Joseph Krist

Publisher

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Given how much we have commented on the subject of cyber security, it was nice to see the municipal analyst community finally come around and take a stand on cyber security disclosure. The National Federation of Municipal Analysts has released a white paper presenting its proposals for better cyber security disclosure  in the municipal bond market. The proposals essentially echo our calls for more disclosure. They provide a variety of options for issuers to choose from in terms of the timing and form of disclosure. Our choice in terms of the Federation’s options regarding proposed vehicles for disclosure would be all of the above.

The municipal market has been lucky that the cyber attacks undertaken against municipal entities have not created more problems than they have. It has allowed the market to lag in terms of its attention to and response to events to date. So, better late than never to the Federation. The real work comes when it is time to insist on the disclosure that investors need and it becomes enough of an issue to influence pricing.

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INCREASINGLY CLOUDY OUTLOOK

As we went to press, Congress seemed to be temporarily paralyzed as we approached the end of enhanced unemployment benefits. In 2008, the levels of new unemployment claims got up to 800,000 and that was generally determined to be unacceptable. Now Congress is unable at this point after some 40 million new unemployment claims and back to back weeks of 1.5 million. That and we are six months into the pandemic.

It is not a partisan statement to say that the lack of leadership coming from Washington is crippling the ability of the economy to recover. That is just a data based view. The economic data does not lie and the role of certain industries – like the hospitality industry – as a source of potentially rapid reemployment an area of concern. These labor intensive employers can only hire up to a level commensurate with the health regulation environment they operate in.

The recent trends which led to the reimposition of restrictions on the hospitality industry point to a longer less robust economic recovery. This refocuses attention on the fiscal state of governments at the state and local level. It is more crucial than ever that the states, cities, and related public agencies get federal funding help. Especially as there are a growing number of cities across the country with concerning illness rates – Miami, New Orleans, Las Vegas, San Jose, St. Louis, Indianapolis, Minneapolis, Cleveland, Nashville, Pittsburgh, Columbus and Baltimore were specifically cited.

This all comes as the rent delinquency rate is projected to go up as enhanced unemployment benefits run out. This coincides with the end of many programs which effectively stopped or delayed eviction proceedings. According to the National Multifamily Housing Council’s Rent Payment Tracker, 91.3% of renters have made full or partial rent payments for the month of July compared with 93.4% over the same period last year, in large part because of federal relief measures.

Federal moratoriums on evictions and foreclosures are set to expire in July and August. In the end, mass evictions will place incredible pressures on municipalities to provide shelter. There will be political pressure to develop and/or acquire affordable housing if the displacement is as bad as expected.

THE LAYOFFS BEGIN WITH BENEFITS IN DOUBT

The process of laying off employees is beginning to unfold. We’re not talking about people furloughed until businesses reopen. These are real layoffs. Notices of potential layoffs have gone to 36,000 United Airlines employees, 25,000 American Airlines employees and  Delta has seen 20% of its workforce retire rather than risk layoffs. Now layoffs are spreading out to heretofore recession proof industries.

All of the major restaurant chains have announced plans to close hundreds and thousands of locations. That does not begin

The University of Akron board of trustees voted to lay off about a fifth of the university’s unionized work force to balance its budget, including nearly 100 faculty members. Ohio University has had three rounds of layoffs, including more than 50 nonunionized faculty members. The University of Texas at San Antonio laid off 69 instructors, while the University of Michigan, Flint, eliminated more than 40% of the 300 lecturers  it employs.

It comes at a real inflection point. Enhanced unemployment benefits of $600 a month are scheduled to end (as we go to press) on July 31. The whole idea was that across the board curve flattening would have occurred for the pandemic and some sustained recovery would be underway. Instead, the pandemic is raging, lockdowns are being reinstated, and the outlook for the Q3 economy has significantly diminished.

So now the hopes of municipal investors have to be focused on the shape of the next stimulus package. Clearly, it must include direct funding to states. The spread of the virus to mostly red states has significantly altered the outlook for such aid. The only question is how inadequate will it be. That does not include the major public transit systems which face sustained losses of ridership and revenues as economic activity and travel are held back.

SMUD LEADS ON CLIMATE CHANGE

We have argued in the past that municipal utilities are in a unique position in the effort to generate carbon-neutral electricity. Now, the Sacramento Municipal Utility District has announced that it had adopted a climate emergency declaration that commits to working toward an ambitious goal of delivering carbon neutral electricity by 2030. In 2018, SMUD successfully reduced greenhouse gas emissions by 50 percent from 1990 levels.

Its power mix is now 50 % carbon free on average. In January, the California Energy Commission a $7 billion investment to achieve nearly 2,900 megawatts (MW) of new carbon-free resources including 670 MW of wind; 1,500 MW of utility-scale solar, of which, nearly 300 MW will be built in the next 3 years; 180 MW of geothermal; and 560 MW of utility-scale energy storage (batteries).  

It has often been driven by economics rather than ideology, but this is not the first time that SMUD has found itself at the forefront of the power generation debate. In 1989 Sacramento made history by being the first community to shut down a nuclear power plant by public vote. Now, a 160-megawatt solar project on the site of the decommissioned Rancho Seco Nuclear Generation Station is poised to begin operations at the end of this year and SMUD has executed a long term purchase agreement for the output.

THE ROAD TO RECOVERY IN NEW YORK

The Partnership for New York has represented businesses interests and viewpoints for some time. It is always important to remember that whenever they weigh in on government policy issues. So keeping that in mind we reviewed with interest a report issued last week by the Partnership documenting its views of how the City should manage its recovery from the pandemic.

Most business leaders are confident that the city will remain a leading financial and commercial center, but it will be more difficult to attract and retain talent until people trust that the urban environment is healthy, secure and welcoming. Many of Manhattan’s 1.2 million office workers will continue to work remotely through the end of the year or until they know that transit is safe, and that schools and childcare centers are fully functional. The attractions that New Yorkers value most in the city—its cultural, social, and entertainment assets—will remain at least partially shuttered until next year. As many as a third of the 230,000 small businesses that populate neighborhood commercial corridors may never reopen.

The pre-COVID economic environment was positive on a macro level. Yet even the Partnership acknowledges that “despite its great assets and amenities, in 2019 New York City was becoming far less livable for large numbers of low wage workers, seniors and even young professionals. The unintended consequences of strong economic growth and rising real estate values had made the city and surrounding region unaffordable to large numbers of residents and small business owners, creating a divisive political climate and contributing to the deterioration of the social fabric of many communities. COVID-19 exposed and exploited disparities of race, income, education and health care that now demand a reckoning if the city and region are to heal.”

There are other challenges. The number of international visitors to the city is expected to decline by over 5 million in 2020, down more than 40% from 2019, causing an estimated loss of over $8 billion in international tourism spending.  Owners of mixed-use apartment buildings report that rent collection is down 60% from commercial tenants. Residential rent delinquencies are about 10% in market rate apartments and 20-25% in regulated or affordable units, as compared to 15% on average prior to the pandemic.

A survey of employers conducted by the Partnership for New York City indicates that about 10% of workers will return to Manhattan offices this summer and only about 40% by the end of the year. According to one survey conducted in late May, 25% of office employers intend to reduce their footprint in the city by 20% or more, and 16% plan to relocate jobs from New York City to the suburbs or other locations.61 Half of companies surveyed anticipate that only 75% of their workforce will come back to the office full time.

One issue in the report piqued our interest. The Partnership makes some very specific recommendations regarding healthcare in New York City. “While hospitals will always be necessary for addressing high-acuity cases, delivering low-acuity services in community health hubs can make preventative care more accessible and help lower health care costs. Community health hubs with telehealth capacity can play a key role in expanding preventative services such as screening and diagnostics, home-care delivery, physical therapy and nursing services.88 Infusing health care services into schools, supermarkets and pharmacies would provide more access points close to home and encourage New Yorkers to use preventative care services more frequently.”

Here’s the problem. Community based medical care was suggested by the Dinkins administration – thirty years ago. At the time, the idea was derided and often faced opposition from the very businesses interests supported by the Partnership. So what is different now? Is it that many tech based companies would profit from tech based medicine? It’s a bit disingenuous to suggest that community based healthcare is a new idea. It wasn’t rejected by the communities, it was rejected by interests more concerned with lower taxes or tax abatements.

The same can be said for the Partnership’s recommendations for education. Their answers are to much more heavily engage with the private  sector especially technology based companies. These are the same companies that look for tax abatements which weaken resource streams available for things like improved schools. When Amazon was looking for huge tax benefits for its Long Island City project, it would only commit to providing space for schools but not to constructing school facilities. Is that the kind of tech based corporate response being suggested? Are landlords owning emptying corporate based real estate willing to convert existing space to educational uses? Are they willing to equip schools and/or their students with the right technology?

The answer may unfortunately be found in the report’s recommendations for addressing some of these issues. Unfortunately, they center around some tired concepts which emphasize roles for the private sector in ways that would be profitable to them. When it comes to things like how to pay for the programs they suggest, the answers are a little different if not painfully predictable. The message has not changed for over a half century. No new taxes. Yes there are many administrative problems in the provision of services by New York City especially in the areas of education and housing. At the same time, the major issue facing those sectors has historically been funding.

The growth that the Partnership likes to take credit for occurred in spite of the allegedly job and economy killing tax policies in New York State and City. Can anyone argue with a straight face that economic development (at least in terms of monetary value) has been constrained in New York City during the 21st century to date?

Why are we optimistic? After 9/11, the fastest growing residential neighborhood in New York was the area adjacent to the World Trade Center site, an area without significant education infrastructure and a local economy built around an office based economy. The area continued to have appeal even after the flooding from Hurricane Sandy. The social, cultural, and economic attractions of the city will remain and once the issues of safety are addressed, we believe that the past will indeed be prologue and that the City will recover again.

ANOTHER VIEW OF THE NYC FUTURE

At the same time the Partnership was offering its prescriptions for the City’s economic recovery, the NYC Independent Budget Office was releasing its latest outlook for the NYC economy. IBO believes that New York City will lose an estimated 564,200 jobs in 2020, with the biggest losses—197,000 jobs—in the leisure and hospitality industry. In the years 2015-2019, the city averaged job gains of 93,400 annually.

At the same time, this year’s state budget includes provisions allowing imposition of mid-year reductions in state aid for localities and school districts if— as expected—gaps emerge in the state’s financial plan. The budget law sets up three points in the year when the Governor can propose reductions to the adopted budget, which take effect unless the Legislature comes up with equivalent alternative savings. Although the first test point passed with no action taken, the Governor’s budget has already stated that balancing the budget would require a recurring reduction in state aid for localities, which IBO estimates would cut education aid to the city by $2.3 billion.

Collections of business and personal income, sales, real estate-related, and hotel taxes are all expected to decline sharply in 2021 before growth returns in 2022. IBO expects growth in city-funded expenditures to resume in 2022, after remaining essentially at from 2019-2021. IBO estimates a $4.5 billion gap in 2022. This gap could be partially closed through the use of existing reserve funds, $1.25 billion of budgeted reserves and just under $2.1 billion of funds remaining in the Retiree Health Benefit Trust Fund.

GOVERNANCE AND RATINGS

A long running soap opera involving a significant customer of the Metropolitan Water District of Southern California has resulted in the Central Basin Municipal Water District in California being lowered from Baa2 to Ba1 due to governance issues. Moody’s cited the fact that since late 2019, the district’s board has not been able to meet with a proper quorum to govern the district and act on crucial matters to conduct business. This included failure to appoint a general manager, a general counsel, and an informational technology manager for several months, resulting in risks to the district’s supervisory control, water flow management, billing system, payroll system, and computer network.

The district was also not able to address urgent infrastructure repair needs and maintain its capital improvement plan. Most recently, the district was not able to adopt a budget in time for fiscal 2021 that began July 1, 2020 and has not yet imposed a standby charge for the fiscal year. Failure to approve and impose the standby charge by August 10, 2020 would reduce the district’s annual revenue by around $3.3 million and likely result in rate covenant violations of outstanding bonds during fiscal 2021.

Central Basin provides water to millions of residents of nearly two dozen cities across southeast Los Angeles County. It’s management has been the subject of many criticisms and investigations. A law approved in 2016 after an audit a year early found the board approved inappropriate spending and displayed instances of bad management. Board members spent lavishly on meals and travel to conferences, cycled through six general managers in five years, and broke state law by establishing a $2.75 million trust fund with no public disclosure.

Legislation in the state legislature is under consideration (Senate Bill 625) which would put the municipal water district under receivership. It has been a long hard fall for the District which was rated Aaa in 2013. It is not easy to follow the ratings path which District management has chosen over the years. It is likely that the legislation will pass as soon as the state legislature is able to convene and that actions will be taken to arrest the District’s financial and ratings decline.

SANTEE COOPER LITIGATION

A South Carolina state judge approved a $520 million settlement in a customer class-action lawsuit against state-owned utility South Carolina Public Service Authority (Santee Cooper) over increased rates for a failed nuclear construction project. The finalized deal also requires Santee Cooper to freeze electric rates for four years. The utility must also refund $200 million to its ratepayers, including members of South Carolina’s 20 electric cooperatives. 

The settlement is positive in that it does reduce the impact of litigation uncertainty on Santee Cooper. At the same time however, the rate freeze reduces financial flexibility going forward during this most uncertain time. Plaintiff’s attorneys have estimated that the rate freeze will take some $500 million from the utility in the form of foregone revenues.

The settlement will also resolve all of those lingering legal disputes between South Carolina Electric and Gas (SCE&G) and Santee Cooper over their roles as co-owners of the abandoned Sumner nuclear project.  With those issues settled, attention returns to the South Carolina legislature where the future of Santee Cooper is in the balance. It is not clear whether or not he settlement and rate freeze will hamper the ability of the State to sell the utility to a private entity.

So the uncertainty which has plagued this credit since it agreed to participate in the Sumner project will continue. For investors, a sale to a private entity would see the outstanding debt of Santee Cooper fully refunded. Continuance as a revenue limited public entity would force investors to cope with continued uncertainty for an extended period with little upside credit potential.

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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SCHOOLS AT THE EPICENTER OF THE VIRUS DEBATE

The outlook for a return to school dimmed significantly this week as districts throughout the country have announced delayed, modified, or suspended reopening. These decisions are coming in the face of a massive pressure campaign driven by conservative political considerations to try to force schools to reopen. The latest example is the announcement that the two largest school districts in California – Los Angeles and San Diego – will conduct their fall semesters on line.

The school districts have been put in an untenable position. The modern US economy, for better or worse, assumes that two parents in each household will be able to work. The resulting shift towards and expansion of the role of school districts to serve as a primary source of child care in the modern economy help create the current situation. Obviously, the economy cannot fully recover until all workers are available to work.

So clearly, school districts are at a crossroads. They are due to open in 5 to 8 weeks but they have no idea of the feasibility of a return to class would be financially, legally, and from a public health standpoint. At the same time, they are highly dependent upon sources of funding like state aid which are uncertain at best. There own local tax bases are undergoing extreme stress. Which leads us to ask, how can a school district rating outlook be anything other than uncertain or developing at best?

The certainly can’t be positive or stable in this environment and in many cases deserve a negative outlook. Here’s what Moody’s says about the pandemic.” The situation surrounding Corona virus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis.” On what planet is that a stable environment? Consider the role of state government in funding education and then look at the financial environment for states. We ask again, On what planet is that a stable environment?

We also ask how the pandemic does not raise governance issues for entities like school districts who do not control their own destinies? In many states, the decision to reopen schools will be driven by decisions at the state level. So from a governance standpoint, how is this not a negative factor for school districts? And if this was not a major consideration, why all the focus on the next stimulus bill and its potential funding for states and localities?

The issue of reopening is fraught for the school districts. What is their overall liability? What about the risk to faculty and staff? What are the potential impacts on staffing and costs? These are all basic issues for school districts to address and they currently are not armed with sufficient information so that all stakeholders can have their concerns addressed. For example, The American Academy of Pediatrics has clarified its stance on school reopening. “Returning to school is important for the healthy development and well-being of children, but we must pursue re-opening in a way that is safe for all students, teachers and staff. Science should drive decision-making on safely reopening schools. Public health agencies must make recommendations based on evidence, not politics. We should leave it to health experts to tell us when the time is best to open up school buildings, and listen to educators and administrators to shape how we do it.”

Two headlines we saw this week frame the issue very effectively. “education board in California’s Orange County votes to reopen schools without wearing masks and 7 in 10 parents sat sending kids to school a risk: poll.” These are not the sort of questions which are answered through data and spreadsheets so a more data based quantitative approach to ratings does not answer the real issues facing credits. So I ask once again, on what planet is that a stable environment?

OPPORTUNITY ZONES

When the 2017 tax reform legislation was enacted, one part of the bill placed municipal bonds right at the center of it. Opportunity Zones were included as part of a package designed to drive investment in historically under invested areas. The favorable treatment of capital gains income from investment in OZ projects was the draw for investors. At the time, there was a concern that the structure of the program might not channel investment into the kinds of community based employment and development opportunities most needed.

Initially, the program was seen as not living up to its goals. it was easy to find examples of developments and projects – primarily real estate related – that seemed to have no need for subsidized investment. And in many cases, they were owned by well funded established entities. Now, research from the Urban Institute finds that the critics may be right.

The Institute conducted interviews with a range of stakeholders working on mission-oriented OZ projects across the US. Through that process they found that the incentive’s structure makes it harder to develop projects with community benefit in places with greatest need. There is a mismatch between the type of investment many mission actors desire and the OZ market’s investment parameters, which favor assets providing the highest returns in shorter timelines. That conflicts with the program’s ten year timeline  for maximum tax benefit.

Tellingly, a few developers said the incentives made a difference in allowing a project to go forward, but most admitted their project would have proceeded regardless of whether they raised OZ equity. That highlights the single biggest criticism of the program which was designed to generate a neighborhood based economy more likely to produce longer term neighborhood equity.

The Institute does offer proposed solutions. They include targeting incentives to investments with the greatest impacts. These investments could be more deeply subsidized while more efficiently using total federal tax expenditures. OZ tax incentives could be based, for example, on the number of quality jobs created by the OZ investment. A redesigned OZ incentive could encourage equity investments in Community development financial institutions (Community development financial institutions (CDFIs) Community development financial institutions that, in turn, invest in or lend to OZ projects.  

The weaknesses of the program make an excellent case for more favorable municipal bond provisions. Advance refundings and an expansion of private activity bonds would likely generate more useful benefits in the immediate term.

MILEAGE TAXES GAINING TRACTION

One of the phenomenon we have been observing is the impact of the pandemic on the willingness of legislatures to embrace new ideas. The pandemic, coinciding with the depression in the oil/gas industries, has forced legislators to consider heretofore heretical ideas in their quest to balance their budgets. One of the items that shows this is the growing support for taxes for transportation which are not linked to fuel consumption. We now have data that backs up the view of that support.

In each of the last 11 years, the Minetta Institute for Transportation has surveyed attitudes towards taxes for transportation infrastructure. This year, the survey showed stronger support for a new vehicle taxation model. 49% supported replacing the gas tax with a ‘green’ mileage fee that charges an average rate of a penny per mile, with lower rates for less polluting vehicles and higher rates for more polluting vehicles. Half of respondents supported a “business road-use fee” that would be assessed on the miles that commercial vehicles drive on the job.

The study also found that If Congress were to adopt a federal mileage fee to replace the gas tax, more than three-quarters would prefer to pay monthly or at the time they buy fuel or charge a vehicle, while 23% preferred to pay an annual bill. Respondents thought mileage fee rates should be lower for electric vehicles than for gas and diesel vehicles. A majority valued the idea of using the gas tax revenue on improvements across different transportation modes, including for both road and public-transit-related projects. Only 3% of respondents knew that Congress had not raised the rate of the federal gas tax since 1993.

The data comes as the US Department of Transportation released data on 4th of July travel. Americans took 2.8 billion fewer total trips during the 4th of July week this year than they did in 2019. That overall drop is supported by similar declines in the number of trips per day throughout the week. It is driven by a similar 2.8 billion drop in the number of local trips (under 50 miles) as well as the number of trips taken in each of several local trip-distance groupings. The number of long-distance trips (50 or more miles) edged up by 0.3 million from 2019 to 2020. That slight increase was driven by a 2.2 million rise in the number of trips between 100 and 250 miles, which was tempered by a 1.9 million drop in the number of trips greater than 500 miles. In 2019, on average, 19.7% of Americans stayed home each day during the holiday week; in 2020, that number rose to an average of 24.8% staying home each day.

HEALTH INSURANCE

In spite of the debate over the Affordable Care Act and the efforts of the Trump Administration to have the ACA declared unconstitutional, it has clearly resulted in more people having insurance coverage. This has benefitted not only individuals newly covered but also the institutions which serve them, especially hospitals. as the proportion of uninsured patients has gone down,

Because of job losses between February and May of this year, 5.4 million laid-off workers became uninsured. These recent increases in the number of uninsured adults are 39% higher than any annual increase ever recorded. The highest previous increase took place over the one-year period from 2008 to 2009, when 3.9 million nonelderly adults became uninsured. Nearly half (46%) of the increases in the uninsured resulting from the COVID-19 pandemic and economic crash have occurred in five states: California, Texas, Florida, New York, and North Carolina.

In eight states 20% or more of adults are now uninsured: Texas, where nearly three in ten adults under age 65 are uninsured (29%); Florida (25%); Oklahoma (24%); Georgia (23%); Mississippi (22%); Nevada (21%); North Carolina (20%); and South Carolina (20%). All but Oklahoma are also among the 15 states with the country’s highest spike in new COVID-19 cases during the week ending on July 12. Five states have experienced increases in the number of uninsured adults that exceed 40%: Massachusetts, where the number nearly doubled, rising by 93%; Hawaii (72%); Rhode Island (55%); Michigan (46%); and New Hampshire (43%).

The movement of the pandemic to the Sun Belt is highlighting again the regional nature of the health insurance crisis in the US. This week the nonpartisan consumer advocacy group Families U.S.A., released the results of research which found that the estimated increase in uninsured laid-off workers over the three-month period February to May was nearly 40% higher than the highest previous increase, which occurred during the recession of 2008 and 2009. In that period, 3.9 million adults lost insurance.

That research shows that the highest percentages of uninsured non-elderly individuals are found in the old Confederacy. With the pandemic concentrated in Texas and Florida, it highlights their respective rates of uninsured at 29 and 25%. That will put the hospitals -already under unprecedented stress – to have to deal with the reality that one in four or one in three patients will have to be treated for free.

Contrast that with the environment in early hard hit states where uninsured rates are 10% in NY and 13% in Illinois. Massachusetts has only an 8% uninsured rate. This mitigates the risks associated with high levels of charity care and does provide some comfort that the resumption of elective surgeries will help to support revenues. 

COAL DECLINE LOCAL IMPACT

The National Bureau for economic research released a report documenting the financial impact on counties which have a significant economic dependence upon coal production. The report identified some 27 counties which derive over one third of their revenues from mining activities.

US coal consumption nearly tripled between the early 1960s and 2000s, with growth disproportionately in the Powder River Basin in Wyoming and Montana. Between 2007 and 2017, the tide turned, and total coal production in the United States declined by 32 percent. At coal’s employment peak in the 1920s, 860,000 Americans worked in the industry. As of March 2020, coal mining employed only about 50,000 people. The most concentrated job losses have been in Appalachia. Employment in the coal mining industry declined by over 50 percent in West Virginia, Ohio, and Kentucky between 2011 and 2016. And the decline has been rapid. In Mingo County, West Virginia, coal mining employed over 1,400 people at the end of 2011. By the end of 2016, that number had fallen below 500. Countywide, employment fell from 8,513 to 4,878 over this period.

Which are the most at-risk counties according to the NBER? Boone County, West Virginia, Campbell County, Wyoming, and Mercer County, North Dakota. What does that risk look like in numbers? Campbell County, Wyoming says that of the $5.3 billion in total county assessed property valuation (which includes the value of minerals produced) in the 2016–17 fiscal year, 89 percent was oil and gas production and coal. The Mercer County, North Dakota  general fund received $1.71 million from coal severance taxes, $1.25 million from coal conversion taxes, and $0.76 million from mineral royalty revenue. Overall county general revenues were $7.5 million, making the three sources about half of all county revenues.

About a third of Boone County’s revenues directly depended on coal in the form of property taxes on coal mines and severance taxes. In 2015, 21 % of Boone County’s labor force and 17 percent of its total personal income were tied to coal. Coal property (including both the mineral deposit and industrial equipment) amounted to 57 % of Boone County’s total property valuation. Property taxes on all property generated about half of Boone County’s general fund budget, which means that property taxes just on coal brought in around 30 % of the county’s general fund. Property taxes on coal also funded about $14.2 million of the $60.3 million school budget (24 %).

ILLINOIS MARIJUANA TAXES

As the first state to legislatively legalize recreational marijuana, it has been a source of interest for analysts of the business. So the latest statistics on cannabis tax collections is interesting. Illinois collected almost $52.8 million in tax revenue during the first six months of recreational marijuana sales. This is nearly double the Governor’s budget estimates, which predicted the state would collect $28 million in cannabis tax revenue before June 30.

The state collected about $34.7 million in cannabis specific excise taxes and $18 million in general sales taxes from the industry. The state expects $25.9 million to go into its general fund. As the first Midwestern state to legalize recreational marijuana, Illinois was well positioned to benefit from that status. For once, Illinois is the beneficiary of good timing. The pandemic has also seen a rise in cannabis sales nationwide.

CLIMATE CHANGE AND MUNICIPAL CREDIT

The National Oceanic and Atmospheric Administration (NOAA) has released its 2019 State of U.S. High Tide Flooding with a 2020 Outlook report. The document highlights the increasing impact of climate change and sea levels. The findings have significant implications for the long term creditworthiness of many municipal credits located on the nation’s coastlines.

Evidence of a rapid increase in sea level rise related flooding started to emerge about two decades ago, and it is now very clear. This type of coastal flooding will continue to grow in extent, frequency, and depth as sea levels continue to rise over the coming years and decades. High tide flooding (HTF) is an increasingly frequent phenomenon. The U.S. annual HTF frequency now is more than twice that in the year 2000 due to rising relative sea levels. Nineteen locations also broke or tied their all-time HTF records (median of 13 days) in 2019 along the East and Gulf Coasts including multiple locations along the Texas coastline, as well as at Miami, Savannah, Charleston and Annapolis.

Under current floodplain management practices, by 2030 the national HTF frequency trend is likely to further increase by about 2–3 fold. This highlights the need for municipalities to take remedial steps. HTF is more than twice as likely now as it was in 2000. The rapid growth is in response to relative sea level (RSL) rise, which is occurring along most U.S. coastlines. HTF in 2019 occurred the most along the Western Gulf of Mexico coastline.  HTF occurred more often along the Southeast Atlantic and Gulf Coasts in 2019.

So where was the problem the greatest? HTF occurred most frequently (64 days) at Eagle Point, Tex., which is within Galveston Bay. Other notable locations setting records include Annapolis, Md. where HTF often causes parking and transportation disruption in the downtown area, Charleston, S.C. and Savannah, Ga., Virginia Key in the Miami region, Dauphin Island, Ala. and Galveston, Tex..

The Northeast Atlantic and Western Gulf coastlines are projected to experience the most HTF in 2020. The national median HTF occurrence was 4 days in 2019, and the trend continues to accelerate. By 2030, the national HTF frequency is likely to increase about 2–3 fold (national median of 7–15 days) compared to today without additional flood-management efforts. By 2050, HTF is likely to be 5- to 15-fold higher (national median of 25–75 days), and potentially in some locations reaching nearly 180 days per year, effectively becoming the new high tide.

Keep in mind that this analysis is the product of the current climate ignorant anti-science Administration  in Washington. And it is still bad news for coastal communities. It needs to carry greater weight in the analyses done by investors and certainly the rating agencies.

UPDATES

The Trump Administration has agreed to rescind a directive that would have barred foreign students from the United States if their colleges canceled in-person instruction during the COVID-19 pandemic, following lawsuits by a number of universities and states. Eighteen state Attorneys General and numerous universities across the country challenged the plan in federal court. The reversal eliminates the risk not only for the schools but also for entities like landlords who rely on students who reside off campus.  

We have commented previously on the risks of single project bonds for things like hotels which are extremely vulnerable to the impact of pandemic restrictions on operations. The latest example is the ill-fated Lombard, IL hotel project which has never been a success. The unrated 2005 bonds issued for the project were restructured its bonds through bankruptcy in 2018 . The hotel has not been open since late March and defaulted on its July 1 debt service payment when due. The $142 million bond exchange resulted in recovery rates for the original holders of between 77% and 86% on three most senior series while a subordinated $29 million series took a near total loss. The new debt extended the  final maturity of the debt to 50 years.

The cruise ship industry and those places which depend on it for tourism will continue to be under pressure from the impact of the pandemic. Now that pressure will continue as the Centers for Disease Control and Prevention issued an order that extended the suspension of cruise operations until Sept. 30. The extension reflects the fact that from March 1 until July 10, 80% of the ships in the C.D.C.’s jurisdiction were affected by the corona virus. The agency said there had been nearly 3,000 suspected and confirmed cases and 34 deaths on ships in U.S. waters.  There were 99 outbreaks aboard 123 cruise ships in United States waters alone.

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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It is becoming clear that in spite of the best efforts of the Trump Administration, there will remain serious issues of concern for municipal bond investors. The most central to emerge is the issue of reopening schools. The pandemic has laid bare the role of the public education system as de facto day care. As the economy is currently constructed, two working parent households are the norm if not the necessity. That has put the schools in an untenable position of being pressured to open to enable workers to work outside of the home.  

The biggest unanswered question of the reopening effort is how working families will find child care for the days when their children cannot be physically present in school. Another is the issue of staffing in the schools. The idea behind opening schools is that younger children are less at risk of the virus than are adults. That begs the question of what to do to mitigate the risk in adults. This will create significant financial costs. And that does not include the cost of hiring staff to replace teachers who will either seek medical exemptions or, perhaps worse, retire. In NYC, the city estimates that about one in five current teachers will receive medical exemptions to work remotely.

The second issue is that the reopening experience overall to date has been perilous. The reimposition of some limits on economic activity is the clearest indication that reopening policies have been a failure. The immediate effect is on governmental revenues derived from taxes most directly related to economic activity like sales taxes especially those generated from the hospitality industry. There is a conger term component to this concern. The problem is that most reopening scenarios make the assumption that there will be work to return to.

Take the airline industry. United has threatened to furlough 36,000 workers if it is unable to resume a “normal” schedule. This week saw reopenings by airlines which were quickly pulled back as the pandemic marched through the Sun belt. A large drop in projected demand drove those decisions. In the hospitality sector, employment could take a significant hit without additional federal stimulus. Now will be the time when the small independent operator will have to face the music and decide whether or not their business is viable. The signs of drags on employment are everywhere with a variety of retail entities announcing unit closings and/or financial restructurings. Banks are even contemplating or announcing branch closures. These will undoubtedly serve to dampen the decline in unemployment.

We believe that there will be a significant impact to local revenues that will become clear when tax collection data for FY Q1are available in the fall.

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WHILE WE WERE AWAY

Lots happened in the short time we took away from things. The pandemic has turned the budget processes of a number of issuers on their heads as they attempt to deal with the fiscal impacts of the pandemic.

Oklahoma voters approved a ballot initiative which would expand Medicaid in the state under the provisions of the Affordable Care Act. The ballot measure requires the state to expand Medicaid by July 1, 2021. At least 200,000 Oklahoman adults will be newly eligible for Medicaid. It comes after the State had positioned itself to be the first to receive a federal waiver to implement a more limited form of the Medicaid expansion. It would convert a portion of federal Medicaid payments from an open-ended entitlement into a defined lump sum, known as a block grant. 

The ballot measure inserts Medicaid expansion into the state’s constitution, which could bar state leaders from making conservative changes to the program, like adding work requirements or premiums. The Governor was an early and vocal holdout against the imposition of containment and mitigation procedures in Oklahoma. Since then, the ground has shifted as evidenced by the failed campaign rally in Tulsa.

New York City adopted a budget for FY 2021 that reflects the fiscal realities of the City’s $9 billion budget gap which resulted from the impact of the pandemic on the City’s economy. It also comes as the City attempts to grapple with demands for reducing funding for the police. It is not surprising that the budget process was a highly political one. What is disappointing is the threatened actions of one of the City’s major elected political leaders.

Jumaane Williams, the city’s public advocate has threatened to attempt to use City Charter language which he interprets as giving him the right to stop the City from collecting property taxes. The advocate’s position reflects his long role as a political activist in the City’s political life. What is also reflects is an irresponsible attitude towards its debt holders. The problem with the advocate’s position is that property taxes are by law initially required to be deposited into sinking funds held for the purpose of repaying the City’s general obligation debt. Only after sums required for debt service have been deposited do those monies flow into the City’s general fund.

It does raise the question of whether a control board should be reinstated to oversee the City’s finances. We only have to look to the City’s eastern border at Nassau County. There the County is seeking to have NIFA, the entity overseeing its operations, extend the potential period of its control. The vehicle for that would be the issuance on behalf of the County of debt through NIFA. A control period would extend through the life of any NIFA debt issued. It comes from the same County Executive who ran against NIFA oversight so, many things have changed.

In Maryland, the Board of Public Works cut $413 million out of the state’s budget — one of the biggest single-day revisions in state history.  Funding was reduced for universities, community colleges, crime initiatives and dozens of other state programs. The Board also approved selling off state-owned aircraft and eliminating 92 vacant state jobs. The largest cut — $186.8 million — affected universities and community colleges. The governor has warned that if the board cannot come up with an alternative to those cuts by next month, the state may be forced to lay off 3,157 employees.

PUERTO RICO

The judge overseeing the Puerto Rico Title III proceedings ruled against bondholders in three motions before her. $6.7 billion of Puerto Rico Highways and Transportation Authority, Infrastructure and Finance Authority, and Convention Center District Authority were affected by the decision. Bond insurers Assured Guaranty (AGO), Ambac, National Public Finance Guarantee, and Financial Guarantee Insurance Corp. had asked the court to lift the bankruptcies’ automatic stay provisions on those entities. This would allow the insurers to sue the issuers for the right to retain revenues subject to what is known as the “clawback” provisions for those bonds.

Those provisions were always a threat to creditor to bond payments. It always seemed clear from offering documents that there could be potential conflicts between the strength of statutory versus constitutional claims on revenues. The   insurers had plenty of motivation to challenge the “clawback” which allows some tax revenues dedicated to the revenue bonds to be held back by the Commonwealth in order to conform to the constitutional pledge securing general obligation debt of the Commonwealth. HTA debt to the tune of $2.95 billion gross par . All three issuers have sold insured debt backed by the insurers. With $4.1 billion outstanding, the HTA bonds are the biggest segment of the insurers claim.

And then there is the water system. Starting July 2, nearly 140,000 customers, including some in the capital of San Juan, became without water for 24 hours every other day as part of strict rationing measures. More than 26% of the island is experiencing a severe drought and another 60% is under a moderate drought, according to the US Drought Monitor. Water rationing measures affecting more than 16,000 clients were imposed earlier this month in some communities in the island’s northeast region. 21 of 78 municipalities are affected by the severe drought while another 29 are affected by the moderate drought. An additional 12 municipalities face abnormally dry conditions. The worst of the drought is concentrated in Puerto Rico’s southern region.

Underlying this all is the annual dance around the adoption of a budget for the Commonwealth. For the fourth straight year, the Puerto Rico government budget that went into effect at the start of fiscal year on July 1 was the version presented by the federally created Puerto Rico Financial Oversight & Management Board (FOMB). Section 202 of Promesa mandates the Puerto Rico Legislative Assembly to approve a “compliant budget” and submit it to FOMB before the start of fiscal year. Otherwise, the oversight board’s proposal will be “deemed approved” by the governor and the oversight board will issue it a fiscal plan compliance certification, entering into “full force and effect” at the start of the fiscal year on July 1.

Funding for full payment of the Christmas bonus to public employees is not included in the approved budget. The House budget plan contained an allocation of $48 million to pay the Christmas bonus to public employees, and the Senate insisted on $64 million in bonus funding. It’s a symptom of the state of denial in which the Commonwealth government exists  and serves as a drag on recovery.

MORE BAD NEWS FOR THE MTA

The New York City Independent Budget Office (IBO)has released an analysis of the impact of declining dedicated tax revenue on MTA finances. Revenue from dedicated taxes comprised 37 %  of the Metropolitan Transportation Authority’s operating budget in 2019. Dedicated taxes made up a similar share of NYC Transit’s budget, or nearly $3.7 billion. On the basis of the recent experience, the IBO has delivered several projections of the revenue impact on MTA revenues due to the pandemic.

Over the years 2020-2022, IBO estimates that dedicated tax revenues for the transportation authority will fall a combined $2.7 billion short of projections by the agency prior to the pandemic. IBO estimates the shortfall will be $484 million in 2020, $1.4 billion in 2021, and $816 million in 2022. Looking just at dedicated taxes from the city, known as the urban tax and the mansion tax, IBO projects a substantial decline from the amount forecast by the Metropolitan Transportation Authority in February. IBO projects urban tax collections will fall $355 million short of the nearly $1.9 billion previously expected by the transportation authority over the years 2020-2022. IBO estimates the mansion tax will generate about $450 million less than the transportation authority estimated over the same period.

IBO anticipates other dedicated taxes also will generate revenue well below previous expectations. For example, the transportation authority had projected that the payroll mobility tax would garner about $5.0 billion in revenue for the years 2020-2022. IBO estimates collections will fall about $500 million short over the three-year period. NYC Transit’s fare revenue totaled $4.6 billion in 2019. NYC Transit’s fare revenue, which totaled $4.6 billion in 2019.

Before the Covid-19 crisis, the MTA expected to receive between $1.0 billion and $1.1 billion per year from the regional sales tax. IBO’s projections for this tax are $138 million (13 %) lower in 2020, $187 million (17 %) lower in 2021, and $142 million (13 %) lower in 2022. The for-hire transportation surcharge (FHV Surcharge) is a fee on trips taken by traditional taxis, car services, or app-based service such as Uber or Lyft, that begin, end, or pass through Manhattan south of 96th Street. The surcharge is $2.75 for app-based services, $2.25 for traditional taxis and car services, and $.75 per passenger in “pooled” vehicles. The MTA in its February 2020 Financial Plan projected FHV Surcharge revenue of $417 million in 2020 and $385 million in 2021 and 2022. Preliminary actual revenue for 2020 was $384 million, and IBO projects revenue of $332 million in 2021 and $365 million in 2022.

One tax source has held up. The internet marketplace tax took effect in New York in calendar year 2019. The legislation authorizing the tax requires third party retail sites such as Amazon and eBay to collect and remit sales tax on purchases made by New York State residents. Most of the revenue from the tax is earmarked for the MTA’s capital program. Given the strength of online sales in the wake of the Covid-19 pandemic, IBO has not adjusted the projected revenue from this tax in 2021 and 2022. The preliminary total of actual dedicated tax revenue received by the MTA in 2020 is $6.4 billion, $484 million (7 %) below what the MTA projected in its February 2020 Financial Plan. IBO projects dedicated tax revenue for the MTA of $5.7 billion in 2021 and $6.5 billion in 2022. Compared with the MTA’s February forecasts, these projections are $1.4 billion (25 %) and $816 million (11 %) lower, respectively.

SCHOOL IS OUT FOR COLLEGE TOWNS

The higher education sector has been under increasing pressure as unfavorable demographics and a demand base which is warier about taking out significant debt to finance attendance have exerted downward pressure on demand. This has led to universities seeking to cut costs and lean on their endowments for greater amounts of annual support. While these factors have pressured university finances, the economic impact of those factors has been somewhat muted for those businesses which cater to college populations. Now, the pandemic may be able to do what these other factors have not – significantly damage local economies.

One way to identify potentially localities vulnerable to the impacts of containment and mitigation strategies is to see whether or not colleges have a significant impact on their local economies. Many of these institutions are state universities located in areas where they have become the dominant employer. With the potential for predominantly online learning due to student fears over returning to a traditional residential campus setting, many of these local economies face the loss of significant economic activity if normal university/college related activities do not resume this semester.

The most recent hit to international student demand has come from the announcement that the Trump Administration has determined that international students must take their courses in person, in order to remain in the US on their student visas. In our February 24 edition we highlighted the importance of international students to many institutions and their local economies. The regulations proposed from the Department of Homeland Security say that students on study visas whose schools will operate entirely online this fall will not be allowed to remain in the US.

The decision will impact all types of universities. The California State system, Harvard and the University of Massachusetts Boston are among those institutions offering only online classes this fall. Harvard and MIT asked a federal court in Boston for a temporary restraining order and permanent injunction against the administration’s new policy. The lawsuit alleges several violations of a federal law known as the Administrative Procedure Act (APA), which concerns how much decision making power resides with federal agencies. 

The effort by DHS to promulgate these regulations at this date under these circumstances seems designed to be as disruptive as possible for the students and the institutions. There have been several affirmations of stable ratings outlooks of state university credits. Under current circumstances, the move against international students is not a source of stability.

Another segment of university operations to succumb to the pandemic is athletics. The pandemic has provided an opportunity for institutions to eliminate varsity support for a number of “unprofitable” sports. The biggest example is the announcement that Stanford University will discontinue 11 of its varsity sports programs at the conclusion of the 2020-21 academic year: men’s and women’s fencing, field hockey, lightweight rowing, men’s rowing, co-ed and women’s sailing, squash, synchronized swimming, men’s volleyball and wrestling.  The 11 programs include 240 student-athletes and 22 coaches. 

It is a trend seen across the country. The University of Akron cut men’s cross country, men’s golf and women’s tennis, while Furman eliminated baseball and lacrosse. Brown is planning to demote eight teams to club status.  If football and basketball result in restricted and/or partial seasons, than the mother’s milk of college sports will have been impacted creating further pressure on college finances.

COAL – NOT IF BUT WHEN?

Coal continues its struggle against the realities of economics and climate change. Last week, the Trump Administration made a last ditch effort to subsidize coal with a $120 million program to seek other uses for coal. This was offset by the trend of utilities in the western US retiring coal-fired plants before they reach the end of their expected useful lives. Even stalwart facilities like the Navajo Generating Station are shuttering. Now, more western utilities are making similar moves even as they are located within reasonable shipping distance of low sulphur coal.

Colorado Springs Utilities voted Friday to close the two municipally owned coal plants, one in 2023 and another by 2030. Colorado Springs Utilities will close its Martin Drake plant in 2023 and its Ray Nixon plant by 2030. The municipal utility’s “Energy Vision” calls for reducing carbon emissions 80% by 2030. The announcement means only three of the state’s remaining coal generators are slated to continue running after 2030. Colorado had 17 coal boilers spread across eight power plants in 2008.

Tucson Electric Power released a proposal to ramp down the usage of its two boilers at the Springerville Generating Station before closing them altogether in 2027 and 2032. The plan is subject to approval from Arizona regulators. Tucson Electric Power said it plans to operate two of Springerville’s four coal boilers on a seasonal basis beginning in 2023, using the units only in the summer months. The utility said it plans to install 2,457 megawatts of new wind and solar by 2035 — a 70% increase in its renewable capacity.

CONVENTION BLUES

The nation’s large convention centers have been under the gun as they deal with cancellations and the decline in tourism which is impacting revenues pledged to support the debt issued to finance their construction. The latest victim is the debt issued by the Las Vegas Convention and Visitors Authority (LVCVA), Nev. S&P announced that it was lowering its rating on the Authority’s outstanding debt from A+ to A.

S&P acknowledges that “the authority is a primarily tax-funded public operating entity”. Nevertheless, “with the onset of the COVID-19 pandemic and social distancing measures implemented in response to the outbreak, economically sensitive pledged revenues are expected to fall sharply in 2020, weakening the authority’s coverage metrics and introducing significant revenue volatility risk in the short-to-medium term, which is reflected in the downgrade.”

Ninety-three events (conventions, events, and meetings) were held at LVCC facilities in fiscal 2019. The pandemic and the restrictions on travel and large gatherings has created real uncertainty regarding medium-term large-scale travel, general tourism, and traditional heavy scheduling of fall conferences in the wake of resurging cases has the potential to slow traffic to the city and significantly reduce expenditures for an extended period of time. Demand for hotels and large-scale events has fallen, leading to weakening pledged revenue collection and debt service coverage. 

NO REST FOR THE HACKERS

Cybersecurity in the public sector was back in the news. NetWalker, a ransomware gang is holding Fort Worth’s Trinity Metro. The group is threatening to release all their data from Trinity Metro’s private files. The group is bold as they are the ones publicizing the hack.

Trinity Metro has the option to either pay up — which most experts discourage — or they can rely on backups of the data and risk the information being posted publicly. The NetWalker ransomware group has attacked the University of California — San Francisco. The university recently paid the hackers $1.14 million to prevent the release of student records and other information. Michigan State University and Columbia College of Chicago were also hacked by NetWalker in June. It’s not clear whether they paid as well. It only takes a few to give in to encourage this activity. As the old saying goes, a million here and a million there and pretty soon it adds up to real money.

CONGRESS AND INFRASTRUCTURE

A bipartisan bill has been introduced in the Senate to support the financing of infrastructure by state and local governments. The  legislation – The American Infrastructure Bonds Act of 2020  – would allow state and local governments to issue taxable bonds for any public expenditure that would be eligible to be financed by tax-exempt bonds. These bonds could be used to support a wide range of infrastructure projects, including roads, bridges, water systems, and broadband internet.

The bonds would be modeled as a “direct-pay” taxable bond, with the U.S. Treasury paying a percentage of the bond’s interest to the issuing entity to reduce costs for state and local governments. The Treasury Department would make direct payments to the issuer of the bonds at 35% after the date of enactment and down to an estimated revenue neutral rate of 28% starting in 2026. These payments would encourage economic recovery from the corona virus pandemic by subsidizing AIBs issued through 2025 at a higher percentage of the bond’s interest.

The payments would revert to a revenue neutral percentage for projects after 2025, reducing long-term costs for the federal government and providing a permanent financing option for localities. the payments from the U.S. Treasury to issuers would be exempt from sequestration. This became an issue as Congress steadily chipped away at the support for Build America Bonds which were authorized in 2010.

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.