The Week in Public Finance: California's Wildfires, Illinois Going Into More Debt and Kentucky Embraces P3s

A roundup of money (and other) news governments can use.
by | October 13, 2017
A couple look for anything to salvage from their burned out home in Santa Rosa in Northern California. (TNS/Brian van der Brug)

The Fiscal Impact of California's Wildfires

Large swaths of Northern California, including much of its wine country, have been destroyed this week by some of the worst fires in the state’s history. The focus for the state and its localities now is on disaster relief. But soon, some of the attention will undoubtedly turn to fiscal relief and how to cope with the major losses in property.

At last count, more than 3,500 homes and businesses have been destroyed and more than a dozen wineries have reported partial or total damage to their buildings in Mendocino, Napa and Sonoma counties. It’s too early yet for a cost estimate of the losses, but given the very high property values in that part of the state, total market value damages could easily top seven figures.

Thanks to California’s Proposition 13, however, many properties in the state are assessed at a value far lower than the market price, which will likely reduce the total taxable property damage. The constitutional amendment only allows property values to be reassessed upon a sale or major remodel.

The Takeaway: If California’s past experience tells us anything, residents and local governments will likely get some form of property tax relief next year through the Special Fund for Economic Uncertainties. Property owners apply to get a one-time reduction in their property assessment; the state then reimburses the local government the difference. The reimbursement usually is limited to the taxes related to the fiscal year in which the disaster occurred. Upon rebuilding, the property’s assessed value is set back to its previous level.

Most recently, the state used the fund to backstop property tax losses in Lake and Calaveras counties after major fires in 2015. Property values in those counties are far lower than where today’s fires are, but the initial estimate for reimbursement to both counties was nearly $2 million.

 

Worst-Rated State Goes to the Market

Illinois is rated one notch above junk status but still plans to issue a whopping $6 billion in bonds this month. Given the demand for higher interest rate muni bonds, the state likely won’t have a problem adding to its already-burdensome bond debt.

But here's the thing: The bonds won’t technically add to the state’s overall debt. The proceeds will actually go to pay down part of the state’s $16 billion backlog in unpaid bills. The sale was expected as part of a budget deal reached this summer after a two-year stalemate threatened to force Illinois’ rating into junk territory.

The Takeaway: There are pros and cons for this sale. The good news is that the issuance is expected to save the state money in the long run. That’s because the interest rate penalties its racking up on its unpaid bills is far higher than the interest rate it will likely pay on the bond debt.

But with the bond debt, Illinois loses some of the flexibility it now has to put off its payments. Not paying a bill has a somewhat contained impact. Not making a bond payment is a default and results in rating downgrades and general shunning by the bond market.

Meanwhile, the state’s budget deal by no means addresses all the state’s fiscal woes. “If the bonding plan is not paired with additional fiscal adjustments,” S&P Global Ratings warns, “the state could be left with a higher tax-supported debt burden and -- once again -- an escalating backlog of unpaid bills.”

 

Doubling Down on Kentucky

Kentucky may have been among the last to the public-private-partnership party, but it’s trying to make up for that with pizazz.

This week, six Kentucky-based banks launched a first-of-its kind private investment fund to support P3s in the state. The $150 million Commonwealth Infrastructure Fund is essentially an infrastructure bank that will provide financing to private-sector firms participating in state and local infrastructure projects.

“Although we were one of the last states in the country to pass P3 legislation, we can lead the nation in figuring out new and creative ways to finance critical infrastructure projects,” John R. Farris, the fund’s manager, said in a statement.

The fund did not identify specific projects it plans to fund, but said money could go the repair and replacement of roads, bridges, and water and sewer systems, as well as social infrastructure projects such as student housing, treatment centers and charter schools.

The Takeaway: Most infrastructure banks are funded with public dollars. What makes this one distinct is it’s driven by private investment. With more private investment in quasi-business government enterprises, that could free up more taxpayer dollars for the other kinds of public infrastructure that also need investment.

Besides, the idea of a private fund to support public infrastructure is appealing to many folks. In 2015, for example, two economists proposed creating private capital funds that invest in distressed cities.

But in P3 projects, revenue generated from the projects themselves is generally the primary source of funding used to repay the up-front capital. By definition, that limits their use to revenue-generating things such as toll roads, bridges and other quasi-business-like enterprises. That’s likely why charter schools were included in the list of possible Kentucky investments but not public schools.

To read this regularly, subscribe to "The Week in Public Finance" newsletter for free.