Funding Infrastructure, CA Drought (Again) and Interest Rates

Categories: Commentary, Uncategorized |

July 21, 2014

I know I should not be surprised by inaction and political gamesmanship, but I continue to be amazed how our elected officials do not act in the best interest of their constituents.   A brief review of recent public policy developments that impact municipalities illustrates a range of techniques that politicians use to avoid addressing serious issues.  Without saying more, I would like to simply offer up an initiative for term limits for the House and Senate.  Maybe if they didn’t make a career of it they would get things done and go home!

Kicking the Can:  Federal Highway Trust Fund & Pensions

What do the Federal Highway Trust Fund and corporate pensions have in common?  Most of us would say “nothing”, but not Congress.  Most in the muni space are aware of the need to shore up the Federal Highway Trust Fund and the impact on municipalities should an agreement not be reached.  Last week, the House passed a 10 month stop-gap measure so the US government can pay their share of road and bridge repairs.  Problem is, to do so, they opted to “pay for” the contribution to the Trust Fund by tinkering with the portion of the tax code which governs pension contributions by private corporations (“pension smoothing”).  Congress hopes this tinkering will encourage companies to reduce pension contributions and thereby increase tax revenues as lower contributions lead to higher tax bills.  So, the “solution” being proffered is to dig a deeper pension hole for US companies (current single employer plan deficit is $24.7 billion and multi-employer plans are at a deficit of $8.3 billion).

This pension scheme is designed to fund the needs of the Trust Fund, without adding to the Federal deficit, but that math only works under the peculiar scoring rules that Congress uses, which allow them to ignore any impact that occurs beyond 10 years.  According to projections by the Joint Committee on Taxation, the scheme will have a positive revenue impact for the next six years, then the impact will turn negative, adding up to  a slight positive over the next 10 years.


Joint Committee on Taxation, The Tax Foundation

A good question to ask is “what will be the impact on the PBGC?” It wasn’t too long ago when folks were wondering if the PBGC would be able to meet its obligations – kind of like some wonder whether municipalities will be able to meet their retiree obligations.

What the heck, kick this can down the road too.  Perhaps Congress and the President should look to the funded (or unfunded) status of municipal pension plans and the reality of failure to adequately fund – will anyone get what they were promised?!

Shuffling the Deck:  Build America Transportation Investment Center 

The President announced this week that he intends to use his pen to create a new group within the Department of Transportation called the Build America Transportation Investment Center.  The purported goal of BATIC will be “to serve as a one-stop shop for cities and states seeking to use innovative financing and partnerships with the private sector to support transportation infrastructure.”  It’s not clear how the mandate of BATIC differs from the mandate of the Office of Innovative Program Delivery, which the DOT already operates.  According to its website the IPD “provides tools, expertise and financing to help the transportation community explore and implement innovative strategies to deliver costly and complex infrastructure projects.”

Maybe we should skip creating a new, redundant bureaucracy and spend the money on roads and bridges instead of stationery, business cards and website development.

Passing the Buck: No Funding For You

Municipal investors should keep an eye on Federal and State government funding for local infrastructure repairs.  The Larchmont Ledger recently highlighted that Larchmont’s water, storm drain and sewage infrastructure, which used to benefit from up to 85% funding from the Federal and State governments for maintenance, repairs and upgrades, can no longer rely on those sources of funds.  That leaves the burden of paying for maintenance and upgrades of the aged infrastructure to the local taxpayer – a problem for a community that is already amongst the highest property tax rates in the US and still struggles to fund its needs and abide by the state tax cap.

I’m not suggesting that you feel bad for the residents of Larchmont but I am suggesting that this is one more example of how our local municipalities will struggle to meet needs previously covered elsewhere.  If we (the “royal we”) will get less from the Federal and State government and are asked to contribute more at the local level, at least reduce the tax burden at the Federal and State level.

Hey, a guy can dream.

As we contemplate tax burdens — DIVER subscribers can access Property Tax data across the application.

“It Never Rains in Southern California” and lately only rarely in Northern California

As recently as June 30, this weekly highlighted concerns around the drought conditions in parts of the US and specifically cited concerns with parts of California.  Last week, the Center for Watershed Sciences at the University of California, Davis released a report that estimated the impact of the drought will cost California $2.2 billion in 2014 in losses and added expenses and cut over 17,000 farm jobs.  If conditions persist, keep an eye out for revised loss and expense impact.

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DIVER Analytics, Map Module; National. Drought Mitigation Center

As highlighted in June, this year’s drought is impacting the counties around San Francisco particularly hard.  The most recent data shows no relief.  The chart below compares the average of monthly Drought Intensity Scores for six San Francisco area counties this year vs. last.   A value of 60 denotes “Exceptional Drought”.

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DIVER Analytics, National Drought Mitigation Center

Interest Rates and Walmart

Last week saw Chair Yellen present to Congress and reiterated what we have been hearing for some time – maintenance of low rates but, should the labor market improve more quickly than anticipated (aren’t we beyond ‘more quickly’ since we’ve been waiting for a couple of years?), rates can go up sooner.  We’ve heard this before.   First, it was improvement in the rate, now its improvement in the number of employed and maybe even wages (as we’ve said time and again, the rate is one simple measure of the real story).  To this mix, I would like to add, as important measures, the percent employed against our growing population and whether folks have full or part-time jobs.  Keep your eyes on these numbers for which States are recovering – we will report on them at the State level next week.

With regard to wages and the need for wages to rise to truly stoke the recovery, this sentiment was echoed by Walmart, Family Dollar Stores and Rent-A-Center in their recent earnings releases.  Each cited, as a primary cause of business stagnation, income levels of their customers have been pretty much stagnant.  Along these lines, I recently learned of something called the “Walmart CPI” created by Charles Gave of Gavekal Dragonomics.  It looks at things lower income folks must spend the majority of their income on as a way to demonstrate income inequality expansion resulting from interest rate decisions.  Point being, wages need to rise (and interest rates) to get the recovery going.  We will continue to update our readers and subscribers on wage data as it is released as watching key income figures (as pointed out in recent commentaries) is critical to understanding which States and municipalities are leading the recovery.  Remember, “these United States are not just one nation indivisible. They are also 50 … economies

[and] 50 somewhat sovereign states.”

Sorry to be a bit long-winded.  Had a lot to cover this week.

This week, Mike V will be in Dallas Monday and Tuesday, Pete will be in NYC Monday and Gregg and Mark will be in our nation’s capital on Thursday.

Have a great week,


Gregg L. Bienstock, Esq. & Michael Craft, CFA


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