worth $78 million to communities in August last year both didn’t happen this summer. And if no budget is in place, property tax relief grants that provided communities with $303 million in aid last September and October would provide just $40.6 million this fall. This is another example of how political problems at the state level deeply affects local credits. IOWA MAY NEED CASH-FLOW BORROWING In more news of state credit problems, the Iowa state treasurer has delivered a letter to Gov. Kim Reynolds, formally asking her to reconsider a short-term borrowing plan to ensure the state can pay all its bills on time. State Treasurer Michael Fitzgerald cites great uncertainty about state finances since Gov. Reynolds hasn’t decided how much of the state cash reserve will be used to balance the previous year’s state budget. The official close of accounts for the previous fiscal year is September 30. Court Street Group Research
9
COURT STREET GROUP Research LLC
September 8, 2017
The Treasurer contends that the state’s cash reserves are down from $729 million last year to $610 million now with no surplus, and with expectations of needing another $50 million to balance the fiscal 2017 shortfall. Iowa has used such borrowing 16 times since 1985 to manage its cash flow. The Governor has cast the request as a political issue. She contends that the cash balances and her executive authority are sufficient to meet all cash needs. The Treasurer says that the state barely “squeaked by” and came “dangerously close” to not being able to pay its bills on time last April. The governor says she expects to decide this month whether it will be necessary to call lawmakers into special session to address a projected state budget shortfall or whether she can address any financial problems using executive transfers. Iowa already had to make nearly $118 million in cuts and adjustments as well as borrow $131 million from the state’s reserves before state tax collections finished below expectations in June. The fiscal 2017 budget year ended June 30, but there is a period in the months following where state officials rectify various accruals, transfers, collections and other accounting before finalizing the balance sheets.
TRANSPORTATION FOCUS: WISCONSIN FUNDING FINALLY IN GEAR Transportation was the major issue that caused Wisconsin to delay adoption of its budget after the July 1 start of the fiscal year. It has been an ongoing point of contention since even as the state moved two months into fiscal 2019. Now it appears that the Legislature may have found a fix for its transportation funding dispute. Republican lawmakers have reached a deal on funding Wisconsin's roads that includes about $402 million in borrowing, new fees for electric and hybrid vehicles, construction delays and modifications to quarry regulations. The deal allows for about $402 million in borrowing — about $100 million less than what Gov. Scott Walker proposed in his budget. Of that total, $150 million will come from the transportation fund. The remaining $252 million allocated for the I-94 north-south project under an incentive deal for Foxconn, will come from the general fund and is contingent on receiving matching federal funds. Walker has refused to support any increase in the state's 32.9 cents-per-gallon gas tax or its $75 registration fee. So instead, the GOP plan would require owners of electric vehicles to pay an additional $100 fee, while owners of hybrid vehicles would pay a $75 fee. The intent is to create "parity" with drivers who are funding roads by purchasing gasoline. The fees are projected to generate about $8.4 million over the biennium. The plan has numerous issues which could make adoption contentious. In line with the Governor's consistent efforts to suppress the influence of unions, the state's prevailing wage law, which sets minimum pay requirements for construction workers on public projects, would be completely eliminated. Opponents of the move say it will lead to lower wages and unsafe work conditions. The plan also directs the state Department of Transportation to spend $2.5 million studying the implementation of tolling, instructs DOT study its ability to "swap" a portion of federal funds with state dollars for some roads projects and places limits on public dollars that can be spent on a streetcar project in Milwaukee. The plan comes after the state learned last week that it will receive $66 million in
Court Street Group Research
10
COURT STREET GROUP Research LLC
September 8, 2017
additional aid from the federal government — far less than the $341 million it requested, but about twice as much as it has received in the past. In the end, the plan if enacted in its current form only serves to settle the biennial budget. It does not address long-term funding needs and shows a bias against public transit in its largest city. WHILE WASHINGTON STATE EXPLORES A MORE PROGRESSIVE APPROACH The Washington State Department of Transportation expects fiscal 2018 gas-tax revenues to rise by 0.9%. It expects its construction costs to increase by 2.6%. That type of spread is projected to continue and increase in line with current driving and fuel efficiency trends. To address the potentially widening funding gap, beginning early next year the state will start a pilot project in which 2,000 volunteers pay a mock tax on the number of miles they drive on Washington state roads, rather than on the amount of gas they use. Participants in the upcoming pilot study won’t be paying actual money yet, but the planned rate is 2.4 cents per mile, which equates to the current gas-tax rate for a car with average gas mileage. They will be provided with a variety of options to “pay” the tax: By sending in pictures of their odometer or having it read at a Department of Licensing office, by using a smartphone app to track miles, or by plugging a mileage meter into their car. With no state income tax and the nation’s second-highest gas tax, Washington is unusually dependent on gas-tax revenues for highway work. Washington is using a federal grant to fund the pilot project, and six other states have received similar grants. Neighboring Oregon already has about 1,000 volunteers who are actually paying a road-usage tax, using a mileage meter instead of paying the gas tax. California concluded a nine-month pilot program in March, with about 5,000 participants testing out various methods of recording mileage. About 85% of participants said they were satisfied with the pilot, and nearly three-quarters said the road charge was fairer than the gas tax. 90% say they would participate in another road charge program. 85% were satisfied with the overall pilot. 78% were satisfied with the security of their data. 73% agree that road charge is more fair than a gas tax. 61% were very satisfied with the concept of road charging.
Court Street Group Research
11
September 8, 2017
THE WEEKLY MUNICIPAL PERSPECTIVE Executive Summary: Managing Partner, George Friedlander, notes two major sources of uncertainty for the bond markets remained through Friday: the unknown but probably severe impact of Irma, and confusion as to what the debt ceiling/Harvey deal would mean for other legislation, especially including tax reform or a tax cut. He also notes that inflation is going to stay structurally low, despite Fed protestations to the contrary. In our Credit Focus, Partner, Joseph Krist, gives an update on the situation in Texas after Harvey, noting that the state will require a massive infusion of outside funds to rebuild and we expect that municipal bonds will play a prominent role. He also covers the stalling Federal infrastructure legislation; Minnesota’s healthcare reinsurance plan to hold down premiums; Connecticut’s budget fight trickles down to hurt its municipalities; Iowa may need cash-flow borrowing; Updates on transportation ideas in Wisconsin and Washington State; and more.
IT BECAME DIFFICULT FOR THE MUNI MARKET TO STAY FOCUSED AS IRMA APPROACHED THE MAINLAND: by George Friedlander, Managing Partner 10-Yr AAA Muni to UST (Source: Bloomberg) This Labor Day week was one 2.8 with an unusual number of 2.6 potential market-moving events, led by the stunning Trump/ 2.4 Democratic deal to delay the debt 2.2 ceiling deadline by 3 months and 2 provide some funding for 1.8 Hurricane Harvey. The muni 1.6 market firmed again this week on 1.4 the back of a much stronger tone 1.2 in Treasuries on Thursday, and an expectation of continued light 1 5/2/16 6/2/16 7/2/16 8/2/16 9/2/16 10/2/16 11/2/16 12/2/16 1/2/17 2/2/17 3/2/17 4/2/17 5/2/17 6/2/17 7/2/17 8/2/17 9/2/17 supply. The Treasury market rallied MUNI 10YR UST 10YR Thursday at least in part due to the economic risks coming out of the imminent landfall from Hurricane Irma. By day’s end, 10- and 30-year yields were down 6 basis points, after bouncing nearly half that much the day before, after the deal to delay the debt ceiling issue into mid-
Court Street Group Research
1
COURT STREET GROUP Research LLC
September 8, 2017
December. For the week ended Thursday, Treasury yields were off only slightly more, after bouncing around considerably on a day-to-day basis. Two major sources of uncertainty for the bond markets remained through Friday: the unknown but probably severe impact of Irma, and confusion as to what the debt ceiling/Harvey deal would mean for other legislation, especially including tax reform or a tax cut. At this point, we think that this is an important distinction: tax cuts remain quite possible, but full-blown tax reform seems increasingly unlikely. What this means for the muni market depends very much on the breadth and depth of any tax cuts. AAA 30-Yr Muni to UST (Source: Bloomberg) 3.5 3.4 3.3 3.2 3.1 3.0 2.9 2.8 2.7 2.6 2.5 11/30/16
12/31/16
1/31/17
2/28/17
3/31/17 30yr AAA Muni
4/30/17 30yr UST
5/31/17
6/30/17
7/31/17
8/31/17
As we have discussed several times, substantial tax cuts on corporations, pass-throughs and on taxable bond interest would likely lead to a “bear flattener” in the muni market, but we cannot be certain that tax cuts of sufficient magnitude to cause this outcome are still on the table. And, with the Administration and Republicans in Congress now in an increasingly wary relationship, revenue neutral tax reform that would qualify for treatment under Budget Reconciliation may be extremely difficult to accomplish.
Without Reconciliation treatment, a tax cut would require 60 votes, and that seems highly unlikely except possibly on a very modest package. To be sure, there is some cross-aisle support for at least a modest cut in the maximum statutory rate on Subchapter C corporations. However, other major tax cuts that don’t focus largely on the middle class—and we don’t see what such cuts would look like-- may be very heavy lifting. In addition, it seems increasingly unlikely that any kind of comprehensive infrastructure package will be enacted before Congress moves into election mode. And, of course, the need for considerably more storm-related funding for both Texas and the Southeast seems quite likely. Meanwhile, benchmark yields on munis couldn’t quite keep pace with the rally in Treasuries, but the light post-holiday calendar helped generate at least a modest rally in the benchmark curve, and the lack of supply helped tighten credit spreads. There has been increasing differentiation in the outcome on high-grades based upon what the budget picture in a given state has looked like. Budgetary success has led to tighter spreads against the curve, while the recent problem states such as New Jersey and Connecticut have widened. And now, the focus turns to the damage from Irma, the cost of rebuilding and repair from Harvey and Irma, and
Court Street Group Research
2
COURT STREET GROUP Research LLC
Court Street Group Research
September 8, 2017
3
COURT STREET GROUP Research LLC
September 8, 2017
implications for the Property and Casualty sector, specifically. Although P and C’s haven’t been net buyers of munis over the last several years—holdings have been flat, almost to the dollar, at $345 billion—they could easily turn into net sellers if the blow to their profits from the two major storms is too severe. 10-Yr AAA Muni to UST (Source: Bloomberg) 2.8
2.6
2.4
THIS WEEK’S NEW DEALS FROM AROUND THE COUNTRY: 2.2
2
1.8
1.6
1.4
1.2
1 5/2/16
6/2/16
7/2/16
8/2/16
9/2/16
10/2/16
11/2/16
12/2/16
MUNI 10YR
1/2/17
2/2/17
3/2/17
4/2/17
5/2/17
6/2/17
7/2/17
UST 10YR
$855 million of general obligation bonds for the City of New York, Aa2/AA/AA. Siebert Cisneros Shank & Co. LLC is lead underwriter. A retail order period is expected for 9/12 and 9/13 with pricing for institutions on 9/14. $424 million of tax-exempt and taxable general obligation bonds for the Regents of the University of Minnesota, Aa1/AA/NR. RBC Capital Markets is head underwriter and it's set to price on 9/13. $402 million of taxable and tax-exempt higher educational facilities second program bonds for the Tennessee State School Bond Authority, Aa1/AA+/AA+. Citigroup Global Markets Inc is lead underwriter and the deal is set for 9/12. $250 million of revenue financing system bonds for the Board of Regents of the University of Texas System, Aaa/AAA/AAA. Bank of America Merrill Lynch is head underwriter and the deal is
set for 9/14. $237 million of utilities system refunding revenue bonds for the City of Colorado Springs, Aa2/AA/AA.
Barclays Capital Inc. and the deal is set for 9/13. Meanwhile, new-issue supply remains muted, off 15.2% over the first eight months versus last year, and we cannot envision a reversal of that trend any time soon. Year-to-date, new-money supply is up 3.5%, but refundings are down a sharp 39.8%, and for reasons we have discussed, we don’t envision a rebound in refundings for years. So-called “combined” issuance is essentially unchanged on the year, but we suspect that the proportion of combined issues that are composed of new-money issuance has increased, and the refunding component has dwindled, for the same reasons as the drop in pure refundings. In any event, volume next week appears to be in the $7 billion range after some hurricane related postponements, and that level could take another hit depending upon the weekend’s events. Much more to discuss next week when we will have a much better picture of the legislative outlook, postdeal, and the new Fed quarterly data will be out, and we will get to take a look at the post-storm outlook. We detail the progress so far in Texas below. For now, we just wish our southeastern friends the best possible outlook in a very challenging weather environment.
Inflation going to stay structurally low, despite Fed protestations to the contrary. In a talk given in New York on Thursday, Federal Reserve Bank of New York President William Dudley, reiterated the need to continue raising interest rates while conceding that the U.S. central bank’s inflation
Court Street Group Research
4
COURT STREET GROUP Research LLC
September 8, 2017
model may need to be modified. We confer, to a degree, but still believe that senior Fed officials, as brilliant as many of them are, may not be seeing the forest for the trees. Dudley stated in his written remarks that, “I expect that the U.S. economy will continue to perform quite well, with slightly above-trend growth leading to further gradual tightening of the U.S. labor market. As this occurs, I would anticipate that wage growth will firm and that price inflation will gradually rise. In response, I expect that we will continue to gradually remove monetary policy accommodation.” He also noted that he has been “surprised by the persistence of the shortfall from the FOMC’s 2% long-run (inflation) objective. While some of this year’s shortfall can be explained by one-off factors, such as the sharp fall in prices for cellular phone service, its persistence suggests that more fundamental structural changes may also be playing a role.” Of course, any tightening in Fed policy, if it occurs, will include a gradual unwinding of the Fed’s $4.5 trillion asset portfolio but will include only a very gradual increase in Fed Funds, if any. So do we disagree with the premise? Well, yes. We cannot get away from the idea that accelerating technological change is going to completely change the labor cost model, increase the output gap, and keep inflation structurally low for the foreseeable future—essentially, forever, because technology inputs will only continue to expand at a growing pace. Indeed, we are of the view that the current economic cycle, with SOME labor tightening and SOME increase in inflation, may well be the last of its kind, ever. Beyond this cycle, we strongly believe that the futurists such as Peter Diamandis (of “Abundance” fame), Brynjolfsson and Mcafee (Of “Second Machine Age” fame) and Osborne and Frye at Oxford (in a series written with Citigroup on “Technology at Work”) will be correct: technological change will create increasing competition with human labor and downward pressure on labor costs. With respect to the output gap, technology will ultimately sharply increase capacity to create “stuff ” relative to cost, while limiting disposable income available to buy the “stuff.” That’s a growing output gap, which means lower trend line inflation. Dudley finally notes that “If it turns out that structural changes have played a significant role, I would generally view this as a positive, rather than negative, development. It would imply that the U.S. economy could operate at a higher level of labor resource utilization without generating a troublesome large rise in inflation.” However, this view doesn’t seem to consider the intermediate to long-term pressures on labor as automated solutions become a larger part of our economy. That is a highly complex set of policy issues, that we will discuss at a later date. So, would there still be a need for some monetary tightening under our scenario? Eventually yes, we think. The reason is two words: asset bubbles. Very low inflation combined with decent, technology-enhanced economic growth and low short-term rates is a great formula for asset bubbles of all kinds. So, we do expect some monetary tightening from time to time. We just aren’t sure as yet how that would translate into higher long-term rates. By the way, we also suggest that the current stubbornly low level of Treasury yields means that the bond market, in its unconscious wisdom, may already be “getting the joke” faster than many individual observers. Court Street Group Research
5
COURT STREET GROUP Research LLC
September 8, 2017
CREDIT FOCUS: HURRICANE HARVEY UPDATE, FEDERAL INFRASTRUCTURE STALLS, CONNECTICUTS’ KNOCK-ON EFFECT FOR LOCALITIES, AND MORE: by Joseph Krist, Partner TEXAS MOVES FORWARD Following the devastation from Hurricane Harvey, Texas will require a massive infusion of outside funds to rebuild. We expect that municipal bonds will play a prominent role, as was the case after 9/11 and Hurricane Katrina. It is too early to assess the impact on ratings that will result from the storm, though rating agencies are likely beginning to plan their actions. Here’s what we do know more than, a week on from Harvey: PORT OF HOUSTON: One of the city’s main economic drivers, the Port of Houston, came back online September 1. The port closed Friday, August 25, at noon, and reopened to some container ships. As it gets back up to speed over the next few days, shipping activities will be limited to daylight hours, and parts of the shipping channel will stay closed. Houston’s port is the country’s second-busiest by tonnage after the Port of South Louisiana, and plays a key role in the U.S.’s oil, gas, petroleum, and chemical industries. It is also handles more foreign shipping, by weight, than any other U.S. port. The port’s governing body estimates it contributes more than $600 billion to U.S. economic activity a year. Houston ships more gasoline than any other U.S. port, accounting for some 38% of overall U.S. gasoline exports, or more than $14 billion worth in the first half of this year. It is the No. 1 container port on the U.S. Gulf of Mexico, and ranked No. 7 in the nation in number of containers handled; servicing all major trading lanes. It is the major container gateway for Houston, for Texas, and for the 100 million people who live between the Mississippi River and the Rocky Mountains. Its Foreign Trade Zone (FTZ 84) ranks first in the country in total merchandise received. The Port of Houston said there had been “no evidence of flooding on terminal. No visible damage to containers, cranes, or other terminal equipment.” SCHOOLS: The first day of school for Houston Independent School District students will be Monday, Sept. 11, weather and facility conditions permitting. The District operates 245 campuses that HISD Facilities Services had reached to assess by Saturday morning. Of those, 115 schools can be deep-cleaned and ready for the scheduled first day of school on Sept. 11. Fifty-three have “major” damage, while 22 have “extensive” damage. The district is still working to assess 32 schools, as well as in-district charter campuses, but accessibility has been hampered by flooding. 10,000 to 12,000 students from HISD schools will need to be temporarily moved to other campuses during the restoration process, and the possibility remains that the first day of school will be postponed beyond Sept. 11. DRINKING WATER: The city's drinking water system was not affected, but the wastewater system was impacted and the City has requested that use be minimized. The fact that drinking water has been available will mitigate some of the financial impact of Harvey, as its is usually water usage on which sewer rates are based. The Houston Combined Utility System is the primary regional water provider for an area
Court Street Group Research
6
COURT STREET GROUP Research LLC
September 8, 2017
with estimated population of more than 6 million including the City of Houston with a population of 2.2 million. MUNICIPALITIES: The federal Community Disaster Loan (CDL) Program provides operational funding to help local governments that have incurred a significant loss in revenue, due to a major disaster, that has or will adversely affect their ability to provide essential municipal services. The CDL Program provide funds to any eligible jurisdiction in a designated area. Loans not to exceed 25% of the local government's annual operating budget for the fiscal year in which the major disaster occurs, up to a maximum of $5 million. The Federal Emergency Management Agency (FEMA) has just $541 million left for disaster management related to Hurricane Harvey. The House passed an initial disaster relief bill of nearly $8 billion, $7.4 billion of which would go toward FEMA's disaster fund. Other disaster funding is accomplished through the Small Business Administration. Through its Office of Disaster Assistance, the SBA made more than $11 billion in loans after Hurricane Katrina, and more than $2 billion after Superstorm Sandy—most of those to distressed homeowners with no business claims at all. Since its inception in 1953, it has issued more than 2 million loans for more than $54 billion. Historically, the program has been characterized by long delays in implementation which negatively impact economic and related tax revenue recovery. The Texas Windstorm Insurance Association (TWIA), established by the Texas Legislature in response to regional market conditions following Hurricane Celia in August 1970, provides windstorm and hail insurance in the Texas seacoast. TWIA is governed by Chapter 2210 of the Insurance Code (Chapter 2210). It is a residual insurer of last resort and is not a direct competitor in the voluntary insurance market. It provides coverage to residential and commercial properties in certain designated portions of the Texas seacoast territory. The designated catastrophe area is that portion of the seacoast territory where the Commissioner of Insurance has found that windstorm and hail insurance is not reasonably available. TWIA is not a state agency and does not receive General Revenue funds or any other state funds for operations. Losses and operating expenses are paid from the following funding sources: TWIA premiums and other revenue, the Catastrophe Reserve Trust Fund (CRTF), public securities, company assessments, and reinsurance. Funding for the 2017 hurricane season is about $4.9 billion. In the end, Texas will require a massive infusion of outside funds and munis will likely play some role. A first step occurred when the Congress approved $15 billion in disaster aid. The measure would continue government funding through Dec. 8, and extend the debt limit for the same period. It would also extend the National Flood Insurance Program, which is to expire on Sept. 30, for the same duration. After 9/11 there were Liberty bonds. After Katrina, there were Gulf Opportunity Zone bonds. We would expect a similar program for the area of damage from Harvey. These are just some examples of how the bond market lends itself to state and local governments.
Court Street Group Research
7
COURT STREET GROUP Research LLC
September 8, 2017
FEDERAL INFRASTRUCTURE FUNDING SEEMS FARTHER AWAY Meanwhile, it’s becoming clearer that despite promises of federal funding for infrastructure, the plan really counts on locally-generated funding. Mick Mulvaney, director of the Office of Management and Budget, said to a gathering of 150 state and local transportation leaders: “we’re trying to figure out how to use a little bit of [federal] money to generate a lot of money, to give state and locals the incentives to do stuff you might not otherwise do.” We think that the emphasis should be on the “little” part. Mulvaney and Transportation Secretary Elaine Chao have talked of funding to put existing projects "over the top" and lots of talk about leveraging. In a time of constrained state budgets, that does not provide much for new projects or maintenance related spending. It is precisely these areas that issuers and likely voters were looking to when they heard the President touting infrastructure during the campaign. This would be especially true for rural projects whether they be for roads, electric grids, or broadband. Trump’s budget proposals have called for cuts in transportation spending, particularly grants to launch new transit systems and other big-ticket projects. So far the only tangible details consist of an executive order to encourage agencies to speed up their decision-making, by, for example, issuing rulings on environmental issues within two years, on average. The order also instructs the government to designate one lead federal agency to shepherd all of the needed approvals for a project and come up with a single federal decision on whether it can proceed. In addition to the lack of detail, the emphasis on privatization and the use of loans rather than grants will be discouraging in some sections of the country. This is especially true of rural areas. Now the plans are likely to be delayed or derailed by the lack of time and attention on the part of Congress. The debt ceiling, tax reform, hurricane relief, and now immigration will all likely have political priority over an infrastructure bill. As for municipal bonds, none of this is good news. The ongoing uncertainty complicates planning, delays projects, makes projects more expensive, and dampens issuance. It is positive for neither the market nor for credit. MINNESOTA ADOPTS REINSURANCE PLAN TO HOLD DOWN ACA PREMIUMS Minnesota has enacted a new law that creates the Minnesota Premium Security Plan, a state-based reinsurance program to stabilize premiums in Minnesota’s individual health insurance market in 2018 and beyond. The new law authorizes $271 million per year for the reinsurance program in 2018 and 2019. These funds would be used to partially reimburse insurers for especially high-cost claims. Specifically, reinsurance would cover 80% of an individual’s annual claims costs between $50,000 and $250,000. As a result of this financial protection against high-cost claims, insurers would be able to reduce premiums for all consumers in Minnesota’s individual health insurance market.
Court Street Group Research
8
COURT STREET GROUP Research LLC
September 8, 2017
The State does need federal approval for the program to commence. Section 1332 of the Affordable Care Act permits a state to apply for a State Innovation Waiver to pursue innovative strategies to provide access to more affordable health insurance while retaining the basic protections of the Affordable Care Act. The new state law calls for the Minnesota Commerce Department to submit a waiver application to the federal government for the Minnesota Premium Security Plan. If approved, the waiver would allow Minnesota to obtain federal funding for the new reinsurance program, without affecting the federal funding that helps support the MinnesotaCare public health insurance program. In a letter to governors in March, Tom Price, the secretary of health and human services, said the Trump administration would be receptive to such state initiatives. The Minnesota plan was a Republican initiative. Most Democrats voted against the bill, and Governor Dayton allowed it to become law without his signature. The state is counting on the federal government to pay about half of the cost for the reinsurance program, using money the federal government is expected to save because of lower premiums here. CONNECTICUT BUDGET FIGHT LEAKS DOWN TO THE LOCALITIES Recent plans to eliminate Education Cost Sharing funding for 85 Connecticut school districts and reduce funding for another 54 if no state budget is adopted before the first week of October are meeting with significant pushback from localities. The Connecticut Council of Small Towns, which represents about 110 communities with populations less than 30,000, wrote the governor a letter questioning whether towns were being unfairly penalized for managing their finances better than the state has. Grants to the 30 lowest-performing school systems, also known as Alliance Districts, would remain unchanged. 54 districts would face a reduction in ECS aid in October, but not lose it entirely. The cuts would range from 40% to 90%. A Superior Court Judge ruled last September that Connecticut’s method of distributing local education aid is irrational and violates the state Constitution. The state Supreme Court is scheduled to hear an appeal of that decision on September 28. In the meantime, the administration says, it will not be holding town to minimum spending requirements. The inability to pass a budget has already had a clear impact in the State. A $30 million road repair grant normally paid in July and a sales tax revenue-sharing grant that was worth $78 million to communities in August last year both didn’t happen this summer. And if no budget is in place, property tax relief grants that provided communities with $303 million in aid last September and October would provide just $40.6 million this fall. This is another example of how political problems at the state level deeply affects local credits. IOWA MAY NEED CASH-FLOW BORROWING In more news of state credit problems, the Iowa state treasurer has delivered a letter to Gov. Kim Reynolds, formally asking her to reconsider a short-term borrowing plan to ensure the state can pay all its bills on time. State Treasurer Michael Fitzgerald cites great uncertainty about state finances since Gov. Reynolds hasn’t decided how much of the state cash reserve will be used to balance the previous year’s state budget. The official close of accounts for the previous fiscal year is September 30. Court Street Group Research
9
COURT STREET GROUP Research LLC
September 8, 2017
The Treasurer contends that the state’s cash reserves are down from $729 million last year to $610 million now with no surplus, and with expectations of needing another $50 million to balance the fiscal 2017 shortfall. Iowa has used such borrowing 16 times since 1985 to manage its cash flow. The Governor has cast the request as a political issue. She contends that the cash balances and her executive authority are sufficient to meet all cash needs. The Treasurer says that the state barely “squeaked by” and came “dangerously close” to not being able to pay its bills on time last April. The governor says she expects to decide this month whether it will be necessary to call lawmakers into special session to address a projected state budget shortfall or whether she can address any financial problems using executive transfers. Iowa already had to make nearly $118 million in cuts and adjustments as well as borrow $131 million from the state’s reserves before state tax collections finished below expectations in June. The fiscal 2017 budget year ended June 30, but there is a period in the months following where state officials rectify various accruals, transfers, collections and other accounting before finalizing the balance sheets.
TRANSPORTATION FOCUS: WISCONSIN FUNDING FINALLY IN GEAR Transportation was the major issue that caused Wisconsin to delay adoption of its budget after the July 1 start of the fiscal year. It has been an ongoing point of contention since even as the state moved two months into fiscal 2019. Now it appears that the Legislature may have found a fix for its transportation funding dispute. Republican lawmakers have reached a deal on funding Wisconsin's roads that includes about $402 million in borrowing, new fees for electric and hybrid vehicles, construction delays and modifications to quarry regulations. The deal allows for about $402 million in borrowing — about $100 million less than what Gov. Scott Walker proposed in his budget. Of that total, $150 million will come from the transportation fund. The remaining $252 million allocated for the I-94 north-south project under an incentive deal for Foxconn, will come from the general fund and is contingent on receiving matching federal funds. Walker has refused to support any increase in the state's 32.9 cents-per-gallon gas tax or its $75 registration fee. So instead, the GOP plan would require owners of electric vehicles to pay an additional $100 fee, while owners of hybrid vehicles would pay a $75 fee. The intent is to create "parity" with drivers who are funding roads by purchasing gasoline. The fees are projected to generate about $8.4 million over the biennium. The plan has numerous issues which could make adoption contentious. In line with the Governor's consistent efforts to suppress the influence of unions, the state's prevailing wage law, which sets minimum pay requirements for construction workers on public projects, would be completely eliminated. Opponents of the move say it will lead to lower wages and unsafe work conditions. The plan also directs the state Department of Transportation to spend $2.5 million studying the implementation of tolling, instructs DOT study its ability to "swap" a portion of federal funds with state dollars for some roads projects and places limits on public dollars that can be spent on a streetcar project in Milwaukee. The plan comes after the state learned last week that it will receive $66 million in
Court Street Group Research
10
COURT STREET GROUP Research LLC
September 8, 2017
additional aid from the federal government — far less than the $341 million it requested, but about twice as much as it has received in the past. In the end, the plan if enacted in its current form only serves to settle the biennial budget. It does not address long-term funding needs and shows a bias against public transit in its largest city. WHILE WASHINGTON STATE EXPLORES A MORE PROGRESSIVE APPROACH The Washington State Department of Transportation expects fiscal 2018 gas-tax revenues to rise by 0.9%. It expects its construction costs to increase by 2.6%. That type of spread is projected to continue and increase in line with current driving and fuel efficiency trends. To address the potentially widening funding gap, beginning early next year the state will start a pilot project in which 2,000 volunteers pay a mock tax on the number of miles they drive on Washington state roads, rather than on the amount of gas they use. Participants in the upcoming pilot study won’t be paying actual money yet, but the planned rate is 2.4 cents per mile, which equates to the current gas-tax rate for a car with average gas mileage. They will be provided with a variety of options to “pay” the tax: By sending in pictures of their odometer or having it read at a Department of Licensing office, by using a smartphone app to track miles, or by plugging a mileage meter into their car. With no state income tax and the nation’s second-highest gas tax, Washington is unusually dependent on gas-tax revenues for highway work. Washington is using a federal grant to fund the pilot project, and six other states have received similar grants. Neighboring Oregon already has about 1,000 volunteers who are actually paying a road-usage tax, using a mileage meter instead of paying the gas tax. California concluded a nine-month pilot program in March, with about 5,000 participants testing out various methods of recording mileage. About 85% of participants said they were satisfied with the pilot, and nearly three-quarters said the road charge was fairer than the gas tax. 90% say they would participate in another road charge program. 85% were satisfied with the overall pilot. 78% were satisfied with the security of their data. 73% agree that road charge is more fair than a gas tax. 61% were very satisfied with the concept of road charging.
Court Street Group Research
11
