Joseph Krist

Publisher

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ISSUE OF THE WEEK

$150,000,000

Norfolk Economic Development Authority, VA.

Revenue Refunding Bonds, Series 2018

The bonds are secured under a Master Trust Indenture (MTI), whereby the parent company (Sentara Healthcare) is the only Obligated Group Member. Sentara Healthcare’s obligation is essentially an unsecured general obligation from a parent corporation with limited assets and revenues. The MTI, in turn, requires that each Obligated Group Affiliate (Sentara Hospitals and Sentara Enterprises) pay, loan or transfer sufficient financial resources to the Obligated Group to pay the principal and interest on all obligations outstanding under the MTI (‘Funding Agreements’). Rockingham Memorial Hospital and Martha Jefferson Hospital have each entered into a Funding Agreement with Sentara; each are dated as of November 28, 2011. Potomac Hospital has entered into a Funding Agreement with Sentara, dated July 2, 2012.

Sentara Healthcare reflects the strength inherent in a regional system. Its primary service area is around Hampton Roads, and comprises an approximately 1,600 square mile area in southeastern Virginia where Sentara controls seven hospitals and its secondary service area known as the Blue Ridge Service Area, where Sentara controls the Sentara RMH Medical Center in Harrisonburg, Virginia, and Sentara Martha Jefferson Hospital in Charlottesville, Virginia. Additionally, Sentara controls certain physician groups; Sentara Halifax Regional Hospital in South Boston, Virginia; and, Sentara Albemarle Medical Center in Elizabeth City, North Carolina. Through its subsidiaries and affiliated companies, Sentara operates a total of twelve hospitals, as well as skilled and intermediate nursing and assisted living facilities, numerous diagnostic and rehabilitative programs, physician offices and clinics, neighborhood medical centers, home health services and two health maintenance organizations.

We continue to believe that those hospital credits which are supported by geographically diverse revenue and demand bases will the credits best able to perform in the current environment of reimbursement pressures and technological advancement.

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PENSIONS ARE NOT JUST A LOCAL ISSUE

In the current environment, the funding and level of pensions has served as a source of much debate. One aspect of the discussion which does not come up that much is the issue of where that money goes. Where do the retirees receiving the pensions actually live? Is a state or city exporting its wealth through pension payments or does that money largely stay within local economies?  Is New York for instance, shoveling significant amounts of money to places like Florida? Some interesting data recently published by New York City’s Independent Budget Office provides some answers to those questions.

In 2017, New York City’s five pension systems for municipal employees paid $12.9 billion in benefits to more than 332,000 retirees or their beneficiaries.  There are no residency requirements for the receipt of one’s pension. Of the $12.9 billion in payments made by the city’s pension funds in 2017, $5.5 billion, or 43 percent, was paid to recipients living in New York City. Payments to municipal retirees within the state of New York equaled $9.3 billion, or 73 percent of total payments over the year.

The average per capita payment to all beneficiaries in 2017 was $38,711, with a median of $34,259. The comparable figure for New York State was $40,098. Among the states with at least 100 city retirees, pensioners living in Hawaii received the largest average payment: $41,700. Among municipal retirees still living in New York City, per capita benefit payments averaged $36,092. Of the 25 largest counties by recipient population nationwide, Orange County, New York, had the highest per capita payments, $55,524. The County is one of the most popular places for retired law enforcement officers.

About 46 percent of retirees receiving pensions from the city live in one of the five boroughs. An additional 22 percent live in one of the six nearby New York State counties. Of the top 10 counties in which New York City pension recipients resided, only one was outside of New York State—Palm Beach, Florida, with 7,868 city pensioners. Other leading counties home to New York City government pensioners included Broward County, Florida; and Ocean, Monmouth, and Bergen counties in New Jersey.

After New York and Florida, the eight other states with the most New York City government retirees are New Jersey, North Carolina, Pennsylvania, South Carolina, Georgia, Virginia, California, and Connecticut. All 50 states and the District of Columbia have New York City pensioners residing within their borders, from 5 in North Dakota to the 35,410 Floridians who were paid $1.3 billion in pension benefits in 2017. The 1,601 beneficiaries living in Puerto Rico received $42 million in benefits, while an additional $24.4 million was paid to 866 retirees living outside the United States and its territories.

So New York’s pension payments remain significant contributors to the metropolitan area economy. They provide a steady flow of income to support local economies and tax bases throughout the region. The idea that all of these employees break family ties and escape the cold weather just is not borne out by the facts. Something to think about when forming one’s views about government employee pensions.

NEW YORK CITY EXECUTIVE BUDGET

Now that the State has concluded its budget process, the Mayor of New York City has released his executive budget. The release was characterized by a number of complaints about how the City was treated in the State budget including areas such as mass transit and public housing. these have been ongoing areas of dispute in the long running feud between the governor and the Mayor. In spite of the picture painted by a the Mayor of a City under siege, the budget actually represents a significant increase on a year over year basis.

The budget includes spending of $89 billion, some $3.82 billion larger than the budget adopted last year. It adds 1,700 more employees. It is also an increase over the $88.7 billion preliminary spending plan that Mr. de Blasio introduced in February. The plan includes $349 million more for homeless services in addition to $300 million for homeless services that was added in February’s preliminary budget. The money covers the 2019 fiscal year, along with some costs from the current fiscal year.

The budget does appear to build in increased spending without sustainable sources of revenue to cover it, The gap for the coming fiscal year was covered by what all seem to agree is an $800 million one-time revenue boost. In spite of the Mayor’s view of state support, we note that nearly 17% of planned spending is funded by revenues from the State.

Education accounts for 35% of spending with social services and criminal justice combining with schools to account for 68% of local spending. The State Budget provides $250 million for capital projects and other improvements at the New York City Housing Authority (NYCHA) in accordance with the development of an emergency remediation plan under the Governor’s Executive Order. Total spending on housing is $7.8 billion.

Capital investment benefits from authorization of more efficient procedures. The State Budget grants the New York City Department of Design and Construction and NYCHA two years of design-build authority to remediate certain conditions. The budget also authorizes design-build for the rehabilitation of the Brooklyn-Queens Expressway and the construction of borough based facilities to facilitate Rikers closure plans.

The City will contract out a significant amount of services to private and non-profit providers. The 2019 Executive Contract Budget contains an estimated 17,664 contracts totaling over $16.17 billion. Over 76 percent of the total contract budget dollars will be entered into by the Department of Social Services, the Administration for Children’s Services, the Department of Homeless Services, the Department of Health and Mental Hygiene and the Department of Education. The Administration for Children’s Services has over $1.76 billion in contracts, approximately 66 percent of which represents contracts allocated for Children’s Charitable Institutions ($470 million) and Day Care ($696 million). Of the over $7.15 billion in Department of Education contracts, approximately 46 percent of the contracts are allocated for Transportation of Pupils ($1.23 billion) and Charter Schools ($2.09 billion).

From a credit perspective, the Plan essentially maintains the status quo. It does not anticipate significant economic changes or represent any significant rethink of how and what the City funds. We see nothing in the budget that will significantly address the primary concerns impacting day to day life in the City. Given the state of affordable housing and transportation, these are not positive for the City. Given those factors, the lack of any sense of anticipation of any serious impacts from higher interest rates and/or moderating economic growth is troubling. The Mayor’s continued expansion of the workforce and blindness to the sentiment against him in Albany are reflective of his lack of foresight. The City’s finances are now much more vulnerable to outside factors than has been the case for some time.

EDUCATION FUNDING WILL NOT GO AWAY

Arizona joined the ranks of states whose teachers have taken a front line role in the effort to increase salaries in particular and education in general as many school districts closed as teachers protested in the state capital. They were joined by teachers in Colorado where the legislature is considering legislation to make job actions by teachers illegal. The growing movement across the country is more than a straightforward labor dispute. The walkouts have addressed salary levels it is true but also have highlighted issues over funding of facilities and supplies as well as the impact of the student loan crisis.

Teachers in both states have referred to the need to pay student loans in association with their demands for better compensation. According to the state’s auditor general, the average teacher salary in Arizona was $48,372 last year, well below the national average.  Also, per pupil funding was estimated at $8,141 per pupil in 2017, well below the national average. The starting salary for teachers in Arizona was about $35,000.

In Colorado, union leaders note that half of the districts in the state now have four-day school weeks, and the state’s low teacher pay has helped create a 3,000-person staffing shortage. The state teachers’ union, the Colorado Education Association, says the state has shorted the education system $6.6 billion since 2009.

The strikes have tended to have received widespread support from the public. The difficulties at the legislative level have arisen when the hard decisions as to how increased funding can be achieved. The movement to increase school funding highlights the general debate over levels of taxation and the increasing competition for funds to pay for growing costs of things like pensions at the state level.

PENNSYLVANIA STATE UNIVERSITY SYSTEM STUDY

The Pennsylvania Legislative Budget and Finance Committee in the State’s general Assembly commissioned a study by the Rand Corp., a conservative think tank to review the existing structure of the Commonwealth’s state university system. The State System was established in 1982 and is the largest provider of higher education in the Commonwealth of Pennsylvania.  Like so many state systems of higher education it faces funding and cost pressures in an era of scarce resources at the state level.

Students are paying a greater share of costs because state appropriations are limited and have declined.  System enrollment has declined 13 percent between 2010 and 2016. As of 2016, 11 of the 14 State System universities are operating in deficit (although some of this effect may stem from 2015 changes in accounting rules for retiree pensions).

The study explored five options ranging from maintaining essentially the status quo with marginal changes to merger of  the State System universities into one or more of the state-related universities as branch campuses. One option would place the State System and all its institutions under the management of a large state-related university, building on their strong performance, possibly for a defined period of time such as ten years. Rand recommended the adoption of one of those two options if large, state-related universities are willing.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

 

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$1,400,000,000

NEW YORK TRANSPORTATION DEVELOPMENT CORPORATION

Special Facilities Revenue Bonds, Series 2018

(Delta Air Lines, Inc. – LaGuardia Airport Terminals

C&D Redevelopment Project)

While New York’s LaGuardia Airport is undertaking a complete replacement of its main terminal, Delta Airlines is undertaking an upgrade of its own standalone terminal facilities.

Right now is a fine time from an airlines perspective to be issuing special facilities debt secured by its own credit. Oil prices are relatively favorable, planes are flying at high capacity factors, and the consolidation of the domestic US air market has created significantly reduced competition in the industry. This has resulted in a period of profitability for carriers which is significantly improved from the last boom period of airline issuance.

The security for the bonds includes leasehold mortgage language and other provisions but at the end of the day the Bonds are effectively secured under an unsecured guaranty of Delta Airlines. The project includes the demolition of Delta’s existing facilities and their replacement. Effectively, there will be periods of time when there is less physical asset security than is equal to the value of the Bonds outstanding. Hence, the rating of the Bonds is on parity with the airline’s unsecured debt.

It is important to remember that any unsecured financing of airline special facilities bonds is backed by general economic risk (this economic expansion has been exceptionally long and driven by policy and other factors which may make any response to an economic downturn problematic), the industry risk of a historically cyclical business, the fact that on a net basis the airline industry as a whole is inherently unprofitable over nearly a century of operating history  We have seen since the turn of the century the vulnerability of the industry to a variety of external risks significantly beyond the airlines’ control.

We point all of this out, not in anticipation of default and/or bankruptcy, but as a reminder that investors should ask for a yield premium reflective of the fact that this issuance is occurring at an optimal time for the borrower. Coupon protection is important when the downside risk is likely greater than the upside risk associated with investment in unsecured airline debt.

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MISSISSIPPI BRIDGE CRISIS

Recently, Mississippi Governor Phil Bryant declared a state of emergency resulting in  the nearly immediate closure of 102 locally owned and managed bridges across the state. They were determined  to have significant structural deficiencies that posed immediate safety risks. The situation will put new negative credit pressure on Mississippi counties, the primary local governments responsible for bridge maintenance. The state itself will also face pressure to develop new capital funds to pay for needed infrastructure upgrades.

The state of emergency followed the US Department of Transportation (DOT) notification to the state that numerous bridges were out of compliance with national bridge inspection standards, and that failure to close the identified structures could result in reduced federal aid for the Mississippi Department of Transportation. According to the DOT, 2,008, or 12%, of the state’s 17,012 bridges are structurally deficient. This share is higher than the nationwide state median of 9% of all bridges.

In spite of the notification, the legislature authorized only $50 million in bonds for infrastructure needs for fiscal 2019 (which ends 30 June 2019). That is however,  $30 million more than the usual authorization. The state estimates an additional $40-$50 million will be needed for local bridge repairs, in addition to approximately $400 million The Governor is considering calling a special session of the legislature to develop an infrastructure plan. The number of locally owned and managed closed bridges now totals 644 statewide, with the county median of closed bridges at 4%.

The State’s credit outlook is already negative. The need for additional capital funding and a likely increase in debt associated with it will make it harder for the State to retain its current Aa2 rating on its GO debt.

PR FISCAL BOARD PUTS FORTH FINANCIAL PLANS

The Financial Oversight and Management Board for Puerto Rico voted and certified its own version of fiscal plans for the commonwealth, the Puerto Rico Electric Power Authority (PREPA) and the Puerto Rico Aqueduct & Sewer Authority (PRASA). The vote came despite government efforts to convince the fiscal oversight board that its own fiscal plans unveiled April 5 achieved savings and complied with the Promesa law. The governor and several lawmakers rejected the fiscal plans. Fiscal board Chairman José Carrion said that if the governor does not implement the plans as approved, “we would have to consult with our lawyers.”

The government continued to object board-sought cuts of over 10% to pensions, which are unfunded by about $50 billion, and the repeal of labor protection laws, including the elimination of the statutory Christmas Bonus and two-week vacation and sick leave. The fiscal plan proposed by the board would make Puerto Rico an at-will employment jurisdiction, which allows employers to dismiss workers for any reason. The plan also calls for raising the minimum wage 25 cents to people older than 25. The board-certified fiscal plan estimates labor reform could raise $330 million for the government, but any related changes will require legislative approval.

The board’s version of the commonwealth fiscal plan achieves a $1.6 billion surplus, some of which may be used to pay debt, compared to a surplus of $1.4 billion in the government’s plan. The board’s document reflects a 6% increase in revenue and an 11% spending reduction. The board contends that if the government were not to implement labor or energy reforms, the island would be back in deficit by 2029.

KENTUCKY FILES OPIOID LAWSUIT

The state of Kentucky has filed suit against Johnson & Johnson and two of its subsidiaries over what the state’s attorney general alleges was a deceptive marketing campaign that caused widespread addiction to opioid-based prescription painkillers. The lawsuit seeks repayment for Kentucky’s “Medicaid, workers’ compensation, and other spending on opioids, disgorgement of Janssen’s unjust profits, civil penalties for its egregious violations of law, compensatory and punitive damages, injunctive relief, and abatement of the public nuisance Janssen has helped create.

The suit was filed in state court so it is a distinct action away from suits filed by other states. Arkansas, Louisiana, Mississippi, Missouri, New Mexico, Ohio, Oklahoma and South Dakota have also sued the company. Kentucky has a high rate of opioid use. The suit claims 1,404 people in Kentucky died from drug overdoses in 2016. the state had an opioid prescribing rate of about 97 prescriptions per 100 individuals.

ARIZONA TEACHER STRIKE

Teachers in Arizona voted Thursday night to launch the state’s first statewide teachers’ strike for this week. Seventy-eight percent of school employees voted in favor of the walkout, which will begin this Thursday. Arizona’s Gov. Doug Ducey (R) has proposed and supports legislation to provide the state’s teachers with a 20% raise by 2020. The strike is intended to pressure the legislature to enact the plan.

Teachers in the state are among the lowest paid in the nation, with the average salary for a state teacher sitting at $48,372. Union organizers want to see that number raised by at least $10,000. The move follows successful efforts in West Virginia and Oklahoma to obtain pay increases for teachers and other school personnel. Other personnel voting to strike included crossing guards and cafeteria workers.

The specific demands of the school teachers and employees include 20 percent salary increase: According to an analysis by the Arizona School Boards Association published in January, the median teacher pay in 2018 is $46,949. A 20 percent increase would amount to $9,390, for a total of $56,339; restore education funding to 2008 levels: This would require adding about $1 billion more in state funding to education. Arizona spends $924 less per student in inflation-adjusted dollars today than it did in 2008, according to the Joint Legislative Budget Committee; competitive pay for all education support staff. Ducey’s proposal does not include raises for these individuals; permanent salary structure, including annual raises; no new tax cuts until per-pupil finding reaches the national average. According to the U.S. Census Bureau’s 2015 figures, the most recent available, Arizona spent $7,489 per pupil, compared with the national average of $11,392.

In the end, the debate will be about funding and whether the revenues can be found to support it. It is not considered likely that the legislature will approve new taxes to fund the increases so the debate over how to fund raises is expected to be fierce.

CONGRESS QUESTIONS BRIGHTLINE’S USE OF PAB DEBT

At a hearing before the House Subcommittee on Government Operations, Brightline President Patrick Goddard and U.S. Department of Transportation official Grover Burthey were questioned harshly about how the railroad project qualified for the tax-exempt bonds. The Committee chair and Freedom Caucus leader Rep. Mark Meadows indicated that he believed that the use of such financing for the privately owned and operated high speed railway was inappropriate.

Two committee members highlighted an aspect of the project which we have criticized for some time. That is the potential inconsistency of All Aboard Florida instances that it is getting no government money, while federal rules require that PABs can be used only on projects that are, in fact, getting federal money.

The railroad tracks between West Palm Beach and Cocoa have received $9 million in federal money for street crossing upgrades. That Brighline insists, makes the railroad route eligible, even though the money was used to improve the streets crossing the tracks, not the railroad itself; and even though the tracks are not owned by Brightline, but by the Florida East Coast Railway.

Committee members indicated that they considered all surface transportation projects to be roads by definition, not railroads. The chairman indicated  that “I do not see this as fitting the definition of surface transportation, not any, even if you read the statute, it doesn’t seem to apply. So at this point I have a real concern that the intent of Congress is being overridden on the Private Activity Bond measure here.”

TRANSPORTATION ON THE BALLOT

Voters in Nashville have begun early voting on a $5.4 billion transportation plan designed to address growing downtown congestion and a perceived increase in demand for mass transit in the city. The ambitious plan incorporates high capacity buses, designated bus lanes, a tunnel designed to facilitate through traffic in the downtown, and a light rail system. Funding for the plan would come primarily from reliance on increased sales taxes derived primarily from the city’s significant tourist industry and, in the case of the light rail component, a healthy share of federal assistance.

Critics of the plan which will fully unfold over a 15 year time period insist that it relies on the current state of technology and would lock the city into a system that could be effectively obsolete upon completion. The debate centers around peoples individual views as to the pace of technological change and whether or not that change will occur as quickly as proponents suggest. Some referendum critics contend that light rail will be too expensive, rely too heavily on uncertain federal funding, and not attract enough riders. One group, Plan B, has floated a separate alternative that consists of a fleet of vans that use rideshare technology. Initiative supporters argue that the reliability and implementation of technology like autonomous vehicles is too far away to rely solely on it. Once it is functional, they say it would work in tandem with light rail and other high-capacity transit.

Omaha, Nebraska voters will have a chance in May to vote on a $151 million bond authorization to fund a variety of improvement and expansion projects to facilitate transportation in the City. The proceeds would be applied to a range of street and road improvements including widening and extensions to the city’s street and bridge system over a six year period. Proponents say that the debt can be financed without a tax increase.

SPORTS FACILITIES IN THE POST TAX BILL ERA

Spokane County, Washington commissioners approved issuance of $25 million in bonds to help build the Spokane Sportsplex – a proposed multiuse sports facility with capacity to host national and local events. The $42 million Sportsplex would include a multipurpose fieldhouse with a 200-meter, six-lane indoor hydraulic banked track, 17 volleyball courts, 10 basketball courts, 21 wrestling mats and an NHL-sized ice rink with 1,000 seats.

Funding for the Sportsplex is to be accomplished through a combination of $11 million in bond reserve funds from the facilities district which owns and operates the Spokane Veterans Memorial Arena, the INB Performing Arts Center and the Spokane Convention Center, $5 million from the city of Spokane and $2 million from a state capital budget request – in addition to $25 million in bonds from the county.

Those county bonds would be repaid over 25 years through lodging and sales tax generated from tourism. The district’s lodging tax allocation committee also pledged $5 million to cover any shortfall in revenue or operating losses for the first five years.

A ballot measure to fund construction costs for the Sportsplex was considered, but the county withdrew the measure citing increased taxpayer burden. The new financing structure does not require a public vote because existing tax dollars already generated will be used to fund the project. A study commissioned by the Sportsplex estimates that the facilities would generate $33 million in direct tourism spending with an estimated 46,000 annual hotel stays.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$588,025,000

COUNTY OF SACRAMENTO, CA

Airport System Revenue

Senior and Subordinate Lien

Moody’s: A2/A3  S&P: A+/A

The proposed senior and subordinate bonds are secured by a pledge of net general airport revenues, with a prior claim of these revenues by the senior lien bonds. The subordinate lien bonds can be additionally supported by PFC revenues, but are not pledged.

The County of Sacramento owns and operates the Sacramento County Airport System, which includes four airports: the Sacramento International Airport, Mather Airport, Executive Airport, and Franklin Field. The main passenger airport for Sacramento County is the Sacramento International Airport, which is comprised of two terminal buildings, and offers service to domestic and international destinations.

A growing service area economy reflected in steady population growth at the county level, the opening of the Golden One Center arena in downtown Sacramento in October 2016, the expansion of the Sacramento Convention Center, and the opening of Amazon’s 10th fulfillment center in October 2017 support the rating. Strong financial management of the airport is reflected in solid financial metrics, a diverse mix of air carriers and an expectation of no additional general airport revenue bonds (GARBs). This is based on a perception of ample capacity to expand service in existing facilities. Pressures on the rating are the airport’s high leverage as well as a high airline cost per enplanement (CPE). These would likely decrease with traffic and revenue growth and no new debt issuance expected during the outlook period.

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CALIFORNIA REVENUE UPDATE

California’s total revenues of $8.02 billion for March were higher than estimates in the governor’s 2018-19 proposed budget by 6.0 percent, and above 2017-18 Budget Act projections by 10.8 percent, according to the monthly revenue report from State Controller Betty T. Yee. For the fiscal year overall, the “big three” sources of General Fund revenue–personal income tax (PIT), retail sales and use tax, and corporation tax–are beating estimates in the enacted budget. For the first nine months of the 2017-18 fiscal year, total revenues of $89.10 billion are 3.4 percent higher than expected in the January budget proposal and 6.4 percent above the enacted budget’s assumptions.

For March, PIT receipts of $4.22 billion were 6.2 percent higher than the 2017-18 Budget Act’s projections, but 4.2 percent lower than anticipated in the proposed budget. For the fiscal year, PIT receipts are $3.17 billion higher than expected in the 2017-18 Budget Act. Corporation taxes for March of $1.31 billion were $549.2 million, or 72.4 percent, higher than forecasted in the governor’s proposed budget. This variance is largely because receipts were about $530 million more than anticipated. For the fiscal year to date, total corporation tax receipts are 32.5 percent above assumptions in the 2017-18 Budget Act. Sales tax receipts of $2.06 billion for March were $10.4 million lower than anticipated in the governor’s budget proposal unveiled in January. For the fiscal year, sales tax receipts are $410.1 million higher than the enacted budget’s expectations.

Unused borrowable resources through March exceeded revised projections by 41.0 percent. Outstanding loans of $11.84 billion were $5.18 billion less than expected in the governor’s proposed budget and $6.43 billion less than 2017-18 Budget Act estimated the state would need by the end of March. The loans were financed entirely by borrowing from internal state funds.

WHY THE NEW YORK CITY HOUSING AUTHORITY CRISES ARE NOT A CREDIT EVENT

The announcement that the chief executive of the New York City Housing Authority would leave her post at the end of April was not a surprise to observers of the Authority’s recent history. Scandals surrounding lead paint mitigation, inadequate capital maintenance, and a failure to provide heat made her position untenable. The Housing Authority’s operations had become yet another political conflict between the Mayor and the Governor of New York. The NYS budget for the fiscal year included funds to address immediate capital repair needs of the authority tied to oversight by the State.  The city is in ongoing negotiations with federal prosecutors who in 2016 began an expansive inquiry into conditions in the city’s housing developments; the mayor has said that could result in a federal monitor for the authority, which already has a court-appointed special master to address mold.

NYCHA is in the front line of the City’s ongoing battle to provide affordable housing for low income New Yorkers. 257,143 families are on the waiting list for public housing.  146,808 families are on the waiting list for Section 8 housing. 15,096 applicants are on both waiting lists. There was a 2.6 percent turnover rate for public housing apartments in 2016 and there is a  0.7 percent vacancy rate of apartments available. Changes and challenges to federal financing for public housing programs have dampened issuance directly by NYCHA.

So it is important that the City’s Housing development Corporation be able to regularly access the public capital markets to finance ongoing development of new multifamily housing units. To finance NYCHA’s capital needs, the HDC issues bonds secured by a pledge of revenues received by NYCHA from the federal government annually appropriated by Congress under the Capital Grant Program. These funds are intended primarily to finance capital maintenance needs for upkeep of existing facilities.

The fact that the recent omnibus spending bill enacted by Congress includes increased funding for the program is credit positive. The change in leadership at NYCHA presents a huge opportunity for improved management and execution and could provide an improved negotiating position for NYCHA in its ongoing negotiations with the federal government. Our view is that additional oversight would only improve the support for funding under the Capital Grant program and would therefore be credit positive for bondholders.

POLITICS INTRUDE ON NJ TOBACCO BOND REFUNDING

The son of the former Governor of New Jersey issued a letter threatening legal action in an attempt to delay or prevent the formal closing on the State’s recent issue of refunding bonds. State Senator Ton Kean, Jr. issued a letter to the State Treasurer describing the refunding bonds as a “restructuring” of an existing issue rather than a refunding which usually results in the funding of debt service on the original issue and ultimately results in the original bonds being defeased and no longer considered outstanding under the authorizing bond resolution.

The distinction is important as the Senator cites the provisions of Article 8, Section 2, Paragraph 3 of the New Jersey Constitution which provides that all debt must be discharged within thirty-five years from the time it is contracted. The debt effectively being refunded by the Tobacco Settlement Financing Corporation was first issued in 2003 and the latest discharge date under the New Jersey Constitution would be 2038. However, under the pending restructuring, the final maturity (2046) is 8 years beyond this deadline. The flaw in the argument is the interchangeable use of the terms refunding and restructuring. If the original bonds are refunded, defeased, and ultimately discharged than it would seem that the newly issued refunding bonds fall within the maturity requirements of Article 8.

The real motive would seem to be an effort to draw attention to budget positions taken by various members of the NJ legislature. The letter calls the deal a $250 million one-shot budget gimmick. It is not surprising that an increased level of partisanship should be observed in the first budget process to occur under a new Governor. So we were surprised when the tobacco bonds successfully closed. Efforts like this often occur when bond issues can be used as a vehicle for political disputes but there has usually been too much sound legal work done to construct them to see those efforts bear any fruit. The Senator ends up looking naive at best.

LOCAL PENSION TROUBLES TRIGGER STATE WITHHOLDING

The City of Harvey, Illinois is a southside suburb of the City of Chicago. Like many Illinois municipalities, the City has significant unfunded pension liabilities. The State of Illinois has decided to withhold some $1.4 million of state aid from the City to cover pension costs that have gone unpaid for years. The city has sued the Illinois State Comptroller’s office, seeking to force the state to release the funds but in the interim is expected to lay off about 30 people working in the police and fire departments.

State Comptroller Susana Mendoza said “the legislature passed a law allowing pension funds to certify to our office that local governments have failed to make required payments to pension funds. The local government has a chance to respond. Once it’s certified, the law requires us to redirect the payments to the pension fund – the Comptroller’s Office has no choice. A judge ruled Monday in favor of the Harvey Police Pension Fund and against the City of Harvey’s request to stop this process, saying the funds were appropriately put on hold. The Comptroller’s Office does not want to see any Harvey employees harmed or any Harvey residents put at risk, but the law does not give the Comptroller discretion in this case.”

Without the funding being held by the state, Harvey officials said there might not be enough money to continue making payroll after Friday. The City contends that it is appropriating sufficiently for pensions but the State disagrees. The Comptroller said it’s up to the city and the police officers’ pension fund to negotiate a deal that would allow the state to release funding for the Harvey payroll.

BROADBAND AT A CROSSROADS IN KENTUCKY

Kentucky Wired started in 2015 with the goal of extending high-speed internet across the state. The plan was to install 3,400 miles of fiber-optic cable, much of it strung on existing utility poles. This would create an access point in each county to high-speed service which would then be provided through private services to individual locations. The project was designed to bring the service to the Commonwealth’s many residents who do not have access. It was seen as a key factor in the Commonwealth’s continuing transformation of its rural economies.

It is a public-private project, with privately-issued bonds to pay for it and a private company, Macquarie Capital of Australia, building and operating it. Much of its revenue would come from providing internet service to state offices. The entire project was originally planned for completion by late 2018. That schedule has fallen behind as the result of delays in getting permission to attach the cable to poles owned by telephone companies and others.

These delays have slowed the revenue flow that was designed to pay contractors doing the installation work. The contractor has made claims for payments related to those delays which were not part of the original project budget, and the state has to pay some $8 million to satisfy some of those claims. State officials worked out a deal with the private-sector partners in the project to resolve the outstanding claims and reset the construction schedule for completion in mid 2020. Like many P3 projects, the contracts would include incentives for ahead of schedule  completion.

The transaction needs legislative approval for funding and a vehicle, Senate Bill 223, which would have given the network authority the ability to borrow another $110 million for the project.  $88 million of that funding would deal with claims and create funding contingencies. The total project cost would come in at $342 million. Now the bill is running into opposition in the Legislature and the Governor has warned that not making good on the contract to build the broadband network would hurt the state, leaving taxpayers potentially facing hundreds of millions in costs, but with no network to show for it and no revenue from it to pay those costs.

Some legislators object to the state providing infrastructure to support a profit making service. The dispute however, is calling into question the State’s willingness to meet obligations which rely on state appropriations. This is crucial as Kentucky is one of the states which relies on appropriation backed debt to finance the vast majority of its capital needs. The legislature did not set aside money in the General Fund to make payments the state owes Macquarie for operating the network and repaying the bonds, called availability payments. However, legislators designated money in the state’s budget reserve fund, the rainy day fund, to make the payments to Macquarie.

Fitch Ratings said in a report this week that the failure of the legislature to authorize funding for the settlement through SB 223 or another mechanism “threatens the viability of the settlement agreement and the project itself.” A failure to complete the deal could raise issues about the relative creditworthiness of appropriation backed deals which could hurt the Commonwealth’s ratings.

BLUEGRASS EDUCATION FUNDING

Kentucky was another state facing protests by teachers over the level of state aid to education. Unlike other states where protests focused on teacher wages, this time the issue was overall education funding. The protests had forced some 30 districts to close as teachers converged on the state capitol. This time the effort succeeded.

The two-year state operating budget includes record new spending for public education, fueled by a 50-cent increase in the cigarette tax and a 6 percent sales tax on some services, including home and auto repairs. Kentucky lawmakers voted to override the Republican governor’s veto of a two-year state budget that increases public education spending with the help of a more than $480 million tax increase.

The teachers protest followed the enactment of a pension reform bill which will no longer guarantee defined retirement benefits to new teachers. Instead, they will be placed into a “hybrid” retirement plan that includes features of both a traditional pension — like teachers in Kentucky have now — and a 401(k)-style savings plan. In this hybrid plan, teachers would contribute 9.1 percent of their salary to the plan, while employers would contribute 8 percent. The plan is portable, meaning that if future teachers decide to leave Kentucky public schools, they can take their plan and benefits with them. The bill does not include any reduction in annual cost-of-living increases for retired teachers, leaving them at 1.5 percent. Earlier versions of the pension bill had proposed not only reducing the adjustment, but also freezing it for five years.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

 

Joseph Krist

Publisher

We hope that you all enjoyed the holidays. Now that you’re back from various Spring breaks, so are we.

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ISSUE OF THE WEEK

$647,955,000

Clark County, Nevada

General Obligation (Limited Tax), Series 2018A

Moody’s: Aa1

This general obligation bond is secured under the typical full faith and credit pledge, subject to Nevada’s constitutional and statutory limitations on overlapping levy rates for ad valorem taxes. The bonds are additionally secured by incremental room taxes legally dedicated by statute under Senate Bill 1 to fund the public portion of constructing a new stadium to host a National Football League (NFL) team. The pledged room tax rates are 0.88% within the Stadium District’s Primary Gaming Corridor and 0.5% elsewhere within the district.

This reflects the use of the proceeds to finance costs associated with full faith and credit pledge, subject to Nevada’s constitutional and statutory limitations on overlapping levy rates for ad valorem taxes. The bonds are additionally secured by incremental room taxes legally dedicated by statute under Senate Bill 1 to fund the public portion of constructing a new stadium to host a National Football League (NFL) team. The pledged room tax rates are 0.88% within the Stadium District’s Primary Gaming Corridor and 0.5% elsewhere within the district.

The proceeds will finance a substantial share of the public portion of the costs to construct the stadium project for the Oakland raiders NFL franchise as well as fund a deposit to the bonds’ debt service reserve account. The stadium project is being overseen and managed by The Clark County Stadium Authority, a discreet component unit of the county which will also own the facility.

The County economy shows steady improvement on a statistical basis over each of the last four years. Employment, personal income, and home prices are all showing strong growth. Clearly there remains a concentration in and dependence on the hospitality industry which leaves the economy vulnerable to a national economic downturn.

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WHEN IS INSURANCE NOT INSURANCE?

Iowa Gov. Kim Reynolds signed a controversial bill allowing sales of health coverage exempt from state and federal regulations, including the Affordable Care Act. The bill, Senate File 2349, will allow Wellmark Blue Cross & Blue Shield to partner with the Iowa Farm Bureau Federation to sell a new type of health policy. The bill defines the new coverage as not technically being health insurance. It won’t be regulated by the Iowa Insurance Division and it won’t have to comply with rules under the Affordable Care Act.

Wellmark and the Farm Bureau could resume denying coverage to applicants if they have pre-existing health problems, such as diabetes, high blood pressure or a history of cancer. Such denials have generally been banned since 2014 by the ACA. The bill also would let Wellmark and the Farm Bureau delete some types of coverage, such as for maternity or mental health care, from the new coverage.

Medica is a Minnesota-based insurer that is the sole carrier selling individual policies in Iowa this year. Medica leaders say it would be unfair to exempt the Farm Bureau and Wellmark from government regulations but require all other carriers to follow them. The bill is alleged to have been written specifically to allow Wellmark Blue Cross & Blue Shield to underwrite the policies.

It will be determined by the Farm Bureau as to what benefits will be offered in the new plans and how they will deal with applicants with pre-existing health conditions. The bill also allows small businesses to band together to buy “association health plans,” which could provide lower premiums for employees than the businesses now are offered on their own. Both of these ideas were floated in the Congressional debate last summer over healthcare “reform”. If the plans are allowed to stand, it would likely create higher costs for the seriously ill in Iowa by allowing them to insure only healthy customers.

The plan anticipates that the Trump administration will not challenge the changes. The precedent for this hope is a program run through the Tennessee Farm Bureau, which began decades ago and has continued under the ACA without ever being challenged by the federal government. No one noticed until the individual mandate was repealed. Now that it has been, it is thought that more consumers may be attracted to similar plans.

Overall, these are not helpful developments for providers in Iowa. They would drive more patients requiring higher levels of care into a system without the requisite resources to pay for them. This would occur at the same time that state resources will likely be strained as Iowa is one of the states that would see their economy seriously impacted by the effects of limits on trade. So the likelihood is that overall, the health system in the state will see fewer resources available to treat its most acutely ill and economically less well off patients than was the case before. Should trade barriers such as tariffs be implemented, the resulting economic damage anticipated to occur in Iowa would only increase the impact.

COMPREHENSIVE INFRASTRUCTURE PLAN FADING – A CREDIT NEGATIVE

A variety of signs point to the likelihood that the federal approach to infrastructure will be piecemeal at best and likely tailored to a particular set of interests. They include indications that federal legislation will consist of several distinct pieces, rather than one fully committed and funded approach. There are also clues that the shift towards privatization as a centerpiece of any plan will continue if not increase.

This week, Speaker Ryan commented support for public-private partnerships and other ways of getting non-governmental sources to help pay for infrastructure needs. “All these infrastructure problems we have in America, there’s no way we can tax you to pay for all of it,” he said. “It’s not possible.” He added: “We’re going to have to think of more creative ways to get the private sector dollars involved in infrastructure, and whether it’s asset recycling or other kinds of creative ideas like that, with the right rules in place for the public good, I think it’s all good.”

We highlight his specific reference to asset recycling and this week’s announcement that DJ Gribbin, President Trump‘s infrastructure policy adviser, is departing the White House. Gribbin will be better positioned to advance the “recycling’ concept in the private sector. He previously worked for asset recycling’s leading champion – the Australian bank Macquarie Capital. Macquarie has been looking for more receptive audiences for the concept after a mixed record and dwindling support for the concept Down Under. The move out of the White House is a sign that Congress is not as receptive to an overall infrastructure plan as once may have been the case.

We think that there is a substantial role for the private sector in any infrastructure plan especially in the design, building, and management of many infrastructure projects. We do understand the reluctance to convert fully paid for public assets into privately owned and operated assets the operation of which is designed to generate a profit. We hold the view that the contribution of the private sector is best directed at efficiency and economics. The achievement of reasonable rates of return for the private sector is not inconsistent with retention of ownership by the public sector. We would cite airports as a good example of a sector which lends itself to private participation.

What would be credit positive for municipalities and authorities is an infusion of funding. Too much of the debate has been about financing. Our view is that financing is not the problem – there is no shortage of ideas. It is funding to help the entities already under pressure to fund existing and steadily increasing expenditures away from capital needs which would be the most helpful answer.

SUTTER HEALTH FACES STATE LAWSUIT OVER COMPETITIVE PRACTICES

WHY IT SHOULD MATTER TO ALL INVESTORS

In our most recent issue of the MuniCreditNews (3/26/18), we discussed the credit of Sutter Health in our issue of the week section, highlighting the system’s plans to use taxable debt to economically refund outstanding tax exempt debt. In the interim the System has found itself named as defendant in litigation brought by the state of California citing illegally anticompetitive practices by Sutter. The suit comes in the midst of Sutter’s efforts to market the aforementioned debt.

California Attorney General Xavier Becerra announced the filing of a lawsuit against Sutter Health, the largest hospital system in Northern California, for anticompetitive practices that result in higher healthcare costs for Northern Californians. The action aims to stop Sutter Health from unlawful conduct under state antitrust laws.

The complaint alleges that Sutter Health engaged in anticompetitive behavior. These illegal practices resulted in higher prices for health care in Northern California by: establishing, increasing and maintaining Sutter Health’s power to control prices and exclude competition; foreclosing price competition by Sutter Health’s competitors; and enabling Sutter Health to impose prices for hospital healthcare services and ancillary products that far exceed the prices it would have been able to charge in an unconstrained, competitive market.

The University of California Berkeley’s Petris Center on Health Care Markets and Consumer Welfare has issued a report which it says documents how the rapid consolidation of healthcare markets in California has led to rising healthcare costs for consumers throughout the state. Market consolidation in Northern California was especially glaring. The cost of the average inpatient hospital procedure in Northern California ($223,278) exceeded that in Southern California ($131,586) by more than $90,000.

The AG complaint cites a variety of studies conducted over several years to support his determination of anti competitive practices. A 2008 U.S. Federal Trade Commission retrospective study of the merger of Alta Bates, owned by Sutter, and Summit Medical Center found that the contracted price increases for Summit following the merger ranged from approximately 29% to 72% depending on the insurer, compared to approximately 10% to 21% at Alta Bates, and that the Summit post-merger price increases were among the highest in California.

The AG asserts that since at least 2002, Sutter has compelled all, or nearly all, of the Network Vendors operating in Northern California to enter into unduly restrictive and anticompetitive written Healthcare Provider agreements that have: established, increased and maintained Sutter’s power to control prices and exclude competition; foreclosed price competition by Sutter’s competitors; and enabled Sutter to impose prices for hospital and healthcare services and ancillary services that far exceed the prices it would have been able to charge in an unconstrained, competitive market.

The complaint further asserts that Sutter’s agreements with insurance vendors force Health Plans to include all Sutter hospitals and Healthcare Providers in their Healthcare Provider Networks—even those Sutter hospitals and providers that are located in areas where it would be far less costly to assemble a Provider Network using Sutter’s lower-priced and/or higher quality competitors instead of Sutter. That the agreements require that Sutter’s inflated prices for its general acute care hospital services (including inpatient and outpatient services) and ancillary and other provider services may not be disclosed to anyone before the service is utilized and billed.

Collectively, Sutter’s anticompetitive contract terms unreasonably restrain price competition among general acute care hospitals, between hospitals and ambulatory surgery centers for outpatient surgery services, and between hospital and non-hospital ancillary service providers, in Northern California and enable Sutter to price its general acute care services (including inpatient and outpatient services), and ancillary and other provider services at artificially inflated levels, according to the complaint.

Sutter is the largest provider of general acute care hospital services and ancillary services in Northern California. In 2016, Sutter had 193,161 hospital discharges, 873,992 emergency room visits, and 8,763,470 outpatient visits. 54. Sutter provides healthcare services to individuals in more than 100 Northern California cities within the following counties: Yolo, Sutter, Yuba, Nevada, Placer, El Dorado, Amador, Sacramento, Solano, San Joaquin, Stanislaus, Merced, Contra Costa, Alameda, Santa Clara, Santa Cruz, San Francisco, San Mateo, Lake, Napa, Sonoma, Del Norte, and Marin.

So what is the contractual structure at the heart of the AG’s assertions? There are at least two contractual arrangements that must be in place before any prospective patient is able to use a particular hospital or other Healthcare Provider as an in network, healthcare employment benefit: a Network Vendor must agree to include the hospital or other Healthcare Provider in its Health Plan Provider Network at pricing levels established through contract negotiations between the hospital or other Healthcare Provider and the Network Vendor. The patient’s Employer or Healthcare Benefits Trust must contract for access by its Health Plan Enrollees to the Network Vendor’s previously assembled Provider Network.

A hospital can be a “must have” hospital. A “must have” hospital is a hospital that Network Vendors have to include in their provider network for that network to be commercially viable. A hospital can be a “must have” because of physician referrals, reputation, or the lack of alternatives in a geographic location. Likewise, other healthcare providers such as an ambulatory surgery center or physicians’ group could be a “must have” provider because of physician referrals, reputation, or the lack of alternatives in a geographical location. Ownership of a “must have” hospital or other healthcare provider can give a Healthcare Provider market power.

By requiring Network Vendors to sign contracts that are designed to interfere with the formation of competitive Provider Networks and restrict the incentives that Health Plans can offer their enrollees and restrain price competition, a hospital system like Sutter can improperly limit the ability of rival hospitals, rival Healthcare Providers, as well as rival Hospital Systems as a whole to compete effectively. In this way, Sutter can exert control over the prices for general acute care (including inpatient and outpatient services), ancillary, and other provider services paid by Employers and Healthcare Benefits Trusts.

At the core of the complaint is what is cited as Sutter’s All-or-Nothing Terms and practices and the other agreement provisions described below, Sutter illegally ties or bundles the price-inflated services and products available at Sutter hospitals located in potentially more price competitive markets to its entire network of other hospitals and providers (including Sutter “must have” hospitals and providers) forcing Self-Funded Payors and Commercial Insurance Companies to pay for services and products they do not want to offer their Health Plan Enrollees at prices that dramatically exceed the prices Sutter could charge absent the illegal tie or bundle.

Sutter ensures that its de facto All-or-Nothing Terms are effectuated by specific Excessive Out-of-Network Pricing Provisions in their contracts with Network Vendors (“Excessive Out-of-Network Pricing Provisions”). If an enrollee requires services at a Healthcare Provider that is not in his or her Health Plan (e.g., he or she gets into an accident and is taken to the emergency room of a hospital outside of his or her plan), the contracts between Network Vendors and the Healthcare Provider or Hospital System fix the rate at which that non-participating provider shall be paid.

In the absence of a specific contract rate, services at a non-participating provider are to be charged at a “reasonable and customary” rate, where under state law as well as federal law that rate is to be determined with reference to such criteria as in-network rates of rivals or Medicare rates. The preference for alternatives close to where patients live or work becomes even more acute as the need and urgency increase, e.g., a patient has a heart attack or a stroke. However, the out-of-network rates set by Sutter are excessive and render uneconomical any narrow networks that exclude that Hospital System or any of its members from a Network Vendor’s provider networks because of this need for emergency services.

So what does it all mean? The issue of consolidation and efficiency will be a keystone supporting the evolution of the healthcare delivery model in the US in the 21st century. How these issues are viewed, valued, and judged whether or not to be effective will be some of the primary determining variables in the assessment of creditworthiness. To the extent consolidation results in efficiencies and cost reductions to individuals and the system as a whole, the creditworthiness of hospitals and hospital systems is likely to be sustained and even improved. Should consolidation result in price gouging and inefficient markets and competition, many hospitals could find themselves in a weakened position which will benefit neither consumers not investors.

 

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.