Joseph Krist

Publisher

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Memorial Day did not become an official Federal holiday until 1971. It sprang from the originally Southern tradition of decorating soldiers graves on the last Monday in May. It recognized service and most importantly sacrifice. While we remember the sacrifices of the past this Monday, it is worth comparing the sacrifice we commemorate to the sacrifices we are being asked to make today. Dying in combat or wearing a mask? Dying in combat or waiting a couple of more weeks to go to the bar? Yes these are difficult and in our lifetimes unprecedented times but they can be overcome with a little sacrifice. Enjoy Memorial Day just do it responsibly.

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MUNICIPAL BONDS IN THE IDEOLOGY CROSSFIRE

Jerome H. Powell, the Federal Reserve chair, testified before the Senate banking Committee and suggested that the central bank might expand its program to buy municipal debt and agreed that state and local governments could slow the economic recovery if they laid off workers amid budget crunches. “We have the evidence of the global financial crisis and the years afterward, where state and local government layoffs and lack of hiring did weigh on economic growth.” 

The Congressional Budget Office (CBO) released its economic outlook through 2021. CBO estimates that real (inflation-adjusted) gross domestic product (GDP) will contract by 11% in the second quarter of this year, which is equivalent to a decline of 38% at an annual rate. In the second quarter, the number of people employed will be almost 26 million lower than the number in the fourth quarter of 2019. The estimates seem to assume that there is not a spike in the fall and early winter into 2021.

Compared with their values two years earlier, by the fourth quarter of 2021 real GDP is projected to be 1.6% lower, the unemployment rate 5.1 percentage points higher, and the employment-to-population ratio 4.8 percentage points lower. Inflation and interest rates on federal borrowing will remain relatively low because of subdued economic activity and weak labor market conditions through 2021.

These estimates and comments reflect one side of the current economic debate over the ultimate scope and scale of stimulus spending. The other side reflects the ongoing efforts of the starve the beast anti-tax movement. It’s latest iteration comes from an Op-Ed in the New York Times from former Wisconsin Governor Scott Walker. He advocated against any direct aid to states and localities because “workers and small businesses need help more than government bureaucracies. ”

Among his other pearls of wisdom are that “one way to help, which will not cost the federal government more money, is to allow people collecting the enhanced unemployment benefit of $600 per week to go back to work and keep the payment until the end of the program. ” And who funds unemployment payments? Those hard pressed states who under Mr. Walker’s proposal would be subsidizing people with jobs, not businesses who could raise pay to incentivize people.

He also goes on to assert that “shortfalls created by the disappearance of federal stimulus funds was a primary reason for the budget crisis that many state governments faced after the last recession.” Too bad it was his political party that fought the stimulus after 2008. What is really rich is that he takes credit for Wisconsin’s pension funding status as the best funded pension funds in the nation. Those funds were the best funded because of a long history of bipartisan cooperation on the issue. All he did was take something that was doing well for years and didn’t screw it up.

As for economic development, here’s where things get dicey. Walker was the governor who pushed for tax incentives to the tune of $3 billon for the Foxconn manufacturing development. That deal is already on track to under deliver in terms of total number of jobs as well as the salaries available for the majority of the jobs.  Should Wisconsin be treated badly for the Foxconn deal?

From our standpoint, the whole red/blue aid discussion misses the point.  At the moment, jobs are jobs. A basic understanding of economics would see the multiplier effect of people being paid no matter the source of that pay.  There will be a time for the ideological issues to be sorted out but right now, the people reopening businesses could not care less how their customer funded his purchase. They’re just thankful for cash flow.  Aid to states and localities would provide much needed cash flow.

PANDEMIC CASUALTIES – SAFETY NET HOSPITALS

While the arguments over when, how, and where to “reopen” the country continue, there are some issues about which there can be little disagreement. Data to date shows the disproportionate impact of the pandemic based on race and/or economics. As with all other major health issues, disproportionate share hospitals (DSH) bear an indeed disproportionate share of the resulting burdens from the pandemic. While always under pressure, the DSH or “safety net” facilities are in a uniquely difficult spot in that their limited financial positions make it difficult to cope with both the revenue losses and the rapidly increased supply expenses associated with the pandemic.

With plenty of existing hurdles to overcome, these facilities now face potential regulatory burdens stemming from their participation in the federal 340 b drug program. Established in 1992 under Section 602 of the Veterans Health Care Act, the 340B Drug Pricing Program allows eligible hospitals, health centers, and clinics (covered entities) to access covered outpatient drugs at reduced prices from manufacturers participating in Medicaid. The program includes a variety of documentation requirements which are more difficult to comply with. If a facility is unable to meet those requirements even under these emergency circumstances, the resulting expense burden occurring as the result of being out of the program could be substantial.

Hospitals, healthcare professionals, and advocacy organizations  have asked the federal Health Resources and Services Administration’s (HRSA) Office of Pharmacy Affairs (OPA) which is responsible for administering the 340B program, to relax program regulations during the pandemic to relieve this burden. Part of the problem is limited technical abilities to generate and transit the required information under current circumstances which rely on electronic data transmissions. These facilities were already behind the curve in many cases technologically going into the pandemic due to limited financial resources. The financial impacts of the pandemic will not help them.

Obviously the risk will be credit specific. So what sort of institutions would we look at? NYC Health and Hospitals, Boston Medical Center, Temple University Medical Center, LA County/USC Medical Center are urban examples. Rural hospitals are also often DSHs.

PG&E MOVES TOWARDS RESOLUTION

It would have been a difficult task to accomplish but the takeover of PG&E by a public entity became less likely with the announcement that thousands of homeowners and businesses had overwhelmingly approved a $13.5 billion settlement for wildfires caused by PG&E’s equipment in 2018. The deal requires the power company to begin compensating, as early as August, some 70,000 wildfire victims who lost homes, businesses and other property.

The announcement means that the most significant remaining hurdle to the resolution of the utility’s bankruptcy proceedings by June 30 to qualify for a $20 billion wildfire fund created by the California legislature. PG&E has agreed to pay half of the $13.5 billion in cash and the other half in the company’s stock. In an all-cash settlement, PG&E has agreed to pay $11 billion in a separate deal with a group of investors and businesses that own insurance claims against the company.

PG&E still has to gain approval for its bankruptcy plan from the California Public Utilities Commission, which is scheduled to vote Thursday on a record penalty of almost $2 billion against the utility for the wildfires it caused.  The actions come after the coalition of government officials who support the creation of a public entity to take over PG&E asked the PUC to reject the proposed settlement.

PANDEMIC CASUALTIES – SENIOR LIVING

Senior living quickly emerged as a prime sector for exposure to the pandemic as the earliest clusters were at nursing homes. While there are great differences in the range of care offered by facilities in this cohort – independent living, assisted living, skilled nursing, some combination of some or all of these – there are common aspects which conflict with best practices in mitigation of the pandemic. An older population, some already old and sick, and all in some form of congregate housing all put these facilities in the crosshairs.

Now there is confirmation of the financial impact of the pandemic on this sector of the municipal market. Moody’s recently cited a variety of specific impacts. They include The Amsterdam House Continuing Care Retirement Community in Nassau County, New York which failed to make a debt service deposit due April 1, and requested debt service waivers through at least July 1 from bondholders. Henry Ford Village in Michigan also missed a monthly debt service deposit, and expects to miss another this month. The project will draw from its debt service reserve fund.

Eagle Senior Living has outstanding bonds secured by revenues from an obligated group operating  17 facilities across eight states. It reported in a Municipal Securities Regulatory Board (MSRB) filing that a reduction of leads and presentations throughout the month of March ranging from 25 to 40% had occurred and there was a reduction of 75% of the same to date in April. has implemented a 14- day quarantine of all new admissions to independent and assisted living as well as strict move-in procedures requiring staff to disinfect and move in furniture. Resident families and guests are not permitted to visit along with all non-essential visitors. No new admissions are being made to memory care due to resident safety and the impracticality of being able to maintain a 14-day quarantine period.

These are more than mere headwinds. The business relies on a steady growth in assets held by potential residents and in particular, a healthy home sales market. The economic impact of the pandemic, especially in a dreaded second wave, would devastate those two markets and limit the available pool of customers needed to maintain occupancy levels.

CHAPTER 9

Fairfield, a city of just under 12,000 residents west of Birmingham, AL filed for bankruptcy under Chapter 9 of the federal bankruptcy code in the U.S. Bankruptcy Court for the Northern District of Alabama in Birmingham. The petition states the city has between 200 and 999 creditors with $1 million to $10 million in liabilities. It’s largest creditor was listed as US Bank with an $18 million unsecured claim. The top 10 creditors for the city are: Fairfield Board of Education $2 million; Jefferson County Finance Department $1.7 million; Alabama Power $994,091; AMBAC $900,000; Alabama Finance Department – Computer $590,532; Birmingham Water Works $550,924; Regions Bank $417,752; Jefferson County Sheriff $349,576; and Retirement Systems of Alabama $305,000.

The city admits that its financial position was precarious before the pandemic. A resolution by the Fairfield City Council states the city has faced “a substantial decline in revenues in recent years due to economic forces beyond its control.” Yes the city has seen some of its businesses succumb to the limits imposed by the pandemic. But the pandemic also gives cover to public officials seeking to take advantage of ” an opportunity to reorganize, reassess our finances.”

Here is where the impacts of recent bondholder unfriendly bankruptcy decisions come back to bite future bondholders. The Fairfield bankruptcy resolution states the city while the bankruptcy process proceeds will honor all pre-petition accrued obligations to current City employees for wages and salaries, including earned vacation, severance and sick leave pay and contributions to employee benefit plans. It also will honor “pre-petition and post-petition continuing obligations to trade vendors that have provided and continue to provide goods and services to the City in the ordinary course of business and according to the credit terms agreed to by such vendors and the City.”

The resolution pointedly omits bondholders from this cohort of pre-petition obligations to be honored. Fairfield says it wants to develop a plan that includes adjusting the terms and conditions of its debts and obligations under Chapter 9. Fairfield brings to an even dozen the number of Alabama municipalities to file for Chapter 9 reorganization since 1991.

STATES BEGIN BUDGET ADJUSTMENTS

South Carolina has decided to enact what is effectively a temporary budget in the face of the fiscal impacts of the pandemic. The Governor has signed a continuing resolution which will allow the State to keep operating until the Legislature can reconvene in September. At that time, the State will have a much better idea of what federal resources will have been provided to the State to offset the budget impact of the pandemic.

To date, South Carolina has received more than $2.7 billion in federal COVID-19 relief. The Legislature is requiring that $1.9 billion of the State’s share into a separate account and treat its spending similar to how the Legislature approaches a budget bill: allow the full General Assembly to first approve it. In the meantime, the agreement allows state agencies and colleges and universities the ability to furlough employees, a step the University of South Carolina has been considering after it moved classes online and returned money back to students.

Waiting would allow South Carolina to see how some of its major industries fare under reopening. The problems facing the hospitality industry hit hard in the state’s coastal region. On the other side, the “autobahn” between Greenville and Spartanburg holds it breath while the auto industry reopens. In Michigan and Illinois, Ford had to stop production at two reopened facilities due to corona virus infections even after a heavy sanitizing and mitigation effort.

WILL MUNIS FINANCE ANOTHER DAM FIX?

Two years ago it was a government built and owned dam in northern California that flooded. That put the State Department of Water resources on the hook for financing needed repairs at the Oroville Dam. The circumstances of the latest example are different and once again highlight the municipal finance industry’s role as a savior of corporate failure.

The Edenville Dam is one of four hydroelectric projects along the Tittabawassee River northwest of Midland, MI. The city is the corporate headquarters location for Dow Chemical and facilities in the city include a nuclear reactor.  Now the dam has failed and 40,000 residents in Midland are at risk. So is Dow Chemical. So who is responsible for fixing the dam?

The Edenville dam and three others were owned by a private interest. That entity failed to invest in the dams over time and the Edenville Dam was constructed in 1924 and was on FERC’s list of “high hazard” dams. Rather than invest, the private owner instead agreed in January of this year (the deal finally closes in 2022) to sell the dams to a municipal authority which planned to finance some $100 million of capital investment in the four dams.

The purchase was apparently the only way to get the needed work done as FERC had repeatedly faulted the previous owner for failing to maintain and improve spillways, which help direct excess water around the dam to relieve pressure on the structure. FERC is reported to have assigned a 5 in 10 chance that the dam would fail under high flood conditions while the private owner put the odds at 5 in 1,000,000. 

SCHOOLS FACE HIGHER COSTS

As the country moves towards reopening, school districts across the country are assessing how to mitigate against the spread of the virus. The possible fixes involve fewer students in each classroom, alternate schedules or even an old favorite (I date myself here) split sessions. Split sessions were originally intended to deal with attendance demands due to population trends. Now, split sessions could address new pandemic based attendance requirements.

The cost of operating schools will of course go up to address enhanced cleaning requirements, increased physical infrastructure requirements, and personnel costs associated with increased cleaning and transit employees. And it is fair to say that teachers will never have a better time to make their case as to their value to the community. It is no surprise that many parents are pressing to get schools open after lockdowns, especially in the case of working parents who rely on the schools as much for day care as they do for education.

This puts school districts in a tough position. Their underlying tax bases will likely be under pressure as businesses close and property values are depressed. If the states which are ultimately the funders of education do not receive federal assistance, it will be that much harder for them to downstream revenues to those districts under the state school aid programs in every state.

LIKE THE VIRUS CLIMATE CHANGE IS NOT GOING AWAY

As the massive flood in Michigan bears witness, significantly increased moisture is becoming an annual feature of each year. Now, the National Oceanic and Atmospheric Administration has issued its predictions for the 2020 hurricane season. Significant incidents in Puerto Rico, Texas, and Florida have become annual events. NOAA’s Climate Prediction Center predicted a 60 % chance of an above-normal 2020 Atlantic hurricane season, with a 30 % chance of a near-normal season. The agency predicted just a 10 % chance of a below-normal season.

NOAA forecast the 2020 Atlantic hurricane season that runs from June through November will include 13 to 19 named storms, with six to 10 possible hurricanes. Three to six of those could become “major” hurricanes of Category 3 or higher. If 2020 does meet that forecast, it would mark a new record of five consecutive above-normal Atlantic hurricane seasons, surpassing a previous record of four seasons during 1998 to 2001. An average hurricane season produces 12 named storms, with 6 becoming hurricanes.

Such a storm season would contribute to issues like flooding again draw attention to the vulnerability of infrastructure to floods and storms. Issues like raising the elevation of streets, rezoning, preventive infrastructure, and managed withdrawal will arise again. This time however, the debate will occur in the context of constrained budgets and revenue generating ability which will in the short term drive that debate. Can local governments fund and finance the investments in resilience under the likely depressed revenue environment?

SHORT TERM BORROWING IN THE SPOTLIGHT

Do this long enough and you see just about every cycle come full circle. That is about to be the case with short term borrowing by state and local government poised to increase. Attention has increased with the development of the Federal Reserve’s Municipal Liquidity Facility. These borrowings – usually in the form of tax and/or revenue anticipation notes have long been an effective cash management and project funding tool. Many issuers, especially states, have used these notes to address timing differences which create temporary cash imbalances.

This year the pandemic has created special pressures on cash flows. This has been exacerbated by extensions of the tax filing date into this summer. This has caused significant cash deficits as these issuers struggle with reduced revenues during their traditionally heaviest quarter of revenue receipts with the unprecedented expense demands related to the pandemic. Because the size and timing of potential issuance is uncertain and the ability of the market to deal with the potential flow due to credit fears, the Federal Reserve’s Municipal Liquidity Facility was authorized and funded at $500 billion.

One of the concerns is that short term debt has at times been not a means to address structural and timing issues but a form of deficit spending. Technically, that concern can be correct. That overlooks the importance of short term borrowing in the process of recovery from extraordinary events. A good example is the experience of the City of New York in the aftermath of 9/11. The City was able to use such borrowings to finance the increased current expenditures driven by the attack and its aftermath. There is no reason to look negatively at borrowers who issue notes in the current circumstances where it can be argued that the economic impact of the pandemic is much greater in comparison.

Right now, the market is focusing on Illinois and its potential borrowing requirements. Yes, Illinois entered this period in a significantly weaker position than most states. Yes, the $4.2 billion of short term borrowing is significant. But it is not an outlier in terms of its decision to use such borrowing to meet disaster induced funding needs. So we do not view the potential for significant short term borrowing by the state to be any sign of a lack of will to address its problems. The real risk pre-pandemic was the failure of a proposed constitutional amendment to move the state income tax to a graduated rate scheme on the November ballot. That has not changed or increased the level of uncertainty which already existed before the pandemic.

TRAVEL WOES HIT LAS VEGAS CREDITS

It’s pretty well established that one of the last sectors to fully rebound from the impacts of the pandemic is the travel/hospitality/leisure industry. For economies where tourism and/or entertainment serve as primary economic pillars, the limitations of attendance and operations have had severe effects. One of the best examples is the greater Las Vegas economy.

Now the impacts of laid off employees and no visitors is being reflected in the ratings of local issuers. This week Moody’s announced that it has downgraded two significant issuers. The Clark County School District had its rating affirmed at A1 but the outlook for the rating was lowered to negative. This reflects Moody’s  expectation that the district’s financial position will be challenged by the coronavirus pandemic which has severely affected the region’s tourism and gaming dependent economy. The State’s ability to support the District will be limited by the impact of the pandemic on state revenues.

The ever growing City of Henderson is feeling the pressure as well. It’s Aa2 rating now carries a negative outlook as the same pressures impacting the Clark County School District are hitting Henderson.

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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Call it what you want but we face depression level employment conditions. The most recent claims number brings unemployment to 23% without accounting for non-participants in the work force. While we realize that precipitous moves in ratings are most likely not in  the cards, that does not mean that the market can’t establish it view of creditworthiness. In the meantime, the debate over the next stimulus package will center around aid to states and municipalities. The argument for stimulus is bolstered by the Fed chairman’s most recently expressed views supporting additional stimulus.

Without it, states and cities will have to take steps to deal with their declining fiscal positions which will have direct economic implications. The traditionally busy summer construction season will look completely different this year. Major capital projects like road repairs are already being slowed, suspended, or reimagined to use different materials and work crews. The contract letting process is on hold in number of states and the economic impact of those decisions has yet to fully take hold.

On the county and local level, those governments cannot wait to decide whether to make cuts. While advertised as temporary, many of these entities have furloughed employees. Many of these cuts are in basic services which support economic activities through functions like business licensing, real estate transactions, inspections, and permitting. These changes will act as a further drag on local economies.

The next obvious concern is the impact on the economies of primarily small businesses for their survival. The multiplier effect stemming from these delays, cancellations, and changes is yet to be felt. That may also be said about the impact of potential delays in the re-openings of institutions like colleges. While the impact of closures and shifts to online learning are clearer, the economies of many localities depend on the presence of colleges to generate demand for all sorts of goods and services. Many of these local economies have long felt essentially immune from the changes in the larger economy.

The reality is that while the present economic realities are daunting, the worst may be yet to come. Empty campuses do not generate pizza deliveries. The potentially longer lasting effects of the downturn will pressure state unemployment trust funds and likely generate borrowing which must be supported by fees from employers. This will serve as an additional drag on the recovery of the economy as well as state fiscal positions.

Given the increasingly negative economic outlook, we would expect to see a series of state downgrades over the summer. States are in the middle of their budget processes and we expect that the rating agencies will wait for the legislative session season to play out before making any moves. Like so many other times of economic challenge, this period has reinforced the role of the rating agencies as lagging indicators of creditworthiness. We discuss the revisions in the fiscal outlook for several states this week. We  ask how these states can be considered worthy of the same ratings they had just eight weeks ago?

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PANDEMIC CASUALTIES – STUDENT FACILITIES REVENUE BONDS

The California State University, the nation’s largest four-year public university system, announced that classes at its 23 campuses would be canceled for the fall semester, with instruction taking place almost exclusively online. More than 480,000 undergraduates are enrolled at the Cal States and they have been taking their classes online since March.

To date, only several smaller institutions have announced similar decisions.  Many schools, public and private, are weighing various courses of action for the fall semester. The decision to open or close has implications for the outstanding debt of these institutions. For bonds secured by student dining and housing revenues to finance those facilities, the plan to stay online has potentially significant implications for the bonds. In the same way, bonds for non-academic facilities backed by student fees also will face financial pressure.

The public institutions are the primary issuers of debt backed by “auxiliary service” revenues. California State is a good example as it issues debt secured by revenue including gross revenue from various auxiliary and mandatory student fees. Total pledged revenue was $5.33 billion for fiscal 2019, including $3.35 billion of Tuition Fees (the basic enrollment charge paid by all CSU students). There is a sum-sufficient rate covenant and no debt service reserve fund.

The university issued system revenue debt in February with a Aa2 rating. The rationale for the rating was “continued excellent demand for The CSU, accompanied by consistently solid cash flow and debt service coverage.” The State of California continues to provide healthy increases in state funding, including capital support. Now, the source of outside support (the State) is under incredible short term stress, 40% of historic revenues are at risk, and demand for the system is under pressure as students attempt to assign a real valuation to the on-campus experience. The rating assigned in January carried a stable outlook but assumed cash flows and demand which may not be realized.

Given the pressures on the revenue sources (the state, economically weaker students, and potentially closed facilities) it’s hard to see how the credit behind the debt could be considered stable.

PANDEMIC CASUALTIES – PORT REVENUES

The National Retail Federation tracks import/export data for its members and produces, among other things, reports on things like port activity. Twenty foot equivalent units (TEU) provide the base metric and input for any analysis of operations and trends. A recent report from NRF documents the actual and potential impact on port operations as the result of the pandemic.

Imports at major U.S. retail container ports are expected to see double-digit year-over-year declines this spring and summer. April was estimated at 1.51 million TEU, down 13.4% year-over-year. May is forecast at 1.47 million TEU, down 20.4% from last year; June at 1.46 million TEU, down 18.6; July at 1.58 million TEU, down 19.3%; August at 1.73 million TEU, down 12%, and September at 1.7 million TEU, down 9.3%.

Before the coronavirus began to have an effect on imports, February through May had been forecast at a total of 6.9 million TEU but is now expected to total 5.87 million TEU, a drop of 14.9%. The first half of 2020 is forecast to total 9.15 million TEU, down 13% from the same period last year. So the current impact of the declines is significant but not unmanageable. At the same time, the importance of getting reopening the country right is highlighted in the report.

The Port of Los Angeles the port handled 689,000 TEUs in April. That’s a 6.5% year-over-year decrease  but better than the March results which showed the port handled 449,568 TEUs in March, a year-over-year volume plunge of 30.9%. According to the Port, “based on the first quarter of this year, the volume at the Port of Los Angeles was down 18.5%, and now if we add in the April stats we’re down about 15.5. On any given day looking at the traffic moving through the Port of Los Angeles we’re doing about 80% of normal volume for this time of year.”

The NRF projections rely on no emergence of a “second wave” of the virus. The report comes with the caveat that “we continue to expect recovery to come in the second half of the year, especially the fourth quarter and into 2021. This is based on the big and somewhat tenuous assumption that there is no second wave of the virus.”

PANDEMIC CASUALTIES – SMART DEVELOPMENT

The Smart Cities movement took a hit recently with the announcement by Google’s parent – Alphabet – that it was no longer going to pursue its experiment in smart cities development under way in Toronto, Canada. Originally dubbed “Sidewalk Toronto” in October 2017, the project was designed to oversee technology based development in a 12 acre area along the Toronto waterfront. The plan called for new housing and smart city technologies including sensor-based traffic signals, dynamic curbs, underground delivery routes for trucks, self-financing light rail transit, heated pavement and pneumatic waste collection.

Quayside is the name of the 12-acre waterfront district on Lake Ontario that was scheduled to be redeveloped by Sidewalk Labs and government-appointed nonprofit Waterfront Toronto. The project was outlined in June 2019 by Sidewalk Labs,  the Alphabet entity created for projects like this. Sidewalk Labs unveiled a three-volume, 1,524-page master plan for the site which estimated the cost at $2.8 billion.  It also helped the public understand some of the issues associated with the anticipated technologies to be used.

The public reaction to the project was mixed. While the effort to produce a fairly walkable, self-contained community was seen as a positive, the reliance on technology based monitoring raised concerns.  Those concerns centered around data privacy and the collection of information from citizens, which are an essential feature of many promised smart-city features.

So here we have one technology company advancing a project which raises data concerns amongst the public while in California we have technology/transportation companies fighting efforts by governments to access data to monitor and manage micromobility providers within their jurisdictions. It places the technology industry writ large on both sides of the privacy/technology debate.

So why care if you are a municipal bond investor? The pandemic is leading proponents of various strategies and technologies to try their best to use the temporary changes in urban living and transportation to advance their agendas. Most of those strategies will involve substantial capital investment on the part of host municipalities. The sort of investment to be required to produce development along the lines of the Toronto project would be substantial and the private sector has not shown the appetite to finance or fund it on its own.

Whenever those conditions arise, the municipal market is looked to as a source of affordable financing. So, municipal investors need to support sound decision making on the part of municipalities so as not to squander resources on a level of risk which really should not be borne by taxpayers and bondholders. It is an important thought to hold as companies like Uber, Lyft, and Airbnb all announced substantial employment cuts. With future funding in some doubt, the transportation networking companies are in a weaker bargaining position going forward as they engage governments while they try to expand. The decision by Uber to dump its Jump e bike subsidiary onto Lime reflects the instability in the mobility space.

 As the executive director of the San Francisco Municipal Transportation Agency (SFMTA) recently pointed out “At a time when all of these private companies should be demonstrating their value, they’re actually fighting for their own financial lives and therefore prioritizing the convenience of the privileged over the needs of cities and their most vulnerable travelers. The private mobility space has got a lot of work to do, to rebuild relationships with cities, and get people to see them as actually a part of a solution, rather than just a mechanism for some potential profit in the future.”All of that is positive for governments and their finances.

PANDEMIC CASUALTIES – HOSPITALS

Strata Decision Technology is an advisory firm in the hospital sector with access to operating information on some 1,000 U.S. hospitals. They have released research on the impact of the pandemic on hospital operations and finances. They found that across all service lines and in every region of the country there was an average decrease in the number of unique patients who sought care in a hospital setting of 54.5%. Clinical service lines that saw the sharp drops in patient encounters included those with life-threatening illnesses such as a 57% decrease in cardiology, and a 55% decrease in breast health with a 37% decline in cancer care overall.

The restrictions on elective surgeries can be seen in the data. The top 10 procedures account for over 50% of the total payments made to hospitals. In this category there were significant declines in the number of hip (-79%) and knee (-99%) replacement surgeries as well as in spinal fusions (-81%) and repair of fractures (-38%). Coronary stents (-44%) and diagnostic catherization (-65%) also saw significant declines. If you’ve had any of those done lately, the potential revenue hit to hospitals is obvious. Access to clinical care for patients with life-threatening conditions declined significantly including congestive heart failure (-55%), heart attacks (-57%) and stroke (-56%).

Those procedures are effectively where the money is for hospitals. Health systems in the study cohort (2 million patient visits and procedures from 51 healthcare delivery systems in 40 states, with varying rates of COVID-19 cases in their 228 hospitals) lost an estimated $1.35 billion in revenue during the 2-week study period compared to the prior year.  Extrapolating the drop in volume from the cohort to a national view would be the equivalent revenue loss of $60.1 billion per month for hospitals nationwide.

According to the study, the number of uninsured or self-pay patients has increased dramatically in the last 90 days, mirroring the rise in the national unemployment rate. In January, 7% of all inpatient and outpatient encounters in the study cohort were with patients who lacked health insurance. By April that figure had risen to 11%, and early results from May indicate 15% of all patients in the cohort are now uninsured, an increase of 114% in just 90 days. 

FEDERAL PANDEMIC ASSISTANCE TO NYC

The New York City Independent Budget Office (IBO) estimates that $5.3 billion in aid from the federal government’s four coronavirus relief packages will flow to the city budget. That does not include federal aid granted to public agencies that provide essential city services but are outside the city budget. That additional aid include $3.8 billion for the Metropolitan Transportation Authority (MTA), at least $818.6 million for NYC Health + Hospitals (H+H, the city’s public hospital system), and $211.9 million for the city’s public housing authority.

The majority of the $5.3 billion in aid that the city is estimated to receive must be used to cover direct costs incurred by the city due to the Covid-19 pandemic or to fund programs that provide aid to city residents impacted by the resulting downturn, such as increased funding for existing food and rental assistance programs. The more than $700 million in federal education aid included in this total will replace state school aid cut by the Governor in the state’s recently enacted budget. The largest impact on the city budget comes from changes to Medicaid funding. The Families First Coronavirus Act increased the share of Medicaid paid by the federal government by 6.2 percentage points (called the enhanced Federal Medical Assistance Percentage, or eFMAP.) In New York the federal, state, and city governments share Medicaid costs, so if the state allows the savings from the eFMAP to flow through to localities across the state there would be savings for the city.

STATES TRY TO COPE

A survey conducted by the Louisiana Oil & Gas Association found that members have been forced to reduce 23% of their Louisiana workforce. This reflects the fact that 77.5% of operators have already begun taking steps to shut-in production. and 51.35% said bankruptcy is likely. 34% applied for Economic Injury Disaster Loans (EIDL) funds, of those only 25% received the funds they expected. Of those who received funds, 46.6% indicted they were not enough to help them stay in business and 72% indicated they were not enough to avoid layoffs. It is not just the number of jobs lost but the fact that jobs in the oil and gas industry are among the state’s best paying. The impact on income tax revenues and sales tax revenues will be substantial.

Georgia has requested that all state departments and agencies submit revised budget plans for fiscal 2021, which ends 30 June 2021, that include a 14% cut from the original fiscal 2020 base of about $27.5 billion. That is positive for the state’s financial position. The across the board nature of the proposed cuts does however, lessen the amounts available for local aid including school districts. Moody’s estimates that the State Department of Education may see its funding cut by $1.5 billion. That would require districts to cut programs or raise taxes. April was the first month to include the full effect of the coronavirus-induced downturn, with Georgia’s revenue falling 35.9% year on year, reducing year-to-date revenue 3.4% versus 2019.

Texas reported $2.58 billion in state sales tax revenue in April — an approximate 8% drop from what the state collected the same month last year. That drop, from $2.8 billion to $2.58 billion, marked the steepest decline since January 2010 and covered sales made in March. Florida’s sales taxes provide for 78 % of the State’s general revenue programs. A May 1 daily revenue report showed that sales and use taxes, plus a few other unrelated revenues, collected during April were about $773 million below the state’s $3.1 billion sales tax estimate.

Other general impacts on projected budget results include Connecticut where the state’s Consensus Revenue Estimates revised general fund revenues and special transportation revenues downward for the current fiscal year, FY 2020 and next three ensuring fiscal years from January estimates. .General fund revenues are now estimated to drop $942.1, or 4.8%. The special transportation fund is expected to decline by $164.4 million, or a 9.5% reduction from January.

In Illinois the current fiscal year general fund revenues were revised to $2.7 billion below February estimates of $36.9 billion by the Governor’s Office of Management and Budget (GOMB). GOMB reports that the revenue shortfall and additional FY 2020 borrowing has created a budgetary gap when compared to the Governor’s original spending plan in February. 

Maryland Comptroller Peter Framchot and the Bureau of Revenue Estimates outlined a shortfall of approximately $2.8 billion during the final quarter of FY 2020. The impact represents a loss of nearly 15% to the state’s general fund.  Maryland’s withholding tax revenues declined by 22% or an average monthly impact of $185 million in losses. The economic shutdown could also result in a loss of 59% of all sales tax revenue in a month, or almost $250 million. 

Pennsylvania’s Independent Fiscal Office (IFO), reported that April revenue collections were down by $2.16 billion, or 49.8% less than projections released in August 2019. Sales and use tax collections fell short of estimates by $357.3, or 35.9%. Personal income tax revenues were below estimates by $1.48 billion and $105 million is estimated to be permanently lost due to reduced economic activity. 

TRANSPORTATION MEASURES THE IMPACT

A University of California-Davis study issued on April 30 found that total vehicle miles traveled or VMT in California is down statewide between 61% and 90% as a result of various stay-at-home orders issued by Governor Gavin Newsom. It estimates that COVID-19-related reduction in travel is slicing an estimated $46 million per week from fuel tax funds for California transportation projects. In Illinois, road travel is down as much as 46% across the state. The Maine Department of Transportation is expecting a roughly $74 million loss in transportation revenue due to COVID-19 over the spring and summer months.

The Minnesota Department of Transportation (MnDOT)  estimates it will take in $440 million less than anticipated over this year and next. MnDOT predicts income from the gas tax will plummet by about 30% compared with what was anticipated for the rest of this fiscal year, which runs through June 30. During the 2021 fiscal year, which starts July 1, the agency said it might drop by 15%.

WHILE YOU WERE SHELTERING IN PLACE…

The Maryland Purple Line, a controversial light rail project, had been the subject of litigation for some time. The litigation – which ultimately did not succeed in stopping the project – only slowed it. The first lawsuit delayed construction by almost a year before a federal appeals court rejected it in 2017. A federal judge dismissed a second lawsuit last year. The slowdown did impact construction and generated costs, however.

Those extra costs are the subject of an ongoing dispute between the state and the contractors on the project. The contractor said May 1 that it would quit in 60 to 90 days because of years-long disagreements with the state over who should pay for cost overruns related to construction delays. Now a third lawsuit is moving through the federal courts alleging that the U.S. Army Corps of Engineers had violated the Clean Water Act by allowing construction crews to discharge dredge and fill into streams.

That suit was dismissed by a U.S. District judge in April. Now, the plaintiffs have decided to appeal the decision to the U.S. Court of Appeals for the 4th Circuit in Richmond. Briefs are scheduled to be filed by lawyers on both sides this summer. The appeal could result in further delays and it will complicate the dispute between the contractor and the state.  

PRESSURE ON UTILITIES

The US Energy Information Administration (EIA) released its latest monthly Short-Term Energy Outlook (STEO) and it validates a number of points we have made in our comments on the sector over time. The outlook says that the effects of social distancing guidelines are likely to continue affecting U.S. electricity consumption during the next few months. EIA expects retail sales of electricity in the commercial sector will fall by 6.5% in 2020 because many businesses have closed and many people are working from home. Similarly, EIA expects industrial retail sales of electricity will fall by 6.5% in 2020 as many factories cut back production. Forecast U.S. sales of electricity to the residential sector fall by 1.3% in 2020 because of lower electricity demand as a result of milder winter and summer weather, which is offset slightly by increased household electricity consumption as much of the population spends relatively more time at home.

Here’s what really caught our eye. EIA forecasts that total U.S. electric power sector generation will decline by 5% in 2020. Most of the expected decline in electricity supply is reflected in lower fossil fuel generation, especially at coal-fired power plants. EIA expects that coal generation will fall by 25% in 2020. EIA forecasts U.S. average coal consumption will decrease by 23% to 453 Million short tons (MMst) in 2020. The decrease is primarily driven by a 24% decline in electric power sector consumption and persistently low natural gas prices. EIA expects renewable energy to be the fastest-growing source of electricity generation in 2020, the effects the economic slowdown related to COVID19 are likely to affect new generating capacity builds during the next few months. EIA expects the electric power sector will add 20.4 gigawatts of new wind capacity and 12.7 gigawatts of utility-scale solar capacity in 2020.

Even the pandemic disaster has not been enough to deter the market forces driving the decline of coal. We expect that municipal utilities will have to become bigger players in the renewable energy space as developers of  renewable generating resources directly and not just as ultimate distributors. They will have to remain nimble as local economies absorb and adapt to changes in job locations, commutes, and work habits which are likely to result from the pandemic.

ONE LESS FOR THE ROAD?

The same energy report projected fuel consumption and those numbers do not look good for transportation infrastructure funding. EIA expects U.S. total liquid fuels consumption will rise from an average of 15.9 million b/d in the second quarter of 2020 to 18.7 million b/d in the third quarter of 2020 and then to average 19.8 million b/d in 2021, up 8% from 2020, but lower than 2019 levels. EIA forecasts jet fuel consumption to decline by 25% year-over-year for all of 2020 and by more than 50% year-over-year in the second quarter. Gasoline and distillate fuel consumption will both see consumption fall about 10% compared with 2019 levels.

This directly impacts gas tax revenues obviously. Where it multiplies is in what it implies about the impact of changes in travel especially commuting. The impending shift to more telecommuting for work we believe is real. The implications for the impact on mobility choices and demands are real and potentially substantial. It will require creative approaches to road funding and the support for the capital it relies on.

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 keep hearing that the pandemic isn’t everyone’s problem when it comes to federal assistance to states. Data out this week showing that the virus moved from the coasts and gateway cities out to the rest of the country will not help anti- New York bias out there among them. Fortunately, data suggests that the State of New York might have been better positioned to deal with the pandemic if more of the state’s resources had been allowed to remain in state rather than bankrolling the rest of the country.

That data shows that in Federal Fiscal Year (FFY) 2018, New York State generated an estimated $26.6 billion more in federal taxes than it received in federal spending. In total dollars, New York’s deficit was the highest among the 50 states. For every tax dollar paid to Washington, our State received 90 cents in return—well below the national average of $1.21. The State generated nearly $254 billion, 8 % of the $3.2 trillion in federal tax receipts. By contrast, the $227 billion in federal spending the State received represented 6 % of the nationwide total, virtually the same as New York’s share of the U.S. population.

So the State would able to fund the entire revenue loss from the pandemic and have money left over were it not for this imbalance. It could even help NYC if it chose. Connecticut tops the list of donor states. Residents there receive just 74 cents back for every $1 they pay in federal taxes. Kentucky on the other hand pays in only about one half of what New York contributes on a per capita basis. So no matter your political leanings, the data tells the story.

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RATINGS TOLL BEGINS TO TAKE SHAPE

The negative impact of the pandemic on the economy and taxes derived from economic activity is already manifesting itself in negative ratings actions. The latest example is the entity which financed Miller Park and the arena for the Bucks in Milwaukee, The Wisconsin Center District . The district’s Series 1996A, 2003A, 2016A and 2020A bonds are secured by a senior lien on the following special taxes: a 2.5% Basic Room Tax, a 0.5% Local Food and Beverage Tax, and a 3% Local Rental Car Tax, all of which are levied across Milwaukee County (Aa2 stable) and can only be used for debt service. The bonds are additionally secured by a 7% Additional Room Tax levied in the City of Milwaukee (A1 negative), which is pledged first to debt service and then any lawful purpose.

Now, Moody’s Investors Service has downgraded to A3 from A2 the rating on Wisconsin Center District’s senior debt to A3 and its junior lien debt to Baa3. The analysis assumes a gradual recovery beginning in the second half of 2020 with slow improvement over the ensuing months. Now the District is undertaking and advanced refunding of some of its debt. The resulting restructuring of the District’s debt service schedule will reduce near term debt service requirements which will accommodate the limits on the economy resulting from the pandemic.

The uncertainty facing the higher education space is unprecedented. Already, schools are seeing fewer acceptances by the usual May 1 deadline so it is difficult for administrators to estimate enrollments and revenues. So far, the vast majority of institutions indicating that they plan to reopen are the state university systems. Overseen ultimately by politicians, these institutions are getting caught up in pandemic politics as states which are considered to have pro-Trump governors are the most favorably disposed to open.

The real risk is in the private space, especially in the smaller college category. These schools were already under financial stress from existing pressures on enrollments. S&P Global Ratings revised the outlooks to negative from stable and affirmed its ratings on certain U.S. not-for-profit colleges and universities (including all related entities), due to the heightened risks associated with the financial toll caused by the COVID-19 pandemic and related recession. The public and private colleges and universities affected by these actions include primarily those with lower ratings (‘BBB’ rating category and below).

Helpfully, S&P named liquidity, as measured by available resources compared to debt and operating expenses, as the primary metric assessed. Liquidity will be the key as colleges manage the financial impact on institutions from the loss of auxiliary revenue from housing and dining fees, and parking fees; as well as revenues from athletics, theater, and other events, which is material for many.

Another risk is the limitations of travel and the potential impact on historically lucrative foreign student demand. If global travel restrictions are prolonged, or the imminent recession diminishes foreign students’ financial means, then some could opt to study or work in their home countries instead. Growth in this demand was already slowing from pre-pandemic efforts to limit immigration. The pandemic has exponentially increased the negative pressure on foreign demand. This impacts public and private schools.

The impact on investments resulting from the pandemic will hurt as most U.S. colleges and universities depend on endowments and fundraising for a significant portion of revenues. Declines in performance and endowment market values along with weaker fundraising results could negatively affect credit metrics during the outlook period. 

For public institutions all major revenue sources are under pressure. Recent increases in state support may not be sustainable and it is likely most states will make cuts to higher education funding. Funding for higher education still remains below pre-recession levels in certain states and this will continue. Some have already withheld funds from higher education institutions for the remainder of the fiscal year (New Jersey and Missouri, e.g.).

FISCAL CURVE IS NOT FLATTENING

The NYC Independent Budget Office (IBO) is updating its forecasts for the NYC budget for the rest of FY 2020, FY 202, and FY 2022. It notes that even after only two months that its outlook has continued to weaken. Now, IBO projects that  the city has a budget gap of $544 million that must be closed in the two months remaining in the current fiscal year. It also estimates a shortfall in the upcoming fiscal year of $830 million and a budget gap that balloons to nearly $6.0 billion in 2022, just 14 months from now. Tax revenue for 2020 is now projected to fall $2.9 billion (4.6 percent) below what was estimated in the Preliminary Budget report; for 2021 the shortfall is $6.6 billion (9.9 percent). It  expects tax collections will total about $61.5 billion this fiscal year, a gain of only 0.2 percent from 2019 and the picture for 2021 is considerably worse. Tax revenues for 2021 will total about $2 billion less than this year, a year-over-year decline of 3.2 percent.

The State of Minnesota has released a revised budget outlook. Like many states, the economy and a rainy day fund had Minnesota riding high fiscally. The February budget estimate is traditionally the one on which the legislature bases its budget debate. Now that the pandemic is eating away at fiscal strength, the picture is much different. The February estimate included a projected revenue surplus in February, 2020 of $1.5 billion. The revised Projected revenue deficit in May 2020 is $2.42 billion. The $3.9 billion reversal is covered in part by $2 billion the state has received from the federal CARES Act and a rainy day fund balance of $2.36 billion. As no one expects the economy to “snap back” to pre-pandemic levels, the damage has not stopped but available are all spoken for.  Minnesota can dip into the rainy day account once there is an official projection of a deficit to pay for the existing budget and be done without further action by the Legislature.

Ohio is in the middle of its biennial budget process. It has a “rainy day” reserve of some $2.7 billion but the state is so far relying on expenditure cuts.  The state had previously reported revenue estimates were up by $200 million over budgeted projections, but state fiscal results through April now project a $777 million deficit. To cover the deficit, the Governor has opted for $700 million of budget cuts instead. The State reported that in April collections showed a $636 million decline in state income taxes and a $237 million decline in sales taxes. Tax revenue overall declined by $867 million. The cuts will impact primary spending priorities. Medicaid spending is budgeted to decline by $210 million. Kindergarten through 12th grade foundation payments will be cut by $300 million and higher education by $110 million and trim $100 million in other general state agency spending. 

Alaska had already been dealing with the declining reliability of oil as the state’s main source of income. Battles over the Permanent Fund dividend had led to contentious budget processes over several years. Those pressures however, pale in comparison to what the state of Alaska faces now. ConocoPhillips, the third-largest U.S. oil producer, announced it would its production in Alaska by half, roughly 100,000 barrels a day, beginning in June. The decline in throughput accompanies similar moves to maintain temporary production cuts demanded by Alyeska Pipeline Service Co. (owned by ConocoPhillips, BP and Exxon Mobil) for May due to projections of oversupply and lack of tanker transport. Alyeska carries crude from the North Slope to the Valdez Marine Terminal.

The California Department of Finance reports that California began 2020 with a strong bill of financial health—a strong economy, historic reserves, and a structurally balanced budget.  The unemployment rate (3.9%) was one-third of its Great Recession peak (12.3%).  The “Wall of Debt” (past budgetary borrowing) was eliminated, and supplemental payments were made to retirement obligations.  The 2020-21 Governor’s budget reflected a $5.6 billion surplus.  The budget reflected a record level of reserves: $21 billion in FY 2020-21, including $18 billion projected in the state’s Rainy Day Fund.  Revenues through March ran $1.35 billion above January’s projections, as markets outperformed the budget forecast.

Now for the May Revision. In the last one-week reporting period, nearly 478,000 claims were filed in California for state and federal unemployment benefits. Since mid March, more than 4.2 million claims have been filed. Finance projects that the 2020 unemployment rate will be 18%, a much higher rate than during the Great Recession. California personal income is projected to fall by nearly 9% on an annual basis in 2020.

Compared to the January forecast, the state’s three main General Fund revenue sources are projected to drop for the 2020-21 fiscal year as follows:  Personal Income Tax: -25.5 %.  Sales and Use Tax: -27.2 %.  Corporation Tax: -22.7 %. Specifically, Finance projects that General Fund revenues will decline by $41.2 billion below January projections, as follows:  2018-19: +$0.7 billion  2019-20: -$9.7 billion  2020-21: -$32.2 billion. Under Proposition 98’s constitutional calculation, this revenue decline results in a lower required funding level by $18.3 billion General Fund for K-12 schools and community colleges.

The Revenue declines of ($41.2 billion), combined with $7.1 billion in caseload increases supporting health and human services programs, and other expenditures of approximately $6 billion (the majority in response to COVID) will result in an overall budget deficit of approximately $54.3 billion, of which $13.4 billion occurs in the current year and $40.9 billion is in the budget year.  This overall deficit is equal to nearly 37 % of General Fund spending authorized in the 2019 Budget Act.  This is also nearly three and one half times the revised balance in the Rainy Day Fund ($16 billion).

JEA BACK IN THE SPOTLIGHT

The Jacksonville Electric Authority has asked its former CEO, Paul McElroy who retired in April of 2018, to serve as an interim CEO of the troubled utility for six months while a permanent CEO is hired. The outgoing CEO is part of the group under federal investigation over the recent failed attempt to privatize the utility.

The process of investigating exactly what happened at JEA and in the city that allowed the privatization plan to advance as far as it did is ongoing. It includes the Mayor’s office as well. It raises serious concern surrounding the governance of the utility both directly and through oversight by the city. The credit would be expected to suffer a ratings impact if the agencies are serious about their emerging emphasis on environmental, social, and governance issues (ESG).

It has also been pointed out that the new interim CEO approved the contract with the Municipal Electric Authority of Georgia (MEAG) for power from the Votgle nuclear plant. The Authority is now in litigation to void the purchases required under the contract. That contract was among issues contributing to lower ratings for the City’s debt. The contract litigation will effectively cap ratings where they are unless a settlement can be achieved.

CHICAGO PENSIONS

The debate over the next stimulus bill from Congress will center on aid to states and localities. In that debate, Illinois’ name keeps coming up along with pensions. So, however unhelpful that debate is to addressing the incredible burden being shouldered by states and municipalities, it does bring a spotlight back onto pension problems in the state.

The Illinois state legislature’s non-partisan Commission on Government Forecasting and Accountability has released its latest analysis of the state of the pension funds supporting workers from the major public agencies serving Chicago. The Chicago Transit Authority Retirement Fund covers all employees of the Chicago Transit Authority. At the end of FY 2018 (January 1, 2019) there were 8,159 active employees and 8,020 employee annuitants. Total Actuarial Assets of the system at the end of that year were $1.836 billion and Total Actuarial Liabilities were $3.489 billion. That is essentially a one to one ratio of active workers to retirees which is not sustainable. The funding ratio – 53%. The Cook County Employees’ Pension Fund covers all persons employed and paid by the County. At the end of 2018 there were 19,671 active employees and 15,820 employee annuitants. Total Actuarial Assets of the system at the end of that year were $10.513 billion and Total Actuarial Liabilities were $17.304 billion. The worker/retiree ratio is just north of one to one. Funding ratio – 61%.

The Firemen’s Annuity and Benefit Fund of Chicago covers anyone employed by the City of Chicago in its fire services whose duty it is to in any way participate in the work of controlling and extinguishing fires. At the end of 2018 there were 4,487 active employees and 3,422 employee annuitants. Total Actuarial Assets of the system at the end of that year were $1.130 billion and Total Actuarial Liabilities were $6.156 billion. That is a 1.3 to 1 worker/retiree ration. Funding ration – 18%. The Policemen’s Annuity and Benefit Fund of Chicago covers any employee in the Police Department of the City of Chicago sworn and designated by law as a police officer. At the end of 2018 there were 13,438 active employees and 9,930 employee annuitants. Total Actuarial Assets of the system at the end of that year were $3.145 billion and Total Actuarial Liabilities were $13.215 billion. Funding ratio – 24%.

On an overall basis, the eight funds reviewed produced a combined unfunded liability of $44 billion. The funding ratio for the combined funds is a paltry 35.2%. That calls for significant transfers of current revenues into pension funding but that is not going to happen in the current environment. We have doubts about whether voters will approve the amendment to the state constitution allowing for a graduated income tax versus the current flat rate. That is a key component of the plan of the governor for fiscal and pension reform that is currently holding the state’s ratings where they are.

PENSION REFORM IN TEXAS

In 2017, Dallas, TX faced a looming crisis in its police and fire pension funds. Pensioners had historically had the ability to make lump sum withdrawals under the terms of the DROP provisions included in their pension plans. Deferred retirement option plans (DROPs) allow employees to continue to work past their eligible retirement age and in exchange, an employer will set aside annual lump sum payments into an interest-bearing account. Upon retirement, the money that has grown in this account will be paid to you, on top of the rest of your accrued earnings. 

Many large lump-sum withdrawals by participants in the Dallas pension funds from their DROP accounts followed investment losses in real estate and other alternative asset classes in 2014 and 2015. This forced the city to contemplate significant increases in expenditures for payments into the funds in order to keep them solvent. In an effort to reduce the amounts needed from current revenues, the City did not allow lump sum withdrawals beginning in 2017. Unsurprisingly, the police and fire unions sued the city.

The Dallas Police & Fire Pension System’s (DPFP) are one of the city’s two pension systems. They  account for some two-thirds of Dallas’ adjusted net pension liability (ANPL). As of its fiscal 2019  reporting and based on a 4.22% discount rate, Dallas’ ANPL was $6.2 billion. Its reported net pension liability, based on a weighted-average 6.73% discount rate, was $3.8 billion. In fiscal 2019, pension contributions consumed around 12% of the city’s operating revenue. That was not a tenable situation going forward and the ability to limit the lump sum withdrawals was a key component of the City’s effort to manage its pension liabilities.

Under current conditions, it would be expected that another “run” on the fund could be imminent. Coming at a time of exceptional market volatility and economic distress, the City would have been hard put to maintain the solvency of the system in the face of significant withdrawals. In an environment where the pandemic is driving expenses while at the same time revenues are crashing, the City’s credit would come under immediate pressure.

Now that pressure is off with the decision of the Fifth US Circuit Court of Appeals which affirmed the City’s right to halt the lump sum withdrawals in 2017. It ruled that the removal of participants’ lump-sum withdrawal options in 2017 was permissible, eliminating a potential liquidity risk for the system and ultimately the city’s budget. Significant withdrawals would pose a threat to the DPFP’s solvency and exacerbate the pressure on the city’s finances, in part because the system struggles to unwind its heavy asset allocation to real assets and other alternatives.

Before the current environment took hold, the system’s net cash flows were close to zero in 2017, 2018 and 2019. This reflected the halt to DROP withdrawals. This allowed the system to stabilize, relieved pressure on the City’s fiscal position, and helped to stabilize its credit ratings. The court decision is definitely credit positive for the City.

CULTURAL INSTITUTIONS CUT BACK

The American Museum of Natural History cut its full-time staff by about 200 people, amounting to dozens of layoffs, and put about 250 other full-time employees on indefinite furlough. The museum projects a budget deficit of between $80 million and $120 million for the remainder of this fiscal year, which ends on June 30, and the next fiscal year. The Whitney Museum of American Art  laid off 76 of its 420 workers. The Metropolitan Museum of Art, facing a potential shortfall for the next fiscal year that might swell to $150 million, announced last month that it was laying off more than 80 people. And the Solomon R. Guggenheim Museum has said it would furlough more than 90 staff members.

What is interesting is the fact that these institutions are by and large not tapping into their endowment funds to cover keeping employees on the payroll. Given the potential for a significant negative impact on donations, this is probably a rational response to that phenomenon. Some of the institutions are being criticized for taking this approach. While these institutions may be not for profit, they are still businesses. It is prudent to take these steps in the interest of long term solvency given the current economic realities.

CYBERSECURITY

President Donald Trump signed an executive order titled Securing the United States Bulk-Power System. The executive order calls for the development of procurement policies that prioritize the security of the US energy grid, as opposed to current rules that give preference to the lowest-cost bids. The Secretary of Energy is empowered through the order to determine if equipment is insecure or harmful to national security, and with blocking its use in US power plants and their transmission systems. The idea is to incentivize manufacturers to invest in developing and maintaining strong cyber security practices or risk exclusion from the US market.

The order is intended in part to address the widespread presence of critical infrastructure components, including software applications and telecommunications equipment, from equipment manufacturers in China and Russia. These countries are known for active cyber espionage and tampering with the physical operations of utility facilities. Wide variance in cyber security practices between suppliers  exposes utility operations and networks to indirect threats that utilities cannot accurately monitor or prevent. The reliance on foreign made equipment and software has been a concern for officials responsible for cyber security. The order does not detail specific products or countries of origin. It instead charges the Secretary of Energy to determine which particular individuals, companies and countries are “foreign adversaries exclusively for the purposes of this order.”

WHERE THE JOBS ARE BEING LOST

The highlight number of the week was the April unemployment number. The 14.7% rate and the number of unemployed at 22 million are already records for the post-war era. Since the numbers are based on a mid-month survey, we know based on the unemployment claims data that this greatly understates the real situation. The May data is likely bring those numbers up to 20% and 35 million unemployed.

There is new data out on the unemployment situation which reveals that unemployment is primarily concentrated in two sectors – construction and the leisure/hospitality space. The data shows that of the 701,000 nonfarm jobs lost in the United States in March, nearly 60 percent came from food services and drinking places, according to the Bureau of Labor Statistics. The potential long term impact on employment is huge. Recently, we have seen estimates that 40 to 50% of bars and restaurants may not reopen. And those are businesses which were thriving in late 2019.

The potential impact of this would be subject to a multiplier effect as these industries traditionally  have been a great source of jobs for those with no college background or as a first job. These would be the individuals less well positioned to compete for the jobs which do return after the pandemic.  They have less ability to wait out the pandemic and therefore are more likely to turn to government social service programs more quickly. These businesses, many of which are individually owned , are finding that complying with all of the regulations attached to the PPP could actually make participation less practical

A recent NY Times article highlighted one of the weaknesses of the Payroll Protection Program in that the loans are only forgiven if they keep paying workers.  Problems with business interruption insurance are making it harder for businesses to hold on.  The fact that restaurants are consistently found in polling to be the last businesses that people would feel comfortable returning to, the outlook for this sector and the sales tax backed debt which it supports is dire.

Opportunity Insights, a non-profit organization at Harvard University has produced data on the change in consumer spending in different locations in the country. It uses data from credit card processors, payroll firms, job posting aggregators, and financial services firms to develop its estimates. The map below reflects more current real time data as opposed to much of the Federal data which by its nature tends to be time lagged. One example of the phenomenon is the Employment Situation Summary (i.e., jobs report) released by the Bureau of Labor Statistics on May 8. It presents information on employment rates as of the week ending April 12. The OI data is as recent as three days before.

That is an important distinction as the OI numbers allow us to take a look at reopened states. That data shows that recent policies ending shut-downs in certain states such as Georgia and South Carolina have not been associated with significant increases in economic activity. These findings suggest that the primary barrier to economic activity is the threat of COVID-19 itself as opposed to legislated economic shutdowns. In Georgia, consumer spending, employment and hours at small businesses, the number of small businesses that are open, and time spent at work all remain relatively similar to their levels prior to April 24.

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

Joseph Krist

Publisher

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The increasingly partisan approach to the fiscal damage done to state and local budgets as the result of the pandemic is at best, disappointing. While politics have always been one of the elements to be evaluated in the successful analysis of municipal credit, partisanship is another story. What we are seeing now is ideology, not practicality. The impact on the economy is clear at 30 million new unemployed. The numbers are bound to increase as even tech based companies like Uber and TripAdvisor are seen to be ready to announce layoffs. That’s in addition to the expected wave of unpaid commercial rent from many of the companies laying off staff. and from retail outlets with few or no customers. These things are happening in a variety of states led by both Democrats and Republicans.

One  good example is the pension funding red herring thrown out there by the Senate Majority Leader. and the White House.  Kentucky has the worst funding ratio among any of the states. At the same time, New York has one of the five best funding ratios. Yes, Illinois, Connecticut, and New Jersey have pension problems but what they have in common is their relative bipartisan history in terms of who held the Governorships. How many downgrades did New Jersey suffer during Chris Christie’s tenure? counting isn’t constructive but the point is that pension funding is a national problem not a partisan problem. It’s also fair to note that a federal entity, the Pension Benefit Guaranty Board exists to bail out pensioners from poorly managed corporations. But not governments?

The discussion during the effort to save the economy from the pandemic is beyond a distraction. It is an impediment to the realization of the goals held on either side of the partisan debate. And it is bad for the process of shoring up state and local credits which have done the majority of the work on the pandemic. It is clear that there is no consensus in support of state bankruptcy.

Now, the President is refusing to extend the federal guidelines regarding things like social distancing .So it’s clear that the attack on state and local government finances is on in earnest. Hit to revenues because you didn’t open as fast as another? That was your fault. More people on unemployment because it’s not safe to return to work? Yup, the states fault. This, as just this week the medical professionals messaged that social distancing must continue for months. The implication is that recovery to the status quo is a few quarters away. Our views are based on the belief that the reality is that a  vaccine will be the answer to the pandemic and a full return to the status quo. That cannot be rushed and it must be safely effective which takes longer. In the interim, a return to 90% of where the economy was might be a good norm to assume as you do your near term forward analysis of the next two to four fiscal years.

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POST PANDEMIC MUNIS.

We are seeing much speculation as to the impact of the pandemic on the US economy and way of life. Much of this commentary is about the future of cities and whether one result will be a paradigm shift in how people locate themselves in relation to where and how they work. Many of the ideas being advanced would require major alterations to the way municipalities are run. There seems to be an assumption that the resulting changes in demand for capital projects would be accommodated easily in spite of the potential changes to how revenues are generated.

One example is the assumption that the responses to the pandemic which have been salutary can be maintained in the context of a restoration of a fully functioning economy. We would remind everyone that there are significant vested interests in returning to something like the ways of life we had going in. The post-pandemic era will not necessarily feature a return to the status quo but it will not be one without large gatherings, mass transit, or private vehicles.  None of the major population centers of the US in 1918-1919 experienced a slowdown in growth. We believe that this will be the case again.

We are seeing much speculation as to the impact of the pandemic on the US economy and way of life. Much of this commentary is about the future of cities and whether one result will be a paradigm shift in how people locate themselves in relation to where and how they work. Many of the ideas being advanced would require major alterations to the way municipalities are run. There seems to be an assumption that the resulting changes in demand for capital projects would be accommodated easily in spite of the potential changes to how revenues are generated.

Mass transit presents a significant issue. Now, the lack of cars and essentially any transportation is being treated as if it is a sustainable long term plan for cities. At the same time, the micro mobility industry is already feeling the pain of pandemic restrictions on movement. Bird, a major e scooter provider has laid off nearly one-third of its direct staff. in a business which has yet to generate profits while relying on regular outside cash infusions, expenses are just not tolerable without operating revenue. Much has been made about the improvements in noise and air pollution underway in the major cities. That improvement, at the expense of a functioning economy and education system, is sparking much thought about cities and transit in the post-pandemic era.

One thing which will not be viable is the approach to urban transit planning taken by the micro mobility industry. ‘We shouldn’t have to pay a city, the city should be paying us” is an attitude attributable to an executive at Bird, the scooter provider. If that is the underpinning of the sector’s business model going forward, it’s not going to work. All of the new modalities will be tested for their full public revenue potential under the economic circumstances of the next couple of years. That will be driven by necessity based on the significant revenue hit municipal credits have faced.

Already the outlook for congestion pricing taking effect as scheduled in Manhattan is waning. The troubles of the MTA (see more later) are likely to become an impediment to a shift away from private vehicles. The capital cost and operating/maintenance cost of new facilities such as protected bike lanes will be more of a burden relative to available resources. It will be in the system’s financial interest to drive as much demand as possible for mass transit services. A sort of policy triage will result that will act to limit the ability of states and cities to fund substantial additional infrastructure. Those facilities which can be produced at the least cost to benefit the most people will be undertaken and others will become delayed or unaffordable luxuries.

There will have been an existing economic infrastructure which will have many interests supporting its rapid restoration. Sports, entertainment, and cultural institutions will not simply disappear. They will still retain their places as significant drivers of economic activity. Look back at the 1918-1919 pandemic and see what followed as the nation moved beyond the limits it imposed. Some of the nation’s most iconic sports venues – Yankee Stadium, the Rose Bowl and the Los Angeles Coliseum, Chicago Stadium, and Madison Square Garden were all constructed and put into operation within the ten years after the pandemic. In New York, active planning and construction of the independent subway system took place throughout the decade of the 20’s.

The point is that mass gatherings not only resumed but thrived and were supported by significant capital investment in facilities to support them. We believe that large events will return and that they will regain their role as drivers of economic activity. We believe that people will want to return to restaurant and drinking venues. They will need to be able to get to them. One of the issues which the economic restrictions has highlighted is the difficult straits in which major public transit agencies find themselves. The MTA in New York is carrying something between 5-10% of its normal load.

The decrease has impacted revenues but has also damaged the non-fare tax and spending base. This creates a serious problem as the same forces impacting the revenue base will also impact the capital finance base on which the maintenance and expansion is reliant. It is ironic that as the MTA was poised to complete the northern portion of the 2nd Avenue Subway, it faced a situation very similar to the one which prevented the construction from 125th Street south in the early 1970’s – the dire fiscal straits of the state and city.  

MTA

New York’s Metropolitan Transportation Authority is in the process of trying to sell some $670 million of its core financing credit, the Transportation Revenue credit backed by fares. The offering gives us a chance to quantify the impact of the pandemic and its socialization restrictions on the Authority’s finances. The official statement for the offering provides us with hard data on ridership and utilization.

As of the beginning of April, ridership on the subways was down 91%. The bus system saw even greater declines at 98%. The commuter railroads have also seen declines of 98%.  The resulting revenue losses will be brutal. Traffic on the bridges and tunnels operated by the MTA and its subsidiaries is down by two thirds. The revenue impact in terms of lost revenues is $142 million a week. Over a full fiscal year, that comes to $7.4 billion. On top of that, MTA relies on state and local subsidies totaling some $6.4 billion.

The impact on the capital program is clear. MTA has for now halted the award of new Capital Plan construction or consulting contracts. It has also suspended the solicitation of bids for contracts. At the same time, the CARES Act is projected by the MTA to generate about $4 billion to the agency. The MTA also expects funding outside of the CARES Act from FEMA to cover costs for things like sanitizing  and safety equipment for MTA workers. While there is no local matching effort required for the receipt of CARES Act funding, the state has nonetheless taken a variety of steps to help the MTA through this period. The budget for the FY beginning April1 includes a significant increase in the borrowing authority of the MTA. It also loosens restrictions on the use of revenues derived from congestion pricing. The budget also obligates the City of New York to increase its share of the cost of paratransit services supplied by the MTA to city residents.

 ECONOMIC OUTLOOK FACING THE STATES

The Congressional Budget Office (CBO) has developed preliminary projections of key economic variables through the end of calendar year 2021. Inflation-adjusted gross domestic product (real GDP) is expected to decline by about 12% during the second quarter, equivalent to a decline at an annual rate of 40% for that quarter. The unemployment rate is expected to average close to 14% during the second quarter. Interest rates on 3-month Treasury bills and 10-year Treasury notes are expected to average 0.1 percent and 0.6 percent, respectively, during that quarter.

In 2021, real GDP is projected to grow by 2.8 percent, on a fourth-quarter-to-fourth-quarter basis. Under that projection, real GDP at the end of 2021 would be 6.7 % below what CBO projected for that quarter in its economic outlook produced in January 2020. The labor force participation rate is projected to decline from 63.2 % in the first quarter of this year to 59.8 % in the third quarter. The unemployment rate at the end of 2021 would be about 6 percentage points higher than the rate in CBO’s economic projection produced in January 2020, and the labor force would have about 6 million fewer people.

LIQUIDITY FOR MUNICIPALS

The Federal Reserve has broadened eligibility for the Municipal Liquidity Facility to let more local governments participate. The central bank has lowered the population requirement to 250,000 from 1 million for cities and to 500,000 from 2 million for counties and plans to buy as much as $500 billion in short-term notes issued by states. The Fed has also expanded the duration of debt it will purchase to three years from two. More than 200 municipalities are eligible to participate. While welcome, the program leaves out a significant portion of the short term municipal borrowing universe.

New Jersey has announced a plan to fill some of the void. The New Jersey Infrastructure Bank (I-Bank) will have available $50 million to provide liquidity for municipalities in New Jersey that experience difficulty rolling over BANs. There will be sector, issue, and credit limits, interest rate guidelines, and a maturity limit of 90 days for any BAN submitted for consideration. While the $50 million looks small in comparison to the levels of federal support, it will  support smaller borrowers where they do not meet the test for federal liquidity assistance.

New Jersey’s I-Bank has amended its investment policy to permit it to invest in local government unit BANs in certain circumstances. The BAN purchase program is a limited and specialized resource made available only to participants in I-Bank associated financing programs to address failed sales occurring during BAN rollovers. This program is designed to ensure solvency and fiscal stability for New Jersey’s local government units, providing protection against potential defaults during the present liquidity crisis.

VIRUS ECONOMIC FOOTPRINTS BEGIN TO EMERGE

The data on urban surface transit ridership has been clearly and sharply lower inflicting significant short term damage on the financers of these systems and credits. Now we begin to see data on the impact of the overwhelming drop in aviation passenger traffic. Las Vegas’ McCarran International Airport serviced 53 % fewer flights in March of this year than it did in March 2019. 2.3 million fewer travelers boarded flights last month. Southwest Airlines, the dominant carrier at the airport, serviced 1.6 million Las Vegas flyers in March 2019. This March, that number dropped to around 600,000 passengers. McCarran International Airport completely shuttered two of its concourses in early April.

State departments of transportation are experiencing significant drops in revenues as the lack of driving has driven down demand for gasoline. The result is that there is significantly less revenue from fuel taxes available to fund projects. The lack of gas revenues has overtaken the impact of social distancing measures on the ability of these departments to execute their projects. The American Association of State Highway and Transportation Officials, or AASHTO, estimates state transportation departments will lose $50 billion in expected revenue over the next 18 months.

States including North Carolina, Ohio, Oklahoma and Pennsylvania are already cutting projects or furloughing workers ahead of revenue shortfalls. Recently, the director of the MO Department (MO DOT)outlined the scope of his state’s dilemma. MoDOT expects to lose 30% of its expected revenue over the next 18 months, about $925 million. According to the MO DOT director, Missouri would lose the ability to draw down $2.1 billion in federal funds for construction projects without those tax revenues or additional federal aid. Added to a loss of $530 million in state funds, the state wouldn’t be able to award $2.6 billion of the $4.9 billion in construction projects it planned through 2025. “To put this into perspective, that would equate to approximately 400 bridges and 20,000 lane miles of Missouri roadways NOT being repaired that are in our current plan.” 

The North Carolina Department of Transportation says that the traffic volume falloff is projected to cause at least a $300 million budget shortfall for the agency in its current fiscal year, which ends June 30. The Washington State Department of Transportation expects a loss of revenue of as much as $100 million per month; approximately 38 % of its average monthly transportation revenue collections.

The City of San Francisco has shown how the pandemic and its demands on resources can and will alter normal operational practices. As a result of the pandemic, SF will present and consider a balanced interim budget before July 1. A full budget will not be presented until August 1 and that budget will be considered over a period not to go beyond October 1. The August plan will cover the two fiscal year period ending June 30, 2021. The City entered the pandemic with reserve of some $740 million but these will quickly be absorbed by the to date impacts on the local economy and tax base for the tourism dependent city. The city estimates that tax revenues will experience a negative imp[act relative to budgeted amounts of between $225 and $575 million depending on the exact timing and magnitude of any economic recovery.

The City’s disclosure – something for which they deserve real credit – highlights another problem facing government at all levels. That is pensions. We have written about the country’s public pension problem and its has been at the center of general obligation analysis for some time. The City points out the problem faced by so many pension funds face. The plan assumes an annual rate of return of 7.4% on its pension investments. Through February, the city’s return was 3%. That was before the equity markets got crushed. Where similar experiences occur and they will,  the low returns will require higher current funding to maintain efforts to more fully fund pensions.

The phenomenon is clear across the country. This is not the fault of the pensioners. It isn’t really the fault of fund managers. It’s a black swan event that nonetheless has done some real damage. The language coming out of the President and the Senate Majority Leader casting the present situation confronting their states as something to assign fault about is not helpful. It only obscures the lack of understanding the Administration and its Congressional allies have of basic tenets of municipal finance and credit. The casting of the current situation in partisan terms only weakens the ability of the federal government to respond constructively.

I would be remiss if I did not reference the news that the Department of Health and Human Services, in its haste to get money out, distributed grants of some $50 billion to closed hospitals. The distribution relied on Medicare reimbursement data for fiscal 2019 which ended on September 30. ” If an institution is closed and their bank account is also closed, the funds are automatically returned,” a HHS spokesperson said. The glass is apparently half full.

TECHNOLOGICAL CHANGE AND THE PANDEMIC

Two items caught our eye this week as the longer term impacts of the pandemic begin to emerge. They have real implications on the process of deciding if and how to develop public infrastructure in an era of technological change. The first was the announcement that Ford Motor Co. was stepping back from its relationship with electric vehicle developer Rivian. Ford had invested $500 million in Rivian which was helping to develop an electric Lincoln model. Ford said it is still making preparations to launch the Mustang Mach-E, a flagship electric vehicle. Nevertheless, the economic decline in the first half of this year has and will damage the environment for new vehicle development.

The second comes in a series of regulatory filings from the state’s major utilities, electric automakers, EV charging providers and New York City’s transit agency. The state’s Department of Public Service in January, released a plan which would put utilities in charge of identifying the best sites for building new chargers and upgrading nearby grid infrastructure. Most of the costs associated with the preparations, meanwhile, would be covered by new incentives. Currently, the state is providing $580 million in incentives for such development. In light of the economy, these entities are looking for more from a state which finds itself in a serious financial crunch of its own. The six New York power utilities in a joint filing said that the charger plan’s incentives should be expanded to cover 100% of the costs associated with preparing the grid to accommodate the new stations. 

The state committed in 2013 to registering 850,000 electric cars by 2025 — up from fewer than 50,000 at present. By midcentury, the state wants to phase out gas car sales entirely. Transit agencies also have new mandates for converting buses and fleet vehicles to electric models. By 2025, five county agencies in upstate and suburban New York must electrify a quarter of their fleet and finish that conversion by 2035, in accordance with an executive order by the governor in January. New York City’s buses are slated to go all-electric five years later.

This just one example of why it might have been good that municipalities  did not run headlong into massive adoption of tech based infrastructure. We are seeing increasing examples of companies pulling back from office based models to integrated models of employment with a heavy emphasis on telecommuting. Some of the recent redundancy announcements have been accompanied by the closing of physical locations. The whole system of transit as a way to deliver workers to businesses is being reexamined. These issues will generate real demand (rather than anticipated) for infrastructure which can then be sized and funded appropriately.

NECESITY AS THE MOTHER OF INVENTION

All across the country, the closure of schools and a shift to online learning highlighted a topic on which we have written much – the availability of rural internet service. The phenomenon has generated a variety of responses. It’s not just about the availability of hardware to students in poorer rural areas but also about the lack of access to a viable internet service provider (ISP). Now we see that the realities of the pandemic are leading some entities – primarily school districts – to take on the role of ISP for their students.

The Visalia Unified School District in Tulare County, CA has announced that over the next three months, it will begin to install antennas at seven Visalia-area schools. The project is expected to provide 91% of the district with WiFi access. Countywide, 45% of households don’t have a broadband internet subscription — among the highest in the entire state — according to a 2019 Public Policy Institute of California report. The District estimates that about a quarter of VUSD students don’t have internet service or don’t have a high-speed connection required by many learning programs. The project has an estimated cost of $700,000, over half of which will be covered through emergency dollars the state has distributed to all California districts. VUSD received $466,000 which will be applied toward the ISP project.

The Tulare County Office of Education has already secured a frequency from the Federal Communications Commission to make high-speed internet a reality for all Tulare County students by this fall.

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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MCCONNELL ADVOCATES FOR STATE BANKRUPTCIES

The pandemic has clearly generated significant pressure on state and local government finances and it has been clear that some level of direct financial aid would be necessary to provide operating assistance to these entities. Such aid would enable governments to confront their responsibilities in response to the pandemic and shoulder the additional responsibilities which the President has made clear he believes are theirs.

It would reduce pressure on them to borrow for operations and it would help to avoid layoffs which would ultimately impact basic government services especially in the area of public safety. It would also reduce the number of people on unemployment. The arguments in favor of aid parallel many of the justifications for the PPP packages passed by Congress. Even President Trump has “promised” that another stimulus (round 4 or 5 but who’s counting) would contain aid to the state and local governments to fight the pandemic.

So it was especially disconcerting to see Senate Majority leader McConnell take the position that states should consider bankruptcy. It was especially disappointing to see the Leader link his opposition to aid to his belief that the states would use the money for pension funding and that aid in this time would be a political bailout. The flaws in his argument should be pretty clear but they should be examined nonetheless.

The Depression was the last time that state and local governments were under the kind of fiscal pressure currently confronting states and municipalities. While Arkansas managed to be the only state to default on its debt, Congress was asked to confront the potential for others to default. As it reexamined the federal bankruptcy laws it made the conscious decision not to provide the states with the ability to declare bankruptcy under Chapter 9. That has served as one of the foundational pillars upon which the municipal bond market has existed. It is at the core of the general obligation pledge by states.

Clearly the pressures of the pandemic and the pressure on Congress to act to offset the poor federal response to the pandemic have clouded the leaders thinking. The potential for damage to municipal bond investors is incalculable. But the real motive may be antipathy to government and its employees, especially those who are unionized. The Leader mentioned unions the source of the problem while ignoring the role of legislators in the historic underfunding of pension obligations. This despite the fact that the negotiated pension benefits granted to employees reflected two sided negotiations (any negotiation requires at least two parities to be involved). It is also pretty rich to hear the Senator from Kentucky – historically one of the worst states in terms of underfunding its pensions- blast irresponsible pension funding decisions. It also reflects a lack of knowledge on the Leader’s part. Pensioners have been treated fairly well in recent bankruptcies (at least in relation to bondholders and other creditors) so there is nothing to indicate that other bankruptcies would yield a different result.

He seems to think that residents of jurisdictions where they have gone through bankruptcy or other significant restructuring processes are somehow better off for having gone through the process. Whether it be bankruptcy or supervised restructuring (Philadelphia, New York, and Washington, DC come to mind – those experiences led to wrenching choices between priorities like public education versus public safety which had long term negative implications for the residents of those entities. It can be argued that the NYC school system never recovered from the cuts made during the City’s road back from its 1975 financial crisis.

Ironically, one of the states which arguably needs the most aid is New York and its pension system is one of the better funded systems in the country. It can be argued that steps taken over the years including the creation of multiple different tiers of pension benefits actually acts as a model for others to follow. Pensions per se are not New York’s problem. Right now, the problem is the fiscal damage ensuing from the shutdown of the economy which accounts for some 10% of national GDP. Bankruptcy will not change that.

RATINGS FOLLOWING THE MONEY

The Atlanta & Fulton County Recreation Authority issues debt secured by a first lien on a 3% rental car tax collected in Atlanta and College Park. Moody’s has assessed the likelihood that car rental tax revenues will suffer an immediate and substantial drop from a coronavirus-induced slowdown. The slowdown has the potential to cause some tax revenue tied to hospitality and travel-related activity to decline by up to 85% through mid-summer, potentially driving debt service coverage down significantly. As a result, it has placed the Authority’s Aa3 and A1 ratings on review for downgrade.

Last week we noted estimates from the City of Los Angeles Controller regarding potential impacts on the city’s major revenue sources. The information was enough for Moody’s to change its view of the city’s likely revenue and reserve trajectory. The prior expectation was for continued revenue growth and increasing reserves over our 18-24 month outlook horizon. Such near-term improvement is no longer probable in the current economic environment, even if the coronavirus downturn proves short and the recovery relatively rapid.

Another sector potentially under pressure is the retail and recreation/entertainment space. Moody’s has downgraded the Syracuse Industrial Development Agency, NY’s (SIDA) Carousel Center Project, PILOT Revenue Bonds to Ba3 from Ba2 and placed the ratings on review for downgrade. The downgrade and review follow the transfer of the subordinate $300 million CMBS loan to special servicing owing to the unprecedented circumstances related to the coronavirus outbreak that resulted in Governor Cuomo issuing a statewide executive order to close all malls on March 18, 2020. Deals like this one which count on outside sources of funding and liquidity from developers find themselves impacted by the nationwide pressure on the mall space as essentially all of these facilities operate under some form of restriction related to the coronavirus.

While actual downgrades await further information in terms of likely schedules for resumption of operations, airport rating outlooks continue to be reduced even if it is from positive to stable. Airport revenue credits have been impacted in that way across the board including Salt Lake City, Denver, San Francisco, and Miami.

PANDEMIC AND CREDIT

We think that when we try to project where the credit environment will be going forward post-pandemic, it is important to distinguish between the current trends as opposed to the actual longer term trends which will follow the pandemic. We are seeing a lot of speculation about the post-pandemic model for cities and what this implies for capital investment and public goods. The current stay at home environment is generating lots of views advocating for controversial approaches to things like healthcare, transportation, housing, and education. Once the pandemic is dealt with – however long it takes – life will begin to reestablish itself. It is important to remember that the current state of affairs is not sustainable long term.

Given that context, we nevertheless believe that some sectors deserve increased scrutiny. The most obvious would be credits dependent upon the retail sector. The role of retail shopping malls as the anchors and main draws at those malls is in the spotlight. The stay at home closings have seriously damaged an industry which was under enormous stress even without the pandemic. The demise of Sears/KMart was a canary in the coal mine for what could happened to poorly structured retail entities in the event of real economic stress. Now, the remaining anchor store players are all facing unprecedented pressure.

Recent press reports highlight the potential bankruptcy of Neiman Marcus and the entry into restructuring talks between J.C. Penney and its lenders. Macy’s said on March 30 that after closing its stores for nearly two weeks, it had lost the majority of its sales. With these entities seeking to cancel orders, refusing acceptance of goods at warehouses,  and extending repayments periods the potential impact on rents and cash flows to mall operators is significant. The negative impact on direct payments as well as taxes generated by retail activity will drive investors to want to know much more detail on the security mechanisms behind each issue.

In the healthcare sector, we see short term impacts on revenues due to the lack of elective surgeries and other services held down by stay at home orders. As always seems to be the case, rural hospitals with weaker and less liquid balance sheets are in the crosshairs of this event. That is not to understate the damage being done to hospital finances as we write. Hospitals will be at the center of the ongoing response to the pandemic going forward as there will still be a need for more than usual acute care (costly and poorly reimbursed by government providers) and the most impacted facilities  serve areas which economically and demographically will remain susceptible to the pandemic especially in a second wave.

Hospitals are not waiting for federal action. The latest example is Henry Ford Health which is serving patients in one of the nation’s hotspots, Detroit. The system has announced that it will furlough 2,800 employees or 9% of its 31,600 workers across its five hospitals to meet hundreds of millions of dollars in incurred and expected budget losses. The hospital system had a $43 million loss in operating income in March due to site closures, increased personal protective equipment costs and the cancellation of elective procedures.  The losses for April and May are expected to be larger. It’s the latest example of a clear trend for healthcare employment. Health care employment declined by 43,000, with job losses in offices of dentists (-17,000), offices of physicians (-12,000), and offices of other health care practitioners (-7,000). Over the prior 12 months, health care employment had grown by 374,000.

The housing sector provides some unique challenges. The pandemic has shined a brighter light on the realities of housing and its relationship to economics. In all of the nation’s largest cities, housing is a contentious issue. The cost of housing drives decisions regarding where one lives, what quality of life it affords, and what sort of employment will allow one to satisfy their needs. The pandemic has served as a vehicle to question so many of the assumptions behind how business are constructed and operated, why they have the office structures that they do and are all of those buildings  necessary? Existing general assumptions have supported greater density especially around transit facilities, the need for huge headquarter spaces and ways to get employees there, and a movement to effectively end single family zoning restrictions on development.

If we move to a model where the majority of “white collar” work is done remotely, that has likely negative implications for local tax bases. It would create much more freedom in terms of where and why people locate. More outdoor space or one’s own space might be more attractive than a Starbucks on every block and a walk to work. It will exacerbate the need for affordable housing. That will force municipalities to rethink development and permitting policies. The pandemic has exposed the need for affordable housing near places of employment and service as many of the currently classified as “essential” workers are also among the lowest paid. They rely on public transport and often on a number of public services.

Transportation has the potential to suffer the most consequences. Already we see the various interest groups advocating for significant changes to the mass transit system in this country. We are seeing discussions about ride sharing replacing public transit which ignore studies showing that such a shift would lead to massive congestion without a significant improvement in commutes. This would exacerbate the existing congestion issues associated with ride sharing. And it ignores the realities which exist in the largest cities.

New York is not going to successfully move some 5 million people daily without a vibrant mass transit system. Streets filled with ride share vehicles and reliance on “personal mobility modalities” (scooters and the like) just are not feasible. The reliance on walking to work would have the effect of limiting distances one could live from work. This would create issues about the cost and location of housing. Those issues won’t be solved expanding sidewalks and banning cars. Other issues like fare subsidies will have to wait as the financial hit being taken by the major mass transit agency are staggering.

PUERTO RICO

In a filing submitted to the bankruptcy judge hearing Puerto Rico’s Title III proceedings, the Puerto Rico Fiscal Agency and Financial Advisory Authority said the Puerto Rico Treasury Department has estimated that in the current fiscal year the commonwealth of Puerto Rico may lose between $1.5 billion and $1.6 billion in tax revenue due to reduced economic activity associated with the island virus lockdown and the delays in tax payments. The filing was made in connection with several motions before the bankruptcy court. It was considering an Unsecured Creditors Committee challenge to the Puerto Rico plan of adjustment. The judge decided to take a two step approach towards resolving the issues before it. One part of the process would include  approving disclosure for the plan. The other step would be part of confirming the plan.

The Unsecured Creditors are challenging the plan’s treatment of pensions and general unsecured claims in two distinct classes, with very different recoveries. The current proposal would provide for retirees to receive between 92.5% and 100% of what had been promised them. As for the challengers, the plan proposes giving the general unsecured claims no more than 3.9%. The challenge is based on the theory that

both classes of creditor have equal legal claim to Puerto Rico government money and that this should result in equal treatment. The dispute highlights the emergent trend of more favorable treatment of pensioners over creditors such as bondholders.

UTILITIES UNDER PRESSURE

The National Rural Electric Cooperative Association released an estimate of the revenue impact of the pandemic on its members. While this component represents a slice of the industry, the findings of the association can be a useful indicator for what the municipal utility sector could be facing as the result of lower demand related to pandemic limits. According to the Association, the nation’s electric cooperatives could lose up to $10 billion in revenue as the economic fallout from the novel coronavirus pandemic continues to linger. The cooperatives are facing a roughly 5% drop in electricity sales, costing them $7.4 billion. They also face a potential amount of money lost from unpaid electricity bills of as much as $2.6 billion.

The study comes as major municipal utilities are coming to market and releasing estimates of the impact of the pandemic on their revenues and operations. The latest is the Sacramento Municipal Utility District (SMUD) in CA. SMUD estimates that it will see a $47 million to $68 million revenue reduction in 2020 and a 2021 revenue reduction of between $67 million and $128 million. It estimates that it may need to reduce operating expenses in 2020 by up to $40 million and by up to $100 million to meet its internal financial planning metrics.

STATES REVISE REVENUE ESTIMATES DOWN

NY State Comptroller Thomas DiNapoli estimates that the amount of overall tax receipts delayed from April to July could be as much as $9 billion to $10 billion, depending largely on how many taxpayers choose to delay their filings. While the state received almost $3.8 billion in Coronavirus Relief Fund resources earlier this month, the total amount of federal assistance available to help address cash-flow and budget-balancing needs remains to be determined. The ability of the state to fully achieve its Medicaid savings target also remains unclear.

Significant losses of State tax revenues are likely to extend into State Fiscal Year (SFY) 2021-22, and there may be further effects in the following years. There will also be upward pressure on State spending for essential services related to the ongoing public health and economic challenges. The State ended SFY 2019-20 with a higher-than-projected General Fund balance of $8.9 billion, but could face a cash crunch starting early in the new fiscal year due to the tax filing delay. On March 17th , the Office of the State Comptroller estimated that SFY 2020-21 tax revenue would be at least $4 billion and possibly more than $7 billion below the Executive Budget projection of $87.9 billion as a result of the economic impacts of the coronavirus pandemic. Economic conditions have worsened further since that date.

The State’s video-lottery terminal (VLT) facilities and commercial casinos have been closed since March 16th. Receipts from these facilities were projected at a combined $1.2 billion in SFY 2020-21. In SFY 2019-20, State revenues from casinos and VLTs averaged $95 million per month.4 In addition, the Native American casinos in the State are closed, reducing receipts from tribal-State compacts which were projected at $219 million in SFY 2020-21, including funding for local host governments. Lottery receipts including Quick Draw rely heavily on sales through retail outlets, as well as restaurants and bars. These receipts, which were projected to generate $2.5 billion for the State this year, are also likely to be affected by diminished consumer traffic in those businesses.

Federal aid has begun to flow to the State, including receipt of nearly $3.8 billion in Coronavirus Relief Fund resources on April 17th. Such funding is to be used for expenses related to the COVID-19 pandemic. in some instances, limitations on use of these resources may hamper the State’s flexibility to use the funds as a budget management tool. The State last encountered severe cash flow issues in the wake of the 2008 financial crisis. Reduced tax revenues and diminishment of the General Fund resulted in delays to required payments for school aid and other purposes, as well as other budget management actions, in 2009 and 2010.

The Delaware Economic and Financial Advisory Council on Monday lowered its revenue estimate for this year by $416 million, or 9%, compared to its March estimate. This year’s revenue total is currently predicted to be almost 6% less than the amount collected last year. The panel also lowered its revenue estimates for the fiscal year starting July 1 by $273 million, or 6%, compared to its March estimate.

HOW ONE TRANSIT AGENCY IS DEALING WITH THE REVENUE HIT

The San Francisco Municipal Transportation Agency (SFMTA) board decided this week to raise fares despite economic downturn and public criticism. Starting in July, monthly fast passes will cost an extra five dollars, bringing the total to $86 for a regular pass or $103 for a pass that allows access to BART stations in SF. Starting in 2021, the price of those passes will rise to $88 and $106 respectively.

Individual rides paid for with a Clipper card will grow more expensive as well, moving up from $2.50 now to $2.80 in July, then $2.90 next year. Cash fares will remain the same at $3. The agency argued that SFMTA must continue paying drivers and other employees a rate commensurate with the cost of living and that the only options other than raising prices would be cutting service or laying off workers. The head of the SFMTA acknowledged public comment about the price increases was overwhelmingly negative but noted that “not a single [person] suggested where we should get additional revenue” otherwise.

The SF situation could be a harbinger of things to come across the country as mass transit providers seek to address the huge loss in demand resulting from the pandemic. It will divide a more wide ranging debate about funding for mass transit. Fare hikes will fall hardest on those least positioned financially to afford them while the alternative mobility industry has yet to resolve its issues over where and who it serves customers. This will stimulate efforts to develop non-fare based funding sources and to subsidize fares for low income riders. All of this will have yet to be determined impacts on transit system backed credits.

CORNHUSKER TUITION PROGRAM

The cost of attending college has been at the forefront of political debate with various  proposals being offered for federal programs to offer low or free tuition. While the debate goes on and a resolution awaits the results of the 2020 elections, states have been moving forward with their own plans. States are uniquely positioned to do so through their roles as funders and operators of institutions of higher education.

The latest state to offer a tuition benefit to lower income students is Nebraska. The University of Nebraska announced that it will offer free tuition to in-state undergraduate students whose families earn less than $60,000 a year. The program will be known as Nebraska Promise. It will begin this coming fall. To be eligible, students must take a minimum of 12 credit hours per semester and maintain a 2.5 GPA. The university will cover up to 30 credits in an academic year. 

The program will include all four of the state’s four year campuses and includes nursing school at the University of Nebraska Medical Center campus. It does not cover room and board but it does at least address tuition. It is impressive in that the announcement of the program follows university officials forecast of a shortfall of at least $50 million this fiscal year because of the coronavirus pandemic. Officials attributed the shortfall to housing refunds, event cancellations, medical costs and other factors.

There are fiscal implications as the University is seeking to fund the program out of its existing budget. That will undoubtedly lead to some level of program cuts. The pressure is limited by the projected limited increased demand. Nebraska Promise would cover about 1,000 additional current and future NU students, officials said. With the announcement, Nebraska becomes the 18th state to offer some form of tuition free college.

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

Joseph Krist

Publisher

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The President has effectively announced game on in the effort to reopen the country. By adopting state by state approach, the reopening process will effectively create 50 state laboratories in terms of how this will work and what the impact on states will be a some try to reopen as fast as they can and others take a more measured approach. What will be most interesting is to see how it all unfolds. If early openers prove to be premature, the potential cost to those states could be significantly higher than it would otherwise be in the event of a second wave of infections. Those states could just as easily find themselves back at square one as they could find themselves able to move forward. In that event, those states would have merely increased the fiscal costs of the pandemic while doing significant additional damage to their state economies.

Whether a state opens or not, the pressure on state and local credits is only increased by the offloading of responsibility of responding to the pandemic to the states. That will exacerbate the high level of fiscal pressure on state and local government we already see. All in all, the Opening Up America plan introduced this week represents a transparent effort to shift cost down to state and local government without funding or financing support. It comes at a time of unprecedented federal hostility to local government which is unfortunately based on political interests rather than any sound public policy goals. It appears that the zombie protesters outside the state capitol in Ohio are running the show now. That is not good for munis.

BIG NAME CREDITS UNDER THE GUN

The ongoing impact of the pandemic on life as we know it continues to take its toll on some of the most widely held and best known credits. The latest example is the Port Authority of New York and New Jersey. The Port Authority generates the majority of operating income with the airports and the tolled bridges and tunnels. The Port Authority estimates it will receive approximately $435 million in federal stimulus funding under the 2020 CARES Act for its airports. It is likely that without additional outside funding that the aid will not be sufficient to cover the operating shortfall resulting from the limits on traffic. It is not clear at all whether there will be federal aid targeted at the toll facilities.

The reduced utilization does not offset the need for ongoing maintenance so that the facilities remain in good repair to accommodate a resumption of utilization. Fortunately, the PANYNJ had around $2.4 billion in the general reserve fund and around $1.6 billion in the consolidated bond reserve fund on hand at year end. Nevertheless, Moody’s has reduced its outlook for its rating on the Port’s consolidated bonds to negative to reflect ” the risk of total DSCR below Moody’s previous expectation of 1.75x and lower liquidity levels over the next 12 to 18 months. It also reflects the uncertainty around the length of governmental restrictions to contain the spread of the corona virus and the length of time before an eventual recovery of its credit metrics.”

The downgrade was followed by the Port’s own statement about current conditions. “Because approximately one third of the Port Authority’s revenues are derived from passenger tolls, fares and user fees, declining utilization has had and will continue to have a negative effect on our revenues for an indeterminate period of time. In addition, some tenants who pay rent to locate and operate at our facilities are also heavily affected by the reduced activity levels and may be unable to meet certain obligations to the Port Authority. Some have requested specific relief from contractual payment obligations.”  As of March 31, 2020, unrestricted cash and investments, including amounts in the General Reserve Fund total approximately $3.34 billion, with investments valued at market.

The other major New York credit to come under pressure is the Triborough Bridge & Tunnel Authority (TBTA). The TBTA’s facilities include: Robert F. Kennedy Bridge (formerly the Triborough Bridge), Verrazzano-Narrows Bridge, Bronx-Whitestone Bridge, Throgs Neck Bridge, Henry Hudson Bridge, Marine Parkway-Gil Hodges Memorial Bridge, Cross Bay Veterans Memorial Bridge, Hugh L. Carey Tunnel (formerly the Brooklyn-Battery Tunnel), and the Queens Midtown Tunnel. The TBTA receives its revenues from all tolls, rates, fees, charges, rents, proceeds of use and occupancy insurance on any portion of its tunnels, bridges and other facilities, including the net revenues of the Battery Parking Garage, and bridges and tunnels’ receipts from those sources. 

Moody’s reduced its outlook to negative from stable to reflect the assumption of materially lower TBTA revenues in 2020 due to the corona virus combined with ongoing credit pressure on the MTA which may materially reduce the organization’s combined liquidity. On the positive side, Moody’s estimates that ” the authority’s credit profile remains strong and could withstand approximately a 40% reduction in operating revenues in FY 2020 while maintaining its ability to pay debt service without liquidity support.”

It’s likely that we will see additional outlook adjustments and downgrades in the transportation sector. The Illinois tollway says passenger volume is down 55% since the stay-at-home order went into effect March 20.

THE PRESS AND MUNICIPAL CREDIT

This week the New York Times ran a story under the headline “Plunge in Convention Hotel Travel Puts Municipal Bonds at Risk”.  The story focused on convention center hotels, a sector which has experienced significant fluctuations in the perception of their credits. The sector emerged coincident with the widespread growth of high yield municipal bond funds. Unfortunately, the article was written from the operator and developer perspective so it was not particularly enlightening about municipal bonds.

Weeks ago, we flagged bonds whose credit relied on taxes and/or revenues to pay off the associated bonds as an area of concern. That was the case regardless of whether or not, there was a pledge of general municipal revenues. The article expressed the correct concern that reduced occupancy and reduced sales tax revenues were bad for these credits. The implication was that cities would be forced to expend general fund monies to support shortfalls in revenues available for debt service. What the story missed was that municipalities support these projects in a variety of ways and that the requirement to pay in the event of shortfalls is often far from a certainty.

Take Baltimore which supported the development of a 750 room hotel adjacent to its Convention Center. In this case, the city support includes the site-specific hotel occupancy tax (HOT) collected at the property and the ability to use up to $7 million of city-wide HOT that must be appropriated from the city’s budget annually, if needed. Yes, that money could have eventually made its way to the City’s general fund but the upfront pledge identifies this as a source of dedicated revenue. That’s a far cry from a city guarantee.

In the case of the Denver Convention Center financing, the City’s obligations are more definitively enumerated including its ability to use any general revenues it chooses. While still subject to annual appropriation, the more explicit language in the security for the bonds makes a better case for the City to be seen as supporting the bonds. In either case, the need for the project to succeed is basic to the security and ratings.

There is of course the issue of whether these concepts have been tested. In one of the better known high yield bond hotel defaults, investors counted on an annual appropriation mechanism to require the Village of Lombard, IL to make up project revenue shortfalls. Unfortunately for investors, the Village declined to make the appropriations when requested and debt service payments were missed. So much for precedent.

My point is that the major media outlets do such a poor job of covering our market. Granted that many of the issues which impact our market are nuanced but the inability of the press to figure it out with some help from people who know has long been disappointing. If you are on the retail distribution side of the business, these headlines just generate a lot of unnecessary angst that you have to deal with.

DATA BEGINS TO EMERGE

We’re seeing the expected press accounts of the fears over the impact of the pandemic on government finances. But it’s all about fear with little information. Now hopefully, the information void will start to fill. A recent report from NYC’s Independent Budget Office (IBO) is one of the first efforts at estimating the impact that we have seen.

IBO has constructed a pared-down economic forecast for NYC, premised on an assumption that the local economy will shed roughly 475,000 jobs over the 12 months spanning the second quarter of calendar year 2020 through the first quarter of 2021. The local economy gradually begins to add jobs starting in the second quarter, with job growth remaining slow through the end of 2022. IBO “constructed a pared-down economic forecast, premised on an assumption that the local economy will shed roughly 475,000 jobs over the 12 months spanning the second quarter of calendar year 2020 through the first quarter of 2021. The local economy gradually begins to add jobs starting in the second quarter, with job growth remaining slow through the end of 2022.

IBO notes that its estimates are based on a forecast of the U.S. economy in recession for the first three quarters of calendar year 2020, with real gross domestic product (GDP) falling by about 4.5 percent for the year as a whole. This compares with our January baseline forecast of 1.8 percent output growth in 2020. The report notes that the city’s economy relies heavily on industries that have been largely shut down in order to limit the spread of the corona virus. These include the retail, transportation, tourism, leisure, and entertainment industries. It estimates retail employment will fall by 100,000 starting in the second quarter of calendar year 2020 (a loss of 60,000 jobs is expected in this quarter alone), with loses continuing through the first quarter of 2021. Over the same period, we project a loss of 86,000 jobs in hotels and restaurants along with a combined loss of 26,000 jobs in the arts, entertainment, and recreation industries.

It is also unsurprising that retail employment will fall by 100,000 starting in the second quarter of calendar year 2020 (a loss of 60,000 jobs is expected in this quarter alone), with loses continuing through the first quarter of 2021. Over the same period, we project a loss of 86,000 jobs in hotels and restaurants along with a combined loss of 26,000 jobs in the arts, entertainment, and recreation industries.

And now for the bad news on taxes. Prior to the shutdowns, leisure and hospitality, which includes sports and entertainment, accommodations, and bars and restaurants, accounted for 21.6 percent of all sales subject to the sales tax, while retail other than food, groceries, and alcohol added another 28.5 percent. The estimate is that sales tax revenue would fall short of IBO’s January baseline forecast by $1.1 billion (-13.1 percent) in 2020 and $3.1 billion (-36.4 percent) in 2021.

Sales tax revenue would fall short of IBO’s January baseline forecast by $1.1 billion (-13.1 percent) in 2020 and $3.1 billion (-36.4 percent) in 2021. The city’s separate tax on hotel occupancy is expected that this revenue would drop by $127 million (-19.8 percent) below IBO’s January baseline forecast for 2020 and $530 million (-82.0 percent) lower in 2021, when the number of nightly room rentals will be less than half the number it projected in January. As for business taxes, revenue from the general corporation tax (GCT) would fall $724 million (-17.9 percent) below IBO’s January baseline forecast for 2021, and $521 million (-12.5 percent) below in 2022. The unincorporated business tax, which is paid by partnerships and proprietorships, would fall short of the baseline by $406 million (-19.6 percent) in 2021 and $292 million (-13.5 percent) in 2022.

Property related tax impacts will occur over time but they will be real. There will of course be delinquencies in the payment of property taxes but the hit on valuations is, by virtue of the city’s property tax rules, an impact that will be phased in over five years. Of more concern is the impact on real estate sales related taxes. transfer tax revenue is expected to fall short of the forecasts in our January baseline by $168 million (-12.2%) in 2020, $344 million (-24.0 %) in 2021, and $122 million (-8.2 %) in 2022. For the mortgage tax, the shortfalls relative to our January baseline would be $69 million (-6.5 %), $112 million (-10.7%), and $87 million (-8.4 %) in 2020, 2021, and 2022, respectively.

The projected shortfalls would leave the city with essentially no growth in tax revenue for 2020 and a 4.2 percent decline in tax revenue for 2021 compared with 2020. Excluding the real property tax with its built-in stability, year-over-year declines in tax revenues would be 6.4 % in 2020 and 12.0 % in 2021. The City has not seen revenue impacts like this since the 1970’s. Excluding the real property tax with its built-in stability, year-over-year declines in tax revenues would be 6.4 % in 2020 and 12.0 % in 2021.

CITY BUDGETS REACT TO VIRUS REALITIES

As the IBO released its estimates, the Mayor released his Executive Budget. The Executive Budget Forecast has reduced tax revenue by 3.5% in FY20, or $2.2 billion, and 8.3% in FY21, or $5.2 billion compared to the Preliminary January Plan Budget. Losses in both years are primarily related to a decline in the Sales and Hotel Tax, Personal Income Tax, and Business Taxes, all due to the COVID-19 pandemic. In order to balance the budget while prioritizing health care, safety, shelter and food needs, the Administration has achieved savings of  $2.7 billion across FY20 and FY21. This includes PEG savings of $2.1 billion ($600 million recurring annually) and $550 million in Citywide savings ($220 million recurring annually). The reductions in the assumptions are substantial but the drops in revenue are less than those projected by IBO.

City of Los Angeles Controller Ron Galperin has revised the current fiscal year’s General Fund revenue estimate downward by $231 million due to fallout from the corona virus. This represents a 3.54 % decrease from the previous March 1 estimate and well below the amount budgeted for the year. For fiscal year 2021, he now estimates a decline in projected General Fund revenues of between $194 million and $598 million, depending on the length of the current shutdown and the speed at which the economy begins to recover.

The largest sources of the decrease this fiscal year are Transient Occupancy Tax (TOT) and Licenses, Permits, Fees and Fines (LPFF), which together are reduced by $110 million, as the travel and tourism industry has fallen by more than 70% and City office operations have been largely closed during the crisis. Revenues reflecting economic activity, such as Business Tax and Sales Tax, also are projected lower, but not to the same degree because both are lagging indicators that will be impacted much more heavily in the coming year.

BUT WILL IT BE ENOUGH?

Even the significant adjustments which will flow from expected revenue trends may not be enough as the outlook for the national economy for the near term is not good, at least as reflected in the April Beige Book from the Fed. A few items summarize what faces tax collectors and budgeters. All Districts reported highly uncertain outlooks among business contacts, with most expecting conditions to worsen in the next several months. No District reported upward wage pressures. Most cited general wage softening and salary cuts except for high-demand sectors such as grocery stores that were awarding temporary “hardship” or “appreciation” pay increases.

Manufacturing activity contracted sharply, and energy and agricultural sectors deteriorated as commodity prices fell sharply. Employment levels fell slightly, but layoffs accelerated late in the month. All of that spells real impacts on taxable income for FY 20 through FY 22. On the current side, estimates of U.S. retail and food services sales for March 2020, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $483.1 billion, a decrease of 8.7% (±0.4%) from the previous month, and 6.2% (±0.7%) below March 2019. And that is only March.

HIGH YIELD’S SPECIAL EXPOSURE TO STAY AT HOME ORDERS

It is likely that the high yield sector will begin to see the impact of the corona virus pandemic on many of the credits at its center. Senior living facilities, niche manufacturing facilities, charter schools, hotels are just a few of the sectors with near and long term vulnerabilities.

It would be a shock if there were not a slew of technical defaults from obligors supporting bonds issued for these facilities. In the short term, senior living will face the specter of patients seeking to leave in response to concerns from patients and their families as these centers have been particularly hit by the pandemic. Many of the outstanding hotel transactions are directly impacted by cancellations thereby hurting cash flows for dent service. It will be more difficult for these credits to meet indenture requirements for annual debt service coverage.

We are starting to see the first notices of actual or potential technical defaults as individual facilities are unable to operate and generate revenues. These also include manufacturing facilities which support bonds from project revenues alone. In some cases, a deep pocketed parent company could choose to step into the breach but this is an international pandemic and those entities have issues of their own in their home countries. In other cases, reserve funds will buy some time but not more than a year. This is the situation many toll and fare based credits find themselves in.

Many stand alone project financings sold to the high yield funds do not have significant excess revenues or reserves, especially those reliant on current economic activity. So it is incumbent on investors to know what they own. Unfortunately, we see this pattern repeated through every down credit cycle. It happened when bond insurers were downgraded as a result of the financial crisis in 2008. Suddenly, the nature of underlying credits mattered. It happened when Puerto Rico defaulted and fund owners suddenly found out how much of their state specific municipal fund was actually in Puerto Rico paper. Now, investors need to find out how the bonds they own (either directly or through a fund) are secured to assess how much risk they face.

COAL GENERATION FACES ANOTHER HIT

The Scherer generation facility in Georgia is a four unit facility which is the nation’s largest coal generation facility. Various shares of the plant are owned by Georgia Power, Florida Power and light, and municipal utilities including Oglethorpe Power Corp., the Municipal Electric Authority of Georgia, the Jacksonville Electric Authority and Dalton Utilities. As the industry shifts in response to the changing and declining economics of coal fired generation, at least one of the major owners is rethinking their ownership in the plant.

Florida Power & Light Co. submitted its ten year resource plan to regulators in Florida and the plan calls for FP&L FPL owns 76% of Unit 4 at Plant Scherer, and Jacksonville, Fla.’s electric company, JEA, owns the remaining share. It also wants to shutter another 330 MW coal plant and two old natural gas fired generators. The plan to divest itself of the plant is consistent with the plans of its parent, NextEra Energy Inc., which owns the world’s largest renewable energy developer, NextEra Energy Resources.

the plan to divest adds to the troubles of Jacksonville Electric Authority which is facing a management and leadership vacuum after a disastrous effort to privatize the utility. The Authority is already under federal investigation over that issue and the plan by FP&L puts further pressure on JEA as it tries to move on from the privatization effort. It highlights the management hole at JEA which could not come at a worse time as the utility deals with lower demand from virus mitigation efforts as well as the pressure all utilities are under from their role as massive carbon producers.

The move by FP&L could cause it to sell its portion of Unit 4 or work with JEA on an agreement to close the unit. The proposed divestiture comes at an awkward time for JEA as it is in the midst of a dispute with MEAG over its participation in the ill-fated nuclear expansion at Plant Votgle in Georgia. With coal on the decline and the effort to develop new carbon neutral generation facing daunting odds of completion, JEA finds itself between a rock and a hard place. None of this is good for the JEA credit.

SANTEE COOPER IN A NEGATIVE SPOTLIGHT

Lots is being said about the need to unite, focus on the economy and on stopping the corona virus. That has not stopped politics from interfering in the resolution of some other big topics at least in South Carolina. Those political disputes have held up a resolution of the process of the state legislature in determining the future ownership and operation of the South Carolina Public Service Authority (Santee Cooper).

The situation with Santee Cooper resulting from its ill-fated decision to participate in the construction of an expansion of the Sumner nuclear generating plant has been documented here. The resulting financial impact on Santee Cooper and its ratepayers from the participation in the Sumner expansion has led to calls for the divestment of the utility by the state or the establishment of new controls and procedures to increase outside oversight of the utility.

Now the debate over the future of Santee Cooper is holding up enactment of a state budget. A bill to allow state government to keep spending included a section to extend the law allowing the state to sell or reform Santee Cooper into 2021. House leaders said Senate leaders agreed to a provision preventing Santee Cooper from entering into any contracts over a year in length. At the last minute, several senators opposed the bill to allow the state to keep spending money if it doesn’t pass a budget by the end of June because of the restrictions on state-owned utility Santee Cooper in it.

Santee Cooper has not helped its cause by managing its messaging to its customers and the political establishment in a less than artful manner. It has been caught misrepresenting the position of its members which has cost the agency the support of the Governor and the House leadership. One of the agency’s long term strengths had been its support over the years from the state’s political establishment. The legislature has one month to figure out what to do with Santee Cooper. The failure of negotiations over Santee Cooper meant the House and Senate also couldn’t reach an agreement to set the parameters of any special session needed after the May 14 deadline in the state constitution for the session to end.

All of this leaves the agency’s bondholders in the air. The lack of consensus in the legislature casts a huge cloud over the agency and its ability to manage and operate. The debate does not seem to be leading to any plan to deal with the approximately $4 billion of stranded costs for Santee Cooper resulting from the Sumner debacle. Now the pandemic is impacting electricity demand especially from the commercial and industrial load customers. We would not be surprised by another downgrade for the once proud utility.

CALIFORNIA POWER AGENCIES

There has been so much focus on the ongoing bankruptcy of Pacific Gas and electric that it is easy to overlook the status of major municipal power providers in the state. They also have exposure to wildfire risk in terms of their role as major distributors and generators of electric power. So we looked with interest at upcoming financings for two of those entities; the L.A. Department of Water and Power (LADWP) and the Southern California Public Power Agency (SCPPA). We especially focused on the issue of wildfires and potential liability.

LADWP is currently in litigation related to the cause of the December 2017, 15,000+ acre Sylmar Creek Fire where LADWP’s investigation concluded that LADWP’s equipment did not cause or contribute to the fire ignition. In October 2019, the 745-acre Getty Fire resulted in 10 residences being destroyed and another 15 damaged. This fire began in LADWP’s service territory from a tree branch from over 30 feet away landing on one of LADWP’s power lines due to high wind conditions. LADWP may be liable for damaged property.

On the other side of the coin, LA exceeds the state’s standards related to the spacing between its transmission lines and has implemented other fire mitigation programs including the replacement of the distribution power lines’ cross bars with composite or steel material, as well as an active vegetation, brush and tree management program. LADWP can raise its rates through its Energy Cost pass through rates within 90 days without City Council approval if LADWP needs emergency recovery of any unexpected high costs or to replenish any depleted liquidity that was used during a potential short-term shock. This rate making structure provides additional and more certain support not available to the investor owned utilities .

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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Once again, government and its means of funding and financing public services is at the forefront of the response to the corona virus pandemic. Initially, attention will focus on the near term pressure on municipal finances – lower revenues and high immediate expense requirements. Longer term, state and local governments will be at the center of any recovery through their ability to regulate activity and tax and spend. The impacts of the pandemic on economic activity, on service needs and demands will serve as the basis for debate going forward over the role of government and the nature of its responsibilities. This reflects the stark divide which has emerged between haves and have nots.

The experiences resulting from the pandemic and its impact are likely to fundamentally alter the debate over the real role of government. We believe that the trend over the last 40 years shifting the responsibility for the provision of  services from the public to the private sector will be reexamined. Many of the obvious results of the pandemic in terms of its disproportionate impact on the poor can be best dealt with by government. One example is the education system. The reality is that schools are about much more than education – they are the center for programs enabling two parents in a family to working an economy which often requires that to be the case through its early morning and after school programs. The school system is the main vehicle for nutrition supporting poor communities. It is also likely to be the main source of healthcare services to poor children.

The health system will come under scrutiny. Lower income citizens tend to have poorer health and a lack of access to reasonable healthcare. we would not be surprised to see pressure grow for school based primary healthcare for children. The prevalence of serious ongoing health conditions in poor communities explains the disproportionate impact of the virus on those demographic cohorts. Part of the problem is that the increasing emphasis on private rather than public healthcare is not supported by a funding mechanism which supports institutions providing lower profit primary care to economically disadvantaged populations.

These issues would, in a logical world, lead to a reevaluation of the anti tax starve the beast mentality which has driven much of our politics and public policy over the last 40 years. It would examine the increasing reliance on individual taxation versus corporate taxation and it would consider the virtues of graduated rather than flat rate income tax schemes. It would shift away from property taxes as the primary source of school funding.

The pandemic has also highlighted the unpleasant reality that transit policies over the last decade have not reflected the interests of all demographic groups. The micromobility industry simply does not address the needs of all segments of society. The scooter and bike crowd remains primarily white, younger, and male. They live certain places and in certain ways which do not reflect the realities of poorer residents. You need access to the internet to remote learn, to communicate, to access goods and services, to bank. The lack of internet and broadband services has made the divide between rich and poor even greater.

The municipal market will have to deal with much of this. It will require analysts to put some of their own political and philosophical beliefs aside as they evaluate municipal credit in light of new circumstances. Not all private or business based approaches will be appropriate. In sectors like healthcare, student housing, transportation, and education, we are likely to see a new appreciation for the benefits of strong public education, heath, and transportation systems We need to remember the role that government services played in helping people manage the pandemic and its economic impacts.

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MTA BY THE NUMBERS

We are finally getting to see some real data on the impact of the corona virus pandemic on mass transit. The NYC Independent Budget Office has released some telling data.
Subway ridership was 32.2 million for the week ending February 28, 2020, two days before the first confirmed case of the Covid-19 virus in New York City. Ridership fell in every subsequent week, with the week ending March 27 serving only 4.6 million riders, a decrease of 86 percent from ridership levels seen four weeks earlier.

How does that translate to the revenue side of the ledger? Accompanying the drop in ridership is a reduction in fare revenue that IBO estimates will ultimately result in a decline of $970 million (21 percent) in NYC Transit subway and bus revenue in the current calendar year. This compared with fare revenue forecast by the transportation authority only a few weeks before in its February 2020 financial plan. IBO’s estimate assumes that most riders with 7-day and 30-day unlimited passes do not immediately renew when current passes expire, and that ridership remains depressed through early May and then creeps upwards again through mid-June, stabilizing at around 25 million weekly riders.

The wide ranging impact of the revenues generated by the MTA from all of its facilities is evident in the IBO comments. IBO notes that in addition to subway and bus fare revenue, the Metropolitan Transportation Authority uses the surplus toll revenue that remains after covering bridge and tunnel expenses to fund mass transit. That support exceeded $1.1 billion in 2019. The transportation authority has included a toll increase for 2021 in its latest financial plan. That will not help the current situation as toll revenue in 2020 is likely to take a major hit in the wake of the current shutdown.

It’s not just pure “transit” revenues which flow through to the MTA. The economic shutdown will have wide ranging effects as other revenues dedicated to transit, including taxes on real estate transactions and mortgage activity, a portion of the sales tax, and many other taxes and fees, will decline in response to the contraction of economic activity. Anticipating a financial shortfall, the Metropolitan Transportation Authority requested some $4 billion from Washington and is set to receive $3.8 billion from the recent federal aid package. IBO estimates that the $3.8 billion is equivalent to around 22 % of the transportation authority’s total operating budget (including debt service) projected for 2020.

The MTA is representative of many large urban transit systems which face significant declines in ridership. Cutbacks in service have occurred at all of the major systems especially those with subways.

REAL TIMETABLES FOR THE ECONOMY

The Congressional Budget Office (CBO) expects that the economy will contract sharply during the second quarter of 2020 as a result of the continued disruption of commerce stemming from the spread of the novel corona virus. Gross domestic product is expected to decline by more than 7% during the second quarter. If that happened, the decline in the annualized growth rate reported by the Bureau of Economic Analysis would be about four times larger and would exceed 28 percent. Those declines could be much larger, however.

The unemployment rate is expected to exceed 10% during the second quarter, in part reflecting the 3.3 million new unemployment insurance claims reported on March 26 and the 6.6 million new claims reported this morning. (The number of new claims was about 10 times larger this morning than it had been in any single week during the recession from 2007 to 2009). The analysis incorporated an expectation that the current extent of social distancing across the country would continue—on average, and with local variation—for the next three months. 

CITIES TAKE STEPS TO ADJUST TO LOWER REVENUE

One of the cities in the US which is quite dependent on tourism and recreation is San Diego, CA. The City has estimated that the pandemic would cost San Diego about $109 million: $83 million in lost hotel tax revenue and $26 million in lost sales tax revenue. To deal with the decline in tax revenues the City has furloughed some 800 employees in what are deemed nonessential services during this time. Most of the employees had been working at city libraries and recreation centers before those facilities closed. Some others worked for the city’s Transportation and Stormwater Department.

The City is allowing those employees using accrued vacation time to continue to be paid and it is hoping that federal aid would come soon enough to avoid layoffs. The San Diego Union Tribune estimated that using the average salary for city workers of $70,000, one month of furloughs for 800 employees would save the city nearly $5 million. If the furloughs last through June, the city’s savings could approach $15 million.

The news comes as the City of New York announced plans to reduce expenditures by some $1.3 billion. They include education, transportation, social services and benefit programs. They reflect the fact that transit use is down that the schools are closed, and that many programs such as summer job programs may be simply not feasible to operate. Nearly 10% of the reductions will come from a public sector hiring freeze and vacancy reductions.

The City is also likely to need to access the short-term markets to borrow for liquidity. Over recent years, short term borrowing has often been viewed as a negative credit event for both states and localities. The fact is that such efforts are a logical response to exogenous events like a pandemic. The press has been casting such plans in a negative light even though short term borrowing was a regular feature of municipal financial operations for decades.  

Detroit is facing an estimated $100million shortfall in revenues as the result of its dependence on the auto industry and casinos and the shutdown of those two industries in the face of social distancing regulations. The city’s three casinos released their report on March revenue that showed a 59% drop from last year. The city gets about $600,000 daily from the casinos. That doesn’t reflect the impact of employment losses associated with those industries. Even after facilities reopen, the loss of disposable income during the pandemic will have longer lasting effects. Municipal income tax revenue is Detroit’s largest single tax revenue source at $361 million in 2019 with gambling related revenue next at $184 million .

KANSAS BROADBAND FUNDING

The availability of serious rural broadband access has been a regular subject here and in other venues for sharing my thoughts. So we were interested in recent legislation dealing with the issue in the State of Kansas.

The Eisenhower Legacy Transportation Program (Program), as its name implies, is primarily concerned with transportation infrastructure. It authorizes the Secretary of Transportation, working jointly with the Office of Broadband Development within the Department of Commerce, to make grants for construction projects that expand and improve broadband service in Kansas. The law requires grants made by the Secretary to reimburse grant recipients for up to 50% of actual construction costs in expanding and improving broadband service. It establishes the Broadband Infrastructure Construction Grant Fund, to be used to provide grants for the expansion of broadband service in Kansas subject to appropriation. 

There is some concern that the Transportation Department might not be the best place to manage and administer a broadband development plan. While the law requires each county in the state to receive $8 million annually for infrastructure, there is no requirement for allocations to broadband. The law requires the Transportation Secretary to select projects for development every two years, but does not require the Secretary to construct every project selected for development. It  authorizes the Secretary to notify the Director of Accounts and Reports to transfer all remaining and unencumbered funds from the Broadband Infrastructure Construction Grant Fund to the State Highway Fund at the end of each fiscal year.

ENERGY AND THE PANDEMIC

The U.S. Energy Information Administration’s (EIA) publishes its Short-Term Energy Outlook monthly. The latest outlook estimates the impacts of the corona virus on demand for energy from a variety of sources. The data highlights some of the issues facing municipal credits as the result of pandemic driven steep declines in demand.

EIA expects U.S. motor gasoline consumption to fall by 1.7 million b/d from the first quarter of 2020 to an average of 7.1 million b/d in the second quarter, before gradually increasing to 8.9 million b/d in the second half of the year. U.S. jet fuel consumption will fall by 0.4 million b/d from the first quarter of 2020 to average 1.2 million b/d in the second quarter. U.S. distillate fuel oil consumption would see a smaller decline, falling by 0.2 million b/d to average 3.8 million b/d over the same period. In 2020, EIA forecasts that U.S. motor gasoline consumption will average 8.4 million b/d, a decrease of 9% compared with 2019, while jet fuel and distillate fuel oil consumption will fall by 10% and 5%, respectively over the same period.

That has significant implications for tax revenues derived from the sale of fuel for cars and airplanes. Severance taxes will also take a hit as EIA forecasts U.S. crude oil production will average 11.8 million b/d in 2020, down 0.5 million b/d from 2019. In 2021, EIA expects U.S. crude production to decline further by 0.7 million b/d. If realized, the 2020 production decline would mark the first annual decline since 2016. 

EIA expects retail sales of electricity to the industrial sector will fall by 4.2% in 2020 as many factories cut back production. Forecast U.S. sales of electricity to the residential sector fall by 0.8% in 2020. EIA forecasts that total U.S. electric power sector generation will decline by 3% in 2020. The pandemic has not fundamentally altered the move away from fossil fueled generation. U.S. coal production will total 537 million short tons (MMst) in 2020, down 153 MMst (22%) from 2019. EIA forecasts that total coal consumption will decrease by 19% in 2020, driven primarily by electric power sector demand, which will fall by 107 MMst (20%) in 2020. 

TEXAS HIGH SPEED RAIL

A group of some two dozen state lawmakers in Texas have signed a letter urging the U.S. Department of Transportation to end work related to a high-speed rail project projected to connect Houston and Dallas. The line is being undertaken by Texas Central Partners, a private entity. The legislators contend that TCP “simply does not have the financial resources required or expertise employed to continue with this project.”

The project has been mired in disputes with landowners along the project’s planned right of way (ROW) over efforts to acquire land for the project. There has been much opposition from landowners in areas which will not be served by the project to efforts to employ eminent domain if necessary to acquire ROW.  The company has said it has already secured 30% of land needed for the project, including 50% of the property needed in Grimes County.

Last month, Texas Central laid off 28 employees and announced that the project would be delayed because of pandemic-related issues with its partners in Italy, Spain and Japan. It said that it would resume its efforts at land acquisition and financing “when we have our permits and the financial markets have stabilized.”

PRIVATE STUDENT HOUSING AND THE PANDEMIC

Privatized student housing was a discussion topic in the last few months as one private sponsor/operator sought to sue the University of Oklahoma when the University declined to make up shortfalls in revenues from low occupancy at a  student housing facility. A recent Boston Globe story highlighted the nature of private versus university owned housing. It makes it clear that these facilities may be built to serve universities but are not run or owned or financed by universities.

LightView Apartments is a private residential complex built on Northeastern land across from campus to house the university’s undergraduates. Monthly rents start at $1300 per person. Leases at LightView run through August on a calendar, not the academic year, basis. So many students move in planning to be able to sublet their apartments to summer students to offset some of the room costs.The pandemic has thrown those plans out of whack. Northeastern, like nearly all higher education providers has moved to online learning to facilitate closures of campus housing. It also is not clear when for certain, the university will be able to return to its current structure. For those who lived in university owned and operated housing, it offered refunds on room and board payments. They can do that as the owner.

Here is where the unrealistic notions of investors and residents align. The private owners aren’t linked to any of the university’s policies so when Northeastern (or any other school for that matter) closes its facilities, the same policies don’t apply to private facilities. It’s as clear a delineation between private and school owned housing as you can get. So the university’s involvement is to waive its requirement that the operator only let Northeastern students live there.

Yes, the schools and developers of these projects are participants in their development but the whole purpose of these projects is to keep the liabilities off of university balance sheets. So no matter how these projects are marketed to tenants and investors that underlying premise should govern how one assesses the creditworthiness of these projects. They generate better yields than do those for projects which are owned by and part of university housing systems for a reason. The present situation illuminates that reason.

MICROMOBILITY

The Arizona Supreme Court unanimously rejected a challenge by the state’s attorney general who said the $4 pickup and drop-off fee that led Uber and Lyft to threaten to stop serving the Phoenix airport were unconstitutional. Attorney General Mark Brnovich argued that the fee increases violate a 2018 constitutional amendment that banned new fees on services. The city argued the higher fees are not taxes on services, but rather permissible charges for businesses to use the city-owned Sky Harbor International Airport. The city successfully compared the charges to the rental payments made by various concessionaires at the airport.

One non-financial issue that did make it through New York State’s budget process was a provision that would legalize throttle-based bikes and scooters. That legalizes electric scooters and bikes. The legislation would create three classes of e-bikes: Class 1 is pedal-assisted with no throttle; Class 2 is throttle-assisted with a maximum speed of 20 mph; and Class 3 is throttle-powered with a maximum speed of 25 mph. E-scooters would be capped at 15 mph, and riders under 18 years of age would be required to wear a helmet. Helmets would also be required for riders of Class 3 e-bikes.

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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This week’s stunning unemployment claims report makes a strong case in favor of a view that essentially all municipal credits should carry a negative outlook. We do not foresee a cascade of sudden multi notch downgrades but rather a steady negative trend underlying most if not all of the metrics supporting ratings. We do not anticipate significant defaults to result from the pandemic over the near term. We do anticipate that downgrades will increase impacts on trading values and raising investor concern.

For investors who plan to hold their bonds until maturity or redemption,  holding on to what have been to date sound credits makes sense. For those who are concerned with real time valuations and the potential short term trading impact, it is a different story. It is time to lighten up on some sectors (project finance – corporate backed or individual facility backed – in all sectors, private student housing, senior living to name a few) and shift to revenue backed enterprise credits (utilities – water, sewer, electric) which are better able to weather a longer term storm.

We are truly in unchartered waters. The implementation of essentially nationwide lockdown regulations has not occurred in our history. There are no good models for an economy with a 30% unemployment rate over an extended period. Current federal fiscal policies, especially those regarding taxation, have created an environment not conducive to decisive and sizeable enough federal fun ding efforts. Even with additional stimulus actions in Washington, states and municipalities will ultimately bear the financing and funding burden of recovery.

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CORONA VIRUS

“The first line of attack is supposed to be the hospitals and the local government and the states themselves.” That comment from the President highlights the unique role that the issuers in our market face. That raises the issue of why Congress has made it increasingly harder for states and localities to fund and finance their activities. The trend over the last 40 years has been to chip away at the ability of states and localities to access capital. So now the ability to use tax exempt financing to engage the private sector is limited, the ability to refinance to provide maximum flexibility to address situations like the current one is limited. All of this was somewhat acceptable when there was a strong federal structure in place to support responses to national emergencies. That is no longer the case.

The lack of such a structure has done significant current and near future damage to state and local finances. That means that stimulus 4 – and there will be a couple of more bills – will need to be the foundation to support a real federal response to the issue of the impact of the pandemic on state and local finances. So far the enacted legislation has help for the health system, people, small businesses, and big businesses. Yes, some public transit agencies will get to divide $25 billion. It has not addressed revenue and expense impacts on general governmental finances resulting from that first line of attack standpoint. It also does not deal with toll facilities which are experiencing significant lower use and revenue.

So what to do when such a federal response is lacking? One has to find what evidence they can about the efficacy of social management policies which seek to combat the virus. The concern is especially heightened as all signs point to a potentially cataclysmic impact on state and local economies and fiscal positions. Now we have some objective guidance to support state and local interventions.

The Federal Reserve Bank of New York has released a study of the impact of “non-pharmaceutical interventions” (MPI) implemented in response to the Spanish Flu pandemic in 1918-1919. It’s primary findings indicate that areas that were more severely affected by the 1918 Flu Pandemic see a sharp and persistent decline in real economic activity. Second, it found that early and extensive NPIs have no adverse effect on local economic outcomes. On the contrary, cities that intervened earlier and more aggressively experience a relative increase in real economic activity after the pandemic. It was true that the 1918 Flu Pandemic led to an 18% reduction in state manufacturing output for a state at the mean level of exposure. Exposed areas also see a rise in bank charge-offs, reflecting an increase in business and household defaults. It also notes that the effects lasted for up to four years after the pandemic.

On the local level, cities that intervened earlier and more aggressively experience a relative increase in manufacturing employment, manufacturing output, and bank assets in 1919, after the end of the pandemic. The effects are economically sizable. Reacting 10 days earlier to the arrival of the pandemic in a given city increases manufacturing employment by around 5% in the post period. Likewise, implementing NPIs for an additional 50 days increases manufacturing employment by 6.5% after the pandemic.

The 1918 Flu Pandemic lasted from January 1918 to December 1920, and it spread worldwide. It is estimated that about 500 million people, or one-third of the world’s population, became infected with the virus. The number of deaths is estimated to be at least 50 million worldwide, with about 550,000 to 675,000 occurring in the United States. The pandemic thus killed about 0.66 percent of the U.S. population. The pandemic came in three different waves, starting with the first wave in spring 1918, a second wave in fall 1918, and a third wave in the winter of 1918 and spring of 1919. The pandemic peaked in the U.S. during the second wave in the fall of 1918.

What else can the study tell us about the economic and fiscal risks which result on a more specific basis? One thing is that the employment and output declines in high exposure states are persistent, and there is limited evidence of a reversal, even by 1923. Most U.S. cities applied a wide range of NPIs in fall 1918 during the second and most deadly wave of the 1918 Flu Pandemic. The measures applied include social distancing measures such as the closure of schools, theaters, and churches, the banning of mass gatherings, but also other measures such as mandated mask wearing, case isolation, making influenza a notifiable disease, and public disinfection/hygiene measures.

Other research supports the continuation of social and economic measures by state and local governments. A working paper from University of Chicago researches estimates that moderate social distancing would save 1.7 million lives between March 1 and October 1, with 630,000 due to avoided overwhelming of hospital intensive care units. Using the projected age-specific reductions in death and age-varying estimates of the value of a statistical life (VSL), we find that the mortality benefits of social distancing are over $8 trillion or $60,000 per US household.

The bottom line is that there is no quick answer to how best to handle the pandemic but there is clear evidence that a strong and timely approach is the best way in both the long and short run. There is no way for states and cities to avoid a significant fiscal hit at least in the short run. New York State will not have a timely budget and many other states are likely to have the same experience. It is also likely that good and timely information will not be available to legislators trying to enact budgets. At the same time, the closures of many public offices will delay the aggregation and distribution of complete and timely financial disclosures to all municipal finance stakeholders. 

CORONA VIRUS INFECTS RATINGS

This week the impact of the corona virus began to be seen in a variety of ratings actions. These actions all occurred in sectors which we have recently highlighted as being vulnerable to the revenue impacts of the corona virus. In the hospital sector, Moody’s Investors Service has placed under review for possible downgrade the ratings of four Washington hospital districts and one California healthcare district due to anticipated financial stress stemming from the coronavirus outbreak. This action affects approximately $214.7 million of rated outstanding general obligation bonds and $19.9 million of rated outstanding general obligation limited tax bonds.

The state general obligation sector saw Moody’s Investors Service has affirmed the Aa3 on the state of Louisiana’s outstanding general obligation bonds but revised the outlook to stable from positive reflecting the impact of the novel corona virus crisis on the state of Louisiana and its expectation that there will be substantial impacts of the crisis on state finances and the economy which will dampen the positive trajectory the state’s finances have been on for the past several years. Moody’s revised its outlooks on both the State and the City of New York to negative from stable, citing the severe strain from the pandemic. We would expect similar actions on credits in the hard hit states. Likely candidates include the State of Michigan and Detroit, Illinois and Chicago, Louisiana and New Orleans.

On March 25, 2020, Moody’s placed the Government of Guam’s general obligation bonds (Ba1) on review for possible downgrade. It also has placed the Baa2 ratings assigned to the Port Authority of Guam’s port revenue bonds on review for downgrade. has affirmed the Baa2 ratings assigned to Antonio B. Won Pat International Airport Authority, Guam’s (GIAA) senior general revenue bonds. The rating outlook has been changed to negative from stable. The actions reflect  a significant reduction in visitors to the territory from Asia as a result of the Corona virus (COVID-19) pandemic, uncertainty about the timing of and speed of a recovery in visitor arrivals, and the impact of the downturn in visitors on the Port Authority of Guam’s revenues as well as general government revenues.

Now we have evidence of predicted impacts on travel related credits. Moody’s Investors Service has affirmed the Baa2 rating on approximately $50 million of Taxable Revenue Bonds, Series 2005 (Rental Car Facility Project at Ted Stevens Anchorage International Airport) issued as special and limited obligations of the Alaska Industrial Development and Export Authority. The outlook has been revised to negative from stable. Moody’s said that the negative outlook reflects our view that rental car transaction days will decline significantly over the next 12 months, resulting in narrow or less than sum-sufficient net revenue DSCRs along with the potential for draws on project reserves. The negative outlook also incorporates uncertainty regarding the project’s ability to adapt its revenues and capital expenditures in a timely manner and the risk that the path to recovery may not restore coverage or liquidity to satisfactory levels.

STATE REVENUE IMPACT

The Illinois General Assembly’s Commission on Government Forecasting and Accountability (COGFA), has released a report which estimates the potential impact on Illinois’ revenues. It based its projections on declines in tax revenues experienced during recent recessions. The conclusion: Illinois’ general operating revenues could fall between almost $2 billion and more than $8 billion over several years, depending on the severity of the virus-triggered recession. Before the crisis, COGFA had estimated that General Funds revenue would total $40.6 billion in fiscal year 2021, which begins on July 1, 2020.

COGFA’s report said the downturn between FY2001 and FY2003 saw overall General Funds tax revenues fall by a combined $1.3 billion, or 5.5%, from $24.1 billion to $22.8 billion. The three main State-source revenues—individual income taxes, sales taxes and corporate income taxes—declined by a similar 5.7% during the period. A recession of like magnitude would be expected to reduce total General Funds revenue by close to $2 billion over the next several years, according to COGFA.

According to the Commission, the Great Recession that began in December 2007 and officially ended in June 2009 saw overall General Funds revenues fall by $2.6 billion, or 8.7%, from $29.7 billion to $27.1 billion. The major State-source revenues declined by a combined $3.2 billion, or 16.6%, from $19.4 billion to $16.2 billion, but the effect was mitigated by federal stimulus funding through the American Recovery and Reinvestment Act. Due to recent income tax increases beginning in 2011, these revenues have grown from about 60% of the total to nearly 78%, according to COGFA. As a result, a recession similar to the Great Recession is expected to result in a decrease of about 11% in total receipts over several years, or a revenue loss of about $4.5 billion.

Pennsylvania reported that general fund revenue dropped 6.2% in March. Fiscal year-to-date general fund collections total $25.3 billion which is $45.6 million or 0.2% below estimates. Withholding of income tax and sales tax are below estimates in March by $20 million and $24.2 million. Keep in mind that sales tax collections are effectively on a one month lag as 60% of the sales tax remitted in March was for retail sales in February. State officials had expected payments of personal income tax to total about $2.1 billion during April, May and June but that will not happen as the tax payment  date has been moved to July 15.

THE STOCK MARKET AND PUBLIC PENSION FUNDING

One of the concerns to emerge from the current crisis and its impact on the stock market is the potential for serious negative consequences for the nation’s public pension funds. One major pension fund investor is New York City which reports that at the end of 2019, the five plans that compose the retirement system held $153 billion in assets on behalf of city workers. Extraordinarily low interest rates for government bonds in recent years have compelled pension plans to rely more heavily on equities as well as alternative assets—like hedge funds, “high yield” debt, and real estate—to increase returns. The City’s Independent Budget Office (IBO) has provided one of the first estimates of the potential impact of the stock market’s recent gyrations on pension funding.

The analysis only covers the five city funds but it outlines many of the issues which will confront pension fund managers in light of the pandemic’s impact on the economy. Assuming the NYC system met its 7% return on assets benchmark in the current fiscal year, the pensions’ assets would add approximately $10.7 billion in value. The amount owed to the pension system resulting from investment returns that fall short of 7 percent  (the assumed rate of return) is phased-in over the next seven years. Because the start of payments is lagged by one year, the first budgetary impact of losses experienced by the funds’ investments in 2020 would not be felt until 2022.

The dollar impact is potentially substantial. IBO notes that during the Great Recession of 2008, the pension system’s investments saw asset values decline by over 20% in a single year. Scaling to today’s assets, a 20% decline in value for the current year would mean the system would require an additional $41.2 billion to be made whole. The single-year losses realized by the pension system in 2022 would be $5.8 billion, resulting in an additional employer contribution of $386 million for each of the next 15 years. The city now contributes about $10 billion annually to the pension system. 

We would expect that similar data could be generated for any number of other public pension funds. The current investment experience will therefore be a drag on credit performance for some extended period. Thus the need to fund pensions will compete to a higher degree with other capital needs. The price for the lack of a coherent approach to infrastructure funding over the past three years will increase in light of the need to fund pensions and other new costs which will result from the pandemic.

HOSPITALS TRY TO MANAGE THE SURGE

Bon Secours Mercy Health will furlough its employees if their work doesn’t involve treating COVID-19 patients. It operates hospital and nursing care services in the States of New York, Maryland, Virginia, Kentucky, South Carolina, and Florida. The system is projecting it will suffer operating losses of $100 million per month without serious non-patient care reductions in headcount. Furloughed employees will be paid through April 3, and the health system will then pay out any personal time off (PTO) those workers have accrued. They will be eligible for enhanced unemployment.

The move comes at the same time its outstanding debt was upgraded  and assigned an  A1 rating by Moody’s. Moody’s based the change on BSMH’s strong liquidity of over $5 billion, centralized management model and platform, and proven ability to quickly execute complicated integration strategies, which will provide resources to manage through COVID-19 challenges. Governance considerations include the successful execution of system-wide integration initiatives over the last 18 months, consolidated management structure, and a common IT platform, all of which will drive a second year of sizable synergy benefits. Strong liquidity from $1.2 billion asset sale proceeds, upcoming asset sales, and expected bank line availability will provide flexibility during COVID-19 operating stress and for long-term growth strategies.

It is just the latest example as hospitals seek to shift the cost burden of stay at home policies to the government. The implementation of restrictions of non-emergency care has a significant impact on their revenues from non-governmental private insurance payers. There is also far less need for the many administrative personnel usually needed to service the existing insurance scheme in the US. The layoffs and cost reductions are the primary tool at the disposal of hospital managements as they navigate a high cost limited reimbursement environment in their effort to maintain as positive a credit profile as they can.

STATE BUDGETS ADAPT TO VIRUS REALITIES

Gov. Andrew M. Cuomo announced an agreement with the Legislature on a $177 billion budget. The pandemic led to a plan which includes lots of hopeful assumptions, increased borrowing power through the relaxation of statutory debt limits, and gives the Governor unilateral flexibility to make budget cuts through the end of Fiscal year 2021.

As is the case in many states, budget negotiations are intertwined with non fiscal policy issues. The impact of the pandemic created an atmosphere of urgency to get a fiscal framework in place as the state deals with its role as the pandemic epicenter. This meant that several such policy issues which might have led to a different budget outcome on both the revenue and expense side were set aside to facilitate a budget settlement.  

New Jersey will extend the state’s deadline for a new 2021 fiscal year budget to Sept. 30 from June 30. It is the first state to do so. “This will allow the administration and the legislature to focus fully on leading New Jersey out of this crisis, and to allow for a robust, comprehensive, and well-informed budget process later in the year,” according to the Governor and the leaders of the state legislature. It would not be a surprise to see other states follow suit as the national stay at home periods continue over what is typically the quarter when states receive their highest proportion of revenues.

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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This week we focus on unemployment as it drives most everything we comment on. There is the direct funding need generated by record initial claims, the uncertainty about the duration of social distancing practices, the potential offloading of laid off employee medical costs to Medicaid, and the costs of highly diminished transportation and its immediate impact on revenues. The lack of coherent federal strategy in response to the pressures generated by the pandemic coupled with continued wishful thinking by the White House has simply added to the difficulty in assessing the pandemics true impacts and potential long term credit effects. Anyone who tries to tell you otherwise is only fooling themselves.

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PANDEMICS, UNEMPLOYMENT, AND BUDGETS

Three weeks ago, initial unemployment claims were at about 200,000. In the week ending March 21, the advance figure for seasonally adjusted initial claims was 3,283,000, an increase of 3,001,000 from the previous week’s revised level. This marks the highest level of seasonally adjusted initial claims in the history of the seasonally adjusted series. The previous high was 695,000 in October of 1982. The previous week’s level was revised up by 1,000 from 281,000 to 282,000. The 4-week moving average was 998,250, an increase of 765,750 from the previous week’s revised average. The previous week’s average was revised up by 250 from 232,250 to 232,500.

The State of New York is not only the epicenter for the virus but is also the first state to have to budget  under the terms of the new economic reality in the US. It is grappling with the fact that we are undoubtedly in a nationwide recession as well as the State’s role as the center of the financial industry. It is feared that the economic consequences of the pandemic will create a $15 billion plus hole in the State’s revenue base. With the declines in the stock market, the capital gains states of NY, NJ, CT. MA, IL, CA will see disproportionate impacts.

We already see requests from the State of California and the City of New York to identify significant potential expense reductions in the face of both an anticipated revenue decline as well as delays in revenue receipt as the result of the delay in the federal tax payment date. NJ State Treasurer Elizabeth Maher announced that she is placing $920 million of appropriations into reserves. We would not be surprised to see a higher volume of cash flow borrowings.

The reality is that state and local budget makers are flying blind as there is no real visibility as to a potential time frame for the renewal of “normal” economic activity. We would anticipate lower general obligation bond ratings to decline essentially across the board. Some states are taking significant steps to marshal resources. NJ State Treasurer Elizabeth Maher announced that she is placing $920 million of appropriations into reserves. 

The Senate stimulus bill would offset some of the impacts on credits especially in the transportation sector. The bill would provide $25 billion to transit agencies, the figure they had been seeking. The money could be used to pay to put personnel on administrative leave as agencies cut service, as well as to buy protective equipment and cover other costs. New York’s Metropolitan Transportation Authority is expected to get almost $4 billion. 

Airports would see a further $10 billion in grants on the condition that they keep 90 percent of their staff employees until the end of the year. It is not clear on whether these monies would benefit contractor employees who make up a significant segment of labor at airport terminal commercial outlets.

We do not see any provisions for toll road revenue losses. This is a concern as roads are virtually empty. Credits backed by high occupancy and demand management lanes will continue to be impacted. One high profile high yield bond is being directly affected. Virgin Trains USA, the parent company of the Brightline express train, suspended all train service in South Florida and laid off 250 employees amid the corona virus concerns. 

The Senate stimulus also provides $117 billion for hospitals and veterans’ health care; $11 billion for vaccines, therapeutics, diagnostics, and other preparedness needs; $4.3 billion for the Centers for Disease Control; $16 billion for the Strategic National Stockpile; and $45 billion for FEMA disaster relief fund, among other things.  More than 80 percent of the total funding provided in the corona virus emergency supplemental appropriations division of the package will go directly to state and local governments. Health care systems would receive $130 billion, including $127 billion for a Public Health and Social Services Emergency Fund.  

NO CENSUS, NO FEELING

One of the things that we would normally be anticipating is the US census for 2020. As our industry and market have become so much more data driven, the importance of the availability of good data whether it be for trading, for analysis, or government has continued to grow. The development of good data regarding the economic, demographic, educational , and other aspects of American’s lives are central to much of the work we all do.

Among all of the issues arising from the corona virus pandemic, interruptions to the process of collecting data from residents for the 2020 Census pale beside things like ventilators and shelter orders. Nonetheless, the hurdle that various actions taken to control the pandemic across multiple states  can create for the timely and complete execution of the Census is substantial. While many can complete

their forms on line, a significant portion of the population does not have or use internet access. Some will fill out and mail a form but up to a quarter of the population may need to be contacted in person.

The US has never failed to execute a timely Census but the possibility of a delay must be considered. If it is delayed, that would raise all sorts of issues with the data. A delay in the data could also impact the state redistricting process. This has practical and political considerations for states and localities especially as they involve issues of federal funding for many projects covering many sectors.

PUERTO RICO

The financial Oversight Board is looking to the courts to postpone proceedings on existing proposals to restructure its defaulted debt. “In light of Puerto Rico’s current reality, the oversight board believes that the government and the oversight board’s sole focus should be on getting Puerto Rico through this unfortunate crisis. The board will present a motion in court to adjourn consideration of the proposed plan of adjustment’s disclosure hearing until further notice.”

There are practical considerations which support such a move. The economic impact of the corona virus pandemic will hit the Commonwealth as hard as anywhere given its weakened economic and fiscal conditions to begin with. As will be the case with the states, Puerto Rico will see significant revenue losses. These will likely be enough to force a reevaluation of many of the economic and revenue assumptions supporting the restructuring plan.

Meanwhile, the US District Court for the First Circuit ruled against holders of debt issued to fund pensions in their request to have the assets of the pension fund taken from the general government and given to bondholders. The Puerto Rico government as part of its restructuring largely abolished the pension system. It then, ordered that the assets be transferred over to the general government funds with the general fund assuming its obligation to pay pensions.

The bondholders’ primary argument on appeal was that the federal court didn’t apply standard commercial bankruptcy principles. The justices said the federal judge could consider that this was a governmental bankruptcy and different interests were involved.  The Court reasoned that “The bankruptcy of a public entity … is very different from that of a private person or concern”. A commercial bankruptcy is designed to “balance the rights of creditors and debtors,” whereas governmental bankruptcies are intended to allow governments “the opportunity to continue operations while adjusting or refinancing their creditor obligations.”

We see it as positive that the Court ruled that the nature of municipal versus corporate bankruptcies is different. The role of investors who traffic in distressed situations in the municipal market has been evolving leading to a debate over the role of distressed institutional investors. I believe that they have a role and often provide a needed source of liquidity for holders without the ability to ride out bankruptcies. At the same time their efforts to jam the round peg of a governmental entity into the square hole of corporate bankruptcy practices often bring unnecessary delay to the process of restructuring a municipal entity.

The bondholders still have a separate case pending in the U.S. Court of Federal Claims in which they are arguing that the asset transfer amounted to a “taking” in violation of the Fifth Amendment. The First Circuit suggested that the plaintiffs “avoid a proliferation of actions seeking essentially the same remedy. Each such proceeding potentially drains assets which could be put to other uses.” We agree.

RATING AGENCIES AGREE WITH US

Fitch placed the ratings of five large U.S. public transit agencies on rating watch negative. They are the Metropolitan Transportation Authority in New York, the San Francisco Bay Area Rapid Transit District, the Washington Metropolitan Area Transit Authority, the Metropolitan Atlanta Rapid Transit Authority, and Colorado’s Regional Transportation District. S&P has lowered its outlook on the Metropolitan Atlanta Rapid Transit Authority’s (MARTA) sales tax revenue bonds to negative from stable. It also lowered its long-term rating and underlying rating to ‘A-‘ from ‘A’ on the Metropolitan Transportation Authority (MTA, or the MTA), N.Y.’s transportation revenue bonds (TRBs) outstanding.

Moody’s revised its outlook  to negative on the Aa3 and A2 ratings of the New York Convention Center Development Center’s (NYCCDC) Senior Lien and Subordinate Lien Revenue Bonds including the Aa3 rating on SONYMA bonds that are subordinated to the Senior Lien Revenue Bonds and the A2 rating on SONYMA bonds that are included in the Subordinated Lien Revenue Bonds. The bonds is secured by a $1.50 per-night unit fee on occupied hotel rooms in New York City; a revenue account minimum balance requirement of 80% of MADS; a debt service reserve funded at maximum annual debt service ($43.4 million for the senior lien and $24.5 million for the subordinate lien); and (iv) a credit support agreement with SONYMA that establishes a dedicated account that may be used to pay up to one-third of debt service each year, after tapping the corporation’s other reserves.

S&P Global Ratings placed Queens Ballpark Co. LLC (Citi Field) and Yankee Stadium LLC — the respective homes of the Mets and Yankees — and Louisville Arena Authority LLC on credit watch with negative implications. S&P rates both New York ballpark bonds BBB. “Stadiums and arenas are already facing canceled events and suspended sports seasons due to the corona virus outbreak,” S&P said. “As a result, cash flows in the related project financings are under pressure.” S&P also revised its outlook on toll roads as well as the airport and parking facilities sectors to negative. Moody’s Investors Service revised its sector outlook for toll roads to negative from stable.

Fitch has downgraded Suffolk County, NY to ‘BBB+’ from ‘A-‘. “Current economic conditions, triggered by the corona virus pandemic, are expected to place significant additional pressure on the county’s revenues and cash position in the near term.” Fitch noted that the county’s financial resilience is limited with no general fund reserves to address fiscal pressures that will arise from the current economic slowdown. The majority of the county’s budgeted operating revenues for 2020, including the general fund and police district fund, come from sales and use tax collections (approximately 47%) and property taxes (approximately 22%).

Fitch highlighted the fact that it does not expect the county to come close to budgeted sales tax assumptions due to the recent declines in oil and gas prices, the temporary closure of the major shopping malls, restaurants and the casino, and other economic pressures associated with the corona virus pandemic. Budget balancing is likely to require drastic spending cuts or increased borrowing.

Port credits began to feel the pressure. Moody’s revised its outlook to negative on port credits in Port Canaveral and Miami-Dade due to unprecedented Corona virus (COVID-19) restrictions globally that led to the halt of cruise operations at PortMiami and other cruise ports in the US for a 30-day period since March 13, 2020.

CA LIFORNIA WILDFIRE AGREEMENT

Pacific Gas & Electric reached an agreement with Gov. Gavin Newsom. It pledged billions of dollars to help wildfire victims, improve safety and make other changes. Half of the company’s $13.5 billion payment to wildfire victims will be in the form of PG&E stock under a previously reached agreement. 

Now, PG&E has agreed to a plea bargain in state court to settle pending criminal charges against the company. The plea agreement requires PG&E to accepted a maximum penalty of $3.5 million. In exchange, “no other or additional sentence will be imposed on the utility in the criminal action in connection with the 2018 Camp Fire.” The company will also pay the district attorney’s office $500,000 to cover the cost of its investigation. The plea  must be approved by a state court, which is scheduled to consider it on April 24, and the bankruptcy court.

The agreement should allow the utility to exit bankruptcy by June 30, a state-mandated deadline for it to take part in the fund designed to help utilities pay claims from future wildfires. PG&E must receive approval of its plan by state regulators and the bankruptcy judge by June 30 and have its financing in place by Sept. 30. Failure to do so will set off the sale of the company.

The agreements will keep PG&E as an investor owned entity after it was threatened with an effective takeover by a state created entity. It will not necessarily be able to maintain itself as a sound entity even after this second bankruptcy is concluded. It will be a heavily leveraged entity as it finances capital needs and will likely face a constricted ratemaking environment.

HOSPITALS AND INSURANCE

California, Colorado, Connecticut, Maryland, Massachusetts, Minnesota, Nevada, New York, Rhode Island, Vermont and Washington run their own health insurance exchanges under the Affordable Care Act. These states have opened up enrollment under the Affordable Care Act to allow laid-off workers to get subsidized health insurance. Under the Affordable Care Act, people who lose insurance coverage when they lose their job are already allowed to buy their own insurance.  The newly announced changes will anyone without comprehensive insurance could simply sign up for a health plan, without having to prove such special conditions. 

The potential for large surges in demand through emergency departments especially by those without health insurance created huge risks for hospitals who could see their uninsured charity caseloads skyrocket without knowing how those costs would be covered. The Kaiser Family Foundation estimates that 17 million people already uninsured are eligible for marketplace coverage. More than a quarter of those people were eligible for a bronze plan that would cost them nothing in premiums after federal subsidies were applied (they would still have a high deductible). 

The question remains what the 32 states which operate through the federal marketplace will be able to do. They cannot expand their programs without federal approval. Whether that approval will come while the Administration is fighting to have the ACA declared unconstitutional is unclear. 36 states expanded their Medicaid programs under the Affordable Care Act, and in those states anyone now earning less than 138% of the federal poverty level — about $17,000 for a single person and $35,500 for a family of four, annually — can qualify for coverage right away. 

There has been some effort to support the states from the federal government. The Centers for Medicare & Medicaid Services (CMS) approved an additional 11 state Medicaid waiver requests under Section 1135 of the Social Security Act (Act), bringing the total number of approved Section 1135 waivers for states to 13. The waivers are designed to facilitate relief from administrative requirements, such as prior authorization and provider enrollment requirements, suspending certain nursing home pre-admission reviews, and facilitating reimbursement to providers for care delivered in alternative settings due to facility evacuations.  This will facilitate funding for the states during this crucial period.

The expansion of coverage would be positive for hospitals in that it would reduce charity care burdens and provide more certainty about how they would be reimbursed. The need for increased coverage is highlighted by the plight of rural hospitals. While many of the financially distressed hospitals in this cohort have been smaller, the pressure on the rural hospital sector is impacting larger rural facilities.

Two 200+ bed facilities saw their ratings downgraded . Southeast Hospital, d/b/a SoutheastHEALTH is a not-for-profit 501(c)(3) health system located in Missouri. The system operates a flagship hospital of 245 licensed beds in Cape Girardeau, a rural community hospital in Dexter, and numerous outpatient clinics. It saw its Moody’s rating lowered to Ba1 from Baa3, affecting approximately $127 million of rated debt. The outlook is revised to negative from stable. Moody’s also downgraded Hutchinson Regional Medical Center, Inc. (HRMC) in Kansas to Ba1 from Baa3, affecting approximately $35 million of rated debt. Both hospitals had underlying credit problems but now are facing increased pressure as the result of the pandemic.

For hospitals whose financial position was marginal going into the pandemic, there will be further ratings pressures. These are just two of the latest examples.

BORDER RESTRICTIONS AND LOCAL CREDITS

On the US Mexican border, several credits will be impacted by the closure of the US-Mexico border to nonessential travel to slow the spread of the corona virus until 20 April closure of the US-Mexico border to nonessential travel to slow the spread of the corona virus until  April.20. The reduced toll revenue is also negative for US-Mexico border cities which rely on transfers from their international bridge funds to support general funds. Lower bridge revenue flowing to border cities’ general funds increases the credit-negative effects of reduced sales tax revenue.

Take Laredo, TX where up to 50% of bridge toll revenue is transferred to the general fund. The Laredo International Toll Bridge System consists of four bridges at the intersection of major rail lines and highways. Bridge transfers provided 17% ($34 million) of general fund revenue in fiscal 2018, which ended 30 September 2018, while sales taxes accounted for 16%.  The impact on retail sales in border cities will be replicated at the many other communities which serve as ports of entry. The free flow of goods and people across the border has supported the emergence of commerce based economies with facilities such as warehouses becoming significant sources of property value growth, taxes, and jobs.

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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Publisher’s Note: The overarching impact of the corona virus pandemic is that we are about to see something unprecedented in our nation’s history – the near total shutdown of industry in the country. This week’s announcement that Ford and GM will halt production at their manufacturing facilities through the end of March at a minimum is unlike anything seen in this country since World War II. The companies and the United Auto Workers will work together on plans to restart production in compliance with social distancing protocols among workers, including at shift change times, and to maximize cleaning times between shifts changes. As demand slackens, we would not be surprised to see additional industrial and manufacturing disruptions.

This is a unique experience in US history certainly after World War II. One would have to go back to the Spanish Flu Pandemic of 1918 and 1919 to find a similar experience. The difference is how intertwined the world is now versus then which raises a whole host of issues creating this unique experience. Unique means that in many ways we are making it up as we go along. With that in mind, view this week’s comments.

CORONA VIRUS

The declaration of a national emergency and the actions increasingly being taken by localities to limit gatherings has made it clearer where the potential sector weak spots are in the municipal credit spectrum. So now the process of picking winning and losing sectors depending upon the individual credit characteristics can begin.

It is estimated that some 14% of total consumption spending – recreation services recreation services; food services and accommodation; transportation services- is effectively shut down for an indefinite period of time. The immediate impact will be on credits backed by taxes related to economic activity. “Wages that aren’t earned aren’t spent.” Sales tax bonds will come under pressure as non-essential spending is curtailed as the result of mandated closings of things like restaurants and bars.

Sales taxes provide current cash flow. They are usually collected and remitted to the taxing jurisdiction monthly. Credits secured by things like admissions taxes (from arena and entertainment facilities), hotel taxes, convention center revenues, toll roads, will all see revenue impacts. Flight cutbacks will reduce throughput at airports which rely on the economic activity from the increasingly important retail sales activity at terminals. That will impact general airport revenue bonds. Stand alone enterprise credits like airport rental car and garage facilities will be under stress.

One sector facing long term implications in addition to the short term pressures is the senior living industry. The vulnerability of their residents to the impact of pandemics is clear. There is no way to determine how the experience of the corona virus will impact long term demand for all of these facilities. For those in the early stages of development and fill up, the potential impact is significant as these projects often rely of fairly delicate timelines for the receipt of those revenues to meet covenant requirements as well as repayment schedules. The potential impact on housing demand and sales will make it more difficult to meet financial targets and schedules.

Project financings for things like shopping malls and casinos will be vulnerable. The Carousel Center in Syracuse, NY was already experiencing operating difficulties when it was downgraded by Moody’s in Late 2019. Carousel Center Company L.P. signed a three year loan extension and modification agreement with the special servicer of its subordinate CMBS loan on May 31, 2019. Now, the extended time period of inactivity faced by a project such as this means that its ability to meet the new Debt Yield covenants in 2020 and 2021 to secure the second and third year of the loan extension remains uncertain. While it is likely that the developer will make every effort to make payments in lieu of taxes which secure the bonds, the secondary financing difficulties make the project vulnerable to a bankruptcy by the developer to deal with the secondary financing needs.

The newly opened American Dream mall and entertainment complex in New Jersey was under significant pressure from its start. $800 million of limited obligation revenue bonds backed by a payment-in-lieu-of-taxes agreement between developer Triple Five Group and East Rutherford, along with $287 million of grant revenue bonds supported by anticipated sales tax revenue were issued to finance the project. Now the facility has closed in response to the virus which will further pressure the reliance on developer support for the bonds while tax cash flows are interrupted.

The impact of the stock market will be felt in multiple ways. States like CA, NY, NJ, IL, and MA all are vulnerable to negative impacts on capital gains revenues. So the immediate impact will be on operations. Longer term, pension funds are at the center of stock market risk so it is likely that funding ratio data and expense requirements to maintain funding will generate negative news.

Overhanging all of this is the need for states to take swift action without the benefit of a coordinated federal response. Maryland Gov. Larry Hogan (R) and New York Gov. Andrew Cuomo (D) ordered state health officials to reopen closed hospitals and to convert other facilities in order to accommodate patients. Retired medical staff is being recruited. These are expenses which must be covered but who and how much is effectively yet to be determined. Cuomo’s order will add an additional 9,000 beds to the 53,000 beds already available around the state. Maryland has about 8,000 hospital beds, and Hogan’s order will boost capacity by an additional 6,000.

Early in the week, The President advised states to seek out their own equipment, a potential sign that the federal government was not prepared or equipped to aid states that are going to need serious help. That will require funding. States will also be at the front lines of providing and funding unemployment insurance.

For smaller communities, orders to effectively shelter in place will reduce short term travel and reduce the opportunity to collect fines. In some rural communities, reduced travel will impact their ability to collect fines which are often an important component of local budgets. Less traffic makes it harder to issue speeding tickets which for many small towns are a significant revenue source. In larger communities, reduced travel will result in lower revenues from parking charges as well as parking related fines. In some localities, ticketing and fines have been suspended which will impact revenues.

On the public transit side, ridership on the NY subway was down 27% in one week and that was before schools and public facilities were closed. Seattle’s Sound Transit has experienced a 25 percent drop in ridership in February compared to the month before. Ferry ridership in Seattle was down 15 percent on Monday, March 9th, compared to the previous Monday. In San Francisco, BART fares account for 60 percent of the agency’s service budget and officials estimate the current drop in ridership will cost BART up to more than $600,000 each weekday. Ridership has fallen some 30%.  

WHO WORKS WHERE

The Airports Council International-North America (ACI-NA) represents local, regional and state governing bodies that own and operate commercial airports in the United States and Canada. They have their own agenda but they have produced data to reflect the potential impact of the economic downturn we are in. The council estimates  that about 1.2 million people work at 485 commercial airports in the United States. O’Hare in Chicago employs 41,000 alone.

Casinos in most places are shut down. Obviously the front line for economic impact would be Las Vegas. Nevada employs 403,000 in the gaming industry segment alone. The top five include New Jersey, Pennsylvania, Mississippi, and Louisiana each with between 30,000 and 40,000 employed.

And then there are the overall leisure/hospitality statistics. Some 16.8 million are employed as of February 2020. Less than three percent of them are unionized so they are not likely to have employment terms favorable to their being laid off. They make an average of $435 per week. So their unemployment will generate pressure on the health and shelter providers.

PRACTICAL FISCAL RESPONSES TO CORONA VIRUS

When one tries to assess the potential fiscal impact of the ongoing pandemic, the implications for ongoing funding things like education must be considered. School aid is often based on formulae which include factors like attendance and the provision of a minimum number of school days. The legislation by which things like ongoing school aid as well as state enhancement programs securing local school bonds does not always include provisions to cover situations such as is occurring right now.

One state’s recent action highlights one such example. In New York, aid is based on attendance as well as minimum day requirements. Should a district choose or be forced to close their facilities for any extended period, it was not clear whether the laws under which school aid is distributed would permit all of the anticipated aid. Districts and their creditors were concerned that cash flow issues related to delayed or lessened anticipated school aid could cause payment interruptions by districts. So it was positive to see that The Governor issued an Executive Order to eliminate the aid penalty for schools directed to close by state or local officials or those closed under a state or local declaration of emergency that do not meet 180-day requirements if they are unable to make up school days. 

For the states generally, the demand for unemployment support and the need to fund it is already apparent. Initial unemployment claims are in the tens of thousands in many states. Twenty three states have unemployment trust fund balances below their recommended funding levels according to the US department of Labor. That is before any Medicaid hit just from that cohort and not inclusive of corona related costs.

After several years of significant headcount increases, the City of New York finds itself with less room to maneuver through the corona virus pandemic. The City does have budgetary reserves but they will be quickly evaporated as it faces a significant revenue hit. This week, City Comptroller Scott Stringer estimated that the City would experience a $3.2 billion loss to the city’s tax revenues over the next six months. The comptroller called for spending at most agencies to be reduced 4% from what the mayor had proposed. For the Department of Homeless Services, the Administration for Children’s Services and the Human Resources Administration, reductions should be 2%. The Health Department and the department overseeing the city’s public hospitals should be exempt, according to the Comptroller. He estimates that over the next six months, restaurant sales will go down 80%, real estate sales, 20% and tourism-related retail, 20%. 

Seattle’s budget director last week estimated the city could collect $110 million less than expected in general-fund tax revenue this year due to an economic breakdown caused by the virus and by efforts to slow its spread. Hawaii’s chief state economist estimates that tax revenue coming into Hawaii state coffers is now expected to be $48 million to $80 million less than previous estimates for the rest of 2020 due to the impact of the corona virus. The drop will be primarily driven by declines in visitors coming to Hawaii and their spending. The latest data indicate that international arrivals are already down by more than 30% compared to the same period last year.

The virus is taking its toll operationally. In Pennsylvania , the Department of Transportation (Penn DOT) is suspending all operations, including construction, except critical and emergency work. Driver licenses, photo ID cards and learner’s permits scheduled to expire from March 16, 2020 through March 31, 2020, the expiration date is now extended until April 30, 2020. Vehicle registrations, safety inspections and emissions inspections scheduled to expire from March 16 through March 31, 2020, the expiration date is now extended until April 30, 2020. Persons with Disabilities Parking Placards scheduled to expire from March 16 through March 31, 2020, the expiration date is now extended until April 30, 2020. Moves like this should be expected across the country. That will impact the timing of fee revenues which along with possible tax payment deferrals could impact cash flows.

SOUTH CAROLINA PUBLIC SERVICE LITIGATION SETTLEMENT

In 2017, concerns were rising about the viability of the project to expand nuclear generating capacity at the Sumner Nuclear plant. A group of consumers filed a class action lawsuit against the plant’s sponsors The suit was brought in an effort to claw back charges customers paid for the unfinished twin nuclear reactor project. It names several electric cooperatives, former and current Santee Cooper directors, South Carolina Electric & Gas and SCANA Corp., and Dominion Energy, which bought SCANA in January 2019.

Now Santee Cooper has announced that it has reached a proposed settlement with the plaintiffs. The utility’s board of directors agreed to pay $200 million in cash over three years and to freeze rates for four years to end the suit. Dominion will pay $320 million in stock that will be sold and converted to cash as part of the settlement. Santee Cooper and Dominion also agreed not to attempt to recover settlement proceeds in base rates or other customer charges.

The settlement, if approved by the court, will remove a major source of uncertainty for Santee Cooper and may enhance its prospects for remaining a public utility. It allows the utility to more accurately estimate its stranded costs and determine a more certain course for its ongoing viability. It reduces the total liability with which creditors and investors would be effectively competing.  

The proposed settlement also helps to solidify some of the math being used to support assumptions being made by potential private suitors involved in efforts to acquire Santee Cooper’s assets. It is likely that the settlement will enhance the position of those who support reforming Santee Cooper’s oversight and management while maintaining its ability to compete. The ability to continue to finance its capital needs in the tax exempt market will continue to provide Santee Cooper with a cost advantage.

Proponents of a sale to private interests still have support in the state legislature and the outcome of deliberations currently underway in the state legislature is unclear. The approval of the proposed settlement is still uncertain. Preliminary approval of the settlement by the judge will begin a process during which all members of the class will be identified, and then they will be given the opportunity to opt into or opt out of the settlement.

Conclusion of the settlement process will be a credit positive event for the Authority and its bondholders.

GREAT LAKES WATER AUTHORITY

During the bankruptcy of the City of Detroit, investors holding debt issued for the Greater Detroit Water and Sewer Systems may have been one of the best positioned creditors. Between existing precedents for special revenue debt like that of the water and sewer systems and its regional revenue base, those credits were the most likely to be successfully restructured. So it was easy to counsel patience to those investors especially retail investors who were significant holders of the debt. Eventually, the Greater Detroit debt was restructured into a new entity, the Great Lakes Water Authority.

Now patient investors who worked through the bankruptcy, restructuring, and exchange process are seeing that patience rewarded. Moody’s Investors Service has upgraded to A1 from A2 and to A2 from A3 the senior and second lien water revenue ratings and the senior and subordinate sewer revenue ratings, respectively, of the Great Lakes Water Authority (GLWA), MI Water Enterprise. It cited ” continuation of strong operating performance that has resulted in healthy annual debt service coverage and liquidity. Additionally factored are the system’s large scale of operations, independent rate setting authority, and sound legal provisions of outstanding revenue debt. At the upgraded rating, these strengths continue to balance the system’s elevated debt burden, as well as their reliance on revenue derived from retail operations within the City of Detroit (Ba3 positive). The upgrade of the second lien revenue bonds to A2 incorporates the same factors while the lower rating reflects a subordinate claim on pledged net revenue.”

The restructuring improved regional oversight of the systems while maintaining their geographically diverse revenue streams. The regional character of the revenue base has only become clearer over time providing a solid foundation on which to rebuild its credit strength. It was always a regional credit and while Detroit had its problems the utilities managed to maintain the city’s suburban communities as customers of the systems.

RATINGS ACTIONS

We cited NY’s Metropolitan Transportation Authority as a vulnerable credit do to its reliance on farebox revenues. The corona virus will impact many credits and sectors but the MTA’s Transportation Revenue Bonds were especially vulnerable in the short term. So we view with interest the announcement this week that the Moody’s outlook for the A1 Transportation Revenue Bond (TRB) rating is negative.

According to Moody’s, MTA’s ridership levels and financial performance will be vulnerable if a widespread coronavirus outbreak occurs in NYC, or if local precautions to control an outbreak are extended. The credit impact will depend on the depth and duration of the economic and service disruption. We note that the MTA has ridden out prior interruptions in ridership – strikes, natural disasters, terror attacks without any real impact on bondholders. Unlike those events, the pandemic is forcing the MTA to fund increased employee education, customer communications and station and fleet sanitization, which will increase expenditures. 

The situation highlights the security structure for the MTA farebox bonds. Unlike most other rated transit systems, there is no debt service reserve fund. Pledged revenues flow to a trustee held account and are set-aside monthly for debt service before being released for operations. Longer term , the basic challenges the MTA faces – flat ridership trends, rapidly escalating leverage that includes growing market access risk, large debt and capital needs and growing public pressure to improve service and limit fare increases – will remain in a damaged economic environment. In the longer term, MTA will also be challenged by growing and relatively inflexible labor costs, and environmental risks (particularly from natural disasters).

PANDEMIC POSTPONES BOND VOTES

After the California primary, transit advocates were concerned that results from those elections might indicate that there was diminishing support for tax funding for transportation projects. Now, with 7 Bay Area counties under shelter in place regulations, there has been concern that a proposed sales tax backed transit funding program in a nine county around the Bay Area might not succeed at the polls this November. The proposal would ask voters in those counties to approve a 1 cent increase in sales taxes with proceeds dedicated to supporting debt issued to fund various transportation projects in the region.

The ballot measure was being proposed to the state Legislature under Senate Bill 278. In order to be placed on the November ballot, the bill would have had to be passed under an urgency clause that would have required at least two-thirds majority support from both the Senate and Assembly. Gov. Gavin Newsom would then have had to sign the law by June 24. Now in light of current events, proponents have announced that they are shifting their emphasis to the post-2020 time frame.

We would not be surprised to see other bond proposals wither in the face of the unprecedented funding demands due to the pandemic. It will be very difficult to garner support for any increases in taxes in the near term as individuals and businesses struggle in the face of extraordinary limits on economic activity. There are practical considerations as well. Many ballot actions in support of proposed bond issuances benefit from efforts to generate support in the community. Efforts in that regard are thwarted by the restrictions (required or voluntary) resulting from the pandemic.

Many scheduled elections in which bond ballot measures would be offered will be difficult to hold. To that end, Texas Governor Greg Abbott announced that local governments could suspend May 2 elections until the general election Nov. 3. The Metropolitan St. Louis Sewer District will go to court in an effort to postpone a $500 million bond referendum scheduled for April 7 because of the COVID-19 outbreak.

NONTRADITIONAL CREDITS UNDER PRESSURE FROM VIRUS LIMITS

Here in New York, there are certain credits which will be under unique pressures due to the limits on public gatherings. While no one is currently predicting defaults, four  prominent cultural or sports functions are exposed to financial pressure as seasons and performances are put on hold.

Bonds issued to finance Yankee Stadium and Citi Field are secured to varying degrees by revenues tied to attendance. The Yankee Stadium bond revenues pledged to debt service are dependent upon attendance or as George Steinbrenner used to put it “fannies in the seats”. A protracted stoppage would be akin to the risk of an extended labor stoppage which has always been cited as a major risk to the bonds. The Citi Field debt is secured by a pledge of certain seat revenues as well as revenues from advertisers at the stadium.  When all is said and done, a downgrade would not be surprising.

The Metropolitan Opera also issued municipal bond debt. It was downgraded in 2018 as the impact of  softening ticket revenue. It also faces labor pressures, pension costs, and disappointing fundraising trends. Weakened operating performance including inability to cover debt service with a 5% endowment spending rate, reduction in unrestricted liquidity, meaningful reduction in total cash and investments, and softened prospects for donor support or inability to meet fundraising targets were all cited as potential drivers of another downgrade. Now, the opera estimates that it will lose $60 million of revenue – a 20% hit after it announced that it would cancel the rest of its season because of the coronavirus pandemic and begin an emergency fund-raising effort aimed at covering the anticipated loss of revenue.

Other NY institutions with debt outstanding include the Museum of Modern Art. It just had its rating of Aa2 affirmed in January by Moody’s which cited excellent visitor demand and programs and strong membership which support revenue prospects. It also noted that the museum remains vulnerable to changes in New York City tourism patterns or art programming preferences. Additionally the museum has some exposure to contractual expenses through pension plans and collective bargaining agreements. Now it has announced that it will stay closed at least until July and expected a nearly $100 million shortfall.

There will be other examples across the country as cultural and educational facilities around the country are closed potentially for extended periods.

IT’S FLOOD SEASON AGAIN

While signs of Spring abound after the 2nd hottest February on record, not all of them are good. This is the time of year when the National Oceanic and Atmospheric Administration released its annual Spring Outlook and its estimates of potential flooding during the winter runoff. Last year saw exceptional levels of flooding across the middle of the country.

This year, NOAA says that major to moderate flooding is likely in 23 states from the Northern Plains south to the Gulf Coast, with the most significant flood potential in parts of North Dakota, South Dakota and Minnesota. It is forecasting above-average temperatures across the country this spring, as well as above-average precipitation in the central and eastern United States. Significant rainfall events could trigger flood conditions on top of already saturated soils. 

The flooding will renew the debate over physical mitigation (flood walls and levees) versus strategies such as managed retreat. The greatest risk for major and moderate flood conditions includes the upper and middle Mississippi River basins, the Missouri River basin and the Red River of the North. Moderate flooding is anticipated in the Ohio, Cumberland, Tennessee, and Missouri River basins, as well as the lower Mississippi River basin and its tributaries. The West seems best positioned going into flood season. Drought conditions are expected to persist and expand throughout California in the months ahead, and drought is likely to persist in the central and southern Rocky Mountains, the southern Plains, southern Texas, and portions of the Pacific Northwest.

Once again, states and localities will be central to any response further straining finances after the impact of the corona virus pandemic. The Army Corps of Engineers and the Federal Emergency Management Agency, are linchpins of the nation’s flood response. They could be stretched thin as the nnation fights the virus.

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