The mid-term elections saw Republicans soundly beat Democrats to take control of the U.S. Congress. At the state and local level there were a few surprising governor races and interesting voter approved debt measures that have implications for the municipal market. Here are our quick hits:
1) California voters passed a budget stabilization ballot measure called Proposition 2. Prop 2 requires lawmakers to set aside 1.5 percent of General Fund revenues each year for the state’s budget stabilization fund until the fund reaches a full 10 percent of general fund spending. Unlike the current reserve funding requirement, which can be waived annually by the governor, suspending deposits or making a withdrawal from the fund now requires that the governor declare a state of fiscal emergency. The ballot measure also calls for deposits to be made from excess capital gains revenues in years when revenues exceed 8 percent of all general fund revenue. This is a way of hedging against revenue's volatility. As a result, Standard and Poor’s ratings agency lifted California’s rating one notch to A+.
2) Also in California, voters approved $7.1B in new general obligation debt for state water supply and infrastructure projects. The new offering will add some much needed bond issuance in the high income tax state.
3) Another large debt measure was passed in New York State. The Smart School Bond Act will offer $2.0B in new bond issuance to support school construction and upgrade technological equipment in the State’s K-12 schools. Again, this is very welcome supply to the municipal market.
4) Maryland and Wisconsin passed a bondholder-friendly measure creating lockboxes around transportation funds. The state legislature can no longer use dedicated transportation funds to balance general fund budgets. The measure ring-fences and dedicates this fund solely for transportation- and infrastructure-related projects. This is a credit positive for transportation-related bonds in MD and WI.
5) The City of Phoenix, AZ Proposition 487 – Pension Reform Initiative – was defeated. The initiative would have made Phoenix the largest U.S. city to do away with a defined benefit plan for public workers. Like many state and local governments, Phoenix needs billions of dollars in additional assets to meet its pension burden. It will be interesting to see how the debate about public pensions will be handled. Prior to prop 487’s defeat, Bloomberg News quoted Matt Fabian of the Municipal Market Advisors as saying, “To have voters actually decide whether or not a major city continues with defined benefit is a major development. There is clearly a growing pushback from taxpayers and other stakeholders against pension benefits, but that hasn’t translated into a grassroots, anti-employee push. That could begin to change with Phoenix if there is some success.”
6) Clear on the other side of the country, Rhode Island elected their first female governor. Democrat State Treasurer Gina Raimondo won the race, riding on her success in reforming Rhode Island's ailing pension system. Initiatives in Phoenix and Rhode Island show that pensions are creating increasingly salient policy issues in state and local elections.
Sources: Bloomberg News, LA Times, Governing Magazine, Reuters