Joseph Krist

Publisher

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Three weeks out from Election Day we see little prospect of a stimulus package. We see continuing disruption and uncertainty in the immediate future in terms of state and local finances. The lack of a plan is already impacting not only the governments but their economies which would benefit from the economic stimulus of infrastructure development.

We look at the upcoming election through the lens of a municipal bond investor and analyst. A continuation of the status quo in Washington would leave the handcuffs on the municipal bond market. No advance refunding, no increased private activity limits, and no additional incentives to drive additional bank investment in municipal bonds. Combined with a clear unwillingness and inability of the Trump Administration to develop and articulate an infrastructure policy, the status quo would be an exceptionally poor outcome for municipal bonds.

If a Democratic administration emerges and if the Senate goes Democratic, a more favorable municipal bond environment would be a likely outcome. Increased flexibility, additional stimulus, a likely top marginal tax rate increase, all would drive additional supply and demand for municipal bonds. Stimulus would support credits and by driving economic activity would be credit positive as well.

None of those issues are red or blue.

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ON THE LINE IN NOVEMBER – MEDICAID AND HOSPITALS

The Trump Administration’s choice to press forward rapidly with its Supreme Court Justice appointment simply reinforces the importance of the election and its possible outcomes. Should the appointment be confirmed before November,  one of its decisions could have real ramifications for the credit of states, counties, and hospitals. The U.S. Supreme Court is set to hold hearings on California v. Texas in November, a case in which the plaintiffs hope the court will invalidate the Affordable Care Act (ACA) in its entirety.

 A recent Urban Institute report attached some data to support its view that should the ACA be found unconstitutional it would be a negative event. The bulk of current media and debate is on the idea of coverage as it pertains to the patient side of the equation.  We look at the issue of what is the current situation where theoretically everyone could have coverage as it pertains to the ability of providers to sustain their businesses while states maintain their solvency under conditions which increase the amount of Medicaid and charitable care would be funded.

If the population were to revert to the pre-ACA environment, there would be significant. Opponents like to criticize the increased costs to states for increased Medicaid eligibility but they never provide data to show how increased coverage is not an overall positive for a state’s economy. The fact is that states only have to cover 20% of the expansion cost in their state undermines the budget argument. The return of the 2009 status quo would reduce some medical spending for states but it would increase costs in other ways that mitigate the value of any estimated net budget benefit.

In the context of the pandemic, the resulting upheaval stemming from the medical insurance market would be only more acute. Whether from a healthcare perspective or a purely economic perspective, such a change would damage the financial position of the funding and provider side of the equation will generating little if any net benefit to the consumer/patient side. The potential general economic impact would be negative from both an employment and consumption standpoint. COVID-19 has exposed health care providers to additional social risks related to protecting the health and safety of communities. Specifically, those risks could cause financial pressure should revenue and other federal and state support fail to cover the increased equipment and personnel costs stemming from demand to care for COVID-19 patients and should revenue losses occur as a result of individuals’ forgoing care for health and safety reasons related to the pandemic.

Approximately 5.8 million Americans enroll in individual (single adult) marketplace policies and receive federal help paying for their coverage. The average adult in this group receives $5,550 in assistance each year through premium tax credits. Another 2.7 million Americans enroll in marketplace plans with their family members and receive federal subsidies to help pay their premiums. The average family among this group receives $17,130 in help each year through premium tax credits.

36 states and the District of Columbia so far expanded healthcare coverage under the ACA. Whenever it is on the ballot for voter approval, it wins. That is not an accident.

ON THE LINE IN NOVEMBER – TRANSIT ON THE BALLOT

The operating outlook for many municipal transit systems is negative right now and the projected course of the pandemic so uncertain but this has not removed the pressure off transit agencies who by their nature develop long range plans for long lived assets. This reality is driving a number of municipalities to seek new or additional funding sources from their own revenue bases to fund transportation infrastructure.

Portland, OR – A 0.75% payroll tax on employers to fund a $7 billion transportation plan. Gwinnett County, GA – 30-year, 1% sales tax for transit expansion in the county, including money for bus and rail expansion, expected to raise a total of $12 billion. Austin, TX – 8.5-cent, no-sunset increase in city property tax to help fund Capital Metro’s $7 billion Project Connect plan.

These requests highlight the continuing lack of a federal role in new infrastructure development. Infrastructure week has morphed into something closer to infrastructure decade. These jurisdictions are all integral parts of significant metropolitan areas with real economic aspirations and it is not unreasonable for there to be clear guidance regarding the federal role in funding mass transit. The pending proposals highlight both the need for local funding as well as the policy vacuum at the federal level.

MICHIGAN

Early on, Michigan was one of the state’s hit hardest by the pandemic. The Governor was aggressive in dealing with it though the use of fairly strict restrictions on economic activity and travel. These moves have been undertaken in the face of vocal opposition which has gotten much publicity. The political atmosphere created real uncertainty about the likelihood that a fiscal 2021 budget would be adopted in time for the beginning of the fiscal year on October 1.

Governor Gretchen Whitmer signed the state’s $62.8 billion budget for fiscal 2021 (which ends 30 September 2021). It includes good news for local governments because it preserves their state funding in the face of revenue difficulties stemming from corona virus related restrictions. Preliminary state budget estimates had signaled local government funding cuts. The stable funding will likely allow K-12 school districts to avoid draws on reserves. The fiscal 2021 state budget includes $95 million in onetime supplemental funding for school districts, which equates to $65 per student.

Given the contentious politics of the State, the changes made to funding ratios and policies as a part of the budget were good to see. One is the change in how student attendance is calculated for purposes of distributing state aid to districts. Roughly 95% of traditional public school districts in the state are majority funded based on their individual per-pupil foundation allowance set annually by the state legislature.

Count day is when all districts in the state determine their enrollment and takes place in February and October. The state has also changed the way it will count students for the year, using a blended count more heavily weighted toward last spring’s Count Day which limits the financial impact of an enrollment drop resulting from students choosing not to attend this fall because of the corona virus.

Non-school district localities benefit from the fact that sales taxes – the primary source for state aid distributions – have performed better than was estimated. This has allowed the state to hold funding constant in the current year’s budget. It’s not all milk and honey for the larger municipalities which have more diverse revenue bases. The maintenance of state aid mostly addresses property tax issues. It does not offset losses from things like income and gaming taxes.

DOWNGRADES CONTINUE

S&P continues to lower airport revenue bond ratings. It lowered its long-term rating and underlying rating (SPUR) to ‘A+’ from ‘AA-‘ on Hillsborough County Aviation Authority (HCAA), Fla.’s outstanding senior-lien revenue bonds and to ‘A’ from ‘A+’ on the authority’s ‘s subordinate-lien revenue bonds, both issued for Tampa International Airport (TPA). A negative outlook was maintained. Combined enplanement levels are projected to be down 43% in fiscal 2020 (Sept. 30 year-end) compared with fiscal 2019 and down approximately 67% for the month of August year over year. 

It lowered its long-term rating and underlying rating (SPUR) to ‘A’ from ‘A+’ on Oklahoma City Airport Trust’s revenue bonds. The outlook is negative. It lowered its long-term rating and underlying rating (SPUR) to ‘BBB’ from ‘BBB+’ on the Mobile Airport Authority (MAA), Ala.’s general airport revenue bonds lowered its long-term rating and underlying rating (SPUR) to ‘BBB’ from ‘BBB+’ on the Mobile Airport Authority (MAA), Ala.’s general airport revenue bonds. A negative outlook was maintained.

Other airport credits downgraded by S&P included Kansas City, Palm Beach, Fl, and the Manchester NH airport. Some of the larger airports have been able to maintain their ratings but have received negative outlooks. Memphis and Denver are the latest examples.

S&P maintained the City of Detroit’s negative outlook assigned in April. Fiscal 2020 revenues were in line with projections and while 2021 revenues have been revised downward, the city will likely use less fund balance than expected, factoring in conservative projections, efficient spending below budgeted levels, CARES Act funding, and some one-time transfers. So what is the major risk? “Revenues do not recover and there is no additional stimulus, and if this is expected to lead to a continued budget gap and even further draws on reserves.”

COAL TAKES ANOTHER HIT

The relentless pressure on the economics of coal continues to claim victims. Competitive energy supplier Vistra announced it would retire 6,800 MW of coal by 2027. The company owns seven coal-fired power plants across the Midwest. Company officials blamed state subsidies, declining gas prices, an overbuild of resources and the “systemic failure of the MISO capacity market to provide Illinois-based power plants with adequate revenues” for its coal fleet. 

Interviews with the CEO of Vistra were telling in terms of the future of coal. Among his revelatory statements he indicated that these decisions are not politically driven.  “The one key about coal plants is that they’re closing naturally because natural gas prices are low, which then turns power prices low. Even though the States are anti coal, what is interesting is that’s not why coal plants are shutting down.”

While the policy debate in terms of coal and climate change continues at the political level, we have previously opined the decline of coal would be a market driven rather than a politically driven one. Merchant coal plants are uniquely vulnerable to coal’s failing economics within competitive markets, because unlike vertically integrated rate-regulated utilities, competitive energy providers are unable to recover any losses associated with plants through their rate base. 

Since Mr. Trump was inaugurated, 145 coal burning units at 75 power plants have been idled, eliminating 15% of the nation’s coal-generated capacity, enough to power about 30 million homes.

RETAIL UNDER MORE PRESSURE

If you own a credit which depends on a shopping mall, you got more bad news this week. The owner of Regal Cinemas in the United States, said it would temporarily close all 663 of its movie theaters in the United States and Britain. The move was expected to affect 40,000 employees in the United States. 200 theaters, mostly in California and New York, have been shut since the pandemic began in the spring.

The closure is attributed in part to the lack of new film releases.  In many locations, theaters serve as a significant customer draw especially to food and drink establishments. The loss of associated sales tax revenues to host localities is problematic. In cases where the revenues are specifically pledged to support debt service, the loss is especially problematic. This is the case whether the revenues are collected taxes or are revenues from rent to developers who are responsible for payments in support of bonds. 

PUERTO RICO

The Financial Oversight and Management Board (FOMB) overseeing Puerto Rico’s fiscal recovery had its status cemented this week by the U.S. Supreme Court. The Court refused to grant review of the opinion of the U.S. Court of Appeals for the First Circuit restricting the government’s spending powers to only those authorized by the board. The appellate decision stated that the Puerto Rico governor cannot carry out expenditures unless authorized through a Board-certified fiscal plan and budget. It also ruled that the board can make its fiscal  plan recommendations  mandatory.

At the same time, four groups of investment funds filed a motion in the U.S. District Court for Puerto Rico asking the court to require the board to do one of three things by Nov. 30: Affirm that it will try to finalize the existing proposed plan of adjustment announced in February, file a modified version of the existing plan with a modified disclosure statement, or file a new proposed plan of adjustment and disclosure statement.

The groups seek to have the requested material available by November 30. The motion seeks to require that by Feb. 1, 2021, the court consider the adequacy of the disclosure statement. The motion seeks to require voting on the plan start by early February and tabulation of the votes be completed by April 30. The motion seeks to have  the court to consider confirming the plan no later than May 31 and order that the plan be consummated by no later than June 30.

Now that this has been settled, the Commonwealth can turn its attention to the gubernatorial race. After that, the political establishment can wrestle with status issues while the government attempts to meet the Board’s requirements for balanced budgets.

Oversight of a different sector made news when The Puerto Rico Energy Bureau (PREB) turned down a request by the Puerto Rico Electric Power Authority (PREPA) for an electricity rate hike the public utility contended was necessary to cover spiking fuel costs. A rate hike will be held back as utility officials acknowledged last week that above-market prices are being paid for oil to operate certain power plants. The PREB determined that “it is necessary to carry out an audit of the process of purchase, acquisition, transport, storage and consumption of fuel, carried out by [PREPA] during past years.”

In some cases, PREPA was paying prices 5 times the current market price at time of purchase. This is exactly the sort of thing that drives investors and analysts to drink. Regardless of the underlying economics, time after time the management inadequacies of the Commonwealth government are clear. It is one thing to have to deal with many of the economic and policy distortions which hold back the economy but competence must be developed and supported. The culture of failure has to be changed.

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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The announcement that the President has COVID 19 is potentially a huge hurdle to the ongoing reopening process. One can hope that it moves negotiations on the stimulus. It comes as the most recent unemployment and jobs numbers continue to show that the momentum is slowing and the economy is at a precipice. The case for additional stimulus strengthens every day. The end of many provisions of prior stimulus bills as of September 30 has raised the stakes for individuals as consumers, business owners, and employees. The concern has to be that the economic recovery slows and that revenue pressures facing municipal credits will worsen. Which leads us to this week’s credit happenings.

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NEW  YORK STATE AND CITY

The rating shoe finally dropped on New York State and New York City. Moody’s Investors Service has downgraded the City of New York’s $38.7 billion of outstanding general obligation bonds to Aa2 from Aa1. It also downgraded to Aa3 from Aa2 approximately $4.5 billion of appropriation-backed debt issued through the Hudson Yards Infrastructure Corporation, NY (HYIC), the New York City Health and Hospitals Corporation (HHC), the New York City Industrial Development Agency (IDA), New York City Educational Construction Fund, NY (ECF) and the Dormitory Authority of the State of New York (DASNY). 

it also downgraded to Aa3 from Aa2 approximately $4.5 billion of appropriation-backed debt issued through the Hudson Yards Infrastructure Corporation, NY (HYIC), the New York City Health and Hospitals Corporation (HHC), the New York City Industrial Development Agency (IDA), New York City Educational Construction Fund, NY (ECF) and the Dormitory Authority of the State of New York (DASNY). Here is the rationale – “The downgrade reflects the substantial financial challenges New York City faces caused by the economic response to the corona virus pandemic and our expectation that New York City is on a longer recovery path than most other major cities. The public health response to the pandemic brought the city’s infection rate down to among the lowest of big cities. The lasting economic consequences, however, will likely be amongst the most severe in the nation and require significant fiscal adjustments.

The city regularly identifies and closes future year budget gaps, but has delayed implementing more recurring savings and relied primarily on reserves, the possibility of direct federal fiscal aid, and a request for deficit financing authority from the state. The current budget assumes $1 billion in savings will come from labor concessions or headcount reductions but those savings have not been formalized. Favorably, current year revenue is tracking ahead of forecast. The city also faces additional fiscal pressure from potential actions the State of New York may take to balance its own budget and as the state tries to help the Metropolitan Transportation Authority, the state entity that operates the city’s mass transit system.

Which leads us to the State. Moody’s Investors Service has downgraded to Aa2 from Aa1 its rating on the State of New York’s general obligation (GO), personal income tax revenue, sales tax revenue, New York Local Government Assistance Corporation (LGAC), and NYC Sales Tax Asset Receivable Corporation (STARC) bonds. Moody’s also downgraded to Aa2 from Aa1 its rating on the New York State Workers’ Compensation Board Pledged Assessment and Employer Assessment Revenue Bonds. Moody’s downgraded to Aa3 from Aa2 ratings on other appropriation-backed debt including the New York City Transitional Finance Authority, NY’s Building Aid Revenue Bonds. The outlook for the state of New York and these associated bond ratings has been revised to stable from negative.

Moody’s said that the downgrade “reflects the financial consequences to the state of the disproportionate impact of the corona virus pandemic on the City of New York (Aa2 negative), the state’s economic engine, and on the Metropolitan Transportation Authority, the state controlled and funded transit system in the city and downstate region.”  The MTA has been one of three major capital need sources – along with the City’s general infrastructure needs and the unique needs of the Housing Authority (NYCHA) – for decades. The only leg of that debt stool which has not been directly by the pandemic is the problematic NYCHA.

The lack of federal action (as we go to press) on an additional stimulus is really hurtful to the fiscal position of states and cities. As is the case with so many issues, New York’s role as the nation’s largest city, multi county local government, financial and cultural center as well as being the nation’s most diverse city place it at the front of the pack. That also means that it takes the primary impact of events which are global in nature. This requires that public officials competently manage the reaction to those events.

Since we are always willing to challenge the raters, we have to in fairness say that the outlook assignments of stable to the State and negative to the City are right on. We share their “ongoing uncertainty about how long the pandemic’s economic consequences will impact the city’s economy and budget, including the return of office workers, business and leisure travel and real estate markets.” And normal does not happen until there is a vaccine. 

PANDEMIC CASUALTIES – COLLEGE ENROLLMENT

The National Student Clearinghouse Research Center produces a monthly report on college enrollments. This means that their September report is some of the first real data we have seen on a collective basis for the current semester.  Total undergraduate enrollment is down 2.4% relative to last year. International student enrollment is down 11%. Declines were seen among all ethnic identities.

Some trends bode ill for the future. Community colleges show the greatest losses of 8%, followed by private nonprofit four-year institutions declining 3.8%. Public four-year institutions are suffering far less with a decrease of 0.4%, although they vary by campus setting, with urban institutions increasing slightly while rural schools fell 4%. Community colleges, on the other hand, suffered universally regardless of location . Historically, recessions have driven community college enrollments higher.

In Arizona, Maryland, North Carolina, Tennessee, and West Virginia, enrollments are up at both undergraduate and graduate levels. In Ohio and Pennsylvania, however, both undergraduate and graduate enrollments fell. Much of this follows similar declines in summer session enrolments.

MASS TRANSIT TAKING THE HITS

The problems of New York’s MTA are well documented but it’s not the only MTA facing revenue reductions. The latest is the Los Angeles Metropolitan Transportation Authority. The Authority’s directors voted to approve a $6-billion budget for the 2021 fiscal year, a $1.2-billion reduction from 2020.  It would extend current temporary reductions in service through the end of the fiscal year. It comes as the Authority estimates that sales tax revenue is coming up short to the tune of $100 million per month.

Ridership is at about half of pre-pandemic levels. The proposed cuts would be a 20% reduction in service. Metro will receive about $875 million Metro will receive about $875 million in CARES Act funding. The budget assumes that Metro will see $730 million less from sales taxes, tolls, advertising and bus and rail fares than this year. It projects an 11% decline in sales tax receipts and a nearly 27% drop in grants from gas tax revenue distributed by the State of California. Fare revenue in 2021 is predicted to be nearly 79%, from $284.5 million in 2020 to $60 million this year. The budget cut does include layoffs or fare increases.

In Pennsylvania, the impacts of COVID 19 on the auto and mass transit sectors come together as the Pennsylvania Turnpike will postpone its second consecutive $112.5 million quarterly payment for transit distributed to local systems by the state Department of Transportation. This will be the second postponed payment. Turnpike traffic for the week of Sept. 20 was down 17.5% compared to the same period last year and revenue was down 21.5%. Since the pandemic began in March, traffic is down 32.9% and revenue is off 31.8% or $187 million through July.

The numbers highlight the revenue vise which local mass transit agencies find themselves in. Whether it’s transfers from the Turnpike in Pennsylvania or from the TBTA bridge system in New York, revenues to these agencies are down and are foreseen to remain so for multiple fiscal years. It shows the need for additional federal support for these agencies.

MAKING THE CASE FOR FEDERAL TRANSIT AID

The agency which has been most visible in news coverage of the financial crisis facing large urban mass transit system has been the MTA in New York. That has allowed the city’s longstanding enemies in Congress to try to cast the situation as a New York issue. A new survey by the Center for Neighborhood Technology shows that In the 10 regions it modeled alone, more than 3 million people and 1.4 million jobs would lose access to frequent transit. Second- and third-shift workers would lose an affordable way to commute, and households without vehicles would have an even harder time meeting everyday needs. Opponents of aid seem to think that the only people who use mass transit at night clean offices. the pandemic. NYC identified some 15,000 users who would have been left without service with just a four hour shutdown.

Overall, there would be significant impacts in all of the 10 markets surveyed. The study assumed that there is no aid which would require cuts at the high end of each agencies estimates (40% in NY and Denver). in the New York and northern New Jersey region, large numbers of people and jobs who benefit from access to frequent full-day service today would lose that service. 555,121 people would lose access to frequent full-day transit; businesses would suffer as 184,911 jobs currently near frequent full-day transit lose that access. The numbers are proportionately just as impactful in each of the other districts.

P3 PRESSURES CONTINUE

The private/public partnership concept has had a rough ride lately as some major transportation projects have faced issues with cost escalation which have caused P3 participants to rethink their stances. The biggest example is the Purple Line project in Maryland. The private contractors building the Purple Line have stopped construction. They are securing sites and are preparing for personnel to leave by mid-October. The State officials said the private contractor’s departure would add one to two years of delays to a project the concessionaire says is already more than 2½ years behind schedule.  The Maryland Department of Transportation, said the state would use money from its Transportation Trust Fund to keep some Purple Line construction going, until the state could issue bonds. 

The unfolding debacle with the Purple Line is impacting the potential use of a P3 to add toll lanes to the Capital Beltway and Interstate 270.

In Hawaii, Honolulu’s Mayor told the Federal Transportation Administration that the City and County of Honolulu has decided to cancel the process that would have used a public-private partnership to build the last third of its rail transit project through the city center. The Honolulu Authority for Rapid Transportation had estimated that the segment would cost $1.4 billion while one of the companies competing for the P3 contract had told investors that the cost to build the last rail segment would cost more like $2 billion.

The Mayor offered a different vision. “I hope to see the timely development of an alternative bid strategy, such as a more traditional design-build approach.” The Authority’s manager continues to advocate for continuing with the existing format which creates a major issue for the project in terms of support from the City going forward. It is thought that the Authority might seek to replace its head as it moves away from the current structure of the rail project.

THE PRICE OF CLIMATE CHANGE

Even when attempts are made to advance projects and technologies which have clear societal benefits, it is important to acknowledge the collateral damage that impacts often non-offending parties. One example is the impact of declining oil demand on jobs related to the industry. The impact of declining production has already heavily impacted direct drilling and oil transport jobs. Then oil services companies began to retrench and lay off employees as long term outlooks for oil growth diminished.

Now the job cuts are being associated with the next level of infrastructure – refining – which needs to align its refining capability with the realities of oil supplies. the industry is turning to plants that can process the full range of crude supplies from sweet West Texas oil to Canadian bitumen. Specialty plants which essentially refine only one of two qualities of crude do not deliver the economics which would support long term operations.  

So in the last three months, six U.S. refineries — representing 3% of total U.S. refining capacity — have announced they are shutting down or converting to alternative fuels. Marathon Petroleum Corp., Gallup, N.M.: 27,000 barrels a day capacity, “indefinitely idled,” more than 200 jobs lost. Marathon Petroleum Corp., Martinez, Calif.: 161,500 barrels a day capacity, indefinitely idled but under consideration for conversion to renewable fuels, more than 700 jobs lost. Phillips 66 Co., Rodeo and Santa Maria, Calif.: 120,000 barrels a day combined capacity, converting Rodeo to renewable fuels starting in 2023, unknown jobs impact. HollyFrontier Corp., Cheyenne, Wyo.: 52,000 barrels per day capacity, converting to renewable fuels, 200 jobs lost. Calcasieu Refining Co., Lake Charles, La.: 135,500 barrels a day capacity, closed through December, unknown jobs impact.

The numbers of jobs do not seem so large but their role in the economies of their host communities is significant. These were some of the highest paying jobs in their regions especially for non-college graduates and were usually union jobs with good benefits. In addition to the economic hit to these communities, these sites often do not lend themselves to repurposing. If abandoned, the result is a brownfield site with potentially high remediation costs. The recent House clean energy bill would provide grants to develop transition plans and apprenticeship programs for local governments that lose fossil fuel plants like refineries.

PANDEMIC CASUALTIES – LAYING OFF MICKEY MOUSE

Try as it might, the recreation/hospitality/cultural space has had real difficulty on its path to recovery. This is in spite of mighty efforts by the Governor of Florida to make a recovery from the virus happen before it was under control. It makes the announcement by Disney that it would eliminate 28,000 jobs in the United States all the more dismal. Theme parks will account for most of the layoffs. It is one more case study of the bleak environment for these businesses and by extension the governments which rely on these businesses to drive economic activity.

The company cited the same issues facing governments as well – “limited capacity due to physical distancing requirements and the continued uncertainty regarding the duration of the pandemic.”  The jobs are the sort that satisfied a variety of employee flexibility needs – 67 % of the layoffs will involve part-time jobs that pay by the hour – which served to generate good employment statistics. With current employment stats declining, their loss will still have a significant impact.

Orange and Osceola counties have many Disney employees as residents. Unemployment in Orange County  where Disney World, the Universal Orlando Resort, SeaWorld and the numerous minor tourist attractions are — was 11.6 %. It was down to 3.1 % in August 2019, according to State data. Osceola County, Disney World’s southern county neighbor  had 15.1% unemployment in August, vs. 3.5%.

Universal Orlando laid off a steady stream of employees over the summer and recently notified state officials that about 5,400 workers had been placed on extended furlough. SeaWorld laid off 1,900 employees at its Orlando properties this month.

PANDEMIC CASUALTIES – RATINGS

Ratings continue to move in sectors which we have previously identified as being especially vulnerable to the limitations on activity related to efforts to halt the pandemic. Two of those sectors are airports and privatized student housing projects. This week, S&P announced multiple downgrades in these sectors.

S&P Global Ratings lowered its long-term rating and underlying rating to ‘BB+’ from ‘BBB-‘ on a student housing project for Texas A&M University (TAMU) at the College Station campus. The outlook is negative. “The downgrade reflects our expectation of a decline in net operating revenues for fiscal 2021, which would produce projected debt service coverage below 1.20x and below-covenant requirements.” 

S&P also lowered its rating to ‘BB’ from ‘BBB-‘ on the Pennsylvania Higher Education Facilities Authority’s series 2013A (tax-exempt) and 2013B (taxable) revenue refunding bonds, issued for Lock Haven University Foundation (LHUF), for the Evergreen Commons Student Housing project at Lock Haven University. The outlook is negative. The Foundation has had to subsidize debt service prior to the pandemic so the need for additional foundation support is assumed.

“The negative outlook reflects our belief that all projects in the sector are facing negative economic or fundamental business conditions that could result in downgrades over the next one to two years. In addition, the negative outlook reflects expected challenges facing the industry due to a sudden and potentially prolonged decline in student housing occupancy and the associated loss of rental revenue because many colleges and universities have transitioned to remote learning from in-person learning.”

The airport sector saw more downgrades. S&P Global Ratings lowered its long-term rating to ‘A-‘ from ‘A’ on the revenue bonds outstanding, issued for the Indianapolis Airport Authority (IAA), and removed the rating from CreditWatch, where it had been placed with negative implications on Aug. 7, 2020. The outlook is negative. It did the same for bonds issued for the Louisville airport. The fact that Louisville is a prime facility for UPS couldn’t offset the decline in passenger demand.

NEW JERSEY PANDEMIC BUDGET

The State of New Jersey has enacted a budget for the none months ending June 30, 2021. It includes a millionaires tax. The tax rate on income of more than $1 million will increase from 8.97 % to 10.75 %.  To make that more palatable, the budget will provide rebates of up to $500 for hundreds of thousands of New Jersey families whose single-parent incomes are less than $75,000, or $150,000 for two-parent households. It reinstates a 2.5 % surcharge on corporations that will be phased-out in a few years. 

It does not include any sales tax increases on “luxury” goods and it also does not include so-called baby bonds which would have given $1,000 to newborns.

CALIFORNIA ECONOMIC FORECAST

The September 2020 UCLA Anderson Forecast is out and it paints a picture of a slow recovery. The release projects that the state’s economic outlook will improve substantially in the third quarter of this year, but that a full recovery will not occur before the end of 2022.  The outlook has payroll employment reaching 16 million by the end of 2020 (still far below the roughly 17.5 million jobs as of the first quarter of 2020), and the unemployment rate falling below 10% by year’s end, but still remaining close to 6% at the close of 2022.

The forecast included a number of observations about the economy going forward which have real resonance for the national economy. One example is office space. “An offsetting factor for the demand for office space will be a partial undoing of the two-decade-long trend to densify office space. The WeWork model of having 75-100 square feet of office space per employee does not work in a virus conscious world of social distancing. Office workers will have more space and there will quite a bit of Plexiglas separating workstations.”

For urban planners, the report offers food for thought. “It will take some time before pandemic-scarred commuters accept mass transit as a transportation solution. Hence the much-reviled automobile will once again become the commuter’s choice. This view is supported by a recent Citi survey of 5,000 urban households which indicated a strong desire to move to the suburbs, especially the higher-income ones. 

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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THE COSTS MOUNT WHILE THE MAYOR WAVERS

The effort to reopen the NYC public school system is becoming a guide book as to how not to get something done. At least the system is not financed and funded with its own source of revenues as is the case in most other big cities. So far the funding of the system directly through the city has not negatively impacted the City’s credit rating. But it is costing the City some serious money while it attempts to execute the Mayor’s hybrid vision.

The City’s Independent Budget Office (IBO)  estimated the additional weekly cost of operating New York City’s public schools while complying with state public health guidance prompted by the Covid-19 pandemic. Although considerable uncertainty remains, it projects that the cost will be roughly $32 million a week across multiple city agencies. It  projects that the cost of hiring additional teachers will account for over 60 % of the additional costs for operating New York City public schools—more than $19 million a week.

Schools across the city would require a 20 % increase in the number of general and special education teachers on their rosters compared with last year (2019-2020), when there were more than 78,000 school-based general education and special education teachers in the system. An additional 11,900 teachers or substitutes would be needed to meet the demands of schools’ hybrid schedules of in-person and remote instruction.

That is just for teaching staff. Custodial costs—including spending for PPE, custodial supplies, and labor costs associated with the extra cleaning—will total nearly $6 million a week and account for more than 17 percent of the additional costs. The weekly cost for testing almost 103,000 students and school-based staff each month (15 percent of each group that has opted into in-person instruction) is estimated at $1.6 million a week. Additional transportation costs would be $1.7 million a week. IBO noted additional capital costs that will be incurred, such as costs for upgrading HVAC systems, purchasing air filters for classrooms, and purchasing additional tablets and hotspots to meet students’ technology needs. It did not estimate those costs.

In the end, it all comes back to the City budget.

HOSPITAL REIMBURSEMENTS

Some of the nation’s largest and best known medical centers are coming in for scrutiny after the results of a RAND Corporation study was released showing that there are significant discrepancies between private insurance payments and Medicare pay for services.

In 2018, across all hospital inpatient and outpatient services, employers and private insurers included in this study paid 247 % of what Medicare would have paid for the same services at the same facilities, including both professional and facility fees. This difference increased from 224 % of Medicare in 2016 and 230 % in 2017. In 2018, relative prices for hospital inpatient services averaged 231 % of Medicare and 267 % of Medicare for hospital outpatient services. Florida, Tennessee, Alaska, West Virginia, and South Carolina) had relative prices that were above 325 % of Medicare.

The RAND researchers collected claims data, including provider identifiers and

allowed amounts, for enrollees in employer-sponsored health benefits from three types of data sources: self-insured employers who chose to participate in the report and provided claims data for their enrollees,  state-based all-payer claims databases from Delaware, Colorado, Connecticut, Maine, New Hampshire, and Rhode Island and health plans that chose to participate.

It puts into stark relief the great fear that many providers have as public sentiment steadily shifts towards at least access to some form of public health insurance. As more work like this is done and data like this becomes more widely available and disseminated, public sentiment is likely to continue to move in the direction of single payer. That was already likely in the aftermath of the pandemic.  

HOSPITALS EMERGE AS PRIME CYBER THREAT TARGETS

In 2017, the National Health Service in Great Britain was hacked by ransom seekers. Shortly thereafter, hospitals in west Virginia and Pennsylvania were attacked. These incidents led to emergency room shutdowns and transfers of patients whose care depended on computerized records. In 2019, 764 American health care providers were hit by ransomware.  At least those cases did not result in deaths. Now however, news out of Germany puts a halt to that streak.

The first death attributed to a ransomware attack was reported this week.  A young patient died after the hospital in which she was treated was attacked forcing her transfer to another facility where the delay in treatment of her emergency condition contributed to her death.  The hospital failed to update its software after a security patch for software it used had been made available. The cybercriminals were able to use the flaw to break in and encrypt data.

F.B.I. advisories warn victims not to pay their extortionists.  Infrascale, a security company, surveyed some 500 corporate executives about their plans or practices for dealing with cyber attacks. Nearly 75% of those surveyed said that they would pay the ransom. This reflects the fact that insurers for these risks have decided that it is cheaper to pay the ransom than the cost to clean up and recover data.

American health centers hit with ransomware this year were Boston’s Children’s Hospital, which saw more than 500 affiliate pediatric offices hit last February and, in June, Arkansas Children’s Hospital in Little Rock, among the largest children’s hospitals in the United States.  The University Hospital in New Jersey was hit with ransomware, and subsequently saw patient medical records published on the internet. The need to access health records and computer systems creates vulnerabilities that increases the likelihood that medical victims will pay their extortionists. The trend comes as hospitals increasing turn to electronic records as their main data source for patient care.

The German experience highlights why analysts are asking more and more questions about how borrowers are dealing with cybersecurity issues. It is understood that information on prevention and mitigation tactics which is provided cannot be too detailed but it is not unreasonable for borrowers to offer some evidence or affirmation of their efforts to mitigate the risk. Asking about what procedures are in place to address issues like the one at the German hospital is not asking borrowers to give up the store. The failure to insure that patches and the like are addressed is no different than asking if adequate audit and accounting procedures are in place. It is a management issue, even if it involves technical issues.

DOWNGRADES ACCELERATE AS THE PANDEMIC LINGERS

It was only a matter of time but the pace of downgrades is beginning to pick up. They are in sectors we have previously noted as vulnerable due to the restrictions on activity related to the pandemic. S&P lowered its long-term rating to ‘BBB+’ from ‘A’ on Rhode Island Commerce Corp.’s first-lien special facility revenue bonds outstanding, issued for Rhode Island Airport Corp. (RIAC). The outlook is negative. The credit in question is backed by the consolidated rental car facility (CONRAC) primarily at the Providence airport. The material negative impact of the COVID-19 pandemic on traffic levels and rental car transaction days, expected financial performance metrics were cited to support the move.

S&P lowered its ratings on Fresno, Calif.’s airport revenue bonds outstanding, issued for Fresno Yosemite International Airport (FAT). The outlook is negative. “The rating action and negative outlook reflect our expectation that activity levels at FAT will be depressed, unpredictable, or demonstrate anemic growth due to the COVID-19 pandemic and associated effects outside of management’s control.”  Essentially the same issues were cited in downgrades of smaller airports including Augusta, GA and Portland, ME.

The largest airport revenue credit to be downgraded was Philadelphia International which saw its rating moved one notch lower to A-. We focus on what S&P said about the airport sector in connection with the Philadelphia action. “We view this precipitous decline not as a temporary disruption with a relative rapid recovery, but as a backdrop for what we believe will be a period of sluggish air travel demand that could extend beyond our rating outlook horizon.

The big name to be downgraded was the City of Milwaukee which saw S&P lower its general obligation rating two notches to A. The city has long had significant pension funding issues which actually were beginning to be addressed. A revision to the City’s discount rate  lowering it to 7.50% from 8.24% is forcing the city to more than double its budget requirements to maintain funding levels. The City has been using reserves to meet rising obligations but home rule limitations on the city’s taxing power restrict its ability to raise taxes to meet the higher obligations. The impact of the pandemic has magnified all of these pressures.

NY SCHOOL DISTRICTS

School districts in New York State approached September and the opening of schools with trepidation as the State explored various options including reductions or withholdings of state aid to deal with its own budget issues. September is the third-highest month of the year for school aid distributed by the state on a dollar basis. It also is generally a period of low liquidity as summer only brings limited cost reductions for districts. So the fact that the state has come through with anticipated funding at a critical time can only be viewed positively.

The districts are not out of the woods yet. It will be halfway through the State’s fiscal year as of September 30. So far the impact of the pandemic on revenues has been shared between fiscal years. The vulnerability is if there is a return of significant pandemic impacts that the bulk of that impact would occur in the remainder of the State’s April1-March 31 fiscal year. With that in mind it is not surprising that uncertainty remains about future payments. there are real concerns around  how any further withholding would impact more economically disadvantaged districts.

The complex structure of payment schedules for each district render generalizations about the district’s credit to be specific to each issuer. New York’s complex school aid formulas and schedules are legislated. They use a number of factors especially wealth to determine the amount and timing of aid payments a given district receives. in some cases – because state aid is a small % of their total revenues (usually wealthy in terms of property values) those districts actually have gotten a larger share of their aid revenues than have less wealthy districts. This means that districts more reliant on state aid for the bulk of their operating revenues are extremely vulnerable to the fiscal problems of the State as the pandemic unfolds.

PANDEMIC REFINANCING

The Harris County-Houston Sports Authority financed Minute Maid Park for Major League Baseball’s Houston Astros, NRG Stadium, formerly Reliant Stadium, for the National Football League’s Houston Texans, Toyota Center for the National Basketball Association’s Houston Rockets, and BBVA Stadium for professional soccer’s Houston Dynamo in its 23 years of existence. Throughout its history it has weathered stormy relations with a bond insurer and even stormier relations with a credit support provider. It has been a credit popular with retail bondholders.

In the middle of the decade, the Authority was forced to effectively accelerate the amortization schedule on some of its debt which led to a cash crunch  that resulted in the Authority’s ratings on its outstanding debt dipping into non-investment grade territory. The Authority used reserves to pay debt service and ultimately was able to resolve litigation with the bond insurer which enabled it to refinance its debt and regain investment grade ratings.

The latest effort to restructure and refinance debt comes as the result of the pandemic. None of its venues generate fan related revenue. Tax revenues pledged to the Authority’s debt – taxes on hotel rooms and rental cars- have been crushed by the pandemic. The planned refinancing will include taxable as well as tax exempt debt reflecting interest rate realities as well as limits on advance refunding. It’s another example of how limits on advance refunding are not a red or blue issue.

CLIMATE AND POWER

Broadly stated, there have been two approaches to climate change and the production and emission of carbon dioxide into the atmosphere. One approach is to limit the emission of carbon dioxide through things like renewable energy and electric vehicles. More radical efforts would seek to limit agricultural production especially the consumption of meat. The other approach is to find ways to manage the carbon dioxide emissions that modern industrial, transportation, agricultural activities which result.

The most prominent of the latter is carbon sequestration or carbon capture. Carbon Capture and Storage (CCS) is a technology that can capture up to 90% of the carbon dioxide (CO2) emissions produced from the use of fossil fuels in electricity generation and industrial processes, preventing the carbon dioxide from entering the atmosphere.

The only coal carbon capture project in the U.S. and the largest post-combustion carbon capture project in the world is the Petra Nova plant at a Texas electric generating facility. It was expected that the plant would remove carbon dioxide from the emissions process and develop stores of C02 which could then be sold to oil drilling operations.

As is often the case with new technologies like this, economics have a way of creating hurdles which manage to trump the science behind them. So, given the crashing economics of the oil and gas industries in 2020 it is not surprising that economics have conspired to sink (for now) the Petra Nova project. NRG, the company that operates the W.A. Parish Generating Station from which Petra Nova captured emissions, the carbon capture project has not operated since May 1, 2020.

It’s easy to cite the economics but filings with the US Department of Energy and the SEC tell a different story. A technical report submitted by Petra Nova to the Department of Energy shows that the project actually experienced so many outages that it did not operate for one of out every three days over the last three years. Overall, the project yielded very disappointing results both technically and financially. The project, fueled by a gas fired generation system, captured carbon dioxide from one of the four coal units at NRG’s W.A. Parish Generating Station near Houston, Texas. Emissions from the gas generator were not captured. The CO2 was then piped 81 miles to an oil field using “enhanced oil recovery”.

Emissions data from the Environmental Protection Agency and a report submitted to the Department of Energy, showed that the carbon capture project actually captured just 7% of the power plant’s total carbon dioxide emissions. The inability of the plant to operate reliably and the fact that oil prices remained well below the break even threshold for the plant of between $75 and $100 per barrel spelled economic doom for the facility. It is now “mothballed”.

While efforts to date have been undertaken by investor owned utilities, the technology offered hope to large coal fired generators both IOUs and municipal systems. The failure of the Texas plant has led the Institute for Energy Economics and Financial Analysis to say ‘that the mothballing of Petra Nova highlights the deep financial risks facing other proposed U.S. coal-fired carbon capture projects, including Enchant Energy’s plan for the San Juan Generating Station in New Mexico and Minnkota Power Cooperative’s Tundra Project at the Milton R. Young Station in North Dakota.”

For municipals which operate coal fired generation, the failure does nothing to decrease the environmental pressure on these facilities. It could likely lead to closures or repurposing (like at the municipal bond financed Intermountain Power facility in Utah) of municipally owned generation facilities.

GAS TAXES RISE UNDER THE RADAR

Alabama and New Jersey have raised their gas taxes effective October 1. Local gas taxes are being implemented as well. Missoula County, MT is beginning to impose a 2 cent/gallon local gas tax increase. The City of Normal, IL voted to double the motor fuel tax from four cents per gallon to eight. The local increases will generate some $1 million which does not sound like much until you consider that this represents some one third of local road budgets for these jurisdictions.

With the demand for gasoline and prices low, gas tax increase are seen as a viable source right now. It helps that gasoline prices vary throughout the year, so differences in price are not always met with consumer resistance. Taxes usually aren’t broken down at the pump so consumers do not readily realize that the taxes have gone up. Also, U.S. motorists drove 11% fewer miles in July than a year ago as drivers stayed home due to the coronavirus pandemic according to USDOT data for the most recent month available. The biggest declines were seen on the East Coast, where mileage in the North fell 15.4% and in the South by 11.3%. Driving on urban Interstate roads fell by 14.8%, the sharpest decline seen in single road category.

In the case of NJ, the impact on volumes may come as much from the resulting drop in demand from out of state buyers. The Garden State’s historically low gas tax rates always made it worth it for travelers to fill up in NJ versus in NY or PA. This was especially true for commercial truck traffic, a mainstay on New Jersey’s Turnpike. Now we will see what a more competitive price environment looks like.

CLIMATE AND TRANSPORTATION

Gov. Gavin Newsom of California issued an executive order directing California’s regulators to develop a plan that would require automakers to sell steadily more zero-emissions passenger vehicles in the state, such as battery-powered or hydrogen-powered cars and pickup trucks, until they make up 100 percent of new auto sales in 2035.

There may be no better time than in the midst of a hugely climate based disaster to make the move. Transportation is seen as California’s largest source of planet-warming emissions, accounting for roughly 40 percent of the state’s greenhouse gases from human activity. The order would not prevent Californians from owning cars with internal combustion engines past 2035 or selling them on the used-vehicle market.

It is a step which was always expected but it seems clear that the wildfires of the past half decade are driving the effort. In June, the state adopted a major rule requiring more than half of all trucks sold in the state to be zero-emissions by 2035. The industry reacted negatively to the concept of a mandate but that is to be expected. California has long been a leader in efforts to combat auto pollution. The nation’s first tailpipe emissions standards and greenhouse gas emissions standards for cars originated in California. “Check engine” lights were also first mandated by CARB before being required by the EPA. 

Electric transportation is becoming more of a chicken and egg conversation. The industry expresses reluctance to fully embrace the change until they see what in their eyes is a sufficient level of demand. At the same time, the technology remains too expensive for the average consumer  so the demand is not there yet. Here a regulatory incentive or stimulus as the case may be could be key to driving the development of affordable electric vehicles. 

PANDEMIC CASUALTIES

The news that the Metropolitan Opera will not resume performances until the fall of 2021 due to the pandemic is a chilling sign to the cultural space. While this is a story about one credit – the Metropolitan Opera – it is still a story about the issues facing the cultural space. In making its announcement, the Met indicated that the revenue losses to date and those to result from the cancellation going forward will require contract renegotiations with the unions representing the bulk of its employees.

This after revenue hits of $150 million led to roughly 1,000 full-time employees, including its orchestra and chorus to be furloughed without pay since April. Other institutions in the space have already executed significant cost cuts through negotiations. The Boston Symphony Orchestra and its players have agreed to a new three-year contract reducing their pay by an average of 37% in the first year. The San Francisco Opera agreed to a new deal that will cut its orchestra’s salary in half this season. Both have provisions to raise pay as revenues return.

It will be easier for outdoor cultural venues like zoos and botanical gardens to slowly ramp up patronage than will be the case for the enclosed entertainment space. The importance and place of the Metropolitan Opera in the American cultural landscape means that decisions by this one institution will resonate throughout the non-profit cultural sector. We would expect to see more such announcements, especially if the much feared second wave occurs.

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 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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The turn of the leaves lets us know that we are about to enter a potentially difficult phase of the pandemic. Lacking a vaccine, the potential for a “second wave” overhangs the economy. In the meantime, there has been much focus on the failing stimulus process. The individual impacts on individual states and cities are already coming into focus. With the close of the fiscal first quarter for many governments, revenue realities will begin to take shape.

The crush on revenues is creating newly favorable environments for policy and fiscal changes. In New Jersey we see the “millionaire’s tax” about to make it into law. In Pennsylvania, the issue of legalized recreational marijuana is up for debate legislatively. It’s an issue we focus on in more detail below. On the revenue side, the news continues to be negative. The NYS Comptroller reports that Local government sales tax revenue declined by 7.8 % in August compared to the same period last year. This drop in revenue is similar to the decline in July of 8.2 %. New York City had a 7.1 % decline, a $43.9 million reduction in revenues, which was comparable to the 7.3 % ($44.6 million) decrease seen in July.

A lack of congressional action and a continuation of trends continue to weaken credit. So risk increases. At the same time, all indications are that rates will be held low for an extended period making getting compensated for risk that much  harder. Stay awake!

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CANNABIS

A petition in Montana to legalize recreational marijuana for adults 21 and older has qualified for the state ballot in November. Initiative 190 and Constitutional Initiative 118 will be eligible for state residents to vote on. It is impressive that the ballot items qualified given the limitations of the pandemic. The initiative reportedly required 25,000 verified signatures to qualify, while the constitutional amendment needed around 50,000.

The initiative would legalize the sale and possession of limited marijuana quantities while adding a 20 percent tax on the sale of non-medicinal pot products in the state. Supporting organizations estimate that sales would generate $48 million in tax revenue for the state by 2025.

In South Dakota, Amendment A would legalize the recreational use of marijuana for individuals 21 years old and older. Individuals would be allowed to possess or distribute up to one ounce of marijuana. The amendment would require the South Dakota State Legislature to pass laws providing for a program for medical marijuana and the sale of hemp by April 1, 2022. Mississippi voters will decide whether to legalize medical marijuana. 

Arizona voters will be able to vote on Prop 207. If it passes, Arizona lawmakers would have to establish regulations for the Arizona recreational marijuana industry by April 5, 2021. The proposition purports to cover the whole range of concerns with legalization. Adults 21 and older would be able to possess 1 ounce of marijuana and the law limits home cultivation to 6 plants at an individual’s primary residence and 12 plants at a residence where two or more individuals who are at least 21 years old reside at one time.

A 16% excise tax (the same as cigarettes and alcohol) would be placed on recreational marijuana products. Money from the excise tax would fund various state agencies and be dispersed between community college districts, police and fire departments, and the Highway User fund. Marijuana use would remain illegal in public places and no marijuana products could be sold that imitate brands marketed to children or look like humans, animals, insects, fruits, toys or cartoons.

The governor of Pennsylvania has proposed legalization as a revenue source. This comes as New Jersey voters will consider Question 1. It would amend the state constitution to legalize the recreational use of  cannabis, for persons age 21 and older and legalizes the cultivation, processing, and sale of retail marijuana. The constitutional amendment would take effect on January 1, 2021. There would still be a significant legislative hurdle to overcome as the amendment would only be enabling the legislature and CRC to enact additional laws and regulations.

Much as was the case when Prohibition was ended in the midst of the Great Depression, initial moral objections to the legalization of alcohol were overcome by the need for state revenues during a time of economic distress. Current state and local government fiscal conditions are creating a similarly based source of support for legalization of marijuana.

APPROPRIATION DEBT

The long running dispute between Platte County, MO and holders of 2007 Platte County Industrial Development Authority bonds issued to finance parking facilities at a shopping mall is destined for the Missouri Supreme Court. In 2018, the County decided not to appropriate some $765,000 to cover shortfalls in revenue available for debt service on the bonds. The County had pledged to make up such shortfalls but the payment of those monies was dependent upon annual appropriations by the County legislature.

Such language is not unusual in financings of this type and while uncommon, other jurisdictions have taken similar actions when revenues which came up shirt were generated from private facilities. Other such non-appropriations have involved hotels and ice skating facilities.

The trustee for the bonds had threatened to pursue litigation from the start of the dispute in 2018 so the County sued to have its agreement validated and has won two prior rounds in the Missouri courts. The trustee unsuccessfully argued the financing agreement supporting the bond issue represented a legally enforceable promise to pay, even in the face of clear language in the bond documents that any payments under the County pledge were subject to appropriation. The Missouri Court of Appeals for the Western District opined that the plain language of the Financing Agreement does not contain a promise by the County to pay for the shortfalls for the Zona Rosa Bonds. 

The continued litigation comes as the new developer for Zona Rosa has announced major changes to the development. Plans include the demolition of retail space and the increase in open green space. It comes as the new developer hopes to develop multi-family housing and hotels at the development. Zona Rosa has been struggling since the Great Recession and more than 50 of its storefronts are closed. The mall hopes to continue to diversify its real estate with more office and residential uses. No details have emerged so it does not appear that there will be any quick fix for the defaulted bonds.

The dispute gives us an opportunity to reinforce our long held belief that investors who rely on legal provisions over and above economic fundamentals are making a serious mistake. If a project is not economically viable on its own, legal provisions can only help so much. They guaranty a place on line at bankruptcy court and not much else. Threats against market access for issuers who do not meet “moral obligation” payment requirements have proven largely empty.

As litigation has increasingly become a favored tactic of investors, the increasing reliance on litigation simply reinforces the details of the legal agreements underlying bond issues. “Moral obligation” security pledges are not legally enforceable payment requirements. The litigation in this case will likely result in affirmation of that concept.

As always, it is up to the investor to do their due diligence and to understand exactly what the legal provisions are and to understand what they do and what they do not do.

GOING TO SCHOOL ON THE MLF

If you have been doing this as long as I have, the continued inability of Congress to get its arms around the municipal bond market is a source of unending frustration. The latest evidence is that Congress is planning to hold hearings on the Municipal Lending Facility. The MLF is a borrowing program which allows the Federal reserve to provide liquidity funding to state and local governments which cannot be addressed through the marketplace.

The MLF provides funding at relatively expensive rates. The Fed initially charged issuers a premium for using the program at a baseline of 150 basis points for triple-A to 590 basis points for below investment-grade-rated issuers. Last month, the Fed reduced those prices by 50 basis points in each credit category. That still does not provide cheap money. As a result, potential borrowers seem to be waiting out the process currently underway in Congress to develop one more stimulus package.

This has caused some consternation among some in Congress who apparently expected strapped municipalities to embrace short term borrowings in a rapid manner. They are shocked that only two borrowers have accessed the funding. That concern reveals a failure to grasp what the facility was intended for – a lender of last resort who could provide financing at a market clearing rate. By that measure, the lack of utilization is almost predictable. In addition, the program was designed with a major flaw in that the minimum population requirements for borrowers – 500,000 – excluded huge swaths of the issuer community to be denied access to the program. There are e tire counties at the forefront of the excess expenditure pressures facing governments who are not able to access the funding.

Those are the obvious places to start. Municipalities have been clamoring for a reduction in the population threshold with numerous bills being offered to do so. That would be a start. A further reduction in borrowing rates would make sense. The problem is that Congress has limited time to act unless one believes that action could be taken during a lame duck session. It is likely that some borrowers are waiting until after the election to see what the expected makeup of Congress is to determine the likelihood of a better deal emerging from a different political atmosphere after January.

MTA DOWNGRADE

The most predictable downgrade of the year finally happened when Moody’s lowered its rating on NY MTA transit revenue bonds from A2 to A3. The Authority’s precarious financial position is well known. The highly uncertain outlook for additional aid from the federal government helps to drive the timing of the downgrade as well as the maintenance of a negative outlook.

This is a very difficult period for the agency. The corporate sector in NYC is working to return its workers to office locations which would hopefully increase utilization of public transit and generate revenues. Some companies are considering rotation plans which would effectively turn many office jobs into a form of shift work. This would enable them to meet pandemic limits on occupancy to enforce social distancing.

A return to the status quo is likely the best long term remedy for the revenue woes of a system which derives a far greater proportion of its total revenues from fares than do most transit systems in the US. More clarity around timelines for an increase in demand would enable the Authority to be more precise in estimating its revenue needs going forward. The problem is that there remains great resistance to the idea of a return to status quo as well as the likelihood of extended economic disruption.  

WATER WARS

When I write about disputes over water, those stories usually come out of the American West. While the extended drought which has plagued the West is rightly now in the spotlight, the first Supreme Court case to resolve a dispute over groundwater that crosses state lines will unfold over the session beginning October 1. That case is a dispute over the use of a fresh water aquifer which provides very clean fresh water to businesses and residents of a three state region.

Mississippi v. Tennessee has been dismissed and rejected  multiple times since Mississippi originally filed the suit against the City of Memphis and its utility company Memphis Light, Gas, and Water in 2005. In 2014 the State of Mississippi revived its suit and added the State of Tennessee to the list of defendants.  The interstate nature of the dispute enabled the Supreme Court to accept the case.

The appeals continued in spite of a significant trail of case law that supports water having a special status as an asset in terms of ownership. Individuals and entities can often have rights to the use of water accessed through their property but ownership of the water itself as part of the real estate has been negatively viewed by courts for nearly 200 years.

It is an argument about where each party gets to place its “straw” into the aquifer in question. Some of the argument ironically around increased use of what has become a  scarce and declining asset – the water. One of the factors driving the search for a final judgment is that the water’s purity makes it a source of inexpensive and non-filtered water. That is a significant cost to avoid. As is the claim by Mississippi for some $615 million. It is also been driven by evidence of subsidence in the area which indicates that the aquifer is effectively running low.

SEC ENFORCEMENT

Yet another municipal bond issuer has run afoul of the securities and exchange commission (SEC). In the latest example, charged Park View School, Inc., a state-funded, nonprofit charter school operator based in Prescott Valley, Arizona, and its former President with misleading investors in an April 2016 municipal bond offering.

The complaint charged that in the years and months leading up to the bond offering, Park View experienced significant operating losses and repeatedly made unauthorized withdrawals from two reserve accounts to cover routine operating expenses, to pay other debts, and to transfer money to affiliated entities. Park View allegedly defaulted one year later by reducing the interest payments that it made on the bonds. Park View allegedly provided investors an offering document that included misleading statements about profit and expense projections and showed that Park View would be profitable in the upcoming fiscal year and able to repay the bondholders.

According to the SEC, a 2016 official statement issued to support an offering of bonds included misleading statements about profit and expense projections and showed that Park View would be profitable in the upcoming fiscal year. In reality, it experienced significant operating losses and repeatedly made unauthorized withdrawals from two reserve accounts to cover routine operating expenses, to pay other debts, and to transfer money to affiliated entities.  

Park View and its President agreed to settle with the SEC and to be enjoined from future violations of the charged securities laws. The school President  further agreed to pay a $30,000 penalty and to be enjoined from participating in future municipal securities offerings. Investors seem to have overestimated the state’s role in chartering the school and assumed a level of veracity to be associated with a state chartered entity that simply was not there.

The irony is that the schools – a middle school and a senior high school-  Prescott, AZ – are not new to the municipal bond market. The sponsor has been chartered for 20 years and has had outstanding debt since at least 2011. So they knew what the rules of the road were when they brought this issue to market leaving them little excuse for misleading investors. The situation also highlights the role of conduit issuers and the lack of control or authority over the conduct of some of the borrowers they help.

THE FUTURE IS ALREADY HAPPENING

I continue to see article after article issuing “the answer” to a whole range of estimates of the ultimate impact of the pandemic in relation to the structure of work. Much is being made of the ongoing debate in cities like New York and other major economic hubs over how to reopen. The most intense debate in terms of public goods has been over education. A consensus formed around online learning except in NY. The issues in the private sector seem to revolve around when office staff can be asked, requested, or required to return. At the same time, the hospitality industry continues to be battered.

In the most  cautiously reopened major city, NY, major employers are quietly establishing schedules and procedures which would enable fairly significant numbers of their employees to return to office settings. It’s what is driving some of the clamor from major businesses in the city. New York office-based employers have been permitted to bring back workers at 50 percent capacity. As the pandemic drags on, the pressure will be there to repopulate existing office space which often exists under long term lease. The asset becomes a drag as the cost of rent is not offset by the existence of any economic activity on site.

Despite the benefits of working from home being apparent to many, there is also a significant share of the workforce that relishes a return to the office. Here is where the maintenance of existing space and the goals of a new workplace actually converge. Office capacity will have to be reduced to meet social distancing requirements so some work from home will likely continue on a rotational basis. Real estate interests are already talking about total workplace ecosystems and other concepts in support of the idea that office space and the demand for it will still be needed.

The timing and scale of the return to offices will be the key factor driving transit, development, and real estate trends longer term. It is hard to see in the midst of the event unfolding whether it be the pandemic, the fires, or the floods and storms that they have an eventual end. That is not the same as saying that it will just go away. We believe that cities are not dead and that ultimately employment will drive migration pretty much as it has always done.

NEW JERSEY MILLIONAIRE TAX

It has always been a policy goal of the Governor to raise marginal income tax rates at the high end off the income scale. Opponents have long believed that such a tax scheme would drive high income residents out of the state (to places like Florida where there is no income tax). It has taken the economic impact of the pandemic to make the concept acceptable politically. To that end, the Governor announced a budget agreement with the legislature whereby lawmakers agreed to raise the tax rate on income over $1 million to 10.75 %, up from 8.97 %. Individuals earning more than $5 million were already taxed at the higher rate.

The deal may not be as beneficial to the state as it also includes a recurring $500 rebate for families with at least one child and an annual income of less than $150,000 a year for couples and $75,000 for single parents. Estimates of the revenue impact of the new tax are $390 million in new revenues but this is offset by the cost of the rebates estimated at $340 million. So it is a tax shift rather than a real revenue producer.

The politics matter. More than 1.5 million NJ residents have filed for unemployment benefits since lockdowns were imposed. The Governor has a 71% approval rating. So the political stars aligned for the tax shift to be agreed to. Now we will see how realistic the threatened exodus from the state will be. An above average hurricane season and the current wildfire disaster are limiting the options for people looking to move. So the jury is out on the impact of the tax plan.

The next step is legislative approval of the full budget.  The pending nine-month, $32.4 billion spending plan will cover the remainder of fiscal 2021 beginning  Oct. 1. (The 2020 fiscal year was extended through September 30.)  The proposed budget Mr. Murphy released last month also includes about $1.2 billion in spending cuts and $4 billion in new bonding debt.

So, if adopted, New Jersey will be the crash test dummy for the raise taxes on the rich movement. If it succeeds, progressives will move onto other states with graduated income tax schemes (New York being the next likely battleground) and try to achieve the goal of taxing the rich there.  The debate will unfold as the home sale market in northern NJ has heated up as NYC residents seek homes with outdoor space within commuting distance. So it will be interesting if that dynamic is altered by the tax if enacted.

 
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 has become increasingly clear that the poisoned current political environment is claiming meaningful aid to state and local government as its primary scalp. It is clear that state and local government face untenable choices in the absence of significant help. The debate comes even in the face of clear indications that significant layoffs will occur in October and after without another PPP round. Furloughs will shift to layoff. The airlines are only the most visible example but many industries will be impacted as increasing pressure on disposable income holds down spending and delays recalls to all types of businesses.

The implications for municipal bonds are increasingly negative as federal inaction not only chokes off revenue but does it at a time when expenses cannot be similarly adjusted. It makes no sense, especially when states are being left on their own from not just a fiscal standpoint but also a regulatory/legal standpoint. If Congress and the President want to abdicate their responsibilities, they could at least provide some resources to those who are actually managing the pandemic.

Inaction also hamstrings efforts at economic stimulation. Increasingly, states and their agencies are announcing delays and postponements of significant infrastructure projects which could be a good source of virtually immediate economic activity. Longer term, delays in several large projects have significant economic implications which will extend the time of recovery and act as a cap on economic upside. If you can put aside the politics for just a minute, the illogic of the current state of affairs is clear.

There is only one partner in the debate which can print money and legally run a deficit – the federal government. That, along with requirements that every state except Vermont must operate under a balanced budget means that the federal government occupies a unique and pivotal position in the process of recovery. That recovery should not count on the results of the upcoming election. There are clear solutions, it’s the politics holding things up.

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WHY PANDEMIC AID IS COMPLICATED

Congress returns 22 days before the start of the federal fiscal year and there appears to be declining hope for a significant federal bailout package. There remains a significant segment of Senate republicans seemingly dead set against any additional aid to state and local government. While much of the opposition seems to be based in an antipathy towards “blue” states, we look at one “red” state to see why there might be a basis for opposition.

In 2016, the Utah legislature authorized the creation of the Utah Inland Port. The plan was to provide fun ding for infrastructure which would connect Utah industries – energy primary among them – with overseas buyers of exports from the Beehive State. In response, private interests undertook a variety of investments. The most prominent is the development of a cargo facility for exports of Utah coal in the Port of Oakland, CA.

The 2016 legislation was designed to create a $53 million fund to support the development of “throughput infrastructure” out of state. The Oakland port facility is the most prominent example. Efforts to develop such a facility have been the subject of ongoing litigation. That process has stymied development and the developer has subsequently filed for bankruptcy.

Now in the midst of the pandemic and the economic pressure being felt by all levels of government, four Utah counties are looking for $20 million of the $53 million of funds to be transferred to the port developer. Carbon, Emery, Sevier and Sanpete counties have told the bankruptcy court overseeing the developer’s Ch. 11 filing that “this project will not only save high-paying jobs but will promote economic growth in rural Utah and create new and lasting jobs for the state and region.”

It is easy to question how to balance the realities of economic development with the fiscal realities of the pandemic. There have been many references like those targeting pension funding needs and unions. What there has not been is as much criticism of subsidies and tax “incentives” which reduce revenues available to government. Whether it is a subsidy for a dying industry (coal) or for a foreign company like Foxconn, these already controversial programs undermine the case supporting them.

We are seeing numerous efforts across jurisdictions to use the pandemic as either cover for or an excuse for significant regulatory concessions or subsidies for business. The need to rebuild the economy is forcing governments to consider these programs even as they experience significant revenue losses. They come under increasing scrutiny in the wake of the failure to extend programs like the PPP and the failure to enact additional aid to local governments. They allow opponents of more aid to point to programs like the Utah program (which serves an out of state entity) to support their opposition.

CANNABIS IN THE KEYSTONE STATE

Pennsylvania is one of the states which chose to enact what was effectively an interim budget in order to start the fiscal year beginning July 1. The commonwealth passed a $25.8 billion interim fiscal 2021 budget in May that funds the state through the end of November. With the course of the pandemic uncertain and the outlook for federal stimulus uncertain at best, states and cities will have to constantly update and revise their plans for balancing budgets in the current fiscal year. The pandemic and its economic effects have put heretofore unpopular ideas for raising revenues back under consideration.

The Governor of Pennsylvania has proposed legalization of adult-use cannabis to help with the commonwealth’s recovery from COVID-19. The proposal reflects The State Auditor  estimates that regulating and taxing marijuana for adult use could generate nearly $600 million of new revenue annually. The Governor’s plan cites significant revenue generations in states like Washington and Colorado in support of legalization. The proposal would direct a portion of the revenue toward existing small business grants. Half of the grants would go to historically disadvantaged businesses with the remainder going to social justice programs.

The debate comes as the Commonwealth examines the future of its state liquor monopoly. The debate has been contentious and it can be expected that the debate over the Governor’s proposal will be vigorous in the socially conservative state. To reflect this reality, the Governor wants to implement legalization incrementally. His initial ask is for decriminalizing possession of small amounts of marijuana. It comes as New Jersey voters will consider the full legalization of cannabis in November and efforts to do the same in the New York legislature are expected to be renewed as the impact of the pandemic fades.

AIRPORT REVENUES

In 1982, a federal law was enacted that imposed constraints on the use of airport revenue (e.g., concessions, parking fees, and airlines’ landing fees), prohibiting “diversion” for non-airport purposes in order to ensure use on airport investment and improvement. However, the law exempted “grandfathered” airport sponsors— those with state or local laws providing for such diversion—from this prohibition. The FAA Reauthorization Act of 2018 provides for GAO to examine grandfathered airport revenue diversion. The study was designed to provide information for those considering a repeal of those provisions.

A repeal of grandfathered revenue diversion would have complex legal and financial implications for transportation authorities. Transportation authority officials said that a repeal would inherently reduce their flexibility to use revenues across their assets and could lead to a default of their outstanding bonds if airport revenues could no longer be used to service debt; exempting outstanding bonds could alleviate some financial concerns. For city and state government sponsors, a loss in general fund revenue could result in reduced government services, though they said a phased-in repeal could help in planning for lost revenue.

Where would repeal have its primary impact? From fiscal years 1995 through 2018, FAA data show that the nine grandfathered airport sponsors lawfully diverted revenue amounts that varied from as little as no diversion by some sponsors in some years to as much as $840 million by a sponsor in one year. All city- and state-government airport sponsors regularly diverted revenue for each of the 24 years from 1995 through 2018, per their local laws and agreements. In 2018, revenue diversions for the five airport sponsors ranged from almost $7 million (City of St. Louis) to about $47 million (City and County of San Francisco). diverted airport revenue comprised less than 1.5 percent of the airport sponsors’ total annual general fund expenditures in 2018 and less than 4.5 percent of their airport(s) operating revenues for that year.

Who would be hurt by a repeal?  Maryland officials explained that under a repeal, the Maryland state legislature would need to restructure MAA to separate its revenues from the state transportation trust fund. Since MAA does not currently have the legal authority to maintain its own cash reserves to finance its own infrastructure investments, officials said a repeal would necessitate legislation establishing a separate state aviation fund for MAA, with a one-time cost of at least $250 million needed to provide the fund with its own starting balance.

In Massachusetts, if Massport were no longer able to use airport revenue to help support its seaport, costs to seaport users would increase, resulting in negative regional economic effects, including job losses at the port and in the wider community. Officials also said that repeal would prohibit Massport’s payments to three neighboring cities, which would hinder cooperation with those cities on airport infrastructure expansion.

The Port Authority of New York and New Jersey is unique among the impacted agencies in that it is the only one serving more than one state. For the Port, a repeal would include possible non-compliance with its governing statutes and breach of its contractual covenants with its bondholders. The general reserve fund statute requires that surplus revenues from PANYNJ’s assets be pooled and does not indicate how PANYNJ should proceed if it were required to stop consolidating revenue.

All of the transportation agencies indicated that a repeal could result in airport revenues no longer being permissible to secure or pay debt service on consolidated bonds. According to Massport and PANYNJ officials, a repeal would cause their agency’s outstanding bonds to be in default or subject their agency to a legal cause of action for breach of contract. According to Massport and PANYNJ officials, a repeal would cause their agency’s outstanding bonds to be in default or subject their agency to a legal cause of action for breach of contract. These airport sponsors currently have $1.6 billion and $22 billion in outstanding bonds, respectively.

TOBACCO

The 2020 National Youth Tobacco Survey has been released. The annual review gives a good indication of current trends among the tobacco industry’s prime marketing target. In 2020, 19.6% of high school students (3.02 million) and 4.7% of middle school students (550,000) reported current e-cigarette use. Among current e-cigarette users, 38.9% of high school students and 20.0% of middle school students reported using e-cigarettes on 20 or more of the past 30 days; 22.5% of high school users and 9.4% of middle school users reported daily use. Among all current e-cigarette users, 82.9% used flavored e-cigarettes, including 84.7% of high school users (2.53 million) and 73.9% of middle school users (400,000).

The significance for a tobacco investor is that in spite of sustained demand for nicotine among a prime market cohort, the demand is for e cigarettes rather than “sticks”. It’s actual cigarette sales of cigarettes that matter to bondholders. The 20% use rate for e cigarettes makes the case for declining cigarette consumption.  The most recent Federal Trade Commission Cigarette Report was released at year end. It showed that the number of cigarettes that the largest cigarette companies in the United States sold to wholesalers and retailers nationwide declined from 229.1 billion in 2017 to 216.9 billion in 2018. That represents a decline of over 5%.

PANDEMIC CASUALTIES – RATINGS

As the pandemic continues, the expected impact on ratings is finally emerging. This week, S&P offered examples. S&P Global Ratings lowered its long-term rating by two notches to ‘BBB’ from ‘A-‘ on YMCA of Greater New York’s (YMCA) and Build NYC Resource Corp.’s general obligation (GO) bonds, issued for the YMCA. The outlook is negative. Gyms were not allowed to open until mid-August in New York State. The Y is planning on opening nine of its 22 branches in September 2020. Capacity is limited to 33%. The organization is facing a projected general operating deficit of $14 million in calendar year 2020.

S&P Global Ratings lowered its long-term rating and underlying rating (SPUR) on the New Orleans Aviation Board’s (NOAB) general airport revenue bonds (GARBs), issued for Louis Armstrong New Orleans International Airport (MSY), to ‘A-‘ from ‘A’ and the outlook remains negative. The announcement cited “the severe drop in demand has diminished NOAB’s overall credit quality and will likely pressure financial metrics relative to historical levels.

We view this precipitous decline not as a temporary disruption with a relatively rapid recovery, but as a backdrop for what we believe will be a period of sluggish air travel demand that could extend beyond our rating outlook horizon.” S&P also lowered its rating to ‘A-‘ from ‘A’ on St. Louis’ airport revenue bonds issued for St. Louis Lambert International Airport (STL) and kept that rating on negative outlook as well.

Private student housing remains vulnerable especially in light of the initial poor experience with efforts to return students to campus at so many schools. S&P Global Ratings cut by two notches to BB from BBB-minus the 2017 student housing revenue bond issue sold through the Illinois Finance Authority on behalf of the not-for-profit CHF Chicago LLC. The facility opened last Fall  more than 97% occupancy rates in fall 2019 and spring 2020. As of Aug. 24 a 53% occupancy rate set it up for significantly weaker financial performance.

Private universities with pressured finances continue to find themselves in a ratings vice. Enrollment declines are hurting revenues while online learning keeps students away along with the auxiliary revenues they would generate living on campus. The latest example is John Carroll University, a Catholic Jesuit private university located in University Heights, Ohio. Its rating outlook was shifted to negative by Moody’s. The school is showing how smaller private universities are trying to cope. The school plans expense reductions in fiscal 2021 to mitigate losses in net tuition and auxiliary revenue, in addition to utilizing remaining CARES Act funds and has approved a supplemental endowment draw in fiscal 2021 to help manage the revenue losses.

SUPPORT GROWS FOR STRINGS ON NYC BORROWING

We are glad to see support growing among respected outside observers for some controls on being imposed on New York City’s fiscal position be part of any borrowing Authority granted by the State to help the City manage the pandemic. The latest example is the private watchdog,  the Citizens Budget Commission, which has been a serious observer of New York City’s fiscal position for nearly 80 years. The control board position is that the State “should certify borrowing as part of a “comprehensive and feasible” multiyear plan that leads to fiscal stability.

It supports a period during which the control board must approve and condition each borrowing instance, monitor the city’s fiscal management, and approve or reject city actions with major fiscal impacts. A control period would continue until the board determines the city can support recurring spending with recurring revenues or the city meets pre-determined benchmarks.”

It really is not unreasonable to attach extraordinary terms to efforts to deal with this extraordinary situation. The market – investors, traders, raters – are all in a position to support and facilitate well reasoned and structured financing plans to deal with these most extraordinary fiscal times. The message should be clear to the Mayor that he needs to come to the table with a responsible plan that reflects a willingness to accept input from the whole range of sources. The key to resolution of the 1970’s fiscal disaster that was NYC was the involvement of both the private sector and the unions in formulating an overall plan. That sort of engagement seems to be something the Mayor believes he can shun. If he keeps it up, he may wind up having to borrow for one year at a higher cost than from the Fed.

In the meantime, a bit of kabuki theater is taking shape in terms of the government/business relationship. Earlier in the summer, the Partnership for New York made clear its view that the private sector is best suited to solving the city’s multiple economic problems. Then a predictable spate of responses generally rejecting such an approach occurred. The Partnership then undertook a study which unsurprisingly reinforced the private sector bias. Now a group of chief executives from some 150 of the city’s major businesses have issued a letter decrying the current state of affairs in NYC and asking the Mayor to follow the Partnership’s framework. All of this while the Mayor plays chicken with the Legislature over layoffs. Different circumstances have driven us down this road before.

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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THE PANDEMIC AND THE ECONOMY

There have been many unfavorable aspects to the need to work remotely but there have been some benefits. One of the obvious ones is the positive impact on the environment from reduced transportation. One aspect of this phenomenon has already been manifest in the crash of oil prices due to severely diminished demand. This decreased demand and spending has had however, the beneficial effect of increasing the disposable income of workers who no longer have a daily commute.

It is hard to determine the exact magnitude of the level of decreased spending but we are beginning to see attempts made to measure it. A researcher working on behalf of a company which links freelancers to businesses has released an analysis on the subject. The analysis estimated that cutting daily commutes out of the equation has saved Americans about $758 million a day in time and expense since the pandemic began. The analysis rests on an assumption that commuting by car costs on average $12.50 an hour.

That generates $411 million a day in savings with an additional amount credited to fewer trips to by gas and that fewer accidents also generate economic savings. Combine these factors and one gets to the daily total of $758 million per day.

Like any analysis which relies on them, the numbers rely on the quality of those assumptions. That leads us to focus not on the accuracy of the numbers but what they reflect about what is going on in the economy.  One of the issues facing the economy going forward is whether the office as we know it will survive. Lower spending, less time in commuting might continue to be attractive to many workers. The longer remote work persists (and many companies are staying remote thorough year end) and if people are given the choice, the alterations in commuting patterns could become permanent.

It is an important concern for all sorts of municipal issuers. We look forward to additional analyses on the subject.

The Federal Reserve also has released its latest Beige Book documenting its findings about economic activity. For the broad economy, activity increased among most Districts, but gains were generally modest and activity remained well below levels prior to the COVID-19 pandemic. Manufacturing rose in most Districts, which coincided with increased activity at ports and among transportation and distribution firms. Consumer spending continued to pick up, sparked by strong vehicle sales and some improvements in tourism and retail sectors. But many Districts noted a slowing pace of growth in these areas, and total spending was still far below pre-pandemic levels. Commercial construction was down widely, and commercial real estate remained in contraction.

Other data and comments reflect the crisis in the tourism and hospitality sectors as well as the airline industry. The recent announcements of permanent cuts to airline employment will likely be reflected in other businesses and industries dependent upon air travel. As we checked through the regional summaries in the Book, we were struck by how often terms like – Outlooks were increasingly uncertain; Uncertainty is extremely high; expectations have been scaled back; conditions in the energy and agriculture sectors remained weak –  came up. It paints a picture of slow recovery both economically and fiscally.

Another sign of the pandemic comes with Amtrak’s plan to furlough 2,000 employees. It is a direct result of diminished ridership and can be seen as a sign of the decline in economic activity in its busiest region. like New York’s MTA, it can cut service to a level which can be supported by available revenue. Amtrak  plans to reduce daily service on its long-distance train network to three times per week without funding help. Cuts of that magnitude would be indicative of difficulties in the underlying economies supporting these agencies. In July compared with July 2019, ridership on the relatively shorter routes through more urban areas was down more than 80%.

PANDEMIC FLEXIBILITY

The pandemic has forced issuers to be more flexible in their approaches to the financing of the revenue shortfalls. In some jurisdictions, structures have existed that provide for borrowing by local issuers to finance these shortfalls. These structures have not always been designed to deal with the unique impacts of something like the pandemic on these issuers. One of the best examples of this sort of borrower is school districts.

New York State has been at the center of the pandemic and the impact of its extended lockdowns and limits on economic activity on local government finances has been significant. To deal with the drop in revenues being received by the State of New York, the State has been withholding 20% of state aid typically distributed to local governments. localities and school districts have taken a number of steps in response to their resulting revenue declines. These include the use of short term borrowing in anticipation of either revenues or the proceeds of a future long term debt issues.

In New York, localities operate under debt limitations enacted by legislation. Among the limitations are a requirement that they be financed or retired within five legislation which extends the period over which notes are outstanding to seven from five years. The ability to roll over the notes an extra two years will allow management to better manage the expected long-term interest costs of borrowing. They can either reducing the note’s principal through annual paydowns of principal by cash funding of capital projects. In either case, long-term principal would decline, lowering future overall debt service requirements.

The legislation also addresses other techniques used by local government to manage the revenue interruptions and shortfalls stemming from the pandemic. The period in which governments must replenish restricted funds that they transfer temporarily to their operating budgets has been extended to five years in equal annual installments from the previous requirement to replenish them within the current fiscal year. The legislation also eases local governments’ access to capital reserve funds to pay for capital costs attributable to the pandemic. Governments will no longer need a referendum to move the funds  access. Capital reserve funds would normally be locked up and not available for corona virus-related expenses.

In New Jersey, newly enacted legislation will allow localities in the Garden State to borrow to replace revenues lost to the pandemic. The legislation permits localities to borrow for up to five years. If local governments can show that debt service costs would present a significant financial hardship that includes a need to increase the tax levy by more than 2%, the repayment period on the bonds could be extended to 10 years. Local governments also received new authorization to increase the tax levy to account for increased mid-year budget appropriations needed to fund emergency COVID-19 expenses. The higher taxes would not be subject to approval from the Local Finance Board which is typically required for municipalities when they exceed the state property tax cap.

We would expect to see similar changes made to local finance laws unfold across the country.

YET NYC STANDS ON ITS OWN

In an effort to pressure the state to provide additional financial aid, the mayor of NYC has chosen to frame the debate over how best to address the revenue to press is that the City must be authorized to borrow up to $5 billion to cover the budget gap which resulted. And that borrowing should have a thirty year term. Without that authorization, the Mayor threatens to lay off 22,000 city employees in as little as 30 days. The layoffs are clearly a bargaining chip to be played with a legislature that is increasingly impatient with the Mayor’s stewardship of the city.

We have stood firmly in the camp of those who believe that the City has been poorly managed especially in the Mayor’s second term. It can be argued that the health aspect of the pandemic was managed as best as could be given the magnitude of the pandemic in New York especially in NYC. Issues in the public eye – primarily the schools and public safety – are easy to cite as examples of ideology clouding management competence. The ongoing debacle over the opening of schools just extends and complicates the economic recovery.  

None of that would be causing a crisis if the economy had kept chugging along creating cover for some of the more troubling issues like soaring headcount which many had questioned. The management of the Thrive NY mental health program raised issues of confidence in Albany and now that the City needs help from the legislature, those concerns create hurdles in the City’s effort to generate additional funds.

Our view is that borrowing authority should be based on a more aggressive amortization schedule. The authority should be linked to cost cutting measures. They would include obvious things like negotiated changes in all forms of compensation, work rule changes, better technology, and better physical plant management. everything should be on the table and all parties will see changes in their level of control. The City’s credibility is on the line and the Mayor needs to step up.

PANDEMIC AND TRANSIT

Two very different scenarios are unfolding in the mass transit space in California. In San Francisco, the San Francisco Municipal Transportation Agency said will not open until at least the end of the year. Since March, the system had only three days of operation before mechanical and staffing issues forced a new shutdown. The mechanical issue will rely on parts not expected to be available until the third week of October. The staff issue reflects the positive test for a person and exposure of two others that forced the qualified workers to quarantine. The closed system does not provide an opportunity to train other personnel.

In Los Angeles, the city will study the potential for eliminating fares on the Metro system. Subsidized or free service is an issue being debated in several jurisdictions across the country. Los Angeles benefits from the fact that fares contribute only about 13% of operating revenues. Contrast this with New York where fares have historically contributed over half of operating funds. The revenue gap which would result in L.A. is far more manageable than the gap which would result in N.Y.

VIRGIN ISLANDS

“The refinancing of our existing bond debt in this unprecedented low-interest-rate environment is too great an opportunity to not explore.”  And so the Virgin Island’s has approved a plan to securitize a portion of its matching fund revenue (derived from the sale of rum) through a taxable debt issue. Like Puerto Rico, the Virgin Islands have had a slow recovery from Hurricane Maria. Now the impact of the pandemic on tourism has accelerated the negative impact of the national economic decline on the V.I. future.

Going into the pandemic, the Virgin Islands credit was characterized by excessive debt and poor fiscal practices. High unfunded pension liabilities and the financial difficulties of the power Authority (sound familiar) have been the recent headliners. Concerns about the timeliness and quality of financial reporting add to the mix. It has all contributed to a well earned Caa rating.

Now existing bond holders who are not refinanced out of their holdings have an arguably weaker credit supporting those investments than they did before. And it does little to address the underlying fundamentals which weaken the credit. It does put off a real cash crunch for the government for now and that would seem to be the major objective of the proposed issue.

MEDICAID, HOSPITALS, AND THE PANDEMIC

It is estimated that some 5 million workers have lost their employer provided health insurance as the result of job losses related to the pandemic. In some cases, these workers might be able to replace that coverage under the Affordable Care Act but many of them will wind up qualifying for Medicaid. We already know that pandemic fears have driven hospital utilization down, impacting revenues after periods of higher unanticipated expenses related to the pandemic. This has created liquidity pressures on hospitals, especially in the most hard hit of markets. The NYC market is a good example.

The Mount Sinai Hospital and Mount Sinai Hospitals Group  provide a good example. In the first quarter, Mount Sinai actually made money in spite of the limitations on operations driven by the pandemic. Recent material increases in liquidity and execute initiatives to improve margins had improved the system’s financial position. Nonetheless, the outlook going forward is uncertain. It has resulted in Moody’s assigning a negative outlook to Mount Sinai’s rating. An already high Medicaid share of revenues will likely increase because of the economic downturn. At the same time, state budget stress could drive Medicaid cuts.

The pandemic comes at a quite inconvenient time for the System. Mount Sinai hopes to replace its money losing facility in lower Manhattan (full disclosure I was born there) with a state of the art facility oriented much more towards outpatient care versus the current traditional structure. If the project is delayed because of a prolonged period of modest margins and high operating leverage would extend the period in which money losing divisions must be supported. Part of the strategy envisions the sale of real estate associated with the existing facility which would have improved liquidity. The benefits of such a sale will either be delayed or will yield a less favorable price.

CHICAGO BUDGET

As one of the largest cities in the U.S. to operate on a calendar year budget, the City of Chicago finds itself at a disadvantage. The primary fiscal impact of the pandemic will occur during this calendar year so that will amplify the impact on the City’s budget. The depth of that impact was reflected in the 2021 Budget Forecast released by the Mayor and city budget officials this week.

The forecast shows a $1.2 billion funding gap which must be addressed by year end. The City’s midyear shortfall for the current fiscal year is $799 million. A $783 million gap is projected for fiscal 2021. The Mayor has hinted at a combination of tax increases and layoffs to deal with the budget realities. This while historical pressures remain. In 2021, the city will pay its four pension funds $1.8 billion, approximately $91 million more than in 2020 from its general operating fund.

The City acknowledges the contribution of existing pressures before the pandemic to the City’s budget gap. Of the city’s projected budget shortfall of $1.2 billion in 2021, $783 million is due to the pandemic while the remainder reflects the City’s structural deficit. It comes as the City projects that full economic recovery is not likely until 2022.

The city will use $350 million in federal relief funds and $100 million saved by refinancing debt last year to help close the 2020 deficit. A hoped for debt refinancing is planned to generate $100 million in current year budget savings.  Over the longer term, the City is putting hopes in a casino which is projected to generate revenues to partially fund uniformed service employee pensions.

It is a bleak outlook which should hold back any improvement in the City’s credit for an extended period.

LAS VEGAS MONORAIL

The Las Vegas Convention and Visitors Authority to buy the struggling Las Vegas Monorail. The monorail opened for service in 2004 The monorail opened for service in 2004 after delays and cost overruns. It has never been a financial success and it was an unmitigated disaster for investors and bond insurers who supported the bonds. The purchase would not be a vote of confidence for the monorail’s financial viability.

It does give the Authority control over the monorail’s exclusivity agreement, which stopped other transportation options in the Strip corridor. It is also interesting that the debate over the vote included comments to the effect that the monorail probably has an 8- to 10-year lifespan. This reflects the expected useful life of the monorail’s physical assets and what is considered to be a prohibitive cost of replacing that rolling stock. It likely spells the end of one of the more interesting sagas of the high yield world over the last two decades and it supports the views of those who knew from the start that the project would not succeed.

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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The municipal bond market, just before its recent pullback has been trading at near 70 year lows in yield. Issuers of all credit stripes are coming forward and with a couple of exceptions are finding a warm welcome for their offerings. So we’re all good, right?

This is an environment where every technique available to help municipal issuers should be utilized to deal with the lack of revenues. Instead things like advance refunding capabilities remain unavailable to issuers, This, while at the same time a real federal fiscal response to the policy of essentially downloading the operational with the pandemic responsibilities of dealing with the pandemic were devolved to the states. It is as if the decision was made to outsource services while being unwilling to pay the entities providing them.

So now we move into the fall with fiscal pressures remaining effectively unabated for government. Yet now is when some of the most significant expenses will be incurred. The preparation work to adapt classroom and other spaces for in person learning is substantial, costly, and likely to be required through at least year end. The recent experiences with college campus openings have been clearly fraught and the sort of on again off again process which some schools seem to be attempting is likely to be more costly than other responses.

The nation’s largest transit system has confirmed how much trouble it is in. The current level of ridership (est. at 25%) has generated significant operating losses which are not sustainable. The agency finds itself in the midst of a hurricane the effects of which are only partially attributable to its own decisions. MTA has requested $12 billion in aid to cover its operating losses through 2021. But that funding is at risk without a substantial federal stimulus bill. Without it MTA projects fares and tolls would be raised by one percent and one dollar, respectively, above already scheduled increases in 2021 and 2023.

The situation with the MTA is simply the largest and most glaring example of the problems. Across the country, state revenues from and for transportation are getting crushed. The situation is being replicated at various scales whether it be less funding for public transit or delayed or scaled back road maintenance and/or construction. The ability of toll roads to facilitate commercial and freight usage may position them better relative to public transit issuers but the demand issue remains in either case. The result for now is diminished infrastructure and a diminished ability to achieve full economic recovery.

So to answer our question, no it’s not alright.

TECH AND GOVERNMENT

The pandemic reinforced the importance of technology as a credit factor. Technology enabled the economy to a least limp along without utter collapse thanks to the technological innovations of the last two decades. The central role of technology in facilitating electronic transactions and video capability that allowed many to continue to work were economic lifesavers. At the same time, the reliance on technology raises several troubling aspects from a societal point of view. These include issues of equal access to education, work, and even medical care. The solutions to those issues will be decided outside of the market.

For municipal bond investors, the issue of government and technology will be a continuing source of risk and cost. You can still go to local municipal governments where the screens are black and the type is either glowing white or green. Think the movie War Games. Then you understand why you can’t complete basic tasks expeditiously or cost effectively. And it’s not a partisan thing. But it is reality and that’s the sort of thing which will throttle adaptation of technology to cover the range of potential applications government provides.

The challenge of updating and replacing information and operating technology will be its cost. Many issuers are not in a position to fund significant tech infrastructure. Yet information technology and infrastructure will be key to the adoption and implementation of technology in support of transportation. One of the ongoing debates in infrastructure world is the issue of technology based transit modalities.

Many of those at the front of the movement to make individual autonomous mobility the cornerstone of 21st century transit are finding out just how much of a chasm exists between the capabilities of government systems and corporate systems. One of the issues which contributed to the huge  level of operating problems for the California was the age of some of the software the system was based on. Some of the system was still on code written for COBOL (Look it up). They’re going to need some serious upgrades to the local tech infrastructure if the future is electric AV powered by renewable energy.

Which leads us to the issue of the effect of making decisions under duress. One of the risks for policymakers going forward as the pandemic follows its course until a vaccine intervenes, is that current conditions can generate impacts which in the longer term are not viable. It has been interesting to see how different interest groups have been actively spinning current conditions in big cities. Whether it’s the end of on street parking, punitive congestion fees, or the permanent expansion of outdoor dining, proponents do not seem to have given much thought to the long term impact of those decisions.

Take dining. The extension of dining into what were formerly parking spaces in NYC stands out. The concept works well in a time of seriously diminished traffic but is there a viable economic model for operating that way? Will it be enough to replace the 10,000 restaurants estimated to have closed in NYC since March? Are current levels of business enough to support rents long term? What tradeoffs in terms of transit and traffic must be made as the level of economic activity is on a sustained path to recovery?

We take the view that the path may be longer than one would hope but, that in a couple of years people will be happy to sit in restaurants and bars, that they will go to movies in theatres, and that once again sports stadia and arenas will be full again. The economic havoc on capital finance will serve to reinforce previously existing preferences in terms of public versus private vehicles. 

We do not subscribe to the theory that it’s the end of the world as we know it and I feel fine. It is important that decisions be made soberly rather than in the heat of battle.

PRIVATIZATION ADVOCATES TRY AGAIN

Under the heading of never letting a good crisis go to waste, the pandemic is providing opportunities for advocates of privatization of existing public assets to take another shot at public opinion. Once again, we see the private sector attempt to use the pandemic and its economic impacts to advance the cause of privatization. The latest comes from the Koch-financed Reason Foundation. It released a study which purports to offer a solution to pension underfunding through the sale of toll roads.

That study concludes that Illinois could generate the largest net toll road lease proceeds but its unfunded pension liability is so large that the lease proceeds would cover just 14 percent of its pension debt. Florida and Oklahoma could pay down half of their unfunded liabilities. Unfortunately, the study rests on some questionable calculations to arrive at its conclusions.

It also ignores the politics of privatization in states like New Jersey and Florida where toll increases generate big oppositions. It also has the bad luck to cite the Chicago Skyway and Indiana Toll Road as US examples. Neither of those deals measured up to the claims of proponents. The study draws on data from a number of overseas toll road P3 transactions in recent years to estimate what each toll road system might be worth to infrastructure investors. Unfortunately, the gross valuation is what would apply globally but that ignores the realities of municipal bonds in the United States, a change of control (such as a long-term lease) requires that existing tax-exempt bonds be paid off.

PUERTO RICO ELECTRIC

The Puerto Rico Energy Bureau is the governmental overseer of the Puerto Rico Electric Authority (PREPA). While PREPA undertakes to restructure and refinance its debt, it also is seeking to rebuild the Commonwealth’s electric system after three years of hurricanes and earthquakes. After Hurricane Maria, we made the case that the rebuilding effort had created a huge opportunity to develop a much more resilient and climate friendly electric grid. With abundant sunshine and wind available year round, the opportunity to shift from a fossil fueled to a renewable generation base was at hand.

Since Maria destroyed the system, PREPA has undertaken a plan of recovery which in many ways seeks to maintain the status quo. So we were glad to see that recent reviews undertaken by the Bureau have led to the Bureau recommending an increased reliance on renewables. It effectively rejected PREPA’s plans to increase reliance on natural gas. The regulators proposed at least 3,500 megawatts of solar and more than 1,300 megawatts of battery storage by 2025. It also sought to have PREPA reconsider its plan to spend $5.9 billion on a rebuild of the heavily damaged transmission system.

The bureau’s proposal would cost PREPA an estimated $13.8 billion compared to around $14.4 billion projected under the utility’s plan. That would represent a 4% reduction in overall costs. Not huge but still meaningful. The disagreement will likely complicate the debt restructuring process. We do not see that as a reason to plunge ahead without real debate over the future of the electric system.

We were interested by comments we saw regarding concerns over reliability of a renewable versus a fossil fuel based system. Those concerns are rooted in the fact that the utility serves a truly closed system with the added complication of reliance on 100% externally generated fuel sources. It is not obvious why concerns about redundancy for a renewable based system are any different than those which existed for the original system. Because there is no access to outside sources of power, the legacy oil and gas based system had the same issues. The risk of energy shortages (such as we see in California) has always been present in Puerto Rico. We do not think that those concerns are sufficient to discourage the development of significant renewable generation resources for PR.

WHY RUNNING GOVERNMENT LIKE A BUSINESS USUALLY FAILS

The current stimulus standoff is generating different responses from different organizations as they operate their businesses. Some of them think that their experiences provide answers to the issues government face. Most of those who think that way reveal their inability to distinguish between a business and a service. While it is not a municipal credit, the Postal Service is a good example.

The current debate effectively revolves around the issue of profitability. The President does not understand the concept of public goods. The Postal Service was never designed to be a business it was designed to be a subsidized service. The current shenanigans at the USPS are based in the belief that it must be profitable in the sense that any business must be profitable. The role of the USPS in facilitating commerce and therefore the economy has economic value. That is why only the USPS has to serve every address and is the only entity required to facilitate things like animal delivery and transport.

It is also why basic infrastructure like water, sewer, and roads have largely been developed under the framework of a public good. Public goods are not supposed to “make money”. The profit they generate is reflected in the role they play in providing a necessary service base in support of economic activity. In those situations where services provide excess revenues those are usually applied to the funding of public goods. service related surpluses fund other facilities or fund items which would otherwise be funded by taxes.

No matter how you slice it, these proposed asset sales take money from public goods and divert it to private interests. Projects which do not generate distributable returns to their investors are generally not undertaken. So at least some portion of the economic return generated by formerly public goods represents a transfer of income and/or wealth from the public to the private sector.

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 would like to say that we are optimistic about the economic and pandemic outlooks but it is difficult to do so given the data we see. The attempt to open college campuses to significant on campus activity is already proving quite problematic. Early openers were among the most adamant supporters of doing so but they have stepped back. At the K-12 level, only New York among the nation’s largest cities is holding on to the idea of a significant in person presence. Experience to date in Chicago and Arizona indicates that it will likely be the teachers making the final call.

The implications of these failed reopenings, along with reopening fueled resurgences of the virus for the economy is clear. The return to pre-pandemic normal is increasingly farther away with all the negative implications which stem from them for state and local revenues. Even the positive trend in initial unemployment claims reversed this week. As for municipal credits, they remain in the eye of the storm as governments must manage the demand for services in a greatly reduced resource environment. The need for additional support from the federal government could not be clearer.

From a policy perspective, California will unfortunately provide another test of the impact of recent political decisions which will hurt the ability of the federal government to respond to disaster. The President is funding his unemployment extension plan with the money which was earmarked for FEMA. So in that sense it is fair to ask where disaster aid funding might be coming from? Just in the last two weeks, significant storms have hurt the northeast, Iowa, and now California is on fire. So it is not a regional or partisan issue.

We remain concerned by the current credit environment which simply does not compensate investors for the risk they hold. That makes these perilous times for those considering an increase to their exposure to risk. Tread carefully.

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TRANSIT TECHNOLOGY

Fairfax, VA is about to join sixteen other U.S. cities in the testing of an autonomous passenger shuttle. The vehicle will travel a one-mile long route, between a transit station and a downtown commercial area. The test reinforces a trend across the country. Since 2016, the National Highway Traffic Safety Administration (NHTSA) has granted permission for the testing of 87 self-driving vehicles as part of 89 different projects in 20 states. The projects include 64 publicly operating low-speed shuttles in 45 cities. In Fairfax, the 12-passenger shuttle will serve two stops, cross only two intersections, and cannot go faster than 15 mph.

The cost of the test will be divided among the Commonwealth of Virginia and Fairfax County. Dominion Energy, which would benefit from increased electric vehicle use owns the shuttle.  The shuttle’s manufacturer has experienced some problems with the vehicle’s operations. This winter, the National Highway Traffic Safety Administration suspended passenger operations on all of the manufacturer’s  autonomous shuttles in the United States. A passenger fell aboard one that was part of a pilot program in Columbus, OH when the shuttle made an emergency stop.

The agency in May allowed passenger operations to resume after additional safety enhancements were made, including corrective actions to increase awareness that sudden stops can happen, more signage and audio announcements, and retrofitting the vehicles with seat belts. A “safety steward” will always be on board. Nonetheless, officials in Columbus were recently quoted as saying that the test in the Columbus project revealed some limitations of existing technology. Left-hand turns in traffic were cited as a nonstarter and a safety driver would always need to be stationed behind the wheel.

One of the issues which has clouded the debate over autonomous vehicles is the perceived difficulty that AVs have outside of urban and suburban areas. Most of what we have seen concerns the benefits of AVs for primarily urban situations, for congestion relief or pollution reduction. What we have not seen much of is the issue of how LIDAR based systems handle the realities of rural driving. If you have ever gotten a speeding ticket based on LIDAR technology, you know how many things can impact the accuracy of that equipment.

Those systems will now be put to the test in rural settings. University of Iowa researchers with the National Advanced Driving Simulator (NADS) are preparing for an upcoming demonstration study about automated driving on rural roads. A $7 million US Department of Education grant will fund the study. As the director of the UI program put it, “There is a big difference between driving in Iowa than in Silicon Valley or states where there are 12 months of sun.”

This study, scheduled to begin in 2021, will use a custom vehicle equipped with scanning lasers known as LIDAR, computer vision systems, RADARs, and high definition maps. It will follow a 47-mile route through parts of Iowa City, Hills, Riverside, and Kalona. The study is intended to see how the technology handles things like sharp curves, gravel, weather, and farm equipment on the roads.

The Iowa study will have a significant focus on how AVs will improve mobility for aging populations in rural areas. If the industry can address the concerns of this cohort, it will go a long way towards building support and demand for the technology.  

LIABILITY AND THE PANDEMIC

One of the issues which has supposedly held up negotiations on an additional federal stimulus package is the issue of liability. Whether it be employers looking for immunity as they push workers to come back to work or institutions like colleges, the issue of liability is emerging as a major point of contention. A recent piece in the Boston Globe shed light on the effort by higher education institutions to protect themselves from liability claims from students who return to campus while the pandemic continues.

The story cited numerous examples. Bates College in Maine requires students to assume “any and all risks that notwithstanding the college’s best effort to implement and require compliance with these prevention and mitigation measures.” any and all risks that notwithstanding the college’s best effort to implement and require compliance with these prevention and mitigation measures.” The state university system of New Hampshire has asked students coming to campus to sign an informed consent form. 

Alternative approaches are being taken by some schools. Northeastern University is asking students to sign a commitment to wear masks, report any symptoms, and abide by the school’s testing and quarantining requirements. Boston University is not requiring students to fill out risk or liability waiver forms or agreements. The actions come in the wake of the American Council on Education’s  letter to Congress asking for targeted and temporary liability protections to ward off “excessive and speculative lawsuits.”

The debate comes as The University of North Carolina at Chapel Hill announced that it was reversing its plan to conduct in person classes. One week into the new semester, 177 cases of the dangerous pathogen had been confirmed among students, out of hundreds tested. Another 349 students were in quarantine, on and off campus, because of possible exposure to the virus.  Three dormitories and a fraternity house developed clusters.

UNC will allow students to leave campus housing without penalty. The dean of public health said, “We have tried to make this work, but it is not working.” UNC is housing about 5,800 students in campus housing — less than two-thirds of capacity — with many more students living off campus.

As the week went on, the perils of the in person approach became clear. Notre Dame was one of the schools to take an aggressive position towards school reopening (and football) but that has blown up in its face. School opened on August 10 and now the university will go to an online only format for at least two weeks. Michigan State planned on on-campus classes but the school President acknowledged that “it has become evident to me that, despite our best efforts and strong planning, it is unlikely we can prevent widespread transmission of COVID-19 between students if our undergraduates return to campus.”

The differences in approach are yet another reflection of the lack of a national approach to so many of the issues associated with the pandemic.

JACKSONVILLE ELECTRIC MEAG SETTLEMENT

At least some of the details of the settlement of litigation between the Jacksonville Electric Authority and MEAG Power have been released. In connection with the settlement of the litigation, MEAG Power and JEA executed an amendment to the Project J Power Purchase Agreement pursuant to which MEAG Power and JEA agreed to an increase in the “Additional Compensation Obligation” payable by JEA to MEAG Power of $0.75 per MWh of energy delivered to JEA. That  Additional Compensation Obligation is not pledged to the payment of either the Bonds or the DOE Guaranteed Loan which have financed the Votgle Plant expansion

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An additional agreement grants to JEA a right of first refusal to purchase all or any portion of the entitlement share of a Project  Participant to the output and services of the Project J in the event that any Participant requests MEAG Power to effectuate a sale of such entitlement share. On August 12, 2020, JEA, the City of Jacksonville, Florida, and MEAG dismissed the litigation among the parties in both the United States District Court for the Northern District of Georgia and the United States Court of Appeals for the Eleventh Circuit. As part of the settlement, the parties agreed to accept without challenge or appeal the June 17, 2020 order of the district court determining that the Project Power Purchase Agreement is valid and enforceable.

It is hoped that after the twin failures of a botched sale of the utility and the settlement of this litigation that attention can now be paid to the management of JEA going forward. Clearly the path it was on was not favorable for investors. Management is conducted on an interim basis as the City looks for a new manager. As it stands, JEA is not really any better off than it was at the start of the process and now likely has fewer options going forward. The Votgle expansion will continue to weigh on the JEA credit for a long time and it should serve as a continuing weight holding back any real improvement in the JEA credit outlook.

RATINGS AND THE PANDEMIC

Ratings are always going to be a lagging indicator. Through their history, the worst of a massive event is often over before the rating agencies take action to lower ratings. We expect that the pandemic will be no different in that regard. So while we are not seeing widespread downgrades yet, we are seeing the signs of validation of our view expressed some weeks ago about which sectors have greater vulnerability to the limitations on economic activity which have resulted from the pandemic.

The latest action we see as strictly pandemic related is the switch in outlook for the Moody’s rating on the New Orleans Port Board of Commissioners. The current A2 rating was maintained but the outlook was shifted to negative from stable. The coronavirus pandemic has significantly affected the port’s cruise business; the current economic contraction is pressuring the port’s container and rail segments; and the port’s breakbulk business remains significantly pressured by tariffs, with throughput down 25% in the fiscal year ended June 30, and down 45% in the last five years. 

Given its location near the mouth of the Mississippi River, the Port serves a significant role in the export of commodities from the Midwest. The board operates as a landlord port authority for a deep-water, multi-purpose port complex located on the Mississippi River in New Orleans. The board’s facilities are located along 22 miles of waterfront on the Mississippi River and the Inner Harbor Navigation Canal (IHNC) and include 52 berths, 23.3 million square feet of cargo-handling area, 3.1 million square feet of covered storage area and 1.7 million square feet of cruise terminal and parking area.

Some of the pressure on the rating comes from capital spending decisions made before the pandemic existed. For example, the port is adding debt to fund capital spending, and is anticipating a robust recovery in cruise that will enable it to match the increase in debt service over the next three years. Moody’s estimates that  lower than anticipated cruise revenue, and potentially lower cargo and rail revenue, combined with more than $7 million of new debt service by fiscal 2023 will require significant spending adjustments – upwards of $10 million, or more – in order for the port to maintain total debt service coverage ratios (DSCRs) near its target of 2.0x.

The negative outlook reflects significant uncertainty around the timing and level of recovery in cruise, continued material pressure on breakbulk cargo (goods that must be loaded individually, and not in intermodal containers nor in bulk as with oil or grain) and cyclical but steep declines in container and rail activity. The Port’s situation is an example of the sort of decisions which will be faced by port operators so long as the economy is held down by the impact of the pandemic.

DEFUNDING THE POLICE

A number of cities have tried to begin the process of “defunding the police” with local legislatures enacting budgets with cuts in budgets for local police departments. The effort comes obviously in the midst of the massive debate over policing in the U.S. As the site of some of the largest demonstrations and some of the more prominent “economic” violence incidents, New York City was at the debate’s center. Mayor deBlasio made a pledge to defund the police to the tune of some $1 billion.

So we were interested to see what actually happened in connection with the defunding movement and the budget enacted by the City for the FY beginning July 1. The City’s Independent Budget Office (IBO) has provided some of the answer to that question. IBO has compared planned police spending in the April Executive Budget with the budget adopted on June 30. This comparison only covers the police department’s operating budget, which totals $5.2 billion.

The operating budget for the police, like that of other city agencies, excludes costs such as fringe benefits and pension contributions for staff, and debt service, all of which are budgeted centrally by the city. IBO estimates that for 2021, city spending on these items will total $5.4 billion for the department and brings total police expenditures to $10.6 billion this year.

The 2021 adopted budget for the police department was $420 million less than what was planned in April. Including centrally budgeted spending for the department, IBO estimates that total planned police-related spending for 2021 fell by $472 million from April to June. The city’s financial plan for police spending in 2022 through 2024 changed even less from April to June, shrinking the department’s budget by only $83 million each year.

The largest recurring savings comes from eliminating one police academy class. Not adding 1,163 recruits reduces the police department budget by $55.0 million in direct salary expenses in 2021. Forgoing this class means that after allowing for usual attrition, the number of uniformed officers would fall to 35,007 by June 30, 2021, down from 36,263 in April 2020.

Although the Mayor’s announcement of the budget agreement highlighted the shift of school safety staff and school crossing guards—along with $350 million to pay for their salaries–from the police department to the Department of Education, other than a $6 million cut in planned school safety overtime, no sign of this shift appears in the city’s financial plan.

GREEN CULTURAL SHOOTS

Museums and other cultural institutions will be allowed to open in New York City starting on Aug. 24. Institutions will be required to keep the buildings at 25% occupancy and to use a timed ticketing system, which would allow museums to carefully regulate how many people are entering at once. Face coverings will be compulsory. The directive does not allow theaters and other performing arts venues to open.

The Metropolitan Museum of Art will reopen Aug. 29; the Met’s Cloisters site in upper Manhattan will open on Sept. 12. Other reopening dates for the city’s museums include The Museum of Modern Art (Aug. 27), with free admission for the first month. The Museum of the City of New York plans to open on that day as well. The American Museum of Natural History will open on Sept. 2 for members and Sept. 9 for the general public.

CANNABIS

A petition in Montana to legalize recreational marijuana for adults 21 and older has qualified for the state ballot in November. Initiative 190 and Constitutional Initiative 118 will be eligible for state residents to vote on. It is impressive that the ballot items qualified given the limitations of the pandemic. The initiative reportedly required 25,000 verified signatures to qualify, while the constitutional amendment needed around 50,000.

The initiative would legalize the sale and possession of limited marijuana quantities while adding a 20 percent tax on the sale of non-medicinal pot products in the state. Supporting organizations estimate that sales would generate $48 million in tax revenue for the state by 2025. Much as was the case when Prohibition was ended in the midst of the Great Depression, initial moral objections to the legalization of alcohol were overcome by the need for state revenues during a time of economic distress. Current state and local government fiscal conditions are creating a similarly based source of support for legalization of marijuana.

CHICAGO’S NEXT PROBLEM

It was big news when the City of Newark, N.J. found that it faced significant fun ding needs to remediate the health impacts resulting from the use of lead piping to deliver water to individual customers. The resulting outcry led the state and other issuers to put together a financing package to address the situation quickly without harming the credit of the City. That program is underway and the City of Newark just saw the outlook on its credit raised from stable to positive.

Now the City of Chicago finds itself in a similar position. Chicago has the most lead service lines in the United States, largely because the city’s plumbing code required the use of lead to connect single-family homes and two-flats to street mains until Congress banned the practice in 1986. The City uses chemicals in the treatment of the municipal water supply that form a protective coating inside lead pipes connecting homes to cast-iron street mains.

The City estimates that some 360,000 Chicago homes have lead service pipes. The cost of line replacement is estimated at $8-billion-to-$10-billion. That is money that the City certainly does not have. The estimates also come at a time when the State of Illinois is in no position to fund such a project and the federal government remains hostile at best to the City and to issues of environmental remediation.

It is a political nightmare. It was City regulations that drove the use of lead piping. That will make it difficult to generate support for a plan which would require customers to bear some of the funding  burden directly. A formal plan to address the problem is expected over the next few weeks but ideas are being floated in the media. The issue was debated during the campaign for Mayor but like so many other things in Chicago, it competes for funding and attention.

With each day, the perception of the City’s (let’s be honest, the Mayor’s) ability to deal with its range of pressing issues becomes less favorable. The media and political establishment are increasingly questioning the Mayor’s ability to address the multiple challenges facing the City. This is a public health issue and after Flint, MI, one that simply will not go away.

It is just one more drag on the City’s credit.

WHAT UBER’S FIGHT WITH CALIFORNIA IS REALLY ABOUT

Uber and Lyft announced that they will have to leave the California market if they are forced to comply with state laws governing their relationship with their drivers. They have been continuously litigating over their non-compliance with California law requiring them to reclassify contract drivers and grant them the benefits and protections afforded to regular employees. The companies complain that they cannot comply in time with the law and that they need at least another year to do so.

Transportation network companies have been at the center of the debate over the future of transportation, in particular the future of public transportation. The debate has been driven by the ability of these companies to artificially cap the cost of a ride. What all of these legal efforts should make clear is that the business model for these companies relies on an exploitive relationship with their drivers.

At one point, Uber tried to make the argument that “drivers’ work is outside the usual course of Uber’s business.”  The takeaway from this line of argument is that TNCs do not work if workers are paid fairly and the cost is passed to the consumer. So the question has to be asked, is the TNC model truly a viable competitor to public transit?

If the answer is not really, then transit systems need to stop cowering before these companies. Uber and Lyft’s growth in NYC came at the expense of massive increases in congestion while they subsidized the cost of rides.  History shows that private vendors have a very mixed record of success in providing public transportation.

The current model for public transit in NYC came about through the failure of the private sector to succeed in the 1960’s. Previously, a number of private companies provided bus service throughout the city. The continued resistance to regulation by the industry especially in the area of how it compensates its drivers shows just how vulnerable the current TNC model is.

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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STIMULUS CARWRECK

The collapse of Congressional negotiations over a next stimulus package is a short term disaster. Obviously, cash strapped state governments need exactly that – cash. The actions announced by the President are in many ways useless towards addressing the major concerns of state and local government. Worse, they show how damaging it is to have a President who cannot or will not learn enough to make intelligent decisions.

Take the unemployment benefit issue. The President “orders” a $400 benefit but asks the states to cover one-quarter of that. That’s in large part because the President is ignorant of the fact that the National Conference of State Legislatures has data that shows that California, Hawaii, Illinois, Kentucky, Massachusetts, Minnesota, New York, Ohio, Texas, and West Virginia have borrowed from the federal government because their respective unemployment benefits trust funds are exhausted.

That is to be expected as these funds often need replenishment during deep recessions. So it is unsurprising that those 10 states and the U.S. Virgin Island have collectively already borrowed $19.79 billion through Aug. 7. The fact that these states have already borrowed and that an additional eight states have prepared requests to borrow shows how useless the President’s idea of having states fund 25% of the proposed unemployment enhancement is. The Governor of New York is right to call the plan something akin to throwing a drowning man an anchor.

HOW’S THAT REOPENING WORKING OUT?

We don’t necessarily link these things to specific credit issues but, they serve as an indicator of what the environment supporting municipal credit generally is looking like. Obviously, the economic outlook is key. Only when it is clear as to the state of the pandemic and the economy which can be sustained under those conditions can one make valid judgments about particular credits. For now, it is a macro issue.

So let’s take a look out over the horizon as we assess the credit environment. One month after reopening, Walt Disney World is reducing its hours of operation beginning on Sept. 8, the day after Labor Day. Hours will be reduced by one to two hours per day, depending on the park. Disney reported an approximately $3.5 billion adverse impact on operating income at its Parks, Experiences and Products segment (theme parks, retail stores, and suspended cruise ship sailings) due to revenue lost as a result of the closures of those operations. 

In Georgia, one school district reopened without masks or distancing. One week in and the schools were closed for two days for cleansing and some 900 students and faculty at the schools are in quarantine. That does not bode well for similar efforts. The large metropolitan school systems are either holding class on line or are holding classes in hybrid form between in person and on line.

Rhode Island Schools were set to reopen on Aug. 31 but the new reopening date will now be Sept. 14. The final announcement of whether it’s safe for districts to reopen in person is expected the week of Aug. 31, rather than Aug. 17. The governor is on record as wanting to monitor data closer to the first day on Sept. 14 while giving school leaders more time to prepare. 

In what may be the most culturally significant action, the PAC 12 and the Big Ten have postponed their football seasons until 2021. The NCAA announced that it “cannot now, at this point, have fall NCAA championships because there’s not enough schools participating.” There was a heavy lobbying effort against such a move. It has real significance given the role of football programs as revenue producers for the schools directly. They are also huge drivers of associated economic activity. Some stadiums become among the five largest populated areas in some states on football Saturdays.

This is about operating within a realm of realism and information or operating in a delusional state.

DEBT RESTRUCTURING

The fact that municipal bond interest rates are at historic lows has created a good opportunity for troubled credits to take advantage of the rate environment to restructure debt. Last week we discussed the use of debt to relieve short term budget pressure. This week, true restructurings were back in the news.

The perennially troubled U.S. Virgin Islands will consider a plan to refinance some $1.1 billion of matching fund debt which is secured by revenues generated through the rum industry. U.S. Virgin Islands Gov. Albert Bryan Jr. announced a plan to create a special purpose vehicle that would receive the rum cover-over payments on U.S. rum sales that currently support the bonds. The new special purpose vehicle should allow the new bonds to pay at around 3.5% rather than the 6% that the current bonds are paying according to the plan. The Governor’s plan assumes that the lower borrowing costs will generate funds not needed for debt service to be applied  to pay off some of the unfunded liability of the Government Employees Retirement System (the government pension).

The City of Harvey, Illinois has been in default on $4.5 million in defaulted debt service that was due in December 2018, June and December 2019 and June 2020 on the $31 million 2007 issue. Bondholders sued to enforce payment of the bonds. The result of the proceedings has been a consent decree requiring  the county tax collector to remit 10% of all ad valorem property tax collections collected in connection with the general corporate levy directly to an escrow agent that manages a tax escrow account for bondholders. The other 90% will be transferred  directly to the city.

The agreement extends until June 2, 2022 as long as the city honors terms of the agreement that call for it to continue negotiations and move towards a debt restructuring. The agreement is not a guaranty that a resolution to the City’s debt situation will occur. Previously, Chicago sued Harvey the city fell in the arrears on payments for Chicago-treated water from Lake Michigan. The two cities agreed to a consent decree in 2015, but Harvey violated it and the court stripped Harvey of control over its water operations in 2017. The City is back in court in an effort to take back control of its water system with the proposed refinancing serving as a vehicle to pay back the City of Chicago. In 2018, Harvey  settled litigation with its public safety pension funds that sought to garnish tax revenues to make up for overdue contributions. Harvey remains in negotiation to resolve a dispute over some of its contributions still in arrears.

NEW JERSEY BORROWING PLAN

The New Jersey COVID-19 Emergency Bond Act authorizes as much as $9.9 billion of state borrowing either through the issuance of general obligation bonds with up to 35-year maturities or short-term debt through the U.S. Federal Reserve’s Municipal Liquidity Facility program. The law was challenged by the state’s Republican Party which sued to have the law declared unconstitutional. This week, The New Jersey Supreme Court unanimously ruled that the law meets the state’s constitutional provisions regarding borrowing.

The bill permits the state to borrow up to $2.7 billion by the end of the extended 2020 fiscal year on Sept. 30, and $7.2 billion for the shortened 2021 budget cycle from Oct. 1 through June 30. The decision limits the borrowing to the amount authorized. The plan is designed to fund the state in the face of a revenue shortfall estimated in May to be $10 billion. The decision is not the final step in the process which will require the Legislature to agree on estimates of revenue which will dictate the amount which will actually need to be borrowed.

The action comes as the Federal Reserve announced that it was lowering the cost of borrowing under the Municipal Liquidity Facility. While the State of Illinois has been the only borrower under the program to date, it would not be surprising to see additional states and other municipalities consider short term borrowing. The debate which played out in New Jersey could be repeated in other states if the economic recovery stalls or falters. Much will depend on whether or not Congress can legislate another aid package that includes direct assistance to state and local government. If it does not, it simply is not reasonable to take the position that the State can cut its way out of a $10 billion revenue loss.

AUTONOMOUS VEHICLES

Before the pandemic and its potentially transformative impact on work, much debate was underway over the future of urban transportation. There has been much discussion over technology and the role of government in the development of infrastructure for things like autonomous vehicles. The potential political, financial, and fiscal implications of the choices made over the next decade are enormous.

So we find very interesting the recent comments on autonomous vehicles from AAA. The AAA automotive researchers found that over the course of 4,000 miles of real-world driving, vehicles equipped with active driving assistance systems experienced some type of issue every 8 miles, on average. Researchers noted instances of trouble with the systems keeping the vehicles tested in their lane and coming too close to other vehicles or guardrails. AAA also found that active driving assistance systems, those that combine vehicle acceleration with braking and steering, often disengage with little notice – almost instantly handing control back to the driver. A dangerous scenario if a driver has become disengaged from the driving task or has become too dependent on the system.

The results will not assuage fears held by those who are reasonably wary of dependence on technology. AAA’s 2020 automated vehicle survey found that only one in ten drivers (12%) would trust riding in a self-driving car. On public roadways, nearly three-quarters (73%) of errors involved instances of lane departure or erratic lane position. While AAA’s closed-course testing found that the systems performed mostly as expected, they were particularly challenged when approaching a simulated disabled vehicle. When encountering this test scenario, in aggregate, a collision occurred 66% of the time and the average impact speed was 25 mph.

At the same time as the AAA comments were being released, a new 34-page research brief was issued by the Massachusetts Institute of Technology. It said that “analysis of the best available data” suggests that the “reshaping of mobility” around automation will take more than a decade. “We expect that fully automated driving will be restricted to limited geographic regions and climates for at least the next decade and that increasingly automated mobility systems will thrive in subsequent decades,” the report said; with winter climates and rural areas experiencing still longer transitions.

As a result, the MIT researchers concluded that AVs should be thought of as one element in a “mobility mix” and as a potential feeder for public transit rather than a replacement for it. They acknowledge that unintended consequences such as increased traffic congestion could result from the use of these vehicles. Examples cited of projects being undertaken to “encourage” AV development are mainly centered around data collection about traffic and demand patterns. We still do not see evidence that the thornier issues surrounding AV technology especially their vulnerability to bad weather are moving forward quickly enough to justify the kind of investment by municipalities sought by the industry to facilitate its rise.

The report highlights the fluidity of the environment in which the transportation debate occurs. We have always believed that technologic change would evolve gradually and that there was no clear path forward. This would support a cautious approach to financing and funding decisions by municipalities as the autonomous or vehicle sector develops. It is simply not prudent for municipalities to make the kinds of substantial investments which futurist technology proponents wish to be made. It is clear that autonomous transportation technology remains at an early stage, with development, acceptance, and widespread utilization still many years away.

PRIVATIZED STUDENT HOUSING AND THE PANDEMIC

“While the CDC may be of the belief that student housing reducing density in student housing may lower the possibility of infection, we do not believe that requires a reduction in the number of roommates that would typically be permitted in the student housing or the number of students that can be housed in a given building.”  Well that is one way for a private operator to react. It of course ignores the realities facing college administrators and the realistic fears of many students and parents.

It also highlights the double edged sword reflected in efforts to include limits on liability in the next stimulus package. For business (and that includes entities like colleges), liability protection is a big concern. For entities like student housing operators, such protection could be the difference between financial viability and bankruptcy. For students and their families, a press to return generated by these operators could perversely lead to widespread lack of demand.

Private operators have at least initially taken an aggressive approach as reflected by the opening quote.  The comments on reopening and distancing have often been accompanied by implied threats of legal action to force occupancy at these facilities. It highlights once again the unique position in which many privatized student housing projects exist.

While often located on land leased from the campuses these facilities are meant to serve, they nonetheless are not university owned. Universities often incorporate these facilities into a portfolio of housing choices available to students. What they do not do is guarantee occupancy or revenues to these project financings.  Privatized student housing deals are risk shifting transactions designed to move the risk of these projects off of university balance sheets, first and foremost. If they were “guaranteed” by the colleges than their main objective would not be met.  The risk would still be on the school’s balance sheet.

So far, when we have seen responses from private sponsors to potential limitations on occupancy and actual on campus attendance they are adversarial. Threats of litigation against colleges by these sponsors may ultimately not be realistic. The point for investors is short of an occupancy guarantee from a college clearly spelled out, these facilities are true stand alone project financings.

CONSTRUCTION DURING THE PANDEMIC

During the initial phase of lockdowns, activity on construction sites ground to a halt. It was one of the first sectors to look to reopen as the pandemic unfolded. There has not been a lot of data regarding the impact of the pandemic on building activity until recently. The New York City Independent Budget Office (IBO) has released some research on construction activity during the second and third quarters of 2020 in New York.

Guidelines first issued by the buildings department restricted construction to affordable housing projects, hospitals and health care facilities, utilities, public housing, schools, homeless shelters, and a broad category titled “approved work.” Even when a site was designated as essential, that did not necessarily mean all work on the project could proceed. As of early June, more than two-thirds of essential sites included components that were required to remain idle during the pause. Conversely, all work was permitted to continue at only 32% of the sites.

This “approved work” fell into different subcategories. Emergency construction covered construction that would be unsafe if it was left unfinished, as well as projects deemed necessary for the well-being of building occupants. Work performed by a single worker was allowed since solo work reduces the risk that an infection would spread. The Department of Buildings also approved work on sites that house, or will eventually house, a business allowed to operate under the shutdown restrictions.

Despite the restrictions, The Department of Buildings issued a total of 4,376 stop work orders and violations during the shutdown period. That is roughly half the number of violations issued by the buildings department during the same period last year, although there was an average of just 6,000 active constructions sites during the pause compared with 35,000 before the pause.

CARES ACT SPENDING COMPLICATES PATH FORWARD

In light of the crushing failure by the Administration and Congress to find a way to move an additional spending package, attention is being focused on how money distributed by the federal government to the states is being spent by the states. Opponents of large scale aid to states and municipalities (largely centered on the Republican side) cite the potential for “bailing out” poorly run blue states. So it is more than ironic that spending by three of the reddest states is at the center of a debate over how the money is being spent.

The debate focuses on what the money is being spent on as well as the potential political/policy implications of some of that spending. The CARES Act says state and local governments must use relief money to cover “necessary expenditures” incurred because of the pandemic. It says governments can’t use the money to cover costs they’ve already budgeted for, and must spend the money on costs incurred between March and December 2020. That has caused questioning if not criticism of how those monies are being spent.

Idaho’s governor  is inviting counties and cities to apply for grants — paid for with federal money — to help cover their public safety budgets. Localities that take the money must agree to keep property taxes constant next year and pass on money they would have spent on payroll this year to taxpayers as a property tax credit. Comments by supporters blow the cover away from any pretense that the program has no political motivation. “Meaningful property tax relief has been the acute focus of lawmakers for several years now,” the House Speaker said in a statement.

County prosecutors are worried their clients will be held responsible for returning misspent funds.

South Dakota officials have spent $4.7 million of the state’s nearly $1.3 billion in aid paying highway patrol officers, according to the state Bureau of Finance and Management. The state is now trying to get permission to use federal aid to cover payroll costs for other public safety positions, such as corrections officers. $45.6 million — has gone to paying unemployment benefits. But the Department of Public Safety has received more funding than any other state agency besides the Department of Health and the Board of Regents.

In West Virginia, the state has admitted that it has received more aid than it knew what to do with in terms of corona virus related expenses. “We got down to a point in time where we had $100 million and we didn’t have a bucket for it,” according to the Governor. “And we could have done one of two things. We could have just sent it back to the federal government, or try to find a way that we could use it within West Virginia and use it for our people.” The state’s legal advisor noted “a cautious approach should be taken before deciding whether to allocate [federal relief] funds to any particular project due to there being no specific mention of road or highways repairs in the list of eligible expenses set forth in Treasury’s guidance.” 

So here we have three states being run from an ideological perspective – not “poorly run blue states” – effectively making the case against additional relief merely by their actions. And the Treasury is facilitating it for states where their governors are being viewed as supportive of the President. All it is doing is helping these Governors achieve political ends which have nothing to do with the pandemic (property tax relief) at the expense of the state and local government sector as a whole. In the meantime, states and cities have been hung out to dry as they cope with the frontline costs of the pandemic without the financial support needed to fund the tasks which the Administration has effectively downloaded to them.

PANDEMIC CASUALTIES

There has been much focus on the impact of the pandemic and economic activity on credits dependent upon economic activity. One sector which has shown signs of weakness is the parking revenue space. The impact shows up two ways, The obvious one is that people are not driving to downtown areas and utilizing paid parking facilities. It has already led to downgrades in this space.

The second less obvious impact has been on the revenue from fines associated with parking. New York City offers a case study. In the weeks before the pause in March, the city issued an average of about 51,600 parking and school zone speeding summonses each weekday. In contrast, over the weeks from March 23 through May 31 the average number of weekday (non-holiday) summonses was 26,571, nearly a third fewer than during the same period last year when the daily average was about 38,400.

Seventy-seven percent of all violations issued this year from March 23 through May 31 were for speed camera violations. Only slightly under 4,600 weekday violations were manually issued. During the same period in 2019, only 13.4 percent of weekday violations issued were due to speed cameras.

Over March through May 2019, 2.8 million parking summonses were issued, for a total liability of $205.4 million. From March through May 2020, 2.2 million summonses were written for a total liability of $138.3 million—a decrease of 38%  in fines assessed from the same period in the prior year. Much of the decline in revenue is attributable to the suspension of street cleaning for all but one week from March 18 through May 31. With street cleaning suspended there was no ticketing for violations of alternate side of the street parking.

Based on past trends, the New York City Independent Budget Office (IBO)  estimates that street cleaning suspension alone reduced the total number of summonses issued by approximately 400,000 during this period, which would have generated about $21.6 million in fines.

This validates some trends observed nationwide. With the decline in the number of cars on the road, speeding was significantly increased. Parking was down all across the country. The fines and fees associated with traffic and parking violations are key components of many local budgets. The loss of these revenues has a real impact on smaller communities.

ILLINOIS DEBT CHALLENGE REVIVED

A state appeals court has allowed an activist investor to continue his legal challenge to the payment of debt service on bonds still outstanding from a $10 billion pension issue in 2003 and a $6 billion payment backlog financing issue in 2017. The plaintiff, activist John Tillman, has challenged outstanding debt from the two prior issues, asserting that they ran afoul of state constitutional constraints  of reversed a lower court’s dismissal of the case which was based on the view that the suit was frivolous and based on politic rather than legalities. The appellate court ruled that the suit could proceed at the district level.

The appeals court decision implies nothing about the legal issues raised by the suit. The ruling case simply establishes that the plaintiff should effectively “have their day in court”. Most observers believe that ultimate success by the plaintiff is unlikely but a definitive ruling against the suit would have removed all uncertainty. The state’s fiscal year 2021 (ending June 30, 2021) general fund budget includes the potential issuance of about $1.3 billion in additional backlog bonds. Whether they can be issued while the case is pending is another story. It will become a more important issue if the constitutional amendment to change the state income tax on the upcoming November ballot is not approved.

Right now all of the legal maneuverings have focused on the issue of the right to bring the suit. The law requires a petition phase prior to filing an action against officers of the state government to limit frivolous suits by taxpayers. The legal proceedings so far have related to the petition phase. There  have been no hearings on the  merits of the case.

BRIGHTLINE LOSES VIRGIN

The never ending saga of the high speed rail line in eastern Florida continues to take twists and turns. In its latest iteration, the Virgin Trains USA Florida LLC (referred to herein as “Brightline”), is the borrower pursuant to the Series 2019A and 2019B Florida Development Finance Corporation Surface Transportation Facility Revenue Bonds (Virgin Trains USA Passenger Rail Project).  Brightline is majority owned by Fortress Investment Group and that parent has announced that it will no longer use the Virgin brand following the termination of its licensing agreement with Virgin Enterprises Limited.

The move follows on the news of major financial difficulties at Virgin’s Australian airline operations which have gone into administration in Australia and into Chapter 11 in the U.S. These distractions follow on Virgin’s less than successful rail operations in the United Kingdom. The railroad will be rebranded as the Brightline. It shouldn’t be hard as the paint was barely dry on the rebranded logos on the trains when service was halted in late March.

Restrictions on social and economic activities remain in effect in South Florida through at least August 13th. Through March 25, the railroad carried a total of 271,778 passengers and recognized $6.6 million of total revenues in 2020. The project is undertaking agreements to expand its revenue base. These include an agreement to build a station on site in Disney World and to reach an agreement with Miami-Dade County for the use of its right of way for commuter service. Such an agreement could provide a steady stream of revenue to Brightline.

It is not a surprise that the affiliation with Virgin USA was not a fruitful one although its dissolution in such a short period of time was. It was always questionable as to wh3ther the Virgin affiliation was more of a marketing or packaging ploy. Its British rail affiliates lost their right to operate long distance trains in Britain after many complaints around the level of service provided. It was not clear what particular expertise Virgin would bring to the actual operation of the railroad. It certainly is not clear as to when economic conditions will return to levels able to sustain the project. So if demand is artificially depressed, it may not matter what the train is called.

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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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.

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