Joseph Krist

Publisher

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HEALTHCARE

The healthcare sector remains one of the municipal industry’s most interesting. As it evolves, it presents a variety of models and approaches which provide a variety of investment opportunities. Large systems versus stand alone facilities; urban versus rural; public versus private. They all reflect different approaches and funding models as they cope with the lack of consensus; the ability of patients to pay, and the particular characteristics and demands of individual local markets. It places some systems squarely in the middle of the conflict between the various market forces currently challenging hospital managements.

The latest example is New York’s Montefiore Medical Center, long considered the leading hospital in the Bronx. Montefiore Health System (MHS) is the parent of Montefiore Medical Center (MMC), which is comprised of three inpatient campuses with 1,558 licensed beds located in the Bronx, NY, as well as several other affiliated “member” organizations in Westchester, Rockland and Orange Counties. Member hospitals include 292 bed White Plains Hospital, 121 bed Montefiore Mount Vernon Hospital, 223 bed Montefiore New Rochelle Hospital, 375 bed Nyack Hospital, 242 bed St. Luke’s Cornwall Hospital, and 150 bed Burke Rehabilitation Hospital. MMC’s medical staff (2,800 physicians), is comprised of employed providers including faculty practice physicians as well as non-employed independent physicians. Montefiore Medicine Academic Health System (MMAH) is the parent above MHS that also controls Albert Einstein College of Medicine (AECOM).

Historically, Montefiore has primarily concentrated on its local market but that market has declining demographics in terms of the financial wherewithal of its primary service area. Nonetheless, it has maintained its quality standards and its role as a significant academic medical center. This however, has not been enough to maintain the system’s finances leading to changes  in its approach to the evolving healthcare marketplace.

In recent years, Montefiore has tried to maintain its role in serving underserved populations but has also attempted to expand its presence as a regional health system. This reflects the declining demographics of the Bronx as well as the hospital’s unique role as a “safety net” hospital while maintaining its position as the primary teaching hospital for the Albert Einstein College of Medicine (AECOM). This places Montefiore in a very difficult position. It faces funding pressures to maintain the academic quality of AECOM while it is also exposed to potential revenue constraints as New York State considers changes to state funding for safety net hospitals driven by overall state budget concerns.

Montefiore finds itself in the eye of a political hurricane. It has a heavily unionized workforce and a larger than average Medicaid component to its patient base. In New York, the impacts of policy decisions like raising the minimum wage to $15 an hour produce a higher cost base at the same time funding is under consideration for cuts. These issues have led the system’s management to undertake an effort to reposition it as a regional provider. This may or may not serve to diversify the system’s revenue base but it will not improve the situation facing several of its individual hospital components.

Montefiore also has a highly leveraged balance sheet and the abovementioned factors have limited its profitability and ability to generate excess cash to address those leverage issues. All of these issues and a planned upcoming bond issue contributed to moody’s recent announcement that it was downgrading Montefiore’s rating from Baa2 to Baa3. “The downgrade to Baa3 from Baa2 reflects unanticipated and meaningful additional debt beyond what was already considered, that will further reduce Montefiore’s financial flexibility amid ongoing and increasing constraints to operating performance. Leverage, which is already high relative to operations and cash, will rise beyond levels consistent with the Baa2 rating. In addition, the potential for strategic shifts following a change in senior management, will provide uncertainty.”

STATE BUDGETS ALREADY GENERATING TRENDS

The states are only beginning to face their FY 2021 budget processes but certain trends are already emerging. Transportation , healthcare, and education are the emerging points of emphasis. Education is focusing on the university sector as states like Illinois and California contemplate tuition increases. Rising costs and increasing demands for insurance reform are driving efforts to deal with Medicaid from a variety of perspectives. New York is focusing on Medicaid costs as a source of budget pressures. Concurrently, Kansas is expected to expand access to Medicaid under the Affordable Care Act after a change in administrations.

Even just a cursory look at headlines yields a strong emphasis on transportation. We have made the case for a long time that states and municipalities would have to take the lead as waiting for an infrastructure plan from the White House has become akin to waiting for Godot. The poisonous political environment in Washington has made it clear that federal action on a comprehensive is unlikely. So now we see the infrastructure dependent transportation sector moving front and center in the state budget process.

Massachusetts will consider an $18 billion transportation infrastructure funding package. Connecticut will consider a financing and funding program including tolls. New York’s governor has proposed a long term approach to transportation envisioning some $275 billion of investment. Virginia’s Gov. Ralph Northam announced $3 billion in improvements for rail traffic along I-95 that is expected to provide new opportunities for Virginia Railway Express commuter trains. The state’s gas tax hasn’t gone up since 1986, and in fact was lowered in 2013 by a Republican governor who had proposed getting rid of it altogether. It’s currently one of the lowest in the country. The Governor is proposing a 4 cent a gallon increase.

Maryland is poised to move forward on a $9 billion plan to expand capacity on I-270 through a public private partnership. The Michigan Senate approved a bill that would require the Michigan Department of Transportation to hire an outside consultant to study the feasibility of putting toll booths on Michigan highways. The study would have a cost of up to $150,000, and a contract with a third party would be subject to a separate approval. The bill calls for the study to review the economic impact and feasibility of tolling particular interstate highways; the ability to provide discounts or credits to lessen the impact of tolling on local, commuter and in-state drivers; information related to the number and impact of out-of-state drivers who would be expected to use the toll roads.

DETROIT

The City of Detroit and the regional economy got real good news in terms of corporate manufacturing investment in infrastructure. This won’t be located downtown where much redevelopment has occurred but rather will revive investment at GM’s Detroit-Hamtramck assembly plant. The plant was scheduled for closure but a byproduct of the October UAW strike against the company was an agreement on electric car investment and employment. GM is investing $2.2 billion in the Detroit plant where it will produce all-electric trucks and sport utility vehicles.

The plant will employ more than 2,200 people, the company said. Production is scheduled to begin in late 2021 on an all-electric pickup truck, followed by the Cruise Origin, a six-passenger vehicle that is intended for use as a self-driving taxi. The plan addresses a variety of concerns regarding the City’s recovery, its relationship with the auto industry, and it’s place in the future of transportation technology.

Other former GM sites are being converted or revitalized to serve 21st century technology needs in transportation. G.M. and South Korea’s LG Chem will make the battery cells that will power the electric vehicles made at the Detroit-Hamtramck plant in a separate plant near Lordstown, Ohio. Groundbreaking expected later this year and employment is planned for 1,100. This follows the closure of the plant by GM. The production at the Detroit plant of electric vehicles will replace the Cadillac CT6 and the Chevrolet Impala models which are currently produced at the factory.

PRIVATE COLLEGE RATING PRESSURE

Yet another tuition dependant private college is facing rating pressure as enrollments fall. The latest is New York’s Marymount Manhattan College. Moody’s has placed the College’s Baa2 rating on negative outlook after it reported a substantial enrollment decline. FTE (full time equivalent) enrollment declined by 3% in fall 2018 and an unexpectedly large 10% in fall 2019. This places real pressures on the College’s finances as it relies on tuition for 93% of its operating funds. A one-time influx of substantial cash in fiscal 2020 (a sale of its air rights on one of its buildings, generated a one-time $9.6 million influx in cash, which will be booked as in revenue in fiscal 2020). It has bought the College some time but given its low liquidity and poor fundraising effort, the impact of lower enrollments is real and immediate.

One thing in investors favor is the fact that the college owns valuable real estate on Manhattan’s Upper East Side. So there is an exit strategy in the event the College does not turn things around in terms of enrollment. The College will have to balance the need to increase enrollments through increased financial aid with the requirement to meet financial ratio covenants in support of its outstanding debt. It is required to maintain a debt service coverage ratio equal to or greater than 1.25x and an Available Assets to Debt Ratio greater than 25%. It is expected to be in compliance for fiscal 2020.

In the Midwest, Moody’s has downgraded Augsburg University’s (MN) rating to Ba1 from Baa3 with a negative outlook. Weaker financial performance combined with declining liquidity constraining its flexibility to respond to future challenges in a highly competitive environment were cited. It was noted that in fiscal 2019, pressures on operations, in part due to the opening of new facilities and rising debt service, absent offsetting stronger revenue growth resulted in a 6% operating deficit and a narrow operating cash flow margin of 5%.

This drove debt service coverage to below 1x, and below the covenant required by privately held debt. While the covenant requirement was waived for fiscal 2019, coverage, the university will face narrow coverage in fiscal 2020. This means the University will have ongoing exposure to potential acceleration of debt repayment. Risk is further heightened by very low monthly liquidity, which declined to $13.6 million or 66 days in fiscal 2019 due to financing of capital projects, and is insufficient to cover demand debt should payments be accelerated.

At the core is its heavy dependence on student charges, at 83% of total revenue. This exposes  Augsburg’s financial performance to the revenue uncertainty related to potential volatility in enrollment. Net, net – the University’s rating will face continued pressure. It difficult mix of tuition dependence, demand volatility, and less than optimum mix and structure of debt are difficult to overcome. Private higher ed is quickly becoming a high yield staple.

INFRASTRUCTURE “PLAN” FROM DEMOCRATS

The history of the Trump Administration’s approach to infrastructure consists primarily of a lot of talk supported by absolutely no policy follow through. It has resulted in one of the great missed opportunities to take advantage of historically low borrowing costs and a favorable political environment. Rightfully, Democrats in Congress have criticized the lack of serious proposals. So there has been hope that with at least one house under their control, so serious proposals might be offered.

That makes the release of a House infrastructure plan this week so disappointing. The Democrats’ framework (just some ideas without any proposed implementing and funding legislation) proposes $329 billion for roads and bridges, $55 billion for passenger rail, $30 billion for airport investments, $50.5 billion for wastewater infrastructure, $86 billion for expanding broadband access for rural areas, and $12 billion for a “next generation” 911 system for emergency calls.

The release does not deal with how to pay for it. Once again, states are taking the lead on issues of funding. On January 13, 2020, the Washington State Transportation Commission (WSTC) submitted their final report on a possible transition to a road usage charge (RUC) to the Governor, State Legislature and the Federal Highway Administration. The WSTC recommended that the Legislature should begin a gradual transition to road usage charging in Washington State. The Legislature should begin a gradual transition to road usage charging in Washington. From fiscal year 2018 to 2019, gasoline consumption declined 2.1% despite an expected 1.5% increase in vehicle miles traveled, and representing 3.1% lower consumption than forecasted at the beginning of the year.

The report also deals with the issue of car owner acceptance which is seen by many as the major obstacle to adoption. The ranking member of the U.S. House transportation committee is a big proponent of vehicle mileage taxes. The research in Washington supports that view. After experiencing the WA RUC prototype system, pilot participants became more favorable towards a RUC throughout the year, with 68% of respondents preferring RUC over the gas tax or preferring it equally to the gas tax by the end of the pilot, an increase from 52% at the beginning of the pilot. Only 19% preferred the gas tax, up from 17% at the outset.

The report also highlighted some of the realities of the legal, regulatory, and political hurdles to be faced during any transition. After experiencing the WA RUC prototype system, pilot participants became more favorable towards a RUC throughout the year, with 68% of respondents preferring RUC over the gas tax or preferring it equally to the gas tax by the end of the pilot, an increase from 52% at the beginning of the pilot. Only 19% preferred the gas tax, up from 17% at the outset.

HOTEL TAXES

Hotel taxes are pledged in support of a variety of municipal bond funded projects. They support projects which may bring economic activity but are projects seen as having a primarily private benefit – sports facilities are a favorite example as well as convention centers. These taxes had shown consistent growth over the years so they are seen as a good way for an issuing jurisdiction to fund such facilities without creating a burden on the local taxpayer.

So we were interested to see that in at least one market – San Diego – this ever increasing revenue stream may be flagging. San Diego County’s hotel revenue growth fell by more than 2 percent last year, marking the first yearly decline since 2009.  This despite slightly positive hotel revenue growth nationally. The percentage of filled hotel rooms, while still relatively high for San Diego County, at nearly 77 percent, fell in 2019, as did revenue per available room, a standard metric used in the hospitality industry to measure hotel performance.

The firm STR, which tracks hotel industry performance, has generated data that shows that in San Diego County, where overall supply grew by 2.5 percent but demand for rooms was largely flat. Over the last two years, the county saw nearly 3,000 additional hotel rooms come online. Room rates declined in the six consecutive months starting in June, 2019.

For the nation as a whole, STR is projecting growth in revenue per available room to come in at well below 1 percent for 2020. So it would be a good time to review holdings secured by hotel and other tourism related taxes to see if you are still comfortable with debt service coverage for your convention center and stadium bond holdings.

DEMOGRAPHICS AND CREDIT

Next month, the Municipal Analyst Group of New York will devote their monthly meeting to a discussion of demographics, data, and how this all impacts on the analysis of state and local credits. It is a timely subject given the availability of data for 2019 which has caused concern about some credits. Much attention was paid to population data for Illinois and Chicago that showed Illinois suffering the largest rate of population decline of any state. Declines in population for Chicago have also been raised as an issue by the rating agencies as well as investors.

We have argued previously that focus on the headlines numbers documenting outmigration may lead to the wrong conclusion. Chicago may be the best example of this. Chicago Magazine recently looked at data from a comparison of 2010 Census data with the 2013–2017 American Community Survey. It found that Illinois saw a decline in households earning less than $100,000 a year, while those earning more than $200,000 increased by 50 %. The state’s real per capita income is also on an upward trend, from $43,208 in 2010 to $53,727 in 2019. 

In Chicago, not all of the outmigration is out of Illinois. As the cost of housing has steadily increased, lower income residents often move to suburbs to find lower cost housing while continuing to be employed in the city. It is a phenomenon being repeated around the country. In some metropolitan areas, the most vibrant housing markets are in the suburban markets where housing prices have lagged behind overall averages.

These sorts of phenomenon may generate “negative”  trends in per capita debt calculations but may also support improvement in terms of debt to personal income and debt as a percentage of estimated full value ratios.   

COAL TAKES ANOTHER HIT

On 23 January, Dairyland Power Cooperative in Wisconsin announced that its Sustainable Generation Plan includes the retirement of the 345-megawatt (MW) coal-fired Genoa Station #3 (G3) in 2021. Dairyland is an electric generation and transmission cooperative that supplies wholesale electricity to its members (24 distribution cooperatives and 17 municipal utilities) in Wisconsin, Minnesota, Iowa and Illinois. Dairyland and its cooperative members serve 274,000 connected consumers. It is the process of obtaining permits for the construction, along with Minnesota Power, a new natural-gas fired plant, the 625 MW Nemadji Trail Energy Center, in Wisconsin.

That proposed plant has reached several hurdles. A December decision by the Minnesota Supreme Court overruled the Minnesota Public Utility Commission and required an Environmental Assessment Worksheet, even though the plant is based in Wisconsin. In January, the plant received a key approval from the Wisconsin Public Service Commission. Right now the project is caught between forces opposing any new fossil-fueled capacity and those looking to transition from to goal to gas to renewables. Neither of those views have any room for coal in their discussion and after all, that is the point.

Elsewhere in the coal dependent Midwestern power grid, the announcement came that  Hoosier Energy Rural Electric Cooperative Inc. in Indiana will also retire a coal plant. Hoosier is a Bloomington, Indiana-based generation and transmission cooperative providing wholesale electric power and transmission services under long-term, full requirements contracts with its 18 electric distribution cooperative members. The members, in turn, serve about 650,000 consumers through their distribution infrastructure, which spans southern Indiana and southeastern Illinois. The retirement of the 1,070-megawatt (MW) coal-fired Merom Generating Station in 2023 will mean that the cooperative will have successfully retired all of its owned coal-fired generation after first retiring its Frank E. Ratts coal plant in 2015.

ROCHESTER, NY SCHOOL DISTRICT

The SEC launched an investigation late in 2019 into Rochester City School District finances, and potentially false statements RCSD officials made when seeking short-term financing earlier in the year. It is reported that when obtaining a rating for a short-term borrowing, RCSD officials claimed that finances were trending positively, and they would rely less on reserves than anticipated. In reality, the district was running a current deficit, and would finish the year over budget by $30 million. 

The opening of that investigation was soon followed by Moody’s revisiting its rating on the City of Rochester which issues debt on behalf of the school district. In December, Moody’s downgraded to A2 from Aa3 the City of Rochester, NY’s issuer and General Obligation Limited Tax (GOLT) debt ratings and revised its outlook on the city to negative. The city had approximately $290 million in GOLT debt outstanding as of 2019. Moody’s was clear that ” the downgrade to A2 reflects the significant decline in reserves and liquidity at the City School District, which is a component unit of the City. The decline in reserves, which is well in excess of what management projected during our discussion in July of this year, is the result of poor budgeting of teacher salaries, benefits, transportation costs and costs associated with charter schools.

This has all culminated in the Governor’s budget proposal for legislation to create a state monitor to oversee the School District’s finances. The district has already laid off more than 100 teachers trying to close its budget gap. Local public officials are supportive. The District is hoping for an extraordinary infusion of some $25 million as a part of the state budget and it is likely that the money would be tied to the appointment of a monitor.

Bottom line for bondholders is that this is another example of New York’s historically positive hands on approach to local financial mismanagement.

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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PUBLIC HIGHER ED GETTING MORE EXPENSIVE

Two headlines last week caught our eye. higher education and its cost have been in the spotlight during the campaign for the democratic presidential nomination. Promises to forgive student loans and plans for free tuition to public universities have  are among the most prominent. In addition, proposals to emphasize technical and vocational training have been offered. The headlines I refer to help to make the case for some of these proposals.

For the first time in six years, tuition will be going up for in-state students attending University of Illinois schools. Trustees unanimously approved a proposal that will raise base tuition for Illinoisans by 1.8% at the campuses at Urbana-Champaign and Chicago, and by 1% in Springfield. That means tuition for Illinois freshmen in fall 2020 will be $12,254 at Urbana-Champaign, $10,776 at Chicago and $9,502.50 at Springfield.

At the same time, the University of California Board of Regents is considering a tuition increase for in-state students. Ironically, it uses the University of Illinois as a basis for comparison in terms of the rate of tuition increases over the years since 2011.  One of the justification for the tuition increases is the need to maintain the University’s ability to offer financial aid. 

Both of these proposals highlight the fact that state schools are no longer the bargain they once were on an absolute basis. Yes, UC is still a bargain compared to somewhere like Stanford but is that the measuring stick for assessing public policy?

PUBLIC POWER COTINUES TO LEAD ON COAL

Tri-State Generation and Transmission is the power generator to 43 energy co-ops which distribute power across the Mountain West. It has announced that the cooperative will also pursue a 90% reduction in carbon dioxide emissions from Colorado-based generation by 2030, based on 2005 emission levels. As a part of that program, closing the Escalante and Craig coal power plants in New Mexico and Colorado and the Colowyo mine in Colorado ahead of schedule and canceling the proposed Holcomb Station coal plant project in Kansas.

It is another example of public power taking a leadership role in the move towards clean energy. To replace that power, Tri State will add over 1 GW of solar and wind generation by 2024 — raising its overall renewable energy mix to over 50% of generation. Tri-State already achieves roughly 30% renewable generation from solar, wind and hydroelectric, with hydro representing the majority of that mix. The updated plan calls for six projects set to go on line by 2023 to combine for 715 MW capacity, nearly 10 times more solar than has been put on-line by the cooperative so far (85 MW).

It reflects what its customers want. Two of its retail distribution co-ops asked Colorado regulators to establish a fair fee for them to exit from their wholesale power contracts with Tri-State. Both co-ops expressed an interest in increasing renewable generation while keeping customer costs down as reasons to exit. asked Colorado regulators to establish a fair fee for them to exit from their wholesale power contracts with Tri-State. Both co-ops expressed an interest in increasing renewable generation while keeping customer costs down as reasons to exit.

Proponents of the move to renewables are bolstered by a Rocky Mountain Institute study which found that retiring 1.8 GW of coal and replacing it with 2.5 GW of solar and wind power would save the association and its members $600 million through 2030. This move shows that locally driven demand for clean power can be effective. One former co-op customer will derive nearly 1/3 of the co-op’s annual electricity demand from renewables, while saving its members from $50 million to $70 million.

Tri State is rated A- by S&P.

 NEW YORK STATE SCHOOL DISTRICTS

Each year, the New York state comptroller announces the rate of growth for the cap on tax increases under which New York school districts operate for the next fiscal year. The rate of growth is limited to the lesser of 2% or the rate of inflation. This year the rate of growth for fiscal 2021will be 1.8%. That will pressure the districts in their effort to raise revenues. Property taxes are usually the largest source of locally generated revenues. To override the cap, districts must receive a 60% voter supermajority, which is rare. So, districts will have to rely on a combination of cost restrictions and drawing down of reserves to manage their finances.

As a result, Moody’s has announced that in its view, the lower cap is credit negative for New York school districts because it limits their revenue-raising ability – property taxes are their largest revenue source – and reduces financial flexibility. That does not necessarily act as a predictor of rating downgrades. Moody’s notes that New York school districts maintained similar levels of financial reserves to what exist now on an overall basis from fiscal 2013, when the tax levy cap took effect, through fiscal 2019, even as the cap fluctuated and dipped as low as 0.12% in fiscal 2017.

Moody’s notes that New York school districts generally choose not to pursue the 60% supermajority voter approval required to pierce the tax levy growth cap and opt to submit budgets with increases permissible under the cap. The experience of FY 2020 is telling. 18 of the state’s approximately 730 school districts sought a cap override, and 10 of those received voter permission (1.4% of all districts). In no year since the imposition of the cap, has the number of districts obtaining supermajority override approval exceed 2%. Without approval, districts choose between a new budget, which is usually within the cap, or otherwise risk the automatic adoption of the previous year’s budget and no tax levy increase.

We do not expect wholesale changes in ratings as result of the lower rate but it does put the districts in a difficult position. Many of the cost savings (like changes in employee benefits like healthcare) have already be implemented. The next logical step has always been to turn to Albany for increased state aid. This year the state is facing its own budget problems. A $6 billion budget gap for FY 2021has made the prospect of increased state aid somewhat problematic. So it will remain a significant credit concern.

ARIZONA TAX INCREASE FOR TRANSIT UPHELD IN COURT

In 2015 the Regional Transportation Authority was established by the Pinal County Board of Supervisors to be a public improvement and taxing subdivision of the state of Arizona to coordinate multi-jurisdictional transportation planning, improvements and funding. The RTA adopted the Regional Transportation Plan in June 2017 (Proposition 416), which identified key roadway and transportation projects to be developed over the next 20 years.

In November 2017, Pinal County, AZ voters approved Proposition 416 to adopt a regional transportation plan and Proposition 417 to enact an excise tax to fund the plan. Shortly afterwards, legal action was brought by the Goldwater Institute and a court ruling froze all monies related to the excise tax. Now, the AZ Supreme Court has ruled that “We find the Prop 417 tax to be valid. The RTA’s authorizing resolution does not change the substance of the question posed to and approved by the voters; the tax, by its terms, applies across all transaction privilege tax classifications; and the tax includes a valid, constitutional modified rate as applied to the retail sales classification. Accordingly, we reverse the order invalidating the tax.”

Pinal County has already levied a half-cent excise tax for road and street improvements(the Road Tax). The tax was passed by the electorate in 1986 and renewed in 2005. Revenues from the Pinal County Road Tax are generated from a number of different tax categories. Retail sales approach nearly one-half of the total Road Tax receipts while utilities, contracting and restaurants/bars comprise 41% of total revenue. Tax revenue is primarily driven by the resident population of the County; tourism currently contributes little revenue in the way of hotel/motel sales. When the tax plan was submitted to the voters, the RTA estimated that in FY 2020 the proposed sales tax would generate $19.6 million in the current fiscal year.

We think that the ability of voters (and potentially also the folks paying the taxes) to express their will and see it implemented is important. These sort of legal challenges are not particularly useful. In the long run, they usually fail and extend the time of implementation and/or raise the cost of individual projects.

PUERTO RICO

The incredible string of bad luck which has befallen Puerto Rico has obvious negative credit effects. No matter what one thinks about the honesty or competence of the political establishment, few places have been asked to cope with this level of natural disaster over such a compressed time period. It would be difficult for any entity with the level of fiscal distress which faces Puerto Rico to successfully recover. The earthquakes have revictimized some survivors of Hurricane Maria, damaged recently repaired infrastructure, and increased the long term financial burdens facing the Commonwealth.

So it was especially unhelpful to see the news that the Secretary of the Department of Housing, the secretary of the Department of the Family, and the commissioner of the Bureau of Emergency Management and Disaster Management (NMEAD) were fired after the existence of several warehouses with provisions stored since Hurricane Maria was revealed. It gave support to the views of those who feel the Commonwealth is not trustworthy to receive and manage aid funds while at the same time feeding the fears of residents that corruption rules the day.

As for the earthquakes, the impact is obvious. Greater aid needs, slower and less successful economic recovery, and a greater impetus to leave the island all result. Unfortunately, the earthquakes accompanied some economic and demographic good news. Population was up slightly in 2019 and real economic output grew for the second straight year. Total non-farm employment also grew in 2019, along with manufacturing employment. 

Now the exposure to earthquake risk has become a reality. There are concerns that corporations would be deterred from investing in the island due to the natural disaster risk at the same time the US Treasury Department announced its intention to phase out a favorable business tax credit for American corporations based in Puerto Rico. Given the Trump Administration’s efforts to withhold or hinder the distribution of recovery funds, this continues a policy bias against the Commonwealth which has hindered recovery. The federal government has declared an emergency. It is then enabled to  cover 75% of equipment and resources necessary for emergency recovery costs. Given the track record after Hurricane Maria – Congress approved $20 billion in Community Development Block Grant Disaster Recovery assistance in 2018 to help rebuild after the 2017 hurricanes. Only $1.5 billion has been released by the US Department of Housing and Urban Development (HUD) – we make no predictions about timing and use of any federal funds.

As for PREPA, the road to recovery and restructuring of its debt took a significant hit from the earthquakes. One of its largest power plants, Costa Sur, which is nearly 50 years old and located in the Southwest corner of the island, suffered material damage and it will take time to bring it back online. Fortunately, a 454-megawatt coal fired cogeneration facility owned by AES Corporation, did not suffer damage during the earthquake and its aftershocks, but did go temporarily offline. In other forums, we have advocated for using the hurricanes and earthquakes to rethink the island’s power system. The island benefits from abundant sun and wind resources on a year round basis. The potential for more localized generation and distribution is even clearer in the face of recent events.

As the island attempts to recover from its later natural disaster setback, the U.S. Supreme Court declined to review lower court rulings dismissing lawsuits by bond insurance companies Assured Guaranty Corporation and Ambac Assurance Corporation that sued the federally created financial oversight board that is trying to restructure about $120 billion of Puerto Rico’s debt. 

MARYLAND P3 MOVES FORWARD

A controversial plan to expand capacity on Interstate 270 in Maryland has been approved by the Maryland Public Works Board after changes were made to reflect opposition to tolls and perceived underfunding of mass transit. the Maryland Department of Transportation agreed to limit the first phase of construction to the Beltway between the Virginia side of the American Legion Bridge and the Interstate 270 spur, and to the lower part of I-270 between the Beltway and Interstate 370.

The future of the Beltway section  between I-270 and Interstate 95, where widening could destroy homes and public parkland  will be decided at a later, unspecified date.  The  changes also delays toll lanes for the northern part of I-270 between I-370 and Frederick because the environmental study for that portion is further behind.

The project’s contracts are estimated to be worth more than $9 billion creating one of the largest public-private partnerships in the country. Participating contractors will be expected to build up to four lanes on each highway and finance their construction in exchange for keeping most of the toll revenue long-term. The existing lanes would be rebuilt and remain free. The toll lanes would incorporate demand based rates designed to maintain certain average speeds.

To address the concerns of mass transit advocates, the state had agreed to allot 10% of its share of net toll revenue to transit.

NEW YORK STATE BUDGET

Gov. Andrew Cuomo proposed a $178 billion budget Tuesday that closes a $6 billion deficit through reducing the growth in Medicaid, limiting aid to local programs and expecting tax revenue to grow by $2 billion. The budget would increase school aid, legalize recreational marijuana, expand a new child tax credit, reduce business taxes and continue an already planned tax cut for the middle class. The proposal comes as the state faces an estimated $6 billion gap for fiscal 2021.

The Governor proposed several steps to address the gap. They include $2.5 billion through Medicaid restructuring based on recommendations from a Medicaid Redesign Team, $2 billion in expected additional tax receipts, and $1.8 billion in reduced spending to local assistance programs from “targeted actions and the continuation of prior-year cost containment.” Planned tax cuts will continue. Under the new rates, tax rate will drop to 6.09% in the $43,000-$161,550 income bracket, and 6.41% in the $161,550-$323,200 income bracket. Businesses will also get a tax break. The income tax rate would drop from 6.5% to 4% for businesses with 100 or fewer employees and with net income below $390,000.

Opposition is expected from the state’s powerful and politically and financially active hospital industry to the proposed Medicaid cuts. Legalized marijuana will face the demands of “social equity” proponents. Other issues will get support such as expansion of the state’s child care tax credit. New York is one of only six states providing a state-specific credit, and it has been equal to 33% of the pre-2018 Federal Child Tax Credit, or $100 per qualifying child aged 4 to 16, whichever is greater. The budget would expand the credit to include children under age 4. It would aid nearly 400,000 families whose income is $50,000 or less.

Education will remain as it always does front and center in any budget negotiations. Overall, school aid would grow to $28.5 billion — by far the most per capita in the nation. The Governor wants 80% of the money to go to poorer districts. He proposed to overhaul the school-aid formula so less goes to wealthy school districts that rely mainly on property taxes to fund their schools.

If all of this sounds familiar, it is. We expect that absent some farfetched proposals that the budget will be credit neutral.

WHO OWNS THE STREETS?

A recent story caught our eye as the fraught relationship between cities and the rideshare industry continues to play out. The Baltimore Finance Department reports that revenues in the last two years from the city’s parking tax, meters and city-owned garages, meanwhile, have declined a collective $4.1 million, or about 6%. The city attributes the decline to the growth of the rideshare industry in the city. The city also admits that Baltimore has collected no taxes on an estimated 9 million Uber and Lyft rides per year despite a 2015 state law enabling it to do so.

It was clearly a policy choice but it reflects the need for governments to be flexible and nimble as they deal with developments in transportation. Uber, in fact charged Baltimore riders 25 cents extra for nearly a year in anticipation of having to pay a similar tax. When that did not occur, Uber began crediting impacted customers with Uber Cash in recent weeks for a “city-specific fee” that was “ultimately not collected by the city.”

There does not seem to be a legal impediment to the imposition or collection of such a tax by Maryland municipalities. In fact, Annapolis, Brunswick, Frederick, Montgomery County, Prince George’s County and Ocean City successfully collect a 25-cent tax on each ride originating in those jurisdictions. In the case of Baltimore, the disruption resulting from the resignation of the mayor about a year ago seems to have derailed efforts to impose such a tax in Baltimore.

A bill that would have allowed the city to begin taxing Uber and Lyft rides was not introduced until January 2019. It then languished without a hearing for the past year in the council’s Taxation, Finance and Economic Development committee.  Finally, the bill will be considered by the Baltimore City Council.

When Uber and Lyft established service in the city in 2013, officials passed a 25-cent “taxi tax,” the only one of its kind in the state at the time, for any trip originating or ending in the city, but the law initially did not include rideshare. The state passed a law enabling such taxes to include the rideshare companies beginning in January 2015. Baltimore was exempted from a 25-cent cap on the tax. Somehow, the City Council was unaware that it was not collecting such a tax until 2018.

There really has not been offered a good explanation for why the City could not get its act together on an issue which resulted in multi-million dollar revenue losses. This is exactly the kind of situation and response that tech companies count on and highlights the risk associated with governments unprepared to deal nimbly with the challenges of emerging technologies. It is not credit positive when a city effectively ignores an opportunity to tax an entity which is already collecting the revenue and is not objecting to a tax.

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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RURAL CREDIT AND BROADBAND

We have long been promoting the need for financing intervention to develop rural broadband. The problem of the lack of access to these services in rural areas has received increased attention. It has even received some funding from the federal government. That funding is scant compared to the need. As we ourselves are rural broadband consumers, we admit to an above average concern with the subject.

Recently we came across a story in the Fresno Bee that we think highlights the scope of the issue. The Federal Communications Commission, through its Connect America Fund Phase II auctions, is spending $13.5 million over the next 10 years to provide broadband service to about 5,600 rural homes and businesses in Fresno, Kings, Madera, Merced and Tulare counties. That sounds promising until you see the magnitude of the need. In Fresno County, the FCC’s investment of about $4.1 million will cover about 1,800 homes and businesses. That leaves some 71,800 households without access.

The five counties effectively are poster children for the rural broadband dilemma.  Rural and economically below average they include some of least cost effective areas to serve for a for profit provider.  The report estimates that nationwide, about 17 million households – or 14% of U.S. households – have no internet access. In Fresno County, it’s more than 73,600 households — roughly 25%.

We strongly believe that there is a significant role to be played by state and local government to bridge the internet access divide. The biggest obstacle to implementation currently the difficulty in deriving profits from the service. Municipal bond issuers could be created to finance and provide the sort of backbone infrastructure without the need to run it on other than a lowest cost of service basis. States need to enact authorizing legislation and allow municipalities to pool their resources and address the problem.

NYC BUDGET

Mayor Bill DeBlasio released his preliminary budget proposal for FY 2021. The Fiscal Year 2021 Preliminary Expense Budget is $95.3 billion.  After years of steady increases in spending and record high employee headcount, the mayor seems to have finally accepted the realities of the need to curb some of that growth. Unfortunately for investors, the budget as presented is much more of a political document than it is a plan for fiscal stewardship.

In presenting his budget, the Mayor focused on the state’s financial issues rather than those of the city. The basis for the plan is the expectation that the State’s efforts to balance its FY 2021 budget in the face of a projected $6 billion budget gap will disproportionately impact the city generally and the poor specifically. He is positioning himself as the savior of Medicaid in the city. At the same time, the Mayor complains about the need for additional funding for the MTA while continuing to fund the free fare program.

The commentary accompanying the numbers provides some context. “The New York City economy is still expanding but the pace is slowing. Payrolls continued to grow for a tenth year, but it appears that 2019 will mark the fourth consecutive year of softer job gains. Sectors that have been reporting decelerating job growth include finance, real estate, and leisure and hospitality. This latter sector may be partly reflecting slowing tourism activity. Professional and business services and healthcare have been advancing strongly, although healthcare gains appear to be caused by home-care aides funded by Medicaid.” That last comment reflects a belief on the part of many that one of the issues driving Medicaid costs is the $15 minimum wage. Cuts in those services would damage one of the interest groups the Mayor counts on.

Where is the money going to come from? The City of New York is expected to collect $64.4 billion in tax revenue in fiscal year 2020. This represents growth of 4.6 percent over the prior fiscal year. Property taxes are forecast to increase 7.1 percent, while non property taxes are forecast to increase 2.1 percent. Non-property Tax revenue growth is forecast to grow 2.1 percent in 2020 and remains fl at in 2021. Personal income tax revenue totals $13.7 billion in 2020, an increase of 2.9 percent. The increase reflects strong wage growth and slight bonus growth coupled with a decrease in non-wage income. Business income tax revenues (business corporation and unincorporated business taxes) are forecast at $6.3 billion. This represents an increase of 1.4 percent over the prior fiscal year.

Sales tax revenue is expected to experience a growth of 7.0 percent to $8.4 billion in 2020. This increase is spurred by consumer spending and tourism. Hotel tax revenue is forecast at $638.0 million in 2020, a 2.0 percent increase over the prior fiscal year. The numbers reflect the City’s ever increasing reliance on tourism and services.

So this budget seems to be designed to pick a fight with Albany as much as it seeks to achieve necessary policy goals. At least debt service remains below 10% of the budget. That’s important as the City faces staggering capital demands in the face of massive infrastructure needs.

HEALTHCARE

CMS generally has paid more for clinic visits conducted in off-campus hospital outpatient departments (HOPD) than those conducted in the physician-office setting. However, the agency in 2019 began to shift payments for services provided at HOPDs to match those for clinical visits that it pays under Medicare’s Physician Fee Schedule. Known as “site-neutral payment” policies, CMS had planned to implement the site-neutral payment policy over a two-year period by: reducing the payments for routine clinical visits to off-campus HOPDs by 30% in CY 2019 compared with CY 2018, bringing Medicare payments down to $81 for such visits and beneficiary copays down to $16. It would also reduce the payments by 60% in CY 2020 compared with CY 2018, bringing Medicare payments down to $46 for such visits and beneficiary copays down to $9. CMS estimated the change would save Medicare about $380 million in 2019 and $760 million in 2020.

The American Hospital Association, the Association of American Medical Colleges and several hospital members filed a lawsuit in the U.S. District Court for the District of Columbia. A federal judge ruled in September 2019 that CMS didn’t have the authority to make the 2019 cuts. Nonetheless, CMS decided to go ahead with the second round of cuts that started Jan. 1. Hospitals could face a 60% reduction in Medicare payments to off-campus outpatient departments if the cuts aren’t reversed. A judge had previously ruled that the parties could not sue until the cuts were actually imposed.

CMS has to refund $380 million in cuts for the 2019 year to hospitals as a result of the 2019 ruling. A similar outcome seems likely in 2020.

TRANSIT DEVELOPMENTS CULTURAL REALITIES

I have believed and argued for some time that one of the major hurdles to be overcome in a resolution of the ongoing debate over the future of transit has nothing to do with the usual suspects – fares, reliability, access. The hurdle I refer to is best described as the issue of social equity in the provision of public  transportation facilities. One of the realities which “alternative transportation” advocates continue to refuse to admit to is the reality that the movement towards micromobility is driven by a less than homogeneous base.

Whether it’s the slower rollout of services like bike rentals in poorer neighborhoods, the use of remote regulators to “depower” electric scooters, or other technological approaches applied to access to emerging service modalities, a pattern emerges. In city after city, these services are rolled out without the agreement of or even the opportunity provided for governmental entities to review the implications and impacts. Even with the involvement of government, the results are not always equitable. 

A good example is Mayor de Blasio’s heavily-subsidized NYC Ferry service. This service is back in the spotlight as press reports highlight the apparent inequities of the City’s current scheme to subsidize ferry service to and from Manhattan. The data has been around for some months. For whatever reason, the press seems to have been relying on getting the data through the Freedom of Information Act even though it has been available since the Fall of 2019. So what follows is not news to us.

New York City, through its economic development corporation, operates a fleet of passenger ferry boats which act primarily as an alternative form of transportation for commuters to Manhattan. The ferry service is heavily subsidized and this funding has occurred in parallel with the decline of the New York City bus and subway system. The system is a form of P3 as the city’s Economic Development Corporation runs the ferry network with private cruise company Hornblower.

Over a two week segment in May and June, the operators conducted a survey of more than 5,400 riders. A couple of points of data generated from the surveys have generated a response highlighting the socioeconomic issue raised. The problem is that the agency’s analysts determined that 64% of the boat users are white, and that riders’ median annual income falls in the $75,000 to $99,000 range. A 2017 report from city Comptroller Scott Stringer’s office found that two-thirds of subway riders are people of color, and that straphangers’ median income is roughly $40,000 a year.

The difference in and of itself is not a surprise given the locations of the very stops feeding riders to the boats.  The area demographics around those terminals and stops seems to be reflected in the boat ridership demographics. They do not seem to be generating new net users of mass transit. So they would seem to be siphoning demand and patronage from the city bus and subway system.  It is that concern that focuses attention of the next data points.

Here’s how the data shape a narrative which support some of the stereotypes. 60% identify as millenials. 75% are commuters to work. This produces a system that is richer, whiter, and younger than is the case with the mass transit system. And yet that system receives a subsidy from the City equivalent to $9.82 in addition to the $2.75. This is a glaring difference between the level of subsidy provided per ride to the ferry service and the level of per ride subsidy provided to 

And it screams of economic inefficiency. The EDC has described demand for the ferry service as “booming”.  The “booming” ferry ridership includes 2.5 million trips made this past summer, a record for the service. That’s still less than half of the 5.4 million rides the subway does on an average weekday. At the same time, the subway receives roughly $1.05 worth of subsidies per rider, according to a report released earlier this year by the watchdog Citizens Budget Commission.

The data raises some basic questions as to the logic behind the Mayor’s efforts to expand the City’s role in the provision of ferry service. With the onset of the State’s budget process, transportation will again be in the spotlight with the MTA facing extraordinary capital funding needs. The City has been resistant to the concept of increased city subsidies for mass transit even as it continues to subsidize services which support only a very narrow slice of the population.

CALIFORNIA SCHOOL DISTRICT FRAUD

In the Fall of 2019, the SEC announced that it had fined the Montebello Unified School District Superintendent $10,000 after finding the district had broken federal laws involving the sale of bonds used to raise millions for construction projects at the school district. In September, according to the SEC’s complaint and order, immediately before and concurrently with the District’s sale of $100 million of general obligation bonds in December 2016, Montebello’s independent auditor repeatedly raised concerns about allegations of fraud and internal controls issues to the District’s Board of Education and management. In response, Montebello allegedly refused to authorize the fees needed for the audit firm to complete its audit and instead decided to terminate the audit firm.  The offering documents for Montebello’s December 2016 bonds failed to disclose this information to investors and instead included a copy of the District’s audit report from the prior fiscal year, which included an unmodified or “clean” audit opinion from the firm. 

The SEC alleges that Montebello’s former Chief Business Officer, helped prepare the misleading offering documents and also concealed the audit firm’s concerns by providing deceptive updates about the status of its pending audit to various gatekeepers, including the disclosure lawyers who worked on the bond offering. The SEC’s order found that Anthony Martinez, Montebello’s Superintendent of Schools, signed the final bond offering document and made false certifications in connection with the bonds.

Now the legal difficulties could impact the District’s ratings. S&P Global Ratings placed its ‘A-‘ underlying rating (SPUR) on Montebello Unified School District, Calif.’s outstanding general obligation bonds and its ‘BBB+’ SPUR on Los Angeles County Schools Regional Business Services Corp.’s outstanding certificates of participation issued for the district on CreditWatch with negative implications. S&P has not received responses to requests for information ” regarding the  federal investigation . S&P said “We need the information to maintain our rating on the securities in accordance with our applicable criteria and policies.”

We wonder why S&P doesn’t just pull the rating. Yes that might hurt secondary bond values but it would also be a real signal that misrepresentations large or small will not be tolerated. After all, one could make the argument that these misrepresentations have led to a rating not fully commensurate with the District’s financial realities. It would be nice to see the rating agencies take a stand. The SEC’s complaint, filed in U.S. District Court for the Central District of California, charges the business manager with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder as well as Section 17(a) of the Securities Act of 1933, and seeks permanent and conduct-based injunctions as well as a financial penalty.

PENSIONS CLAIM ANOTHER ILLINOIS RATING

S&P Global Ratings lowered its rating to ‘A+’ from ‘AA-‘ rating on Cook County, Ill.’s general obligation (GO) debt, of which roughly $2.8 billion in principal for GO bonds remains outstanding. The outlook is stable. The move comes as the state enters its FY 2021 budget season. Underfunded state and local pension funds are once again front and center in the budget debate.

While much attention is rightly focused on the City of Chicago’s difficult pension situation, Cook County faces substantial issues and relies on the same tax base as does the City.  “The downgrade reflects the county’s large and underfunded pension obligation,” said S&P, “and although the county has made steps to address its pension funding levels–specifically with a new sales tax revenue stream beginning in fiscal 2016 that significantly increased its annual contributions–its ability to meets its planned additional payments over the long term will remain an ongoing challenge, in our view. Further, even with these additional payments, in our view, contributions fall well short of both static funding and minimum funding progress, in part because of poor assumptions and methodologies.”

S&P does note some positive factors. ” Although the county’s poorly funded pension will likely place considerable pressure on its finances, in our view, recent progress toward actuarially based statutory payments through new sales tax revenue has reduced the likelihood of plan insolvency. Over the outlook period, pension contributions are known and are not expected to cause significant budgetary pressure. However, given the plans’ assumptions and methods and very low funded ratio, costs are certain to rise and will be a continuing challenge for the county–particularly given the reduced flexibility caused by overlapping entities, in our view.”  

The bottom line – the Chicagoland region will continue to be negatively impacted. While legally distinct entities, the troubles of one or the other credits (the city or the county) are inextricably linked. Not only is the scope of the problems significant but the politics may be as difficult as there are in any large city. We think that the rating could have easily accommodated one more notch lower to reflect those pressures.

CALIFORNIA SCHOOL DISTRICTS BENEFIT FROM LEGISLATION

Assembly Bill 1505 was enacted in 2019 and it became effective at the beginning of 2020. The legislation was designed to slow the growth of charter schools, especially in poorer areas where charters and public districts directly compete for students and the state aid that follows them. Aid, after all is based on attendance. K-12 school districts gained more authority via legislation to reject new charter school applications. K-12 districts have more flexibility to reject new charter school applications by allowing them to evaluate the fiscal impact of a proposed charter on the district, and whether the school will duplicate or undermine programs already in place. The law also makes districts the primary authorizers of new charter schools, with the state retaining an appeal review function.

Like it or not, charter schools do indeed move resources from one group of schools to another. Often, charters do not have to deal with legacy employee costs or the costs of special education. The number of charter schools increased 60% statewide between the 2009-10 and 2017-18 school years. The largest number of charter students is by far in the Los Angeles Unified School District. Proportionally, the poorer districts of Oakland and Sacramento see significant proportions of its total enrollment base in charters (27% and 13% respectively.

Limits on new charters has to be viewed positively in terms of general credit factors. The new law provides additional powers for financially struggling K-12 districts to limit potential new charter school competitors, a credit positive for those districts. The districts include those the state says “may not” meet financial obligations, which have a “qualified certification;” those the state says “will not” meet them, which have a “negative certification;” and those under state receivership. Of California’s 10 districts with the largest charter school enrollment, three fit these categories: Oakland Unified, Twin Rivers Unified, and Sacramento City Unified.

CLIMATE CHANGE FOLLOW UP

Last week we commented on the subject of climate change and municipal credit. Since then the National Oceanic and Atmospheric Administration released data regarding damage from floods in 2019. The data is interesting.

Precipitation across the contiguous U.S. totaled 34.78 inches (4.48 inches above the long-term average), ranking 2019 as the second-wettest year on record after 1973. Michigan, Minnesota, North Dakota, South Dakota and Wisconsin each had their wettest year ever recorded. Hence, the downstream flooding which impacted the Mississippi Valley. The combined cost of just the Missouri, Arkansas and Mississippi River basin flooding ($20 billion) was almost half of the U.S. cost total in 2019.

The average temperature measured across the contiguous U.S. in 2019 was 52.7 degrees F (0.7 of a degree above the 20th-century average), placing 2019 in the warmest third of the 125-year period. Here’s an anomaly that always complicates the debate. Despite the warmth, it was still the coolest year across the Lower 48 states since 2014.  Last year, the U.S. experienced 14 weather and climate disasters with losses exceeding $1 billion each and totaling approximately $45 billion. Their locations as depicted in the image provided by NOAA reinforces one point we made last week. Simply avoiding “coastal” risk is not a sophisticated enough approach.

NEW  YORK CAPITAL DEMANDS RISE

The numbers were already staggering – $30 billion for the Gateway Tunnel, $50 billion for the MTA, and $32 billion for the New York City Housing Authority (NYCHA). At $112 billion the pressure is enormous. So it was a bit disconcerting to see that the new boss at NYCHA has had to increase NYCHA’s need by 25% in his latest estimate. Some change from the 2018 estimate was expected but this a substantial increase. Apparently, the 2018 estimate didn’t fully capture the costs of lead abatement, elevator replacement and other compliance costs. 

Sometime this year the agency will release an updated proposal to raise additional capital and therein lies the rub. Debt will clearly be part of the plan but there were vague references that it “might be” looking to disposition. Currently, NYCHA hopes to convert 15,000 apartments to private management by the end of the year as part of the federal Rental Assistance Demonstration program (RAD). 

Under RAD, it allows Public Housing Authorities (PHA) to manage a property using one of two types of HUD funding contracts that are tied to a specific building: Section 8 project-based voucher (PBV); or Section 8 project-based rental assistance (PBRA). PBV and PBRA contracts are 15- or 20-years long. The program is “voluntary” but it is important to note that the city is managing NYCHA under the terms of a consent decree with the federal government. There is enormous pressure on the City to use the RAD program. So it is not a purely financial or credit based approach. That raises concerns about the execution of these conversions and the clarity surrounding the potential implications for NYCHA and its investors.

So we look out ahead and see a capital need of some $120 billion just from these three areas. That doesn’t count the normal capital investment requirements of the City. One thing investors won’t have to worry about going forward will be the supply of new bonds.

HIGH SPEED RAIL

After a five year effort, Indian County, FL is expected to let an appeals court ruling stand unchallenged that The U.S. Court of Appeals last month ruled Virgin Trains legally was entitled to finance its private railroad project with government issued, tax-free private-activity bonds. The county has determined that its appeal was unlikely to be heard by the U.S. Supreme Court. It will not pursue such review.

The county will continue to pursue its Circuit Court lawsuit over maintenance of the 21 crossings along the Florida East Coast Railway corridor within Indian River County. The lawsuit, filed last year, claims Indian River County should not be required to pay for crossing improvements that Virgin Trains says are required in order to run 32 higher-speed passenger trains daily. Safety has been a significant issue for Virgin USA as federal data released in December that in terms of deaths by pedestrians on tracks, the Brightliner route is the most dangerous in the US.

These deaths occur at a rate of more than one a month and about one for every 29,000 miles the trains have traveled. That’s the worst per-mile death rate of the nation’s 821 railroads. The company has not been blamed in any of the deaths as suicides and drivers trying to beat or avoid existing gates have been the cause. U.S. trains fatally strike more than 800 people annually, an average of about 2.5 daily. About 500 are suspected suicides. So the issue comes down to who pays for the upgraded crossings – the railroad or the County?

The favorable turn in the legal outlook is clearly credit positive for the bonds.

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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We value your feedback as we move forward into the new year. Let us know what you think. Tell us what you would like to see covered. E mail me directly @ joseph.krist@municreditnews.com.

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ATLANTIC CITY

Four years into its five year recovery program overseen by the State of New Jersey, Atlantic City has seen the effort to support and reform its finances bear some fruit in the form of a rating upgrade. Moody’s upgraded the City of Atlantic City, NJ’s Long-Term Issuer Rating to Ba3 from B2. The outlook has been revised to stable from positive.  The outlook has been revised to stable from positive. This means that if the City were to issue unenhanced general obligation debt it would come at that rating. Currently, all of the City’s outstanding GO debt is secured under state enhancement programs.

The rating reflects not only the City’s fiscal difficulties but also its location as a coastal community. The upgrade “reflects the city’s continued, albeit reduced, financial and economic stress. The upgrade reflects the successful settling of long-term, open-ended liabilities and the concomitant improvement in city finances, the successful implementation of the casino PILOT program, the recent health of the casino industry, and the ongoing efforts to diversity. The rating is also informed by the continued, strong oversight by the State of New Jersey.”

Moody’s also commented specifically on climate related impacts on the rating. This reflects growing interest by the market in climate change related impacts on municipal credits. It follows Moody’s acquisition of climate data providers which it will now incorporate as a factor in its formal rating process. In the case of Atlantic City, “the rating is heavily influenced by the city’s exposure to environmental, social, and governance risk. The city is located on the Jersey Shore and is exposed to rising sea levels and extreme weather events. Income inequality is starkly evident in the city’s juxtaposition of high unemployment and poverty and opulent casinos. Finally, the city’s governance structure is of paramount importance; the city’s ongoing recovery has been largely masterminded by extraordinary state oversight which is set to expire in less than two years.”

In spite of the clear reference to climate change, it is not clear what the ultimate impact of this emphasis will be. Will it act as a hard cap on how high a rating can go for a coastal community? It will be  an evolving process as a variety of entities and funding sources would have to be employed to combat climate change. So it is not clear what the limits are in terms of what an individual entity (like Atlantic City) and its ultimate responsibility for mitigating climate change related impacts on its credit. This introduces a level of uncertainty into the ratings process which will take some time to be resolved.

MEDICAID EXPANSION IN KANSAS

It has taken a change in administrations and a more responsive electorate but as we go to press the Kansas legislature is considering a proposal to expand Medicaid under the  reached a deal with Republicans who control the Legislature to expand Medicaid under the Affordable Care Act. The agreement includes provisions to help Medicaid recipients find jobs. It does not however, include a work requirement that some Republicans in Kansas and other states have long called for.

The Kansas House passed a version of Medicaid expansion last year. In 2017, a Medicaid expansion passed but was vetoed. Since then, four rural hospitals in the state have closed. The New York Times cited one that closed in Independence, Kan., in 2015 would have received an estimated $1.6 million a year if Medicaid had been expanded. 

This plan is a true compromise. The Governor gets a relatively straightforward expansion which is estimated to allow some 150,000 to enroll. The legislature gets a program that has been proposed for driving down private health insurance premiums to make it less likely people would drop existing private plans for Medicaid. The proposal would allow the state to charge new Medicaid participants a premium of up to $25 per individual and $100 per family. It also would ask hospitals to contribute $35 million a year to cover the state’s costs.

The agreement provides for a one year period to fully develop the premium reduction plan and develop a source of funding for it. It does not include a prior plan to increase the state’s tobacco taxes including a $1 increase in the cigarette tax. The new expansion proposal would extend Medicaid coverage on Jan. 1, 2021, to Kansas residents earning up to 138% of the federal poverty level, or $29,435 for a family of three.

As the legislature debates the issue, the Journal of the American Medical Association published a study which finds that counties in states that accepted the Medicaid expansion under the Affordable Care Act (ACA) had a 6% lower rate of opioid overdose deaths compared to counties in states that did not expand Medicaid. It found that Medicaid expansion may have prevented between 1,678 and 8,132 deaths from opioid overdoses between 2015 and 2017. For comparison, there were 82,228 total opioid overdose deaths in that time period, the study states.  

PRIV ATIZATION FAILS IN JACKSONVILLE

In July, 2019, the Jacksonville Electric Authority initiated a process by which it would explore the privatization of the city’s municipal electric utility. JEA’s board of directors unanimously has since voted in late December  to stop its efforts to sell the city-owned utility. Thus ends a process which cost $10 million and yielded no discernable benefits. The cancellation  came as the local press discovered that the head of the utility had positioned himself to financially benefit from a sale to a private entity.

That executive had taken a number of controversial steps including threatening layoffs if a privatization was not allowed to be pursued. Over one fourth of the workforce was at risk. A plan also came to light where employees of JEA would receive “bonuses” from the sale. The plan would have allowed employees to purchase “shares” of JEA, much like an employee stock option, that could grow in value and be cashed in if JEA hit certain financial benchmarks. Auditors said the financial goals were too easy to reach and that limitless nature of the plan could result in employees receiving $315 million if JEA was sold for $4 billion.

The whole mess has cast privatization proponents in a poor light and reinforce the worst fears of customers of public entities considering privatizations. The local state attorney has announced that her office “is — and has been — looking into matters involving JEA.” JEA decided to cancel the bonus plan after the city attorneys determined the plan wasn’t legal under local and state laws.

If public/private partnerships or privatizations are going to have a significant role in the development and expansion of the nation’s infrastructure, the kinds of issues which have arisen in Jacksonville (and to a lesser extent with the St. Louis, MO airport) cannot continue. The use of questionable private business practices especially in terms of a lack of process transparency will only raise suspicions and mistrust on the part of the public who are the ultimate consumers of the service in question.  

The change in course comes at a tumultuous time for JEA. It is still engaged in litigation that tries to void an agreement JEA signed to purchase power from the Vogtle nuclear plant expansion in Georgia for a 20-year period. JEA spent about $5 million through Sept. 30 on litigation and related negotiations in that lawsuit.  JEA set aside $10 million in the budget that started Oct. 1 to continue on that legal track.

The two new Plant Vogtle reactor units are being built through an ownership partnership of Georgia Power, Oglethorpe Power, the city of Dalton, Ga., and the Municipal Electric Authority of Georgia (MEAG). JEA entered into a contract with MEAG to purchase electricity generated by a 206 megawatt portion of the two units, which is one-tenth of the 2,200 megawatt capacity of both units. There would be a significant impact to ratepayers if the purchase cannot be voided. All in all a fairly credit negative environment for the JEA credit.

NEW ENGLAND HEALTHCARE

Partners HealthCare System is in the process of changing its name to Mass General Brigham. Regardless of the label, the current System is the legal obligor on a significant upcoming bond issue. The system has been at the center of the healthcare finance debate. Healthcare advocates have viewed the System as a source of many of the perceived problems in terms of costs, pricing, and business practices with which universal health insurance advocates often take issue.

In the midst of the unfolding debate, Partners is issuing a total par amount of bonds expected to be approximately $1.3 billion and bonds are expected to have a final maturity in 2060. The bonds come with a Aa3 long term rating. Partners is the sole member of the following entities: Massachusetts General Hospital (MGH), Brigham Health (parent of Brigham and Women’s Hospital and Brigham and Women’s Faulkner Hospital), NSMC HealthCare, Inc. (parent of North Shore Medical Center), Newton-Wellesley Health Care System, Inc. (parent of Newton- Wellesley Hospital), Foundation of the Massachusetts Eye and Ear Infirmary, Inc. (MEEI), Partners Continuing Care (parent of several non-acute service high level providers, including the Spaulding Rehabilitation Hospital Network), AllWays Health Partners (f/k/a Neighborhood Health Plan), Partners Medical International and Partners HealthCare International. 

These are institutions with international reputations and historically strong finances which underpin the credit. Given those characteristics, the rating is where it is because of high leverage, competition, and an expectation of moderating results in fiscal 2020. Nonetheless, Partners finds itself in an increasingly challenging environment given its position between all of the various interest groups in the healthcare debate. The bond sale will allow the market to render its verdict.

UTILITIES – MORE BAD NEWS FOR COAL

The Associated press reported that the Colstrip Steam Electric Station in Colstrip, Mont., will close two of its four units by the beginning of this week, or as soon as they run out of coal. The plant employs around 300 people, some 15% of town of Colstrip, with a population of some 2,300 people. The six utilities that own shares of the two remaining units are making plans to stop operations as soon as 2025.

One of the issues associated with the closure of these facilities is the need for protracted environmental remediation. The AP reports that large amounts of ash from burning coal at Colstrip has contaminated underground water supplies with toxic materials and will cost hundreds of millions of dollars to clean up. The same is true of nuclear facilities when they close. These generate significant legacy impacts which can become hindrances to efforts to move the impacted economies forward.

The immediate impact will be on property value as a non-operational facility becomes significantly less valuable. The resulting lower tax obligation for the plant’s owners can result in significant hits to the host community’s tax rates. Often, smaller host communities become dependent on one large taxpayer and face significant disruption caused by lower revenues.

CLIMATE CHANGE AND MUNI CREDIT

Having commented many times on climate change in this and other spaces related to municipal bond credits, we are more than interested to see the market’s current interest in the issue. We are heartened to see attention drawn to it, but we are disappointed in some of the simplistic advice offered. Like sell Florida and California to defend against ocean level increases and reinvest inland. But that stance can lead investors down equally wet roads.

Some examples – the greatest sustained flooding issues in 2019 were in the Spring in the Midwest. Yes there was storm related flood damage where one would expect in the hurricane zones on the coasts later in the year. In the Midwest, there was not only the physical damage to infrastructure but the damage from not being able to raise a crop due to wet conditions and flooding. So maybe those climate related risks (heavy winter moisture and exceptionally low temperatures backed up moisture for months) will continue and you might want to lighten up on exposed Midwest credits.

Or you might look a bit northeast of the Mississippi flood zones. But then you have to ask, where in terms of miles is the greatest coastline or shoreline exposure? The 2,165 miles of coast for the 14 states on the Atlantic Ocean seems significant. There are 1,293 miles of coast for California, Oregon and Washington on the West Coast. But combined they are less than the real coastal exposure to rising levels of water. That would be the 4,530 miles of U.S. coastline for the five Great Lakes. 

The Gulf of Mexico has 1,631 miles of coastline (apparently Florida gets it two ways.). Hawaii has 750 miles but the leader is Alaska at 5,580 miles of coastline on the Pacific Ocean. Around the Great lakes, the problems are immediate. According to the Chicago Tribune, in 2013 Lake Huron bottomed out, hitting its lowest mark in more than a century, as did Lake Michigan, which shares the same water levels, according to data from the U.S. Army Corps of Engineers and the National Oceanic and Atmospheric Administration. Since then the rate of lake levels increasing has been astonishing. The swing in the water level of Lake Huron from January 2013 to July 2019 was nearly 6 feet, from historically low to historically high.

Island properties near Michigan’s Upper Peninsula are under water, the lakeshore in Chicago is being overtaken and eroded damaging water access and recreational infrastructure, and intermittent flooding along Lake Ontario in New York State has become more frequent and voluminous. So if we really do take the threat of rising sea levels and altered climatic events seriously than these numbers would make the case that the job of avoiding their impact on municipal bond investments will be that much harder. There are fewer places to hide.

CALIFORNIA BUDGET

California Gov. Gavin Newsom presented his $222.2 billion budget proposal  with plans to spend part of a projected $5.6 billion surplus on green technology and homeless aid. The presentation of the Governor’s proposal is the official kickoff to the FY 2021 state budget process. Highlights include funding 677 new CalFire positions over five years and allocating $90 million for new technology and a forecast center to better predict, track and battle blazes. The plan also assumes the continuation of a $200-million annual investment approved by lawmakers to reduce the kinds of vegetation that fuel wildfires, and more than $100 million to fund the Legislature’s pilot program to harden homes in fire-prone areas. There would be $50 million in one-time funding to help critical services prepare for power outages associated with fire prevention plans.

Governor Newsom also has a proposal to set aside $250 million per year for four years to create the Climate Catalyst Revolving Loan Fund, which would help small businesses and organizations invest in projects, such as recycling and climate-smart agriculture, to help the state meet its environmental goals.

The total spend sets a record if it is adopted. Education funding remains a preeminent issue as does funding for healthcare.  The budget would deliver more money to Medi-Cal, the state’s health care program for low-income people. Part of that expansion would boost assistance for homeless people and mental health care funded in part by $750 million from the anticipated surplus to be directed to organizations that help homeless Californians. That money could be used to pay rent, build housing and improve shelters.

The budget anticipates an accumulated surplus for the State of $21 billion. Newsom and lawmakers have until June 15 to pass a budget in time for the start of the upcoming fiscal year July 1. The Governor submits a revised proposal in May. If the economy continues on its current course, a budget similar to this plan should be credit neutral.

LOUSIANA P3

The Louisiana Department of Transportation and Development announced the execution of a Comprehensive Agreement with Plenary Infrastructure Belle Chasse, LLC an indirect, wholly-owned subsidiary of Plenary Group Concessions USA Ltd. to build the Belle Chasse Bridge and Tunnel Replacement Project in Plaquemines Parish. The new bridge will be located between the existing vertical lift bridge and tunnel and will include four lanes with a separated, protected sidewalk in the southbound direction. 

This the first transportation infrastructure Public-Private Partnership (P3) project in the state. Funding for this project will be combined with funds from the $45 million Infrastructure for Rebuilding America (INFRA) grant that DOTD received in June 2018, $26.2 million in federal/state funds allocated to DOTD, $12 million in federal funds allocated by the Regional Planning Commission, and up to ten percent of the project cost in GARVEE Bond proceeds, as this is a toll project. 

The tunnel opened in 1956, and the current bridge was built in 1968. The average daily traffic is approximately 35,000 and this route serves as the primary access point to the residents, businesses, and industries of Plaquemines Parish. Construction is anticipated to begin summer 2021, with an estimated completion of spring 2024, weather dependent. The legislature’s acceptance of the plan had Construction is anticipated to begin summer 2021, with an estimated completion of spring 2024, weather dependent. That approval overcame opposition to tolls for the project. Construction is anticipated to begin summer 2021, with an estimated completion of spring 2024, weather dependent.

The deal is a positive for private/partnerships generally and for Louisiana in particular. With the state facing so many infrastructure challenges especially through its exposure to climate issues, the acceptance of the P3 concept is an important step forward for the state.

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 advisers prior to making any investment decisions.

Joseph Krist

Publisher

RECENT STATE DEMOGRAPHICS

According to the US Census Bureau, Forty states and the District of Columbia saw population increases between 2018 and 2019. Ten states lost population between 2018 and 2019, four of which had losses over 10,000 people. The 10 states that lost population were New York (-76,790; -0.4%), Illinois (-51,250; -0.4%), West Virginia (-12,144; -0.7%), Louisiana (-10,896; -0.2%), Connecticut (-6,233; -0.2%), Mississippi (-4,871; -0.2%), Hawaii (-4,721; -0.3%), New Jersey (-3,835; 0.0%), Alaska (-3,594; -0.5%), and Vermont (-369  ; -0.1%). 

To be honest, these numbers just tell a story from 50,000 feet up so much detail and nuance is lost. We are more interested in things like the incomes and ages of the people moving. States with decreasing but aged populations present one set of issues while growth can still dictate increased demand for capital facilities (especially schools). Both present challenges.

The point is that much will be made of the data depending on where an individual state falls in the rankings. Critics of fiscal policies in Illinois and New York will make much of the negative data while states which grow will likely take a different view. By the way, here are the eight growing states and the numerical increases – Washington (612), Utah (293), Nevada (232), Arizona (175), Idaho (166), Montana (66), Vermont (44), and Colorado (30).

That is not a large number but he direction is still positive. Four states had more deaths than births, also called natural decrease: West Virginia (-4,679), Maine (-2,262), New Hampshire (-121) and Vermont (-53). The top states with net domestic migration loss were California (-203,414), New York (-180,649), Illinois (-104,986), New Jersey (-48,946), Massachusetts (-30,274) and Louisiana (-26,045). We note that the top 5 all are negatively impacted by the loss of the SALT deduction.

MICROMOBILITY

Micromobility advocates will have to wait before they can legally deploy electric bicycles and scooters on the streets of New York’s cities. Legislation legalizing their use was vetoed by the Governor. One of his primary stated issues is the law’s lack of a helmet requirement for users of the bicycles. The legislation would have allowed cities and towns around the state to set local rules for electric scooters and bicycles. Scooter rental companies like Bird and Lime would not have been allowed to operate in Manhattan.

The deployment of these vehicles raises significant safety issues on both sides of the transportation transaction. In Elizabeth, NJ, a 16-year-old boy became the first person killed while riding a shared electric scooter when he collided with a tow truck in November. Another NJ city – Hoboken – started a pilot program in May and stopped it last month while the City Council is considering whether to renew the program.

Leave it to the micromobility advocates to treat this not as a transit safety issue but in terms of race, inequity, and general social policies. That ignores the reality of the real time use and speeds of the bicycles delivering your food and the danger to the unprotected. Of course, these advocates tend to ignore the use of these vehicles on sidewalks, for example. The point is that this clouds the debate and the lack of common sense does not advance development.

SUTTER HEALTH BURIES SETTLEMENT UNDER CHRISTMAS WRAP

Sutter Health, the dominant haelthcare provider in northern California agreed to pay $575 million to settle claims of anti-competitive behavior brought by the California state attorney general as well as unions and employers. The details were not expected to be made public until the first quarter of 2020. Sutter will also be prohibited from engaging in several practices including “all or nothing” agreements which made insurers choose between servicing all of Sutter’s hospitals or none of them.

Sutter will be required to limit what it can charge patients for out-of-network services. These are a leading cause of “surprise medical bills”. The chain was not helped by the fact that there was lots of data available to document the rise in prices Sutter was able to drive through ownership of an increasing number of facilities.

The news ironically followed the release by the California Health Care Foundation of a report documenting the disparity between health costs within the state. It found that various inpatient and outpatient services cost more in California than in other states, and they cost more in Northern California than in Southern California. A critical factor in the fast growth of prices in California compared with the rest of the country is market concentration. The percentage of physicians in practices owned by a hospital/health system has increased dramatically. For specialists, the increase has been even faster.

In 2016, Northern California wage-adjusted prices were on average 24% higher than in Southern California. In the end, the data spoke for itself and the various explanations offered simply did not carry the day.

P3s

Denver International Airport has paid $128 million to Great Hall Partners as part of its divorce from the consortium, which had been hired to redesign and renovate the airport’s main terminal.  When all is said and done, DIA will pay between $170 million and $210 million. DIA moved to terminate the contract after the revelation that bad concrete is laced throughout the terminal. The termination also followed big cost disagreements with the consortium, which claimed the project would cost $1 billion — not $650 million, the agreed-upon figure.

DIA officials expect to propose a contract with the new builder, Hensel Phelps, in January. Construction should resume in January but the completion date has been pushed back to 2024.

St. Louis has decided not to pursue a P3 arrangement for its airport after taking initial steps towards such a financing. The announcement came as the four member working group was reviewing 18 submissions to a request for qualifications from firms and working to finalize which firms would be invited to participate in a request for proposals. The city was seeking “to structure a transaction that meets the city’s primary objectives: improvement of the airport for all stakeholders, including incremental uses of the airport’s significant excess capacity and net cash proceeds to the city, upfront and/or over time for non-airport purposes.” 

Support for the project was less than universal. The politic s behind the proposed expansion reflect the status of the City as the owner of the airport which actually serves a significant population outside of the city which drives facility demand. The clash between those interests has come to the fore in the form of proposals to reconstruct regional governmental structures. These were defeated at previous elections with concerns about how those changes would shift power and economic benefits throughout the St.Louis metropolitan area. Support for a public vote was growing and in light of the regional politics, such a vote would have been problematic.

In New York, recent successful public/private partnerships has supported an environment for increased use of the concept. Now, Gov. Cuomo approved legislation Tuesday granting New York City the power to issue a single request for proposal and contract for the engineering and construction of capital projects. The bill also forces private contractors to cover any extra costs that come with unexpected changes or delays to a project. Design-build can also be applied to most undertakings of the Department of Design and Construction, Department of Environmental Protection, Department of Transportation, Health and Hospitals Corporation, School Construction Authority that costs more than $10 million. The legislation sets the threshold for the Parks Department or the Housing Authority at $1.2 million.

CYBER ATTACK NETS RANSOM

A December cyber attack on the Hackensack Meridian Health system resulted in the payment of a ransom to the hackers. The attack brought down the system’s computer network for two days, during which facilities were forced to reschedule some non-emergency procedures and revert to using paper—rather than electronic—medical records. Hackensack Meridian said that, “due to the frequency with which healthcare organizations are targeted by cyber criminals,” it had a coverage plan in place to cover the costs associated with the cyber attack, including payment and recovery efforts. 

Hackensack Meridian did not immediately comment on which parts of the system were not operational and for how long. there was no initial information provided regarding how much time the system expects it to take to bring those applications online.

The system ran the risk of paying up and then not seeing their systems back on line. It also, by going against broad recommendations from law enforcement that ransoms not be paid, risks encouraging other attacks on Hackensack Meridian but other providers as well.

CANNABIS

In its annual draft report, the California Cannabis Advisory Committee cited high taxes, overly burdensome regulations and local control issues posing significant obstacles to the legal marijuana market in California. Those pressures are reflected in tax revenue about a third of what was expected and with only about 800 of an anticipated 6,000 licensees open for business.

The report estimates that California is expected to generate $3.1 billion in licensed pot sales in 2019. As is so often the case, that would make the Golden State the largest market for legal cannabis in the world. But nearly three times as much — $8.7 billion — is expected to be spent on unlicensed sales. It was originally estimated the state would take in $1 billion annually in tax revenue from cannabis. In reality, the fiscal year that ended in June saw just $288 million collected. The current state budget projects $359 million in tax collections.

An increase in taxes on cannabis cultivation is scheduled for Jan. 1, including a bump tied to inflation that will raise the levy on cannabis flower from $9.25 per ounce to $9.65. The Legislative Analyst’s Office recommended that lawmakers consider overhauling how cannabis is taxed, including a possible potency-based tax to reduce harmful use and eliminating the cultivation tax. 

Meanwhile, the Massachusetts Cannabis Control Commission marked the end of one year of legal recreational cannabis sales in the Commonwealth. The first two Marijuana Retailers commenced operations in Massachusetts in November, 2018. Since then, 33 total have opened statewide. Another 54 Retailers with provisional or final license approval were in the process of completing the Commission’s inspection and compliance procedures towards that end. In total, the Commission has licensed 227 Marijuana Establishments, including Cultivators and Product Manufacturers.

ANOTHER PRIVATE COLLEGE IN TROUBLE

Just before the new year, another longstanding private college saw its finances result in a downgrade. This time it’s Hartwick College in Oneonta, NY. The institution’s origin is rooted in the founding of Hartwick Seminary in 1797. That history and tradition has noit been enough to balance the College’s finances. Moody’s Investors Service has downgraded Hartwick College’s bond rating to Ba3 from Ba1, affecting $38 million of debt. The outlook continues negative.

In Moody’s view,” The downgrade is driven by Hartwick’s materially increasing and now very deep operating deficits that will persist through at least fiscal 2020 and most likely beyond. The college is relying on supplemental endowment draws to fund operations which will result in further reductions in liquidity. This weak financial performance is largely driven by a challenging revenue environment with a small scale of operations, $49 million expense base, and a high cost education model. While the college has incrementally trimmed expenses over the past five years, reductions have fallen well short of the 20% decline in operating revenue during this period. The college confronts a difficult student market environment reflected in declining net tuition revenue, which accounts for about 81% of total operating revenue, a business condition which is likely to persist for the foreseeable future.

Hartwick College is a small, tuition dependent private liberal arts and sciences college with fall 2019 enrollment of 1,180 students and fiscal 2019 operating revenue of approximately $39 million. That is not nearly enough to cover some $10 million of expenses over and above that revenue stream. For four consecutive years through fiscal 2019, the college’s calculated annual debt service coverage under the covenant was below 1.0x. The negative outlook acknowledges the college’s structurally unbalanced operating performance driving continued liquidity declines. Absent a significant increase in philanthropy, it will be difficult for the college to restore fiscal balance.

Declining net tuition revenue accounts for about 81% of total operating revenue, a business condition which is likely to persist for the foreseeable future. Over the last five years, operating revenue has declined some 20%.

The news on Hartwick comes as government datat continues to reflect demographic trends which bode ill for college credits which are tuition dependant. declining net tuition revenue, which accounts for about 81% of total operating revenue, a business condition which is likely to persist for the foreseeable future.

The news on Hartwick’s worsening credit were accompanied by government datat reinforcing demographic trends which bode ill for tuition dependant private colleges. According to the U.S. Census Bureau’s national and state population estimates released, forty-two states and the District of Columbia had fewer births in 2019 than 2018, while eight states saw a birth increase. With fewer births in recent years and the number of deaths increasing, natural increase (or births minus deaths) has declined steadily over the past decade. The Northeast region, the smallest of the four regions with a population of 55,982,803 in 2019, saw population decrease for the first time this decade, declining by 63,817 or -0.1%. 

NYC BUDGET OUTLOOK

Just before the end of the year, the NYC Independent Budget Office delivered its outlook for the NYC budget as we enter 2020. IBO expects the city to end the current fiscal year with a surplus of $635 million that will be used to prepay expenses for next year, leaving a gap of $2.9 billion for fiscal year 2021, which begins on July 1, 2020. IBO’s outlook for the local economy is for the expansion underway since the end of the Great Recession to continue, although at a slower pace. IBO continues to project relative strength in the growth of city tax collections—thanks largely to the property tax—at rates that exceed planned expenditures. However, as personal income tax revenue grows more slowly and the business income and property transfer taxes see actual declines in revenue, IBO expects tax revenue growth in 2020 to fall sharply from 4.0% in 2019 to 1.9%.

Looking at the economy, the growth of New York City’s economy has also slowed in 2019. IBO projects employment growth of 65,000 for the year (4th quarter to 4th quarter), compared with an average of 98,000 jobs a year from 2010 through 2018. IBO forecasts slower employment growth of 50,100 in 2020, and even smaller job gains in the following years. Slower employment growth coupled with slowing growth in the labor force is expected to increase the unemployment rate but only slightly—from a projected 4.2 percent in 2019 to no more than 4.5 percent during the forecast period. Health care and social service employment is expected to grow more slowly but this sector will continue to provide more new jobs than any other.

QUICK THINGS TO LOOK FOR IN 2020

The year opens with a mediator’s recommendation that settlement talks continue in the Commonwealth’s debt restructuring case of debt including commonwealth general obligation, Highways and Transportation Authority, and Public Buildings Authority bonds. The outcome of this process will raise as many questions as it answers about any comparable action. On Dec. 23 the Mediation Team Leader Houser described the ongoing mediation talks as being “productive.” She said if the parties reached further progress, she would have to add other parties to the discussions and that coming to an agreement would take additional time.

The judge managing the case  extended the deadline for the team to submit a report to Feb. 10 from Jan. 10. She extended the planned hearing on the report and any possible further extension of the stay on litigation to March 4 from Jan. 29. She also extended the stay on litigation to March 11 from Jan. 31.

Annual appropriation debt will have its day in court as the trustee for $29 million of debt sold through Platte County, MO’s industrial development authority for the Zona Rosa Shopping Center project has been granted of an appeal of a decision rendered against the Trustee in May, 2019.

The county argued that the pledge provided on the bonds was not a promise to pay, but a pledge that the auditor could request coverage of a shortfall with the decision resting with the county on an annual basis. Platte County sued the bond trustee UMB Bank NA in November 2018 to secure a legal determination that it was not legally on the hook to make the appropriation.

The Zona Rosa bonds are repaid with a dedicated 1% sales tax in Zona Rosa, but the revenue doesn’t fully cover debt service. It is another reminder of the need to evaluate economic viability along with project documents.

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 advisers prior to making any investment decisions.