Analysis Roundup – May 31, 2013

Next Analysis Roundup will be published Monday, June 10th

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Followup on Tax Reform, League Analysis Now Available

Yesterday, we shared an overview of the tax reform plans introduced for legislative review yesterday in the NC House and Senate Finance Committees (click here for the summary).

This afternoon, the NC League of Municipalities published its comparative analysis of how each plan would impact local government revenues, specifically looking at the impact on municipalities. You can view it by clicking here.

Here is further analysis from today’s NCLM League LINC newsletter:

The League thanks the sponsors of all three bills for working to limit the fiscal consequences of tax reform to municipalities. Of the three bills, HB 998 appears to provide the cleanest mechanism for ensuring that no individual city or town’s revenues will decrease under tax reform.

The House is expected to approve HB 998, possibly as part of its version of the budget. Prospects for the Senate bills are less clear. Although supported by the Senate leadership, SB 677 contains some provisions that are expected to meet resistance, such as applying sales tax to food and medicine not covered by insurance. The Governor already has indicated that he opposes such measures, as well as a sales tax expansion that imposes the responsibility to collect taxes on too many businesses. The eventual compromise plan may include elements of all three bills. Fiscal impact information is available on only two of the bills, HB 998 (impact) and SB 394 (impact), but some of the figures in the impact statements do not appear to reflect the actual bill language. Sufficient data is not yet available to allow city-by-city impacts to be estimated. Only SB 394 would significantly affect municipal revenues for FY 13-14.

All three bills would expand the local sales tax to cover services, but the range of services covered varies widely, with SB 677 applying the tax to most services delivered to consumers, but not on business-to-business transactions. Both Senate bills would affect the municipal privilege license tax, SB 394 by eliminating it and SB 677 by capping it at $500 per location. Each of the three bills would eliminate the franchise tax on electricity and natural gas and the local distribution of a portion of such taxes, but the bills differ in how this revenue would be replaced. Both Senate bills also would eliminate the local distribution of beer and wine taxes and the local government sales tax refund. SB 677 also would reduce the local sales tax rate, but it would cap sales tax refunds to non-profits.

Each of the bills attempts to ensure that cities and towns receive as much revenue under its new system as they do under the current system, but how this would be done varies.

HB 998 would replace the franchise tax revenue with a distribution equal to the amount of franchise tax each municipality received during FY 13-14. Combined with the additional revenue received from the sales tax expansion, HB 998 would ensure that each city and town would receive at least as much revenue in the future under the new tax system as it did during FY 13-14.

SB 677 includes a transitional hold harmless provision that would ensure that each municipality receives as much revenue in FY 14-15 and FY 15-16 as it did from sales taxes and the repealed state-collected taxes during 2014. It would not hold citiesharmless for the privilege tax change. The hold harmless would phase out by 10 percent each year and expire after FY 24-25.

SB 394 includes a hold harmless only for the electricity franchise tax, but its combination of tax changes are designed to provide each city and town with more revenue than under the current system. Sufficient data is not yet available to determine whether this goal is met at the individual municipality level, or only in the aggregate.

In reference to the point made about the Governor’s preferences, Governor McCrory did indicate he prefer a “measured” tax reform effort similar to that of the House, as opposed to that of the Senate.

Employment Continues to improve in most of NC

The NC Division of Employment Security released April 2013 employment and unemployment statistics for counties and metropolitan areas this week. Overall, they found that unadjusted unemployment rates declined in 97 of North Carolina’s 100 counties.

32 counties have rates still above 10%, compared to 42 in March. 75 counties saw actual increases in employment for the month, with 17,252 jobs added in April compared to March (+0.4%).

Dare County had the largest growth in jobs for the month (2,730).

In-depth statistics on local unemployment are available at their Demand Data Driven Delivery System (D4) website (click here).

Economic Updates from Richmond Fed District

The Richmond District of the Federal Reserve provides monthly updates on economic data for its region and each member state, including North Carolina. It is a good way to see how we size up with our neighbors and other states in the Mid-Atlantic.

Click on the links below for their latest monthly reports, many of which were updated this week and today:

Regional Survey of Business Activity

Regional Survey of Business Conditions

Regional Mortgage Performance Summaries

Survey of Business Conditions for the Carolinas

Economic Indicators

District Snapshop

LGC Delays Debt Term Limit Resolution

From Deputy State Treasurer T. Vance Holloman:

The staff of the Local Government Commission (LGC) has received numerous comments, and continues to receive comments, concerning a proposed LGC resolution that documents our long-standing approach to establishing debt term limits.  I want to thank each of you who have responded for your interest and for the time you have taken to respond.  The comments we have received reflect a great deal of thought and analysis on your part.  In order to give your comments the thorough consideration they deserve, the decision has been made to remove this resolution from the LGC’s June 4th agenda.  We anticipate that the resolution will be considered at the August meeting.  In order to incorporate your comments into the proposed resolution, we request all comments be made by the end of the day on June 14th.  We anticipate releasing an updated proposed resolution sometime in the late June, early July time period.  You will be given an opportunity to comment again before the resolution is presented to the LGC in August.  You may submit your comments to me at vance.holloman@nctreasurer.com, Tim Romocki at tim.romocki@nctreasurer.com or Robin Hammond at robin.hammond@nctreasurer.com.

Thank you for your interest in this matter.

The resolution (click here to view the full PDF document) would have set in place the following guidelines:

General Obligation Bonds: “…the normal maturity will be twenty (20) years or less, with exceptions for special circumstances or needs, and a requirement of even principal payments annually so that approximately one-half of total principal will be repaid within ten (10) years. Some flexibility may be allowed at the beginning of a term to allow blending with the existing debt service schedule of the Unit. In no case should the term allowed exceed the expected useful life of the asset being financed.”

Installment Purchase Contracts and Certificates of Participation (Limited Obligation Bonds): “…the normal maturity will be twenty (20) years or less with a requirement of level principal payments for governmental activities so that approximately one-half of total principal will be repaid within ten (10) years. Level annual payments may be permitted for debt issued to acquire assets supported by user fees so that customer charges may remain fairly constant from year to year. Some exceptions may be appropriate for larger projects with an asset life extending beyond twenty (20) years such as parking facilities.”

Revenue Bonds: “…the normal maturity shall be between twenty (20) and twenty-five (25) years depending on the life of the asset, with some exceptions for large enterprise financings with longer asset lives. For revenue bonds, the normal bond structure contemplates level annual payments to reflect the normally level stream of revenues generated by the project. With even annual payments, principal payments are initially smaller and increase gradually over the term of the financing much like a home mortgage amortization. Sometimes an exception might be in order to allow a term of thirty (30) to forty (40) years for projects where the asset financed has a longer useful life, such as a nuclear power facility.”

Refunded debt: “…the expectation is that net present value savings from the refunding will be at least three percent (3%) of the amount of bonds or debt refunded. There should be no extension of maturities, and level annual savings. In no event should an original term combined with a refunded term exceed forty (40) years.”

Restructured Debt: “…the (jurisdiction) must be experiencing severe, unforeseeable loss of revenues or additional expenditures. In no event should an original term combined with a restructured term exceed forty (40) years.”

USDA Refinancing: “…the (LGC) has concluded that the USDA terms are no longer advantageous or necessary for (jurisdictions) to achieve its capital improvement goals. When the USDA loan is refinanced with a conventional tax-exempt loan, it should be placed on a conventional footing from the date of the original loan in relation to the remaining term. The (jurisdiction) should have the capacity to make level principal payments and to pay the balance of the loan over the remnant of the period of twenty (20) to thirty (30) years from the date of the original loan. The savings to the (jurisdiction) should be due primarily to actual interest rate-created savings as opposed to solely cash savings realized by shortening up the term. In no event should an original term combined with a refinanced term exceed forty (40) years.”

Economic Commentary from Wells Fargo

Click Here to view this week’s report

Highlights:

  • The second look at Q1 GDP growth showed little change from the first release. The economy grew at a 2.4 percent annualized rate. Personal consumption was revised slightly higher.
  • Personal incomes were flat in April as was wage and salary growth. Personal spending contracted for the month, falling 0.2 percent.
  • Consumer confidence bounced back sharply in May as consumers’ expectations of future economy growth improved.

 

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