Kentucky general fund receipts rise as road revenues see a drop in January

Bonds

The Kentucky Office of the State Budget Director reported January’s general fund receipts increased to $1.3 billion, up 4.4% from the same time last year. Last month’s sales tax receipts hit a record high at $586.2 million.

Large increases also occurred due to a new section of the individual income tax, the pass-through entity tax, taking effect, combined with payroll withholding receipts and interest income, the office said on Monday.

The PTE tax is a workaround for the cap on the federal deduction for state and local taxes that allows “pass-through” entities like partnerships and S corporations to pay state tax at the entity level, and benefit from federal deductions unavailable to individuals, according to an analysis of the Kentucky legislation by accounting firm Dean Dorton.

Downtown Louisville, Kentucky. State road fund receipts fell 5.7% in January while year-to-date collections were up 6.7%.

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The official fiscal 2024 general fund revenue forecast, which was revised on Dec. 8 by the state’s Consensus Forecasting Group, called for 2.7% revenue growth. To hit that target, revenues must rise by 0.7% over the final six months of the fiscal year, officials said.

“General fund collections produced broad-based growth in January,” Budget Director John Hicks said in a statement. “Year-to-date collections are on pace to achieve the new official estimate for fiscal 2024 and are significantly above the projected revenues for the enacted fiscal 2024 budget.

“Both withholding and sales tax receipts were quite strong in January, sending a clear signal that Kentuckians are experiencing wage gains which support a brisk pace of consumer spending,” he said.

Meanwhile, road fund receipts fell 5.7% last month to $135.8 million. Motor fuels revenues grew at a higher-than-expected rate while motor vehicle usage taxes fell sharply.

Year-to-date collections were up by 6.7%.

For January, motor vehicle usage revenue fell 26.7% and license and privilege receipts dropped 19.3% while motor fuels collections rose 18.9%.

Budget officials noted that the motor vehicle usage and motor vehicle license accounts were affected by the closure of vehicle registration and licensing operations in the first part of January as the state transitioned from its 45-year-old vehicle information system to a new system.

The official estimate for road fund revenue is a projected 7.3% rise for the full fiscal year. Based on year-to-date tax collections, revenues must increase 8.2% for the rest of the fiscal year to hit the forecast, the state said.

On Tuesday, the Turnpike Authority of Kentucky approved a resolution authorizing the issuance of up to $250 million of economic development road revenue refunding bonds.

At its meeting in Frankfort, the authority board unanimously OK’d the annual refunding resolution for economic savings that authorizes the issuance of the Series 2024A bonds for revitalization projects.

Depending on market conditions, the bonds may be issued as tax-exempts or taxables and may include forward delivery bonds.

A tender offer may also be extended to holders of the authority’s outstanding bonds under the authorization.

“Cash flows are not provided at this time due to the complexity of predicting the economics of a tender in advance,” Billy Aldridge, a member of the state’s Office of Financial Management’s debt group, said at the meeting.

“Throughout the year, the staff will work with the Transportation Cabinet to monitor that potential transactions meet the necessary parameters,” he said.

In 2022, the turnpike authority attained more than $17 million in net present value savings by issuing refunding bonds.

The authority was last in the market in September 2022 when J.P. Morgan Securities priced $47.48 million of Series 2022B tax-exempt economic development road revenue bonds.

In 2021, the authority offered $70.755 million of economic development road revenue refunding bonds consisting of Series 2021A tax-exempts and Series 2022A forward deliveries. It also issued $85.9 million of Series 2021B taxable economic development road revenue refunding bonds for revitalization projects.  

In September, Kroll Bond Rating Agency affirmed the authority’s long-term AA-minus rating and stable outlook.

Kroll said “the revenues that provide for lease rental payments can only be used for transportation purposes,” adding that “the commonwealth’s use of lease financing is the primary funding mechanism for essential purpose road and highway infrastructure.”

The rating agency noted that the turnpike authority’s credit challenges include data that showed wealth and income lagged the region and the United States and that road fund revenues are subject to economic volatility, “although there is a statutory floor on motor fuel tax revenues.”

The rating could be lowered, it said, if the state’s wealth and income metrics continued to lag.

In 2022, Moody’s Investors Service assigned an Aa3 rating with a stable outlook to the authority’s Series 2022B bonds. It maintained its Aa3 rating on the turnpike authority’s $1 billion of outstanding parity road revenue bonds.

Moody’s said its rating was “anchored by the commonwealth of Kentucky’s issuer rating of Aa3, and reflects the moderate legal structure of the bonds, which are contingent lease obligations subject to biennial appropriation of road fund revenues, as well as the high essentiality of the financed highway projects to the core responsibilities of the commonwealth.”

It noted the legal structure “is strengthened by key enhancements that reduce the risk of non-appropriation, including the constitutional requirement to use motor fuels revenues and any other fees or taxes related to the regulation of vehicles for transportation purposes, the statutory requirement to deposit such revenues into the road fund, and the automatic renewal of leases each biennium.”

Constitutionally dedicated revenues provide strong coverage of debt service, Moody’s said.

“Additionally, the bonds issued through the Kentucky Turnpike Authority include a back-up pledge of certain revenues within the road fund, which the commonwealth represents would not fully cover debt service,” Moody’s said, “but this, in combination with additional legal strengths, provides for a strong structure on par with the commonwealth’s issuer rating.”

Moody’s also said its stable outlook for the bonds “reflects that of the commonwealth — the commonwealth’s stable outlook reflects sufficient tools to manage an economic downturn, including satisfactory liquidity and a recent history of maintaining balanced operations. These two items are key as Kentucky balances elevated long-term liabilities and associated fixed costs.”

Separately, Kentucky officials are preparing for an influx of travelers using state roads during the solar eclipse that will happen on April 8. A total solar eclipse is when the moon passes between the sun and Earth, blocking the sun’s light.

About 150,000 visitors are expected to travel to the western part of the state, with officials estimating more than 1 million travelers will drive through Kentucky to other viewing spots in Ohio, Indiana and Illinois.

“The solar eclipse will be a memorable and fun event for many Kentucky families,” Gov. Andy Beshear said in a statement. “I encourage Kentuckians who intend to watch it to plan early to make this event safe for all. Choose your viewing location in advance, expect increased traffic and remember to take essentials, like protective eyewear and water.”

The total solar eclipse will be able to be seen in eight Kentucky counties and in parts of four others. The totality phase will enter Kentucky around 2 p.m., CT. The total eclipse will last about one to three minutes in Kentucky. Cities along its path in the state include Paducah, Morganfield and Henderson.

The Kentucky Transportation Cabinet is working with Kentucky Emergency Management, Kentucky State Police and local emergency agencies on event impacts, including potential traffic issues.

“Ensuring smooth traffic flow is crucial for everyone’s safety,” said KYTC Secretary Jim Gray. “Motorists should refrain from parking on or along highways during the solar eclipse to ensure first responders have a path to respond to emergencies.”

Traffic into and through Western Kentucky along Interstate Highway 24, Interstate Highway 69 and U.S. Highway 41 is expected to be congested, as is traffic along the Pennyrile Parkway and the U.S. Highway 68/Kentucky Highway 80 corridor before, during and after the eclipse.

The eclipse could also add traffic to Interstate Highway 165 and U.S. Highway 231, as well as Interstate Highways 64, 65, 71, 75, 165 and other corridors and back roads, as well as Ohio River crossings where traffic passes through Kentucky.

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