There has been no shortage of deliberation by elected officials at both the state and national levels concerning the poor conditions of our public infrastructure. Governor Jim Justice throughout the budget negotiations at the statehouse has steadfastly held to the notion that in order for West Virginia communities to develop there must be highway and bridge improvement projects. Many agree. And, many of the projects would be financed by bonds.
Of course, as the experienced readers of the League Lites know it is easy to find sources of capital for traditional public projects. The pinch point for infrastructure projects is finding the revenue to pay back the borrowed capital. To overcome that limiting factor at the state, the Governor together with the Legislature considered increased road taxes, fees, and tolls. However, it is significantly more difficult for municipalities which have limited revenue options to undertake projects despite available capital for worthwhile municipal projects. The question becomes, if capital isn’t the problem, is the lack of available municipal funding a problem to be addressed at the Capitol?
As discussed in part 1 of this series, in order to finance public projects municipalities issue securities. The municipal bond market is active. According to the National Association of Bond Lawyers (NABL), in 2016 about $445 billion of bonds were issued by state and local entities. If Governor Justice is successful in his efforts to garner an additional $2.8 billion for West Virginia roads he will add to that number in 2017.
What is missing from the national and state discussions, notably, is any meaningful efforts giving municipalities more alternatives to engage in local infrastructure projects, whether by grants, innovative public-private partnerships (“P3″), or even tax credits to spur local investment. As readers know, the West Virginia legislature has been very conservative when deliberating whether to allow TIFs for Class 3 and 4 municipalities. It has been similarly cautious in approving design-build procurement and other low-cost models that would maximize limited local resources. Until the recent addition of the municipal sales tax option for home rule cities, West Virginia municipalities were restricted in funding sources. The often-criticized business and occupation gross receipts tax has been the predominate local revenue source for decades. Albeit the B&O is the primary revenue source of West Virginia cities and towns, a number of municipalities still haven’t imposed the unpopular tax, or if they have, they have not imposed the maximum tax rates responding, in part, to the concerns of local businesses.
Limited property tax revenues, excise taxes on utilities, coal severance and oil and gas tax distributions together with the B&O, wine and liquor tax, hotel occupancy tax, user fees, building permits and municipal licenses, among a few other items, all combine to fund the general expenditures of most municipalities. Often, these combined monies are insufficient for new public projects after a city satisfies its pension fund obligations and healthcare costs. If nothing else, West Virginia cities have become very effective in delivering responsible services using their limited general fund monies.
One bright spot is special revenues derived from delivering services like water, sewer, parking and related enterprise activities. Bond issues related to maintaining these systems are fairly common, even if only done to comply with regulatory requirements of the PSC, DEP or like entity. Another bright spot is the recent option of a municipal sales tax. Municipal sales tax now provides much needed flexibility for municipalities to deliver services and to implement infrastructure projects.
One superb example of the sales tax being a game-changer is the City of Charleston’s use of municipal sales tax revenues and a TIF district to fund its more than $75 million civic center renovations using municipal bonds. While the project isn’t yet complete, so far it looks like a success. Suffice it to say, other West Virginia municipalities will be looking at municipal sales tax to stabilize their budgets and to apply the benefits to long overdue infrastructure projects.
It is doubtful the West Virginia legislature will ever be considered progressive with respect to its dealing with West Virginia Municipalities (examples, look how long it took to get municipal home rule in place; we won’t even discuss annexation). Nonetheless, it is vital that attention be given to the important role that municipal infrastructure plays in our State, whether that infrastructure is broadband, water, sewer, city streets and sidewalks, police and fire stations, or a civic center. The expanded funding source of a municipal sales tax is key to more flexibility for cities to invest in local infrastructure.
Despite the debate in the capitol about tax policy, most seem to agree that improvements must be made to the state’s infrastructure if West Virginia is going to move forward. This includes our cities. Thus, it is important for you, as a municipal issuer, to know about the bond issuance process.
To help you, there is a free online course being promoted by the Municipal Securities Rulemaking Board (MSRB) designed for municipal issuers. The course, “Being an Informed Municipal Bond Issuer”, provides an overview of the bond market. With a solid understanding of the bond process, West Virginia municipalities will be better equipped to tackle their local infrastructure needs. Check out the site at: www.msrb.org.
Ryan White and Mark Matkovich are members of White Law Offices PLLC, a boutique law firm focusing on public finance located in Charleston, West Virginia.
This is the second article of a series appearing in the West Virginia Municipal League Lites in the Fall of 2017. If you missed the first article “an Introduction to Bonds” or want to know more about municipal tax and revenue, check our blog at www.whitepllc.com.