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.

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

Joseph Krist

Publisher

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SCHOOLS AT THE EPICENTER OF THE VIRUS DEBATE

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

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

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

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

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

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

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

OPPORTUNITY ZONES

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

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

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

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

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

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

MILEAGE TAXES GAINING TRACTION

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

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

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

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

HEALTH INSURANCE

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

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

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

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

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

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

COAL DECLINE LOCAL IMPACT

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

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

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

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

ILLINOIS MARIJUANA TAXES

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

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

CLIMATE CHANGE AND MUNICIPAL CREDIT

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

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

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

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

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

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

UPDATES

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

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

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

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

Joseph Krist

Publisher

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

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

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

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

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

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WHILE WE WERE AWAY

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

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

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

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

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

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

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

PUERTO RICO

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

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

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

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

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

MORE BAD NEWS FOR THE MTA

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

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

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

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

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

SCHOOL IS OUT FOR COLLEGE TOWNS

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

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

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

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

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

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

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

COAL – NOT IF BUT WHEN?

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

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

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

CONVENTION BLUES

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

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

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

NO REST FOR THE HACKERS

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

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

CONGRESS AND INFRASTRUCTURE

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

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

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

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

Joseph Krist

Publisher

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We come upon the midpoint of this most unique year. As we enter the second half, we see one of our top five cities by size begin its decent into the abyss from which New York City is just beginning to rise. Houston is now the flashpoint but also is likely to serve as a cautionary tale for communities large and small as they face the full force of the virus. Now, Texas is poised to be the first major example of a failed reopening. As events unfold, it is likely that a paused restart will generate many lessons for the nation at large.

The economy now teeters between an uncertain recovery and a possible second stumble. Cutting through the data, there are some 21 million people collecting unemployment benefits as of last week. The initial claims figures are leveling at 1-1.5 million, a heretofore unacceptable number. This, before many state and local government employees find themselves furloughed our laid off with the new fiscal year for most states beginning July 1.

That unemployment wave is coming with 13% of the US workforce employed by government. The revenue hit has been just too great to maintain headcount. many in the public sector hope that the potential impact of widespread government employment is the argument which moves the needle on pending additional federal aid to states and localities. It would shift the spotlight to general economic impact versus pension costs and other spending issues.

With GDP down 5% in 1Q 2020 and an even steeper decline expected for 2Q 2020, more optimistic scenarios spun by various interests become less likely. The economy will not be rocking by the 4th of July. The hope is that is does not look like the exhausted couples at the dance marathon contests of the Great Depression.  Estimates are that the decline for the entire year 2020 will be 8%.

The Muni Credit News will take a week off the celebrate America’s 244th birthday. It will return for the week of July 12. In the meantime, you can take the Muni Credit News to the beach by checking out our recent Bond Buyer podcast.

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STATES

Recent data from the National Association of State Budget Officers, shows that government was already a diminished source of spending as the pandemic hit. Based on pre-COVID estimates, general fund spending was on track to total $919.1 billion in fiscal 2020, a 5.8% increase, with this growth partially driven by one-time investments and rainy day fund deposits made with surplus funds. After steep declines during the Great Recession, state general fund spending just barely returned to inflation adjusted pre-recession fiscal 2008 levels in fiscal 2019.

Before COVID-19 hit, revenues were on track to increase 3.0% in fiscal 2020 over fiscal 2019, slower than the level of growth observed over the past couple of years. General fund collections from sales taxes were on track to grow 5.0% in fiscal 2020, personal income taxes were set to increase by an estimated 2.7%, and corporate income taxes, a more volatile revenue source, were estimated to increase by 1.0% in fiscal 2020. In fiscal 2021, general fund collections from sales taxes were forecasted to grow 3.3%, personal income taxes by 3.7 %, corporate income taxes by 2.7%, gaming and lottery revenues by 2.5%, and all other revenues by 0.9 %.

On the spending side, the changes are just as profound. Before COVID-19, Medicaid spending from all fund sources was estimated to grow by a median of 5.8 % in fiscal 2020 compared to fiscal 2019 levels. In fiscal 2020, spending from state fund sources was estimated to grow by a median of 6.4 %, with general fund spending growing 5.0 % and spending from other state funds growing 9.9 %. Federal fund spending on Medicaid was on track to grow 7.6 % for fiscal 2020.

Medicaid spending growth was forecasted to slow somewhat in fiscal 2021, based on governors’ proposed budgets. The median growth rate for total Medicaid spending was projected at 3.4% for fiscal 2021. Governors in two states that have yet to expand, North Carolina and Oklahoma, included funding in fiscal 2021 for Medicaid expansion in their recommended budgets.

When governors proposed their fiscal 2021 budgets, fiscal conditions were stable in the vast majority of states, and recommended revenue actions were for the most part limited and modest in size. According to executive budgets, 14 states proposed net increases in taxes and fees while 15 states proposed net decreases, resulting in a projected net positive revenue impact in fiscal 2021 of $2.4 billion. That is all off the table now given the realities of 4Q FY 2020 and the depressed outlook well into FY 2021.

PANDEMIC CASUALTIES – CAPITAL INVESTMENT

One of the ways in which the pandemic has impacted public capital investment is reducing the revenue available from states for distribution to municipalities for local road repair and construction. As a result, many communities are being forced to delay or cancel some projects for lack of funding.

One example may be found in Maryland. The Maryland Department of Transportation recently revised its estimates for highway-user revenue disbursements for the current and upcoming fiscal years in May. The state grants are based on revenues from vehicle-registration fees and taxes for gas, corporate income, rental cars and vehicle titling. The highway-user revenue grant amounts to local governments factor in a jurisdiction’s vehicle miles traveled and vehicle registrations. Early estimates showing transportation revenues to come in $550 million short this fiscal year and $490 million to $560 million short for the new fiscal year, according to the Maryland DOT.

The Massachusetts Port Authority board voted to reduce its five-year, $3 billion construction plan by a third in the face of a worldwide slowdown in air travel brought about by the pandemic. The ambitious multibillion-dollar renovation and expansion of Logan Airport would have included a monorail-like people mover and two parking garages. The board also approved trimming three of seven gates from the expansion of Terminal E.

Passenger counts at Logan are roughly 90% below the levels of a year ago. Massport estimates as few as 13 million passengers will use Logan in the fiscal year beginning July 1, under its worst-case scenario. There were about 42.5 million passengers in 2019. Other Massport operated facilities are experiencing significant utilization declines.

Worcester Regional Airport saw two of the three airlines end service in June. Shipping volume has dropped at the Conley freight terminal in South Boston. The nearby cruise ship terminal has handled as many as 150 ship visits annually yet may not see a single ocean liner this calendar year. There is a clear budgetary impact. The Massport board adopted a new budget for the fiscal year that begins in July that anticipates $600 million in revenue, down from about $900 million two years earlier. The reduction in the scale of the Terminal E expansion is projected to reduce its cost from $700 million to $565 million. Other project reductions include postponement of plans to connect the terminal to Airport Station on the MBTA’s Blue Line.

The biggest casualty to date is the pending $51.5 billion capital improvement plan for NY’s Metropolitan Transportation Authority. The agency faces a $10.6 billion deficit over the next two years with the virus hammering ridership numbers. The subways are carrying some 1 million passengers daily but this is only 20% of the normal pre-pandemic ridership.  At the same time, extraordinary maintenance costs will have to continue in order to drive higher utilization. The question is how permanent is any resulting decline and how bad is it? That drives this decision.

BUSINESS AND GOVERNMENT ON THE SAME PAGE?

The pandemic is turning many notions upside down as they pertain to commuting, working remotely, and urban life writ large. The unique dynamics of the pandemic are leading to some of the most unexpected marriages in terms of near term government finance and fiscal policies. The latest example is an emerging linkage of interests on the part of government and business.

The U.S. Chamber of Commerce has come out in support of increased stimulus for state and local governments. It is not as if business has had its “come to Jesus” moment in terms of its historic stances against taxes and government spending. It is a reflection of business being able to read the emerging tea leaves and realize that the public has noticed that many more resources have been provided to the corporate sector through Congressional action than has been the case for governments.

With in excess of 40 million Americans claiming unemployment over the last twelve weeks, it is apparent that raising individual taxes is an idea that is dead on arrival. So business has figured out that after receiving four times as much aid as governments that there is an appetite for raising taxes on companies. The move to support additional stimulus to government  reflects a real fear of higher taxes on businesses. As the Chamber’s head of policy put it “Part of our conversation with Republicans on Capitol Hill is that ironically, if your concern is big state government, then the last thing you want to do is force states to replace one-time lost revenue with permanent tax increases.” 

The newly adopted stance reflects the realization that the impact of the pandemic will be long lasting as the economy has essentially taken a ten year step back. The downturn has strengthened the position of those who are against tax breaks to entice facilities and jobs, especially if many jobs previously done in offices are done remotely on a long term basis. (No need to bribe Facebook or Amazon if no one is using the offices.)

MIXED SIGNALS ON HIGHER EDUCATION

Depending on where you look, the outlook for state universities is either benefitting from the pandemic or is being hurt by the pandemic. We were intrigued by two stories we saw recently on the subject about enrollment trends in two neighboring states – West Virginia and Pennsylvania.

The first story centered on the Universities of West Virginia and Kansas and highlighted what is reported as increased demand due to students wanting to stay closer to home as the result of the pandemic. The schools reported anecdotal evidence of increased demand but offered no tangible data to back it up. While much of the focus was on cultural issues driving the demand it was also clear that as much as anything the economy was driving demand for lower cost higher education options. It isn’t clear which is the primary driver.

The second story however, highlights many of the concerns facing the higher education sector overall. The Pennsylvania state higher education system is facing a different set of circumstances. Recent data released by the Commonwealth showed that projected first-year enrollment is down at Pennsylvania’s 14 state universities. The decline is not precipitous – 2% vs. last year’s pace of acceptances. Completed applications were down 6% this year.  The impact was not consistent across the board but some cited institutions saw nearly 20% declines in demand. Officials cited the corona virus pandemic as one reason for the lower numbers, but they also said there was a continuing decline in high school graduates.  

PURPLE HAZE OVER MARYLAND P3

The unfolding drama underway at the Maryland P3 developing and constructing a suburban light rail system moves to its next phase. In a move which had been anticipated, Purple Line Transit Partners (PLTP) filed a notice of termination. In 60 days, PLTP could withdraw from the project, effectively crippling it when it had finally able to begin construction. PLTP, as we have previously chronicled, had threatened the move.  It comes as negotiations continue over the size of project cost overruns and how those additional costs would be distributed to the various entities comprising the P3.

The actual notice clearly indicates that this is essentially a catalyst for ongoing discussions. A resolution is thought to depend on the employment of a new contractor. The current contractor and the state are in disputes over performance and payment. The contractor claims that litigation and regulatory related delays account for much of the overruns. The state has granted the contractor a five-month extension for delays related to the lawsuit but no additional money, saying the other delays are the contractor’s responsibility.

PANDEMIC CASUALTIES – GOVERNMENT HEADCOUNT

The profligate hiring practices of the DeBlasio administration are quickly coming back to haunt it as additional aid from either the State or the federal government is not forthcoming. While the City waits to see if additional aid materializes, it has had to prepare for the reality that current headcount levels – 325,00 – for the City are untenable. Now the Mayor is considering furloughing or laying off some 22,000 city employees.

It is likely that some headcount reduction is necessary. We believe that for now the announcement of potential layoffs is a bargaining tactic as the City looks to the State and federal governments for more aid. It is important to remember that the Mayor has greatly expanded headcount during his tenure by some 10%. The proposed reductions would still leave the City with some 8,000 more positions filled than at the start of his administration. Many, including ourselves have regularly cited rapidly expanding headcount  as a credit risk as the growth in headcount could not be sustained in other than an optimal economic environment.

The headcount issue arises in a number of situations. In Chicago, the Mayor recently garnered some unwanted attention when she discussed the role of police headcount as an economic development tool. The Mayor expressed the view that “defunding the police” means “you are eliminating one of the few tools that the city has to create middle-class incomes for black and brown folks. ” Not real productive jobs, not better teachers, not better services. Policing as a tool of economic development. It is the kind of thinking that makes one wonder how serious the City is about matching its service priorities to the real needs of the City.

What is unfortunate is that this kind of thinking has been tried and failed before. Thirty years ago, NYC’s then Mayor David Dinkins undertook a program of hiring for traffic control officers and parking enforcement officers as a way of providing entry level employment. Over time, the jobs began to be occupied less and less by formerly unemployed residents. It became instead a mode of entry employment to immigrants. It became a less effective economic empowerment tool for the very people it was intended to help.

Localities would be hard pressed under the best of circumstances

HOUSE PROPOSES BOND FRIENDLY INFRASTRUCTURE BILL

The Moving Forward Act (H.R. 2) includes bond financing provisions such as advance refunding bonds, an increase of annual state volume cap, creation of new Qualified Infrastructure Bonds, and the restoration of certain tax credit bonds. It also makes the NMTC permanent, gives LIHTC a major boost, delays the phase down of the ITC, and increases the Historic Tax Credit, among many other provisions.

H.R.2 includes provisions to establish a permanent minimum 4 percent rate for the LIHTC, increase the annual LIHTC allocation amount, temporarily reduce the test for bond-financed housing to 25 percent and permanently extend the NMTC at $5 billion, increase the historic tax credit (HTC) applicable percentage from to 30 percent for five years and delay the phase down of the renewable energy investment tax credit (ITC) until 2026.

The new Qualified Infrastructure Bonds (QSIBs), which are modeled after Build America Bonds, would have their direct-pay subsidies phase lower to 38% in 2025, 34% in 2027, and 30% permanently thereafter. The legislation also would restore tax-exempt advance refunding 30 days following enactment into law and authorize the issuance of $30 billion in qualified school infrastructure bonds (QSIBs) over three years.

NUCLEAR STUMBLE

The latest piece of negative news to come out of the Plant Vogtle expansion project is an announcement of changes to the timing of certain planned activities at its Plant Vogtle Units 3 & 4 new nuclear construction project. The changes reflect the impacts of workforce reductions earlier this year as the project needed to enforce social distancing while it continued construction.

Georgia Power and Southern Nuclear Company, an affiliated entity that manages project construction, are employing an aggressive site work plan that targets regulator-approved in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, dates that have not changed following the latest schedule adjustments. That schedule is viewed as aggressive. It is also likely to further extend in service dates and increase costs.

Georgia Power announced in April that it would reduce its workforce at the construction site by about 20% to mitigate the effects of the corona virus pandemic, including on labor productivity. Georgia Power expressed its view that the reduction would enhance operational efficiencies by increasing productivity of the remaining workforce and reducing fatigue and absenteeism. The company also hoped that  the reduced workforce would facilitate increased social distancing and compliance with the latest recommendations from the US Centers for Disease Control and Prevention.

It seems likely at this point that the project will experience further delays. It remains a drag on the credit of all of its participants and customers. It increases the likelihood that the messy litigation between MEAG and JEA will continue.

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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NEW YORK CITY HOUSING AUTHORITY

The New York City Housing Authority (NYCHA) has been a troubled entity for some time. It has identified capital needs in excess of $40 billion. These include basics like fixing roof leaks and heating systems which did not operate this winter. They have little to do with “amenities” on either a unit by unit or project by project basis. Now, NYCHA’s already strained finances are absorbing yet another blow as the result of the pandemic. The NYC Independent Budget Office (IBO) recently delivered its analysis of the financial hit being taken by the nation’s largest public housing agency.

In the Mayor’s Executive Budget and the state budget enacted in April, the city and state did not provide any additional funds for NYCHA for corona virus response. The city’s funding for NYCHA grew by $34 million from 2020 through 2024 to reflect new collective bargaining agreements with NYCHA workers, but otherwise was unchanged from January’s Preliminary Budget. The state did not appropriate any additional new funding for NYCHA as part of the current budget. The rent NYCHA charges its tenants is pegged to their household income. As incomes fall due to the economic downturn, NYCHA’s rental revenue from tenants will decrease. IBO estimates that with the present economic downturn, NYCHA’s tenant rental revenue will be $85 million (8 percent) less in 2020 and $140 million (14 percent) less in 2021 than estimates produced by NYCHA this past December.

Tenant rental revenue makes up over one-third of NYCHA’s total operating revenue. Tenant rents are pegged at 30 percent of household income, so when tenants become unemployed or lose income, the rents they owe NYCHA decrease proportionally. Tenants are required to recertify their household income with NYCHA annually, but are also able to recertify their income to adjust their rent any time their income or household composition changes under a Rent Hardship Policy. With high unemployment expected to continue through the year, IBO projects that NYCHA will receive only $840 million in 2021—$140 million less than expected.

Through the CARES Act, NYCHA received $150 million from the Public Housing Operating Fund. These funds are based on operating expenses and are, as of yet, unavailable to offset any loss of rental income. CARES public housing operating funds can be used for eligible operating and capital expenses as well as corona virus-related activities.

The difficulties of NYCHA were already clouding the future fiscal outlook in New York. The Authority is effectively competing with both the state and city governments to finance its capital needs. NYCHA will continue to be a source of pressure and drag on the City’s finances. The pandemic is slowing capital expenditure through deferrals of all but essential maintenance during the pandemic but that just leads to an increasingly expensive backlog. And NYCHA remains under a federal consent order. A federal monitor was imposed last year by the Trump Administration to ensure NYCHA would perform work related to lead paint, mold, and pest infestations that will bring the housing authority into compliance with the law.

DATA BEGINS TO TELL THE STORY

The focus was all on the headline number when the latest retail sales data was released by the U.S. Department of Commerce. Yes, the April to May change of 17% was a great number. The reality is that the May 2020 number was 6.1% below the May 2019 number.

State by state data is beginning to come in and the picture is not pretty. Texas collected about $2.6 billion in state sales tax revenue in May, leading to the steepest year-over-year decline in over a decade. Motor fuel taxes, for example, were down 30% from May 2019, marking the steepest drop since 1989. And the hotel occupancy tax was down 86% from May 2019, marking the steepest drop on record in data since 1982. On average, Texas cities got 11.1% less in this year’s June tax distribution than they got last year; the May distributions were down an average of 5.1%. 44 Texas cities — including Houston, San Antonio, Dallas, Austin and Fort Worth — each saw double-digit percentage decreases in sales taxes.

Sales tax diversions to cities across the state of Mississippi are down from 2019. Cities across the state will receive $34.8 million for sales tax collected in April compared to $37.6 million in 2019. That is a decline of 7.45%. In New Jersey, the sales tax was one of the worst-performing revenue sources in May, falling nearly 30% off the pace set during May 2019. The Tennessee Department of Finance and Administration Commissioner announced that revenues for May were $981.9 million, which is $197.3 million less than the budgeted monthly revenue estimate. State tax revenues were $184.7 million less than May 2019, and the overall revenue for the month represented a negative growth rate of 15.83%.

May sales tax collections in Illinois fell by $181 million compared to the same month one year earlier, a decline of more than 24%. That follows a 21% year-over-year decline in April of $146 million. Wisconsin estimates year-to-date tax collections are down $380 million compared to this time last fiscal year. The agency estimates $1.3 billion in tax revenues for the month of May, $66 million below May 2019 revenues. Tax collections in April 2020 were $870 million less than collections in April 2019. New York State’s tax receipts in May were down $766.9 million or 19.7% from the amount of money that had been collected in May 2019. Total receipts for May 2020 were $2.694 billion.

SANCTUARY CITIES

The Supreme Court let stand California’s sanctuary law that forbids local law enforcement in most cases from cooperating with aggressive federal action to identify and deport undocumented immigrants. The law had been challenged by the Trump Administration.  The Administration had tried to withhold grant monies for popular law enforcement programs from jurisdictions which had declared themselves to be sanctuary cities.

The Edward Byrne Memorial Justice Assistance Grant (JAG) Program is the primary provider of federal criminal justice funding to states and units of local government. It was that money that the Administration sought to withhold from localities.

Grants fund among other things: law enforcement;  prosecution and courts; prevention and education; corrections and community corrections;  drug treatment;  planning, evaluation, and technology improvement; crime victim and witness assistance (other than compensation); and  mental health and related law enforcement and corrections programs, including behavioral programs and crisis intervention teams. Since FY2012, appropriations that are available to be allocated through the JAG program have generally been around $340 million each fiscal year.

PANDEMIC CASUALTIES – PORTS

Data is starting to come in on May port operations around the country as the damage being done by the pandemic continues. The Port of Los Angeles, the nation’s busiest, reported a 29.8% year-over-year decline in twenty-foot-equivalent (TEU) containers, moving 581,664 shipping receptacles compared with 828,662 in the same period of 2019. Year-to-date, the Port of Los Angeles is running 18.4% behind 2019ls through May. The Port of Long Beach processed 628,205 containers in May. That is a 9.5% increase compared to 2019’s 573,624 TEUs. It is also a statistical fluke as 28.8% of the TEUs moved— some 181,060 — were empty containers that had been stored at Long Beach and were shipped back to ports and other locations in Asia.

The Port of Oakland reported a 17% decrease in May, processing 184,995 TEUs compared with 223,095 in 2019. The Port of Virginia on June 15 reported the facility had a 22.7% decline in May, processing 112,913 containers compared with 146,018 last May. Georgia’s Port of Savannah reported a 9.65% decrease in container volume in May, which moved 337,360 TEUs compared with 373,394 in the same month ago. Port Houston saw a 15.1% drop in TEUs to 222,250 compared with 263,061 in the same period a year ago.

PANDEMIC CASUALTIES – AIRPORTS

Fitch Ratings weighed in this week with its views of the situation facing airports. As we all know, the airline industry has been among the hardest hit as the result of the lack of demand for flying during the pandemic.  Fitch has applied a stress test to airport credits based on the following assumptions: enplanement declines of approximately 50% in calendar year 2020 (relative to 2019), with a recovery of 85% in 2021, 95% in 2022, and 100% in 2023 (relative to 2019). 

Fitch outlined several airport characteristics and offered examples of potentially impacted credits. “Large airports that serve as fortress hubs for a single carrier may have greater vulnerabilities with regards to recovering its connecting segment of passengers when compared to O&D traffic.” Examples include large airports with elevated risk like Charlotte, Chicago-Midway, LaGuardia (NY)  and Dallas-Love Field. “Airline revenues for regional airports tend to be better protected against volume declines as they are closely tied to cost recovery mechanisms under lease agreements.” 

Some regional airports, particularly those with a more limited underlying traffic base, would be susceptible to downgrades under Fitch’s more severe stress scenario. This includes airports in Buffalo, Burlington, Dayton, Fresno and Harrisburg. They are all on negative watch. As for the major international airports, they are better positioned. Where there are single terminal based credits, such as those at JFK in New York, single terminal projects tend to have relatively low liquidity cushions relative to entire airport facilities. Two single terminal credits at JFK have been downgraded.

SAFETY NET HOSPITALS

At the onset of the pandemic, we expressed concerns about the potential impact of  the pandemic on the financial position of “safety net” hospitals. These institutions tend to serve sicker populations with less access to health insurance and a limited ability to pay for services. These populations have been inordinately impact by the pandemic through larger rates of infection and hospitalization than for the population as a whole.

One of the institutions we cited as having these vulnerabilities was Boston Medical Center, a safety net facility in one of the most affected states. So we were interested to see that this week Moody’s affirmed the Baa2 rating on BMC’s debt. “Although the system will report depressed margins in fiscal 2020 relative to budget and prior year performance due to corona virus, BMC should meet all bond covenants and generate positive operating cash flow, owing to funding from the CARES Act and the Commonwealth, and management’s swift actions to raise liquidity and minimize operating losses.”

BMC has sizeable exposure to Medicaid as one of its affiliates operates primarily Medicaid managed care plans. High exposure to Medicaid and the reliance on supplemental funding at BMC, as well as government-determined funding rates for the insurance products offered by that affiliate, will continue as credit challenges. The rating also assumes that BMC does not face a “second wave” of corona virus cases.

SUTTER HEALTH BACK IN COURT

Under the category of “it ain’t over ’til it’s over”, Sutter Health is asking the courts to revisit the terms of a settlement it entered into with the State of California to settle antitrust violations by Sutter. The settlement, which is pending final approval was supposed to take place in February. Since then, the pandemic has occurred and now Sutter is complaining that the terms of the settlement are too onerous.

Sutter’s lawyers filed a motion requesting the California state Superior Court in San Francisco to delay approving the settlement for an additional 90 days, due to “catastrophic” losses stemming from the COVID-19 pandemic. That would delay approval from the original February date to sometime in September. In the interim, Sutter has not made any payments or instituted changes required by the settlement in its operations.

Sutter reported an operating loss of $404 million through April, citing declining patient revenue and expenses resulting from the pandemic. System officials said that loss took into account the more than $200 million the system received in COVID-19 relief funds from the federal government via the CARES Act. Sutter agreed to limit what it charges patients for out-of-network services and increase transparency by allowing insurers and employers to give patients pricing information.

Some of the specific settlement terms Sutter now considers problematic include a provision that calls for Sutter to end its all-or-nothing contracting deals with payers, which demanded that an insurer that wanted to include any one of the Sutter hospitals or clinics in its network must include all of them. Limits on rate increases included in the terms of the settlement.

A recent analysis by a healthcare economist at the University of Southern California found that Sutter has earned an average 43% annual profit margin over the past decade from medical treatments paid for by commercial insurers. A 2018 study from the Nicholas C. Petris Center at the University of California at Berkeley found that healthcare costs in Northern California, where Sutter is dominant, are 20% to 30% higher than in Southern California, even after adjusting for cost of living.

According to Sutter, “There are certain provisions that, if they went into effect today, would interfere with Sutter’s ability to provide coordinated and integrated care to patients in California.” Sutter generated $13 billion in revenues in 2019 so it’s becoming more obvious that Sutter hopes that delaying the final approval will allow it to rack up more losses in an effort to reduce the amount it will be forced to pay.

GOVERNMENT AS EMPLOYER

This week the Chairman of the Federal Reserve testified before Congress as to the impact of the pandemic on the economy. That testimony shed light on the role of government throughout the country at all levels as a significant source of employment. 13% of the American workforce are employed by state and local governments.

Much of the questioning revolved around what could happen without the provision of additional stimulus aid from the federal government. State and local governments already have laid off 1.5 million workers. And that is before the budget process for FY 2021 has been completed. The Chairman agreed that the slow pace of economic growth following the Great Recession was partly attributable to spending cuts that had been made by state and local governments. The Fed estimated that state and local government austerity measures were a drag on economic growth for 23 out of 26 quarters between 2008 and mid-2014. That austerity resulted in 3.5% less in economic growth by the end of 2015.

We have not seen any discussion about the role of government as a source of demand for goods and services. Obviously, as headcount is reduced and projects are  delayed and/or eliminated the demand for various supplies is also reduced. For many smaller issuers at the local level, these steps have already been taken as they are below the thresholds based on population to receive aid from the enacted federal stimulus packages. Those communities have begun the process of furloughs and project delays to the detriment of their small local economies.

ANOTHER STUMBLE FOR JACKSONVILLE ELECTRIC

It is at the center of a scandal, it has effectively temporary management, and it faces significant legal and potential financial risk. The Jacksonville Electric Authority (JEA) is facing more of that after a federal District Court judge ruled the power purchase agreement between Georgia’s joint action agency, MEAG Power, and JEA, is “valid and enforceable”. The 20-year, take-or-pay contract obligates JEA to pay unconditionally, regardless of whether electricity is delivered or units are completed its share of the Plant Votgle expansion project in Georgia. 

JEA argued that the contract was not valid as the City Council had not approved it.  That claim was rejected. It was not a total loss for JEA as the judge did agree to lift a stay he had imposed on JEA from pursuing a claim of negligent performance by the Municipal Electric Authority of Georgia. Cohen also allowed MEAG to continue its breach of contract claim against JEA. This will force JEA to litigate its issues within the framework of the power purchase agreement.

The negligent performance issue stems from a 2017 agreement entered into by MEAG on behalf of its project partners of which JEA was one. The agreement was designed to reflect the impact of the bankruptcy of Westinghouse, the manufacturer of the plant’s reactor. Under the new deal, JEA’s obligation increased to $2.9 billion (up from $1.4 billion) and the completion date was delayed from April 2016 to November 2021. JEA contends that it should have been able to review and approve the plan and that it did not occur. Under the new deal, JEA’s obligation climbed to $2.9 billion and the completion date was delayed from April 2016 to November 2021.

Litigation uncertainty has weighed negatively on JEA for some time. It has led some to question the City’s (not just JEA’s) willingness to meet its debt obligations. JEA has taken an aggressive stance in its litigation approach questioning not only the validity of the contract but also the security for MEAG debt. This despite the concerns raised by the ill-fated attempt to privatize the utility last year. Put all of this together and the outlook for the credit remains quite negative.

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

________________________________________________________________

PANDEMIC ECONOMY

The Federal Reserve will leave interest rates near zero for the foreseeable future . It projects the unemployment rate to end 2020 at 9.3% and remain elevated for some time, coming in at 5.5% in 2022.  Officials are expecting output to contract by 6.5% at the end of this year compared to the final quarter of 2019, before rebounding by 5% in 2021.

The last time the Fed released projections was in December, when officials expected 2020 unemployment to close out at 3.5% with 1.9% inflation and 2% growth. Now, the Fed chair, Jerome H. Powell, said at a news conference that the latest unemployment data probably understates the extent of unemployment. 

So will exports pick up as other countries enter various phases of reopening? The Organization for Economic Cooperation and Development predicts that the global economy will contract 6% this year if a second wave of the virus is avoided. If a second wave does occur, world economic output would fall 7.6%, before rebounding by 2.8% in 2021. The two scenarios are viewed as having equal probabilities of occurring. The OECD projections are sobering in that export demand will not be able to drive growth. That demand has driven export growth in the energy, transportation, and agricultural sectors and they remain dependent on them.

PANDEMIC DOES DRIVE SOME BENEFIT

The Pennsylvania Turnpike Commission has announced that the cashless, all-electronic tolling (AET) system instituted in March to minimize the spread of the COVID-19 virus will become permanent. Customers will move through the toll plaza lanes at posted speeds without stopping. Changes like that along with the effort in some states to use the huge reductions in traffic as an opportunity to undertake major projects more efficiently have been unanticipated benefits of the lockdowns.

The drop in driving has also yielded some new revenue patterns leading to some innovation in transportation funding. Beginning July 1st, the statewide gas tax in Virginia will increase by five cents this year and next and there will be a highway use fee implemented. The highway use fee is designed to generate more of a user fee. The Commonwealth says the average fee is expected to be $19 annually for most vehicles, which would represent 85 percent of the difference between the amount of fuel tax on a vehicle that gets an average of 23.7 miles per gallon and the amount of fuel tax on a more fuel-efficient vehicle. To offset these changes, vehicle registration fees will be reduced by $10 or between 20% and 25%.

RATINGS AND WHAT THEY ARE TELLING US

The pandemic continues to pressure a variety of ratings. We are as interested in these actions as much for what they reflect about given sectors as they do about the individual impacted  credits. As the various restrictions on activity are gradually relaxed, the longer term impacts of the pandemic on particular sectors come into clearer focus. Here are a few visible examples of credit downgrades which are reflective as much about sector concerns as they are about individual credit details.

S&P Global Ratings lowered its underlying rating (SPUR) on the Pennsylvania Economic Development Financing Authority’s (PEDFA) $106 million–bonds outstanding and accreted interest–series 2013A senior parking revenue bonds to ‘B+’ from ‘BB+’. The parking system buyout was an important component of the plan to keep Harrisburg out of bankruptcy. Now, “While the system currently has capacity to meet its financial commitments on existing obligations, we believe the lingering weak operational performance and ongoing adverse economic conditions brought on by the current economic recession will impair the obligor’s financial capacity to meet its future commitments on all its obligations.”

S&P Global Ratings lowered its rating on Harris County-Houston Sports Authority, Texas’ senior-lien series 2001A, 2001G, and 2014A bonds to ‘BBB’ from ‘A-‘, and its rating on the authority’s second-lien series 2014C bonds to ‘BBB-‘ from ‘BBB’. At the same time, S&P Global Ratings affirmed its ‘BB+’ rating on the junior-lien series 2001H bonds, and its ‘BB’ rating on the third-lien series 2004A-3 bonds. The outlook for all ratings is negative. The reason: Anticipated decline in pledged revenues in 2020 due to the onset of COVID-19 and weakness in the energy sector; Unaudited fiscal 2019 pledged tax revenue providing 1.51x, 1.35x, 0.67x, and 0.74x maximum annual debt service (MADS) coverage on the senior-, second-, junior-, and third-lien bonds, respectively.

S&P Global Ratings revised the outlook to negative from stable on St. Louis Municipal Finance Corp., Mo.’s series 2014 city parks leasehold improvement dedicated revenue debt, issued for the city of St. Louis. “The projected drop in the city’s key revenues because of economic restrictions imposed as a result of the COVID-19 pandemic will materially limit the city’s ability to maintain structural balance within the current and following fiscal years.”  The downgrade has a one in three chance of happening in as little as six months.

S&P Global Ratings lowered the Port Authority of New York and New Jersey’s senior secured series 6 and 8 special project bonds issued on behalf of JFK International Air Terminal LLC one notch to BBB from BBB-plus. S&P is forecasting that annual passenger volumes for the Terminal 4 project will be 57% lower in 2020 than a year ago and would not recover to 2019 levels until 2024. Passenger volumes are projected to gradually improve throughout the year from a 92% drop in the second quarter, to 70% in the third quarter and 50% in the fourth quarter. The Queens Ballpark Co. LLC bonds issued to build Citi Field, the home of baseball’s New York Mets, received a downgrade to BB-plus from BBB. The status of the 2020 season is still “up in the air” and the team is openly for sale.

So those are the specifics of each story. The broader picture is that there will be many credits which rely directly or indirectly on economic activity to produce revenues to pay back bonds. The particular impact of tourism and travel overall (to include business travel) on many credits is stronger than one might think. Even for more locally driven economic activity, the limits on economic activity have been real and immediate for many credits. If you couldn’t go shopping, you didn’t need to go into town and park, eat. Even if you did want to attend, sports and concerts will not be available due to postponements and cancellations.

MC CORMICK PLACE

The Metropolitan Pier and Exhibition Authority, IL (MPEA) was able to successfully sell some $882 million of sales tax backed revenue bonds to fund the convention facilities at McCormick Place in Chicago. At the time of the sale, the Authority rightly made disclosures about the potential impact of the pandemic on economic activity as well as the number of events cancelled and the potential for more.

Even as the State of Illinois begins to emerge from the restrictions imposed as the result of the pandemic, the impact of the pandemic continues to emerge. The Association of Manufacturing Technology today called off its upcoming International Manufacturing Technology Show scheduled for Sept. 14-19. The event, which is held in Chicago every other year, was slated to bring nearly 130,000 attendees to McCormick Place and account for more than 99,000 nightly stays at Chicago hotels. MPEA estimates IMTS’ local economic impact, including ancillary spending on restaurants and transportation, to be $247 million alone.

This announcement follows the cancellation of the Radiological Society of North America’s (RSNA) 2020 annual meeting. The RSNA event—which was planned for late November and early December—and IMTS would have accounted for more than 200,000 out of 586,000 room nights that were expected from McCormick Place events during the second half of the year, according to MPEA. The convention center had lost 95 events to COVID-related cancellations that would have accounted for 744,000 room nights.

Bondholders can take some solace from the fact that the revenues covering debt service are not directly generated from the convention center. Things like ticket revenues are not pledged. The loss of events however, puts a major damper of one of the major drivers of economic activity and sales taxes for debt service so it matters. Hotel, car rental, and restaurant taxes are the Authority’s prime source of revenue with a dedicated portion of state sales taxes providing the remainder. The Authority’s tax sources have been among those most directly exposed to the economic restrictions of the pandemic.

The State has shown its commitment to the credit when budget disputes over the last five years resulted in an inability by the State to pass a budget. An enacted budget triggers payments for the Authority’s bonds. that means that those monies are subject to appropriation. When a budget has not been adopted, the State Legislature has enacted enabling legislation that facilitated the necessary transfers of revenue to pay debt service.  

RESERVE FUNDS MATTER AGAIN

Over recent years, the covenants which serve as the basis for the security of bond repayments have been steadily weakened. In the municipal bond market, this has shown up most clearly in the continuing move towards reducing the requirement for reserve funds. Historically, a fully funded debt service reserve fund equal to maximum annual debt service was the gold standard. Over time these requirements were gradually reduced for many borrowers with fund sizing reduced to six months debt service and in some cases reserve requirements were eliminated.

When objections were raised to lower levels of reserve protection, investors were told that new realities had replaced old thinking and after all, many issuers has established long records of repayment without resorting to draws on their reserves. Issuers were convinced that reserve funds represented stranded assets that only inflated the amount needed to borrow to fund reserves. The move towards weaker reserve positions was supported when there were effectively no ratings repercussions for issuers lowering or eliminating reserves.

The pandemic has now shown the value of reserves. As the situation unfolds, we are beginning to see issuers disclose that they either have or will likely have to make draws on their debt service reserve funds to cover their next debt service payment.

PRESSURE ON PROPERTY TAXES

The pandemic and its impacts on municipal operations and finances are becoming clearer by the day. While much attention is rightly focused on the impact on sales and income taxes, property taxes are another item which must be considered. In New York, the City Council is considering two proposals which would allow some taxpayers to defer property tax payments. The proposals reflect the fact that many New York homeowners are facing lost or much-diminished incomes and are worried about their ability to pay their property taxes, which are due in a few weeks. Many commercial property owners report that they, too, may have trouble paying their property taxes because some of their tenants—of apartments and/or commercial space—are unable to pay their rent, leaving landlords with insufficient income to pay all of their bills.

The City’s Independent Budget Office recently discussed two proposals which would offer property owners the option of deferring taxes due on July 1. The first would apply to owners whose primary residence has an assessed value below $250,000 (the vast majority of one-, two-, and three-family houses, coops, and condos qualify under this test) and whose household income is below $200,000 (according to census data, only about 10 percent of homeowners in the city would be excluded by the this criterion). Owners who meet these criteria and who faced some health or economic hardship due to Covid-19 can apply for the right to defer their July 1 tax payment until October 1 without incurring penalty or interest.

IBO does not have the access to homeowner income data or information on individual and household impacts of Covid-19 that would allow it to offer a robust estimate of how much revenue would be deferred. IBO did provide a “rough estimate” using property values, census income data, and zip code health statistics. That analysis suggests about $500 million in collections could be shifted from July to October, which is about one-third of what small property owners usually pay on July 1. It is notable that when looking at the zip code level, areas hardest hit by Covid-19 have low homeownership rates. Homeownership and property values are generally higher in zip codes with relatively low Covid-19 infection rates.

The second proposal would also offer owners of commercial properties with assessed value over $250,000 the chance to defer property taxes due July 1, but on different terms. Property owners would have to pay a quarter of their deferred payment by October 1, 2020 and pay the remainder by May 1, 2021 with interest accruing at a rate of 9 percent. Owners with either commercial or residential tenants would be required to offer rent forbearance during the deferral period.

Properties affected by the Covid-19 public health orders or occupied by tenants who were impacted would be eligible. Many properties would be eligible under this proposal and these properties are responsible for a much greater share of baseline property taxes than small property owners. However, the accrual of interest and the requirement to offer rental forbearance during the deferral period will likely discourage many from participating. IBO does not have an estimate of the amount of revenue that would be deferred. Both of these proposals would take effect on July 1.

There will be many similar situations across the country. For many municipalities, property taxes are the primary source of revenues and collections have historically held up pretty well during times of economic difficulty. That has been cited by the rating agencies as a reason why general obligation downgrades may be as numerous as feared. The IBO rightly notes that “this time however, is different.”

VIRGIN ISLANDS

Over time we have commented on the dire fiscal straits in which the US Virgin Islands Power Authority has existed over recent years. Whether it be the impact of Hurricane Maria, the potential for the Authority to be unable to purchase needed fuel, or the national economic disaster, the Authority has faced many challenges often escaping serious default by the thinnest of margins.

It appears that the Authority’s luck is about to run out. Press reports cite multiple sources for the view that the Authority is likely to default on debt maturing July 1. Moody’s said toe the Daily Bond buyer ““Our Caa2 senior electric system revenue bonds rating and Caa3 subordinated electric system revenue bonds rating with a negative outlook continue to reflect a high probability of default for the U.S. Virgin Islands’ Water and Power Authority (WAPA). We expect WAPA will likely be able to make debt service payments on the rated senior and subordinate electric system revenue bonds on July 1. However, WAPA will be challenged to refinance the unrated bond anticipation notes due this July 1, 2020, or extend their maturity. WAPA has very limited cash on its balance sheet, which is likely insufficient to redeem all outstanding bond anticipation notes at maturity.”  Fitch released a statement that “maintenance of the ratings watch reflects risks related to the authority’s debt profile and near-term maturities. WAPA faces debt service obligations on July 1, 2020, that include scheduled bond anticipation note (BAN) maturities totaling approximately $49 million that will require external financing or maturity extension. ”

It can be argued that a debt default by the Authority has been inevitable and that it  would take an event of that magnitude to drive needed changes in the Authority’s operations. The Authority is weighed down by a dependence upon oil as its primary fuel,  a weak economy , and an unsupportive rate environment. The note holders are in a weak position behind the senior debt holders and it is not clear what practical remedies are available to address the Authority’s problems. Some investors who had gotten used to the availability of triple tax exempt income at a spread were tempted to take the plunge on VI debt after the Puerto Rico default, even though it was clear that the Authority’s credit was on a knife edge.

NEW YORK HOSPITALS REPORT THE DAMAGE

With the city serving as the epicenter of the pandemic, it is no surprise that the major not-for-profit health systems experienced significant financial pressure. The results for the first quarter of 2020 bear this out.

Northwell Health, the state’s largest private health system with 19 hospitals, lost $141 million. New York–Presbyterian lost $128.5 million on the operations of its 10 campuses. Montefiore Health System, which runs facilities in the Bronx and the Hudson Valley, lost $96.8 million. The results represented loss margins of 4% to 6% for the systems. Mount Sinai Hospital did manage to make a profit, reporting $33.3 million in operating income in the first quarter. This was however, a drop-off of about one-third from its performance in early 2019.

Northwell received $1 billion from federal Cares Act programs, New York–Presbyterian got $567 million, and Mount Sinai received about $263 million. They also received advance Medicaid payments. Those payments however, are required to be repaid within one year. If that does not happen, outstanding balances would carry a 10.25% interest rate.

Hospitals are hoping that the next stimulus package would convert resulting loans into grants. They are also hoping that additional aid to state and local governments could provide additional resources if it is part of the next bill.

LOST IN THE FOG OF THE PANDEMIC

This time the fog smothering an airport’s operations is from the economic downturn’s impact on travel. In any other time, the completion of a significant major infrastructure would get much well deserved attention. But as is the case with so many other things during the pandemic, the new LaGuardia airport central terminal was officially opened. That marks the completion of the major project component and leaves the overall expansion/rehabilitation about 50% complete.

At a time when some major public/private partnership projects have hit serious snags, this project seems to be poised to represent how a well crafted P3 project can actually realize the promise of the concept. Ironically, it is the fourth P3 project to be successfully completed in New York. The successful implementation of these P3 projects in an area historically resistant to the concept is another example of the idea that if you can make it there, you can make it anywhere. The project only bolsters the case for P3 proponents.

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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RATING IMPACT BECOMES CLEARER

We noticed in a variety of ratings reports that a common theme is emerging. The impact of the pandemic and the containment and mitigation restrictions imposed by states and cities on sales taxes is unsurprising. In all of those situations – whether they be direct sales tax revenue bonds or general obligations supported by a significant reliance on sales activities – when they have led to negative outlooks for ratings they come accompanied by estimates of the probability of downgrade.

It looks like the most commonly cited probability of a downgrade is one in three. That probability has been assigned to a diverse range of credits and include those with historically strong credit profiles to those who have had more difficult histories. They are diverse geographically and diverse in terms of the way they generate revenues. This week alone the credits receiving negative outlooks with that 33% probability of downgrade ranged from AAA credits backed by heretofore solid economies to BB distressed city credits.

It is hard to tell exactly why some credits have not been providing timely information to the rating agencies but we took note of several credits this week which saw ratings withdrawn due to inadequate financial reporting. They tend to be smaller credits where information systems may not be up to date which makes revenue collection and accounting and reporting more difficult.

Other rating actions confirm trends we have identified early in the pandemic. Moody’s downgraded the Washington State Convention Center Public Facilities District’s senior lien lodging tax bonds to A1 from Aa3 and downgraded the subordinate lien lodging tax bonds to A3 from A1, respectively. The outlook has also been revised to negative from stable. The downgrades and negative outlook affect $1.3 billion in debt outstanding. “The downgrade of the PFD’s senior and subordinate lien lodging tax bonds to A1 and A3, respectively, is driven by the substantial declines in lodging tax revenue following the outbreak of the corona virus pandemic. Previously healthy and growing pledged revenue driven by the strength of the underlying Puget Sound economy have dropped to nearly zero as business and leisure travel to the Seattle metro area has largely ceased.” Moody’s expects debt service coverage from pledged revenue to be sufficient for the July 2020 debt service payment but, coverage from regular lodging tax revenue is likely to be less than sum sufficient in 2021. 

PUERTO RICO

The U.S. Supreme Court unanimously ruled that members of Puerto Rico’s Financial Oversight and Management Board do not require U.S. senate approval because the board’s handling of the island’s $125 billion bankruptcy is limited to Puerto Rico’s fiscal issues and it only exercises local, territorial authority. The decision will likely give the Board more confidence to exercise its oversight powers. That is positive for the long run viability of the Commonwealth credit as there are many hurdles to overcome for the Commonwealth to achieve any level of fiscal stability.

The case was brought by Aurelius Investment and a public employees union. They had hoped that they would have their claims receive better treatment without the Board. The decision comes as the creation of the Board is about to mark its fourth anniversary. It says that ““Congress has long legislated for entities that are not states — the District of Columbia and the Territories,” he wrote, both making law for those places and creating structures for allowing local officials to make and enforce local laws. This structure suggests that when Congress creates local offices using these two unique powers, the officers exercise power of the local government, not the Federal Government.” 

Now it will be interesting to see how the Board uses its newly reinforced powers to manage the recovery of the Commonwealth’s finances. The issue of its legality now much more settled, the Board will have a stronger position from which to negotiate. That does not mean that legal pressure is off the board. Representatives of the utility workers union continue to challenge the Board’s role and existence. And there will be continued resistance to any outside oversight.

PANDEMIC CASUALTIES – MEDICAID EXPANSION

The last couple of years have seen growing electoral support for the expansion of Medicaid eligibility under the Affordable Care Act. It had even begun to occur in some of the “reddest” states. Two of those states are recently in the news however, for announcing delays in the implementation of expansion. The pandemic and its resulting pressure on state budgets is driving these decisions.

A deal in deep-red Kansas to expand Medicaid to about 150,000 poor people has been tabled for this year.  The Governor and legislative leadership had reached agreement but there was resistance among some conservative lawmakers over issues related to abortion. With the impact of the pandemic added to the equation, there was not enough support at present to move forward with expansion. This despite the fact that expansion was a significant issue in the 2019 election for Governor.

Oklahoma has the nation’s second-highest uninsured rate but that was not enough to keep the Governor from vetoing legislation to expand Medicaid. The expansion was slated to commence on July 1 but political issues have now combined with the pandemic to stop that.  Voters will still have a chance to authorize the state would not take effect this year.

While not a direct expansion of Medicaid, some states had been attempting to enact legislation creating a “public option” for health insurance. The most prominent were Colorado and Washington. In Colorado, legislation was pending that would offer an insurance plan at an estimated 7 to 20% cheaper than private options by paying doctors and hospitals less. The state projected about 18,000 people newly able to afford coverage would sign up for the plan.

Washington will still attempt such a plan but expectations are being tempered. In both states, the hospital sector has been opposed to proposed lower reimbursement levels especially as these institutions try to recover from the impact of limits on many services as the result of the pandemic.

P3 CHANGES

I’ve written on the issue of public/private partnerships and their role in the development of large scale infrastructure projects for some time now in a variety of publications. In some situations, such partnerships (P3) have generated positive results for their sponsors and municipalities in terms of both cost and efficient execution of the projects. Those successes encouraged others to consider and adopt the concept for several large scale transportation projects. Now, however, a couple of high visibility P3 projects have seen those partnerships lose partners or see their projects returned to traditional providers to complete projects.

The market has already had time to digest and analyze the decision by Denver International Airport (DIA) to terminate the P3 created to renovate and expand its Great Hall terminal complex. Now, we see that the P3 created for the expansion in Maryland of the Purple Line Rail Project is losing a partner. The design/build entity for the project – Purple Line Transit Constructors (PLTC), a joint venture between Fluor, The Lane Construction Corp. and Traylor Bros. Inc. – announced “that it has not been able to successfully negotiate time extensions for schedule delays and for the extra costs it has incurred during the last three years on the project.

The move follows announcements last year that certain major construction entities were withdrawing from the P3 space. The impacts on project costs, schedules, and ultimately the rate of return earned by the P3 participant have made those returns less attractive to these companies. Because of the size and visibility of projects like DIA and the Purple Line, many see these moves as signs of the demise of the concept.

We disagree. Each project should include a review of all available funding, financing, and execution modalities when they are being considered. There is clearly a role for the private sector in the development of public infrastructure. That role however, does change from project to project. That is a risk which potential private participants should consider further when they negotiate the terms of their participation in these projects.

SOUTH CAROLINA PUBLIC SERVICE AUTHORITY

The South Carolina legislature has decided to delay its process for determining the future for the troubled utility until next year. The budget difficulties associated with the corona virus pandemic have taken precedent. The legislature passed legislation providing for enabling the overall government to continue operations. Part of that legislation includes restrictions and oversight provisions governing Santee Cooper which are expected to remain in effect until May 31, 2021.

Governance will be provide through the Santee Cooper Oversight Committee. The Committee will be comprised of the governor, president of the Senate, speaker of the House, and the chairmen of the Senate Finance Committee and House Ways and Means Committee. The Committee will review for approval many of the contracting activities of the Authority as well as providing for review of many of the Authority’s functions.

Santee Cooper wanted to negotiate coal and rail contracts, refinance existing debt and conduct a request for a proposal process for including solar projects. The legislation provides for the Authority to be able to issue debt, and to resolve outstanding claims and lawsuits. The legislation specifically limits the authority from entering employment contracts with terms longer than six months.

The ability to manage and negotiate litigation is important as the Authority hopes to execute a settlement of a class action suit against it. A proposed settlement is scheduled for a court hearing on July 20. That proposal would require Santee Cooper to pay $200 million in cash over three years and to freeze rates for four years. That suit was filed within weeks of the cessation of construction at the Sumner nuclear facility.

Now the utility’s stakeholders including its bondholders are facing another year of risk and uncertainty. The decision as to whether to maintain or sell the utility can now be evaluated in the light of all of the impacts of the pandemic and economic realities.

MUNICIPAL LIQUIDITY BORROWING

Last week we noted the adoption of a budget for FY 2021 by the State of Illinois. With that process out of the way, the state has announced its next step in financing itself as it deals with the fiscal impact of the pandemic. It has executed an agreement to sell $1.2 billion of one-year, general obligation backed notes to the Federal Reserve. The issue will be the first to close under the Municipal Liquidity Facility program. The one year notes will come at a rate of 3.82% based on the Fed’s formula for determining rates. The move comes after the State decided that a public debt sale would not have yielded the most favorable results.

The rate of 3.82% is based on MLF pricing guidance that includes a base tied to the overnight swap index and a spread based on an issuer’s ratings. The New York Fed put out a pricing guidance as of June 1 that put a borrower rated at the lowest investment grade level— BBB-minus across the board — at 3.83%. The State had been able to gauge the market’s appetite for the State’s notes through a prior recent bond sale which made the 3.82% note rate the more favorable alternative. The Illinois legislature had to amend legislation governing short-term borrowing by the State to forgo a competitive sale requirement. This allowed the State to sell directly to the MLF for fiscal 2020 and 2021.

The State has not used its full authorization for short-term borrowing. The Legislature has authorized up to $5 billion of notes to fund tax shortfalls resulting from the pandemic. The State qualifies to borrow up to $9.7 billion under the terms of the Liquidity Facility program. It is anticipated that Illinois will sell additional notes especially if expected federal legislation provides inadequate resources to fund state and local tax shortfalls. This issue represents just over 20% of the State’s expected short term borrowings.

As Illinois takes advantage of this facility for state governments, the program is being expanded. The Federal Reserve said on Wednesday it will allow governors of U.S. states to designate transit agencies, airports, utilities and other institutions to borrow under its municipal liquidity program. Governors will be able to designate two issuers in their states whose revenues are generally derived from operating government activities. The program is being expanded to allow all U.S. states to be able to have at least two cities or counties eligible to directly issue notes to the municipal liquidity facility regardless of population. Until that change, only U.S. states and cities with a population of at least 250,000 residents or counties with a population of at least 500,000 residents have been able to make use of the program.

PENNSYLVANIA INTERIM BUDGET

Many states are likely to enact FY 2021 budgets in the full knowledge that those plans will have to be revisited as the impacts of the pandemic can be more fully determined. One state has gone so far as to enact an interim budget. The Commonwealth of Pennsylvania has adopted what is effectively a five month budget. The temporary, no-new-taxes budget plan maintains current spending levels while the Legislature watches to see how badly corona virus-related shutdowns damage tax collections and whether the federal government sends another aid package to states.

The action comes in the face of estimates of a $5 billion hit to revenues due to the pandemic. As adopted, the budget includes full-year money for many public school budget lines, as well as for state-supported universities, debt service and school pension obligations. But much of the rest of the state’s operating budget lines would be funded through Nov. 30. The plan takes pressure off local school district credits. It does leave counties in a state of limbo, even though they are the main expense point for many social services. Those credits remain under significant pressure.  

PANDEMIC CASUALTIES – HOSPITALS

No matter where you look in the flow of information out about the costs of the pandemic continues to run negative. A recent story on the problems with smaller and rural hospitals getting federal aid reflective of their costs and reimbursements provides some data. Around Chicago, The University of Chicago Medical Center got the state’s largest share in the high-impact funding round, with a total of $72 million—or 10 percent of the $694 million spread across 33 Illinois facilities. Nonetheless, monthly revenue declines of $70 million in March and April and negative cash flow of $35 million for each month occurred. Rush University Medical Center was losing about $40 million a month prior to resuming elective surgeries in early May. 

The smaller community safety net hospitals have fared poorly, an issue we recently highlighted. St. Anthony Hospital was the only independent safety net in Chicago to qualify for a high-impact payment, getting $21.5 million for admitting 264 COVID patients.

As for rural hospitals, over a six year-period, median overall profit margins declined for all rural hospital types except for critical access hospitals (CAH), according to aHealth Affairs study released last week. The study  analyzed data from the Centers for Medicare & Medicaid Services (CMS).  Nonprofit CAHs saw median overall profit margins rise between 2.5% to 3.2% from 2011 to 2017, while all other rural hospitals experienced declines ranging from 0.4% to 5.7% over the same period. The study concluded that rural and 2010, noting the amplified struggle by provider organizations in states that did not expand Medicaid as part of the Affordable Care Act.

NEW JERSEY TURNPIKE

The pandemic may have crushed utilization rates on the New Jersey Turnpike – they were down 61% in April. The pandemic has not stopped the need for planning for capital investment for its roads and establishing ways to fund it. So in the midst of all the disruption, the New Jersey Turnpike Authority (NJTA) approved a resolution passing a $24 billion Long Range Capital Plan and associated toll rate increases to fund it. The NJTA operates the New Jersey Turnpike (Turnpike) and the Garden State Parkway.

The vote comes at a perilous time for all transportation credits. In this case, the Authority has not been a frequent toll increase entity. It can take advantage of the fact that the last toll rate increase in  January 2012 was 53% on the Turnpike and 50% on the Parkway. There have only been eight toll increases in the 69 year history of the Turnpike. The 2020 toll rate increase is smaller than three of the last five since 1991. The plan incorporates smaller annual increases as it includes the initial approval for toll rates to be increased according to a still undetermined index, with a 3% annual cap, starting on January 1, 2022.

It is hoped that the use of an index based formula for determining tolls will reduce politization of the issue which has historically pressured the Authority’s ratings. It has been nine years since the last effort to legislate roll backs of increases. In the near future, the concern is likely more due to pressure for the Authority to deliver annual “surpluses” to the State. The current agreement governing those transfers between the Authority and the State runs out after FY 2021.

PANDEMIC CASUALTIES – CULTURAL FACILITIES AND TOURISM

The outlook for bonds backed by revenues from cultural facilities are in for a longer road than they had hoped to recovery. While sports can resume some level of operation through money from television rights contracts, by definition things like museums cannot. This puts them in a unique orbit in the universe of cultural facility debt.

The Metropolitan Opera announced that it has canceled the first few months of its 2020-season, and will now open its doors next season with a special gala performance on December 31st. The company’s performances will then continue through June 5, 2021. Those with tickets to canceled performances with have the value of their tickets credited to their Met account, the company said, with that value transferable to another performance through the end of the 2021-22 season. Tickets to canceled performances can also be refunded or have their value donated to the Met. 

The risk of extraneous events -natural, terrorism to name two – to the financial position of any of the established cultural institutions nationwide.  The pandemic presents challenges so unique that it is difficult to imagine a return to status quo for many of these institutions. The New York market reflects trends seen in many places. Half a century ago, the majority of attendees at major cultural facilities in New York came from New York. Broadway shows had an 80/20 ratio of natives to tourists. A near thirty year effort has reversed those ratios for almost every major cultural activity.

The pandemic however, highlights the risks of a tourism based economy. Until the economy is restored to support good levels of disposable incomes, economies which rely on those incomes will be hurt. Another issue is whether new workplace realities reduce the number of people and business entertainment to a serious degree.  In cities like San Francisco and New York, these two forces converge.  We expect that many other facilities will face similar decisions and challenges.

SCHOOL DISTRICTS

We will find out what the taxpayers think at least those in New York State when they vote on school budgets next week. Districts can get approval on only one budget resolution, voters are not offered a menu of options. NYS districts will all suffer reduced state aid. Many will show what a contingency budget looks like and in many cases it will not be pretty. Given economic realities, tax increases would seem to be off the table. We do not expect to see many approvals for exceeding the 2% tax cap.

The state’s largest district is funded through NYC. New York State’s enacted budget for state fiscal year 2021 eliminated a proposed 3.0 percent increase in school aid that had been included in the Governor’s Executive Budget, presented in January, before the Covid-19 pandemic emerged. The state’s enacted budget only provided a $96 million (0.4 percent) increase statewide for the upcoming school year, with state aid to New York City falling by $18 million (0.2 percent) compared with the prior year. Under the enacted state budget, the city’s Department of Education (DOE) shortfall in state education aid, relative to the aid the city expected in January, grew to $360 million.

For New York City, the $717 million pandemic adjustment reduced total state school aid by 6.3 percent compared with a 2.6 percent cut for the rest of the state. This expected to be offset in the end by CARES Act funds. The updated state financial plan incorporating the state’s enacted budget projects that over $8.0 billion of the anticipated $8.2 billion reduction in aid to-localities funding for fiscal year 2021 will remain in place through 2024. Alas, the CARES Act provides only one-time relief, restoring funds lost through the pandemic adjustment after 2021 would require additional federal funding.

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

________________________________________________________________

So we have now passed the 40 million mark for new unemployment claims verifying what one can see with their own eyes. At the same time, the Administration has apparently decided that releasing economic projections as a part of the budget process would contain more bad news than they believe the American public can handle. The claims number is 25% of the labor force even as the reported rate is over 13%. The implications for FY 2021 for states and municipalities are bleak.

Municipal bonds will and should be at the center of the debate over next steps on the road to recovery. There seems to be a growing consensus that infrastructure could be a key generator of jobs going forward. A number of comments and proposals have been floated all involving municipal bonds. Whether they be issued for capital finance purposes or  for operating purposes, municipal borrowing is likely to be a key component of any recovery process. It was true of the Great Depression and it is true during the current depression.

The current Depression has raised worries over government solvency. Moody’s made some comments about bankruptcy which should give investors pause. They raise issues which we have raised previously.” Municipalities will not strive to make bondholders whole when doing so would be too painful for residents and other constituents… municipalities will not strive to make bondholders whole when doing so would be too painful for residents and other constituents.”  The second issue reflects cracks in the legal consensus around the treatment of special revenues .

Moody’s notes that decisions in the ongoing Title III proceedings in Puerto Rico have been negative for special revenue backed bondholders. “If this court determines that the revenues securing Fairfield’s bonds constitute special revenue pledges protecting bondholders against impairment, just as another judge ruled in Jefferson County’s bankruptcy case in this district, it would contrast with the recent 1st US Circuit Court of Appeals decision in the Puerto Rico (Ca negative) bankruptcy-like proceedings and likely provoke further litigation, possibly ending at the appellate-court level.”

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HOSPITALS AND FEDERAL AID

We have for some time been advising that investors should be very wary of the small and/or rural hospital sector. They have always been characterized by narrowly balanced finances at best. In recent years, these hospitals have been asked to deal with an increasing share of uninsured patients and cash positions have narrowed in the face of weakened reimbursements. Obviously, these institutions have been among the worst positioned to withstand a significant economic decline. So one might have hoped that the needs of these institutions would have been addressed through any of the pieces of federal legislation designed to mitigate the impact of the corona virus pandemic.

Unsurprisingly, the Trump Administration has taken a different path. The Department of Health and Human Services (HHS) has now begun distributing a portion of the $175 billion allocated for grants to health care providers in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Paycheck Protection Program and Health Care Enhancement Act. Congress stated the money can be used either for costs related to treating COVID patients or to reimburse for lost revenue due to the pandemic. The largest share of the initial tranche of $72.4 billion to be distributed is the $50 billion that the Department of Health and Human Services allocated to providers who participate in Medicare based on their total net patient revenue from all sources.

A recent analysis of the distributions was released by the Kaiser Family Foundation (KFF) and it confirmed the worst fears of the rural hospital sector. These institutions tend to have higher levels of patients either under Medicaid or uninsured. The KFF research showed that the formula used to allocate the $50 billion in funding favored hospitals with the highest share of private insurance revenue as a percent of total net patient revenue. The hospitals in the top 10% based on share of private insurance revenue received $44,321 per hospital bed, more than double the $20,710 per hospital bed for those in the bottom 10% of private insurance revenue.

The disparity reflects the reliance of HSS on input from the larger hospitals and the for profit sector. The formula penalizes smaller and rural hospitals for the fact of the underlying demographics of their patients. KFF found that when compared to the 457 hospitals with the lowest share of private insurance revenue, the 457 hospitals with the highest share of private insurance revenue are less likely to be teaching hospitals (10% vs. 38%) and more likely to be for-profit (33% vs. 23%).  The hospitals with the highest share of private insurance revenue also had higher operating margins (4.2% vs. -9.0%) and provided less uncompensated care as a share of operating expenses (7.0% vs. 9.1%).  Uncompensated care includes bad debt, charity care and unreimbursed Medicaid and children’s health insurance program expenses.

KFF also notes that all things being equal, hospitals with more market power can command higher reimbursement rates from private insurers and therefore received a larger share of the grant funds under the formula HHS used. An alternative methodology for distributing the funds based on patient volume or that increased the size of the grant for providers that are more reliant on public payors such as Medicaid would have distributed the funding more evenly and less skewed by higher revenues from private insurers.

Dignity Health, the Cleveland Clinic, and Stanford Health Care were the only organizations to receive over $100 million in payments from the Relief Fund. Other recipients include Memorial Hermann Health System, $92,422,556, NYU Langone Hospitals, $92,120,455, County Of Los Angeles, $80,867,712, HMH Hospitals Corporation, $76,839,719; Florida Cancer Specialists & Research Institute, $67,343,375; Memorial Hospital For Cancer And Allied Diseases, $64,048,724; Massachusetts General, $58,076,206; Yale New Haven Hospital, $54,994,143; Ohio Health Corporation, $53,810,332, Allina Health System, $53,596,403; Texas Oncology Pa, $52,039,485.

The reimbursement formula is just another brick on the credit load faced by the smaller and rural hospital sector. Only one could be considered a safety net provider. And it is one more reason to avoid the single site and rural hospitals.

VEHICLE MILEAGE TAXES

The pandemic has potentially created opportunities to innovate in the funding of certain services. One of those sectors in the middle of technological change and its impact is transportation. Some states may find that the need to strengthen state finances in the aftermath of the pandemic allows for more creative thought.

We saw this week that the Director of the Wyoming Department of Transportation has suggested a ” a per-mile road usage charge was an option worth considering” as a source of funding for state road projects. Utah and Oregon recently implemented their versions of vehicle mileage taxes (VMT). Other alternatives in Wyoming include a bill to create a master I-80 tolling plan, which would have considered ways to exclude Wyoming drivers. It failed introduction in the Senate, with nearly two-thirds of legislators in opposition. 

Wyoming has assumed for its revenue projections a program with a penny-per-mile rate, which would be half a cent lower than those in Oregon and Utah. It is estimated to bring the state roughly $104 million in annual revenue. That would cover a significant part of the state’s estimated annual road bill.

The discussion is reflective of certain trends regarding the potential for tolls to become a major funding source. In any number of jurisdictions, voters have shown clear opposition to tolls for both new projects as well as maintenance projects. The opposition has been across the country even where there has been a clear need for improvements. That opposition limits the range of funding options available for capital development.

ILLINOIS BUDGET

Illinois was one of the states in similar straits to that of New York with high caseloads and impacts which could potentially result in  difficult budget process. New York moved relatively quickly and enacted its budget essentially on time. Now the Land of Lincoln has moved forward with its budget. The state legislature passed approved a “maintenance level” budget of $40 billion. It depends on federal funds and on companion legislation designed to made another effort to get a casino in Chicago up and running.

The adopted budget keeps spending essentially flat for everything except pandemic related health expenditures. Any budget enacted would be a highly uncertain one given the dispute over state and local aid levels in any future federal legislation. Add the additional uncertainty of the pending November vote on the constitutional amendment restructuring the state’s income tax rates. Asking for more could be a bit unrealistic.

NYC BORROWING REQUEST MEETS OPPOSITION

The state Legislature refused to take up Mayor Bill de Blasio’s request to allow New York City to borrow $7 billion to address a shortfall triggered by the corona virus pandemic pandemic. The Mayor estimates that the pandemic will impact the City’s revenues by some $9 billion. Publicly, the reasons include a desire to wait and see what aid is generated for state and local governments in an expected fifth stimulus bill. There are also issues of oversight cited by both the Legislature and the Governor.

To address those concerns, it has been proposed that should a borrowing be authorized for essentially operating costs, that the borrowing be done under the oversight of the Financial Control Board. The real story is the lack of trust between the Mayor and the State, both the Legislature and the Governor. We have discussed on numerous occasions the concerns that existed about absolute spending levels by the City as well as the number of employees and accountability for spending programs like Thrive NY. While publicly unspoken, these are real drivers of the debate.

The Legislature adjourned for this session leaving a number of topics for later discussion which are normally settled in the session ending in June. In the interim, the City Council President (a 2021 mayoral candidate) has expressed concerns about oversight as well. The City also has to adopt a balanced budget by June 30. The lack of borrowing authority will force a more rigorous approach to expense control as the budget process unfolds.

We expect that that the City will ultimately receive borrowing authority but under much tighter outside oversight and control than the Mayor would like.

EDUCATION, HEALTH, AND THE PANDEMIC

Stanford University is poised to come to market with $750,000,000 of taxable municipal bonds. The issue provides a good opportunity to see how one of the financially strongest private universities talks about how it will operate going forward. This comes as universities large and small, public and private, grapple with the issue of how to approach the fall semester.

The University has announced that a university-wide salary freeze and a moratorium of hiring were in place and that operating budgets were to adopt expense reduction targets of up to 25%. This is driven by, among other things, a projected 15% reduction in revenue available through the university’s endowment. These funds are estimated to account for 26% of the pre-pandemic current budget. That budget projected a $126 million surplus. The most recent estimate issued in May is for a $40 to $45 million operating deficit.

In FY 2019, student income – tuition, room and board, fees – generated 11% ($653 million) of operating revenues. As is the case with the major private research facilities that research is actually a financial keystone for many of them. In the case of Stanford, sponsored support for research comprises 27% ($1.7 billion) of total operating revenue. The medical facilities are integrated into the University’s financial operations. They account for 20% of revenue.

Currently, the University does not estimate a reopening schedule in terms of on-campus teaching and residence. Currently, the entire University operates remotely. It does say that research operations will resume before in-person instruction resumes. In the meantime, Stanford Health Care was one of three organizations to receive over $100 million in payments from the CARES Act Relief Fund.

In Massachusetts, a committee of a dozen Massachusetts college presidents has released an outline of a plan to help universities reintegrate half a million students and some 136,000 employees back into a campus setting. The plan comes with higher education leaders also urging the governor and legislature to change the law so that institutions are held legally harmless if they reopen and people get sick.

That may be a bigger issue than even the extra costs of equipping facilities to provide mitigation. It is a common theme whether it be for businesses (especially those with offices) or for educational institutions. College heads are less certain about being able to test students, faculty, and staff particularly when they come back to campus, according to a survey the advisory group conducted of nearly 90 campus leaders. 

According to the Boston Globe, slightly fewer than 60 percent of state institutions were very or somewhat confident that they could do robust testing of everybody returning to campus. Fewer than three quarters of college leaders felt strongly that they could do the contact tracing to curb the virus’ spread, according to the survey. Boston University recently announced it would open its own testing lab and is buying robots to conduct large-scale testing.

Michigan State will resume in-person classes in the fall along with “enhanced” remote learning opportunities. Students will be able to return for in-person classes on Sept. 2, as previously scheduled. There will be both in-person and online components to instruction in the fall semester. It is planned to end all in-person instruction on Wednesday, Nov. 25, with remaining instruction, study sessions and final examinations moving remotely for the remaining three weeks of the semester. Students will have the option of returning to their permanent residences for the Thanksgiving holiday and not returning to campus, or remaining on campus until the semester ends. 

The question of liability will likely be central to the debate over the next stimulus package. While resistance to state and local aid appears to be softening, there appears to be a linkage between government aid and liability protection.

TOURISM BEGINS TO GEAR UP

With venues large and small being closed for some three months, some bonds backed by tourism related revenues (sales taxes, hotel, car rental) were seen to be at particular risk. Now we see that the relaxation of pandemic related restrictions on public activity is driving the reopening of some of these facilities in some of the most tourist dependant municipalities.

The Orlando area has announced several openings and dates. Disney World is slated begin reopening in July. Magic Kingdom — the most attended park — and Animal Kingdom will reopen for business on July 15. Universal Orlando, is expected to reopen June 5 with Sea World reopening a week later.

Las Vegas will begin to try to create a viable model going forward after the Governor of Nevada announced that casinos will begin reopening next week on June 4.  Nevada had the highest unemployment rate of any state in the country last month, with 28.2% of workers without a job — nearly double the national average of 14.7%.  Guidelines issued this month by the Nevada Gaming Control Board limit capacity to 50% and require new cleaning and social-distancing policies.  This reduces the number of slot machines and regulators have capped capacity at three players a table for blackjack and four for poker.

Both of these areas will provide a good initial test of the dynamic between the desire to reopen, whether there is enough current demand, and whether hospital employees will be willing to return to work under proposed mitigation protocols.

NYC RESTAURANTS AND STREETS

The latest interest group to seek use of the public streets for its businesses is the New York City Hospitality Alliance which represents the City’s restaurant industry. The NYC Council introduced legislation backed by the restaurant industry requiring the mayor to find a way to open streets, sidewalks and public plazas to outdoor dining.  Proponents have couched it as a way to rescue the businesses.

The controversial part comes from comments from the Alliance. ““Our hope is there may be areas where entire streets could be shut down for restaurant service.”  That raises issues which have been heretofore been primarily the provenance of the transportation space namely who owns the streets. Are municipalities expected to turn over use of its streets to certain businesses but not others? How does that reflect in things like property taxes? Do proposed closures raise issues of public safety (access to police and fire) and do they create negative real estate impacts?

The NYC moves come in the wake of the release of guidance for restaurants seeking to reopen in Chicago. That city calls for tables to be placed at least six feet apart, or have a permanent barrier, such as Plexiglas, installed between them, while parties at one table should be capped at six people. Patrons must always wear face coverings — except, of course, when eating — while employees should cover up allowed for the time being.

PG&E UPDATE

The California Public Utilities Commission voted 5 to 0 in favor of PG&E’s plan to exit bankruptcy. The approval was seen as the last significant hurdle for the company to overcome. It preserves the utility’s status as an investor owned entity. Over 200 public officials across the state had supported the idea of creating a public entity to own and operate the PG&E assets. Legislation to allow for such a takeover is working its way through the California Assembly.

The plan includes a statement that its bankruptcy reorganization would not increase customer rates and would lead to about $1 billion in interest savings to customers.  One condition of the approval is guidelines for PG&E and other utilities that cut power to customers during extreme weather events to prevent equipment from causing wildfires. The guidelines require improved communication with local governments and communities while limiting the duration of the power shut-offs.

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