By Joseph Krist
This credit commentary is part of the CSG Municipal Perspective, brought to you by Court Street Group Research and Neighborly. Click here to download the full weekly report.
KANSAS CITY AIRPORT P3 POISED FOR TAKEOFF
While toll roads and mass transit public-private partnerships (P3s) have run into all kinds of potholes, the airport sector seems to be moving ahead with the concept. This time the locale is the Kansas City airport. The terminal, which was built in 1972 was, as they say, conceived in a much simpler time. It was designed to facilitate quick check in and boarding with an absolute minimum of distance between curb and gate. In its day it was one of the most convenient places to catch a plane, especially for the business traveler.
Obviously, much has changed in the post 9/11 era, and terminals have had to be reconfigured and expanded to meet current traffic and security demands. The three-terminal design, built in 1972, creates logjams at ticket counters and is not as welcoming or secure as more modern airports. One of the big barriers to redeveloping the facility into one with a single terminal, however, has seen opposition from local taxpayers. They have previously resisted any plan that could leave them responsible for long-term financial support of the new facility if airport revenue can’t cover the costs.
To address that concern, Kansas City is undertaking the construction of a new passenger facility, via a P3.
Four development and construction teams have submitted proposals to design, build and finance a new $1 billion, 750,000-square-foot terminal at Kansas City (MO) International (KCI) airport. They include Burns & McDonnell, AECOM, Turner Construction, Edgemoor Infrastructure & Real Estate — a subsidiary of Clark Construction — BlueScope Construction and JLL.
The P3 concept gained traction in the Spring when Kansas City-based engineering firm Burns & McDonnell sent an unsolicited bid to the Kansas City Council that included a private financing option, transferring risk away from taxpayers. A few weeks later in June, AECOM sent a letter to city officials expressing an interest in spearheading any future public-private partnership at KCI as well. There was some negative reaction among council members around privatization. They reflected concern over claims that the city could finance the project at lower interest rates. Nevertheless, officials subsequently opened the project for public bid.
Now the airport is expected to select a winning bid by August 14 and then seek approval for the project by the City Council. After that, public approval would then be sought on the November ballot.
ARE MILEAGE TAXES THE FUTURE?
There has been much movement in the field of automobiles powered by non-internal combustion engines. With European nations and car manufacturers taking clear steps to promote the development of electric cars. In the U.S. Tesla unveiled its version of a mass market electric automobile. All of this has led to thought and some discussion of the future of transportation infrastructure financing if gasoline based taxes become a less and less viable credit structure as new transit technologies emerge. Another area of concern, is the reliance of localities in particular on parking fees and fines as a source of revenue and the impact of technology on driving and parking patterns.
(There has recently been considerable discussion of “Transportation as a Service,” (TaaS) under which a very large proportion of cars will ultimately be 1) electric, 2) self-driving, and 3) owned by a leasing company that provides them to user as needed.)
One example of the of a response to these issues is Austin, TX. 500 electric vehicle charging stations are already spread throughout the city. In March, the city council adopted a resolution prioritizing plans for self-driving vehicles. As the city moves forward with its plans for the future, a potential revenue issue has emerged. Half of the revenue applied for transportation capacity and operations improvements is based on a parking model that may be obsolete in a dozen years.
Parking fees for the Austin Transportation Department account for nearly a quarter of its total budget. Governing Magazine recently surveyed the 25 largest U.S. cities and obtained revenues for parking collections and fines, traffic citations, traffic camera fines, gas taxes, vehicle registration, licensing and select other fees. The results showed that those 25 cities collectively collected approximately $5 billion in auto-related revenues in fiscal 2016, or about $129 per capita. The total impact on individual cities varied. For example, the Governing data showed that New York City generated $1.2 billion in 2016. Those reporting the highest related revenues per capita included San Francisco ($512), Washington, D.C. ($502), and Chicago ($248).
The issue of car ownership in the future carries with it an additional set of issues. Parking, in addition to generating revenue from meters and tickets also generates revenues from private off-street parking. In New York City, private parking spaces generate double digit rates of sales tax on garage parking. Changes in technology that reduce private automotive ownership and increase ride sharing have the potential to negatively impact revenues.
So it makes sense for states and cities to find ways to generate revenue from travel itself which uses roads without regard to the method of propulsion. The first answer that some are looking to is mileage taxes. Vehicles are registered and mileage tracked and owners of those vehicles are then assessed on a per mile rate. Oregon was the first state to try.
The Oregon Legislature convened the Road User Fee Task Force, an independent body of state legislators, transportation commissioners, local government officials and citizens, to develop new ways to fund Oregon's roads and bridges. This Task Force examined the challenges and benefits of a mileage-based road user charge system and conducted two pilot projects to gather driver feedback on different options. The resulting program is OReGO, an ODOT program that creates a new way to fund road maintenance, preservation and improvements for all Oregonians.
OReGO volunteers will pay a road usage charge for the amount of miles they drive, instead of the fuel tax. The OReGO road usage charge is set at 1.5 cents per mile. Volunteers will receive credits on their bill for the fuel tax they pay at the pump. Volunteers will have their choice of secure mileage reporting options offered by OReGO’s private-sector partners. The first phase of OReGO is limited to 5,000 cars and light-duty commercial vehicles.
Other jurisdictions include a program for trucks in Illinois. The I-95 Corridor Coalition, a group whose membership includes transportation agencies from Florida to Maine, is moving forward with new testing in Delaware and Pennsylvania of a system that would charge drivers based on the number of miles traveled as either a replacement for or addition to the gas tax. There will be a three-month pilot of the mileage-charging system next year on some 50 vehicles in Delaware and Pennsylvania to prove the technology can work.
The project is funded through a grant from the Federal Highway Administration that was requested last year, and the final findings will include input from driver, trucking and tolling industry groups, as well as state agencies along the corridor. Granted these are limited initial steps and we are a long way from establishing mileage fees as a viable replacement for fuel based taxes. The activities however, represent real progress toward answering the question of how to replace gas taxes in a modern transportation environment.
MOODY’S UPGRADES WISCONSIN
It is one of only two states yet to enact its budget for the fiscal year beginning July 1, Wisconsin is considering a huge program of tax incentives to entice a foreign manufacturer to locate in the State, and its infrastructure needs are at the center of a contentious debate. Nonetheless, Moody’s Investors Service has upgraded the state of Wisconsin’s General Obligation rating to Aa1. Other associated upgrades include to Aa2 for Certificates of Participation issued under the state's master lease program; Aa2 for General Fund Annual Appropriation Bonds; Aa2 for Taxable Pension Funding Bonds; Aa3 for Appropriation Revenue Bonds; Aa3 for Milwaukee Public Schools Revenue Bonds Series 2007A and A1 for Milwaukee Public Schools Revenue Bonds Series 2013A.
All of the outlooks for these ratings are now stable. We leave it to Moody’s to explain. “The upgrade to Aa1 reflects the proven fiscal benefits of the state’s approach to granting and funding pension obligations when many other states are experiencing stress from rising costs and heavy liabilities; an economy that delivers steady but moderate growth; conservatively managed budgets; and adequate liquidity. Despite Wisconsin's slightly elevated debt levels, its fixed costs for pensions, debt and retiree health benefits are below the median for Aa1 states and outweigh the credit challenge of the state’s negative unassigned fund balances.
Appropriation debt is notched off the state's GO rating to reflect risk of non-appropriation since the state is not obligated to appropriate debt service for the bonds. The Certificates of Participation, General Fund Annual Appropriation Bonds, and Taxable Pension Bonds are upgraded to Aa2, one notch lower than the state GO rating, to reflect their average legal structure and essential nature of the projects funded. The Appropriation Revenue Bonds funded a sports facility, which we view as a less essential purpose warranting an upgrade to Aa3, two notches off the state rating. The Milwaukee Public Schools Revenue Bond Series 2007A is upgraded to Aa3, two notches off the GO to reflect the moral obligation of the state to make debt service payments on the bonds. The Milwaukee Public Schools Revenue Bonds Series 2013A is upgraded to A1, three notches lower than the GO rating to reflect weak legal provisions."
So if nothing else the move have emphasizes even more the role of pensions in the rating process. You can have negative fund balances and a budget process that is not working on a current basis but you had better have your pensions funded.
Joseph Krist is a Partner at Court Street Group Research who has spent his career researching, analyzing and writing about municipal credits for both buy and sell side clients.View author