CSG: A Cautiously Optimistic View of the Election and its Effects on Munis
By Court Street Group Partner, Joseph Krist
Four-term Rep. Randy Hultgren (R-Ill.) was unseated by his challenger, Democrat, Lauren Underwood. Rep. Hultgren was one of the leading voices championing the role of municipal bonds in financing infrastructure and the many other beneficial projects that the market supports. In a body that does not exhibit a deep well of knowledge about our industry, he will be missed.
At least 11 of the 24 Republicans on the Ways and Means panel — which has jurisdiction over health and trade issues in addition to taxes — will not be back in the House next year. That means that nearly half of the authors of the tax bill were not rewarded for their efforts. Many of these were retirees who apparently saw the handwriting on the wall. Three who were voted out represented the sort of affluent district that is positioned to absorb the brunt of the impact of the elimination of the state and local tax (SALT) deduction.
CSG will continue its efforts educate the new and old classes of Congress on the value of the municipal market, infrastructure funding and impact investing. While the Democrats took the House, we remain cautiously optimistic that an infrastructure/municipal-related package could emerge in 2019. More on that below.
Below we will detail the specifics of what happened on Election Day across the states, but first, let’s look at what it all broadly means for the industry.
So What Did It All Mean?
The general observation is that well thought-out and articulated proposals that clearly tied revenue to projects did well. Increases in existing taxes, such as the gas tax, had mixed results. It is important when handicapping any ballot results, voters’ views of the economy and politics of their states seemed to govern attitudes toward various ballot initiatives.
Colorado is a state with a significant natural resource development component to its economy. So it is not entirely surprising that initiatives relying on higher gas taxes and an initiative designed to limit the growth of fracking failed. This despite a high demand for increased road capacity. Arizona has a significant mining component and high energy demand. The fact that it is a conservative state made its rejection of renewable energy requirements even less surprising. Utah voters were asked to approve a gas tax increase but the money would have gone to education rather than on infrastructure needs. Without a clear relationship between the source of the funds and the use of the funds, that initiative went down to defeat.
The arguments at the Congressional level about the Affordable Care Act will continue but the support for many, if not all of the ACA's requirements, continues to receive voter approval whenever the public gets a chance to vote on it. The fact that expansion was supported in three politically, fiscally, and socially conservative states cements the view that the ACA is popular.
Whether the ACA is the answer to more universal coverage is a whole separate question. The idea that health insurance is a good thing seems to no longer be in doubt. If policymakers allowed the ACA to stand or fail on its own, healthcare providers and state governments would find themselves in an environment where more rational planning over a more than one-year time horizon would be a practical goal.
While the expansion of Medicaid may have some political meaning, there is nothing to indicate that the general anti-tax bias held by a great proportion of the electorate has gone away. Increases in traditional taxes as well as taxes from newer sources (services, carbon) received a less than resounding greeting from the electorate. In other instances, voters delivered mixed messages by voting in ways which seemed to clash with other views they hold.
Nothing has changed about the relative trend of credit factors confronting tax-backed credits — we are getting closer to the end of the favorable credit environment every day.
An infrastructure plan may be enacted but even at the high end of estimates may not be nearly enough to fill the $4 trillion infrastructure funding gap. The pension funding vise will continue to tighten with voters seeming to prefer changing benefits (not easy to do under statute or constitution) to either raising taxes or reordering spending priorities.
On the revenue bond side, resilience will continue to grow as a source of demand for capital spending. Affordable housing will continue to be an issue. Water infrastructure, while benefiting from the recent legislation in Congress, will continue to surprise negatively as more issues arise from the aging of the long-established systems. Pressures to hold monthly charges for services lower and other issues will hold back support for needed bonding regardless of whether a federal infrastructure plan emerges.
This will be reflected in voter support or the lack thereof for capital borrowing even for basic services. In California, voters rejected $8.877 billion in general obligation bonds for water infrastructure, groundwater supplies and storage, surface water storage and dam repairs (less than two years after Oroville), watershed and fisheries improvements, and habitat protection and restoration.
The most important result may be the shift to the Democrats now having a House majority. This will create momentum for an infrastructure package. Both sides would benefit from enactment of a package and adoption would allow states and localities to at least have some roadmap to help them to determine how a federal investment can best be leveraged by states and municipalities. Democratic control also enhances the chance that issues such as a Build America Bond-type structure, advanced refunding bonds and the SALT deduction will be reevaluated.
With ballot initiatives to increase taxes to fund infrastructure turning in mixed results, a federal role in infrastructure development will take on even more significance.
The Details on Tuesday’s Ballots
Medicaid Expansion — Medicaid expansion was approved in Idaho, Utah, and Nebraska. In Montana, a change to existing taxes on tobacco to fund the continuation of Medicaid expansion was approved.
Marijuana — In Michigan, legal recreational marijuana was ahead by 15 points with just more than half the results in. In North Dakota, an initiative to legalize recreational use was soundly defeated by nearly 20 points. In Missouri there were three initiatives calling for the legalization of medical marijuana with the primary difference being the rate of tax charged on sales. The initiative which was being approved called for a 4% tax to be imposed on marijuana sales, with the revenue dedicated to health care services for veterans.
Transportation — The California initiative to repeal the 12-cents-a-gallon gasoline tax passed last year and required voter approval to raise the tax in the future was defeated. In Colorado, both initiatives authorizing bonds for transportation projects lost. A ballot item requiring a "lock box" for the collection and disbursement of transportation revenues received 88% support. In Missouri, voters defeated a proposed gas tax increase. Hillsborough County (Tampa), Florida, voters approved a rise in the sales tax to fund transportation improvements.
Taxes — Colorado rejected an initiative to change the income tax from a flat to a progressive scheme. Louisiana voters approved two ballot items for property tax exemptions and the phase in of property tax increases. Oregon voters defeated a measure to prohibit taxes on groceries. The ban would have stopped any attempt to tax soft drinks. A similar measure passed in Washington. Voters in Arizona approved a prohibition on the government from increasing taxes on services in the future. Florida voted to require a 2/3 vote of the legislature to impose or increase taxes or fees. North Carolina voters approved lowering the cap on the top income tax rate to 7% from 10%.
California voters rejected Proposition 5 amending the State Constitution to expand the special rules that give property tax savings to eligible homeowners when they buy a different home. Hillsborough County, Florida voters approved a 10-year, half-cent sales tax that will provide an injection of funds to Hillsborough County Schools, which needs an estimated $3 billion to fund school construction, repairs and debt repayments.
Education — Colorado rejected a ballot initiative to establish an income tax bracket system rather than a flat income tax rate and raise taxes for individuals earning more than $150,000 per year, raise the corporate income tax rate, and create the Quality Public Education Fund. Georgia voters approved an amendment to allow a school district or districts with a majority of enrolled students within a county to call for a referendum to levy a sales tax for education purposes. Maryland voters amended the state constitution to dedicate certain revenue from video lotteries to education as supplementary funding.
Energy — A Washington state initiative to establish a carbon tax was trailing by 13 points. An advisory to repeal the "oil spill tax" was narrowly approved. Arizona voters rejected a proposal to require 50% of energy to come from renewable resources by 2030. In Colorado, the initiative to mandate that new oil and gas development be a minimum distance of 2,500 feet from occupied buildings and other areas was defeated.
Healthcare — Proposition 1 requiring minimum nursing staffing levels in Massachusetts hospitals was defeated. A proposal to increase funding for children's hospitals in California passed.
Local Issues — Houston voters were approving Proposition B, the referendum to grant Houston firefighters the same pay as police of corresponding rank and seniority. The vote comes right after the Houston City Council approved a nominal increase in the city's property tax rate, the first rate hike at City Hall in two decades. Approval was seen as a significant credit negative as the city is already dealing with pension funding issues.
San Francisco voters approved Proposition C, a measure to address homelessness through a gross receipts tax and a payroll tax on companies above a certain size. The measure was fiercely opposed by the tech industry which has beaten back similar taxes in other cities. The vote was 60% in favor but opponents will challenge it in court as it did not receive a two thirds majority. A state Supreme Court ruling last year raised questions about whether tax increases proposed by voters for specific causes needed the same two-thirds majority to pass as those proposed by elected officials. The San Francisco City Attorney’s Office is currently seeking a court order to resolve the confusion, asking the city’s Superior Court to affirm that special tax increases proposed by voters can be passed with a simple majority vote.
Other initiative result headlines:
Marin County, California Transportation Sales Tax Extension Approved; Broward County, Florida Voters Agree to Raise Sales Tax to Fund Transit; Voters Approve Beaufort County, South Carolina Transportation Sales Tax.
San Jose voters support major $650 million infrastructure bond that would fund road and bridge repairs along with improvements to the city’s police and fire stations with a 69% majority.
Disclaimer: The opinions and statements expressed in this report are solely those of the author(s), who is solely responsible for the accuracy and completeness of this report. The opinions and statements expressed on this report 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.