Joseph Krist

Publisher

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IS CONGESTION PRICING HITTING A ROADBLOCK?

It has been the expectation that the era of congestion pricing in the US would officially begin on January 1, 2021. When the NYS Legislature authorized the City of New York to impose a scheme of congestion pricing to fund part of the Metropolitan Transportation Authority’s (MTA) massive capital funding needs, the goal was for the charges to begin on that date. This would provide time for the Legislature to work out the details of such a plan and the expectation was that the State’s budget process would lead to  the development of a full mechanism for the collection of the charges and the distribution of any resulting funds.

Now it looks as though achieving a January 1 start will be difficult if not impossible. That is because the pricing scheme must be approved by the US government – the Department of Transportation – as the result of federal funding for the MTA. That approval process also includes an environmental impact component. Therein lies the rub. The State and the City would be responsible for producing an analysis of the environmental impact of the plan. It would help if they knew to what level of analysis the feds would require any assessment to meet. Alas, the federal government has sat on the decision for the last ten months  and now the planning process is held up.

The issue is – does New York State and New York City have to undertake a more limited environmental assessment or a complete “environmental impact statement? It is a big deal because of the serious time implications of such a decision. A report by the National Association of Environmental Professionals on reviews concluded in 2018 cited academic data that showed that for agencies like the MTA that have conducted environmental impact statements with the Federal Highway Administration, it took an average of 2,691 days to complete the process. The shortest time any agency completed such a review with any agency in the federal government was 637 days.

With the State and the Trump Administration at virtual war right now over immigration policy, it would not be realistic to expect any help from the Administration. So it becomes increasingly unlikely that we see any monies paid until the approvals are secured. There also has to be time reserved for the inevitable flow of  litigation which the final regulations should generate. Those are ironically not anticipated to be made public until mid- November.

The situation begs the question of whether or not a full environmental review process just should have been part of the process to begin with. It is easy to become suspicious of just what everyone is afraid of as the result of a full review? Would proponents case for environmental benefit be undercut? Would the impact on the economy cause opposition? Would it support expanded use of the concept both in New York City and in other jurisdictions nationally? Why can’t supporters of significant policy changes based on issues like the environment just do the research, make the case, and then get on with making it successful?

It is a sign of how politically rather than policy driven so much of the current debate over climate, environment, and issues like “car culture”, “micromobility”, and the like find themselves. Government finds itself in the middle of the implementation conundrum. It is easy to criticize government – especially smaller less sophisticated levels of government – for their response to cultural and technological change. The situation in which New York’s congestion pricing scheme finds itself illustrates the difficulty government and therefore municipal credits face when  dealing with these sorts of issues.

FLORIDA UTILITIES

HB 653 is a bill pending in the Florida legislature which would forbid cities from using utility revenue for anything other than the maintenance and upgrade of the utility system’s infrastructure. Attention is being paid to the bill which does not have a companion bill in the Senate as local officials are rallying against it. The debate highlights a phenomenon which has been around for a long time.

Utilities have long been used to keep property tax rates lower primarily for residential properties. The political logic is pretty clear. The idea was that the electric rates paid by large commercial/industrial customers would not be such a significant marginal cost to those entities that they would care. Over the years, cities came to be reliant on often significant annual transfers of revenues out of municipal utilities.

How reliant? Recent press accounts cite examples like the State Capital in Tallahassee where $31 million was transferred to the City’s general operating funds, Jacksonville transferred $118 million to the city’s general revenue fund this fiscal year, and Gainesville’s utility provided $38 million (30%) for general revenue. So it is a significant issue in the Sunshine State. That easily explains the effort to derail the bill early in the legislative process. For utility investors, such a ban would reduce the level and timing of future rate increases. These would expect to be offset by a payment in lieu of taxes mechanism of some other which would require the utility to generate revenues for direct city use.

Nonetheless, the cities should be concerned. Obviously, that level of concern should reflect the proportion of operating funding derived from transfers. It’s generally a subject which comes up in times of fiscal stress on the part of entities on either side of the equation. When those pressures lead one side of the equation to seek changes in the rate of transfer, real credit implications can result.

More recently, it reflects the increasing attention being paid to the issue of infrastructure and the electric grid in particular. The understanding on the part of electric consumers and their desire for more flexibility in their own utility sourcing decisions increases daily. This places more attention on operating and economic efficiency with direct pressure on costs. This will only increase with the development of battery technologies, microgrids, and less centralized generation. Those pressures will be driven from the bottom up as climate change, sustainability, and other environmental issues alter the utility landscape.

PUERTO RICO

“The elected government of Puerto Rico does not support a plan based on the [February] Plan Support Agreement because the government has concluded that the current terms — standing alone — are not in the best interests of the people of Puerto Rico. And, without government support for the PSA and Amended Plan [of Adjustment], the Amended Plan cannon become a reality.” So now we see where the political establishment stands in what should be seen as a reinforcement of the belief that until populism ceases to be the primary driving force in the debt resolution process, that process will not result in resolution of the Commonwealth of Puerto Rico’s debt problems.

Puerto Rico’s Fiscal Agency and Financial Advisory Authority filed an objection to a central government debt-restructuring plan. Cutting through the technicalities, the motion indicates that further concessions to bondholders can only be seen as being detrimental to pensioners. Other legal moves saw the Ad Hoc Group of General Obligation Bondholders, Ad Hoc Group of Constitutional Debtholders, Assured Guaranty Corp, Assured Guaranty Municipal Corp., and Invesco Funds filed a motion to dismiss the board’s and the Unsecured Creditors Committee’s challenges to late vintage GO and Public Building Authority bonds.

It seems that there is little appetite for negotiation outside of legal proceedings. That is not positive at all.

PRIVATE HIGHER ED CREDIT SIEGE CONTINUES

We have hammered the point home for some time in a variety of forums about the enormous pressure small private college/university credits are under. Demographics are trending against maintaining demand over the short run. Those institutions depending on ongoing demand to generate tuition revenues will continue to display rating distress. We saw yet another example with the recent action by Fitch Ratings to downgrade the ratings on Immaculata University  to ‘BB-‘ from ‘BB’.

Immaculata was the first Catholic women’s college established in the Philadelphia area and it celebrates its centennial in 2020. recent times have not been kind as full time equivalent (FTE) enrollment declined by about 18% between fiscal years 2016 and 2019. That trend did end with a 3% increase in enrollments but it was achieved through an acceptance rate of over 80%. That is because on 20% of those accepted enroll.

The fundamental credit weakness in  the current environment is the fact that student-generated revenues constitute approximately 90% of university operations. Fitch notes that ” Immaculata’s student base exhibits an elevated level of price sensitivity, as even modest increases in net tuition and fee revenues are likely to result in further demand pressure.”  

Currently FTE enrollment is approximately 1,700 students in 53 undergraduate majors, seven master’s degree programs, three doctoral degree programs, and over 40 additional professional endorsement, certificate and certification programs. This puts the University right in the middle of a large pool of comparably sized and oriented private institutions competing for a currently limited demographic cohort.

We continue to believe that this sector is one to currently avoid. This is more evidence in support of that view.

INTERNATIONAL STUDENT ACCESS UNDER PRESSURE

Each year, the International Educational Exchange releases its Open Doors report on enrollment trends for international students. International students make up 5.5% of the total U.S. higher education population. According to data from the U.S. Department of Commerce, international students contributed $44.7 billion to the U.S. economy in 2018, an increase of 5.5 percent from the previous year. Because of that economic impact and the importance of these usually “full fare” students, they have become increasingly important to universities in particular.

There have been ongoing concerns that the immigration policies of the Trump administration might put a damper on demand from that sector. There have been a variety of reports on the difficulties students from a wide variety of countries have experienced with obtaining visas and visa renewals.  Overall, data shows that international student enrollments in the US increased 0.05% in 2019. One would have expected more robust demand absent conflicts with China and nation specific limits and bans.

One institution which is not happy with the current regime is the University of Illinois at Urbana-Champaign. It has the fifth-largest population of international students in the country. , according to the 2019 Open Doors. More than 15,000 are enrolled in the university system, including the Chicago campus. UI is at the forefront of a group of presidents and chancellors from nearly 30 colleges and universities in Illinois are pushing for lawmakers to do more to help international students and scholars who face new obstacles tied to immigration policy.

The group has sent a letter to the Illinois congressional delegation expressing “concern about changes in immigration policy and procedures that undermine the ability of our institutions — and the state of Illinois — to continue benefiting from the important skills and contributions of international students and scholars.”  That concern reflects academic concerns but also the fact that more than 53,000 international students went to colleges and universities in Illinois, according to the Open Doors report – contributing $1.9 billion to the state’s economy. 

It matters and is a situation worth continued monitoring.

DISCLOSURE

Recently, the various facets of the disclosure issues facing the municipal bond market were indirectly debated in an industry publication. And as expected, it featured the usual litany of reasons why investor demands for timely information are so difficult to fulfill. After some five decades in the municipal credit analysis sector, I have to admit to a high level weariness with the laments of issuers of various sizes and structures and their difficulties in meeting those demands.

My views are built on a foundational view that one knows the rules associated with access to the public securities markets. It is not that we don’t understand that there is a very wide range of municipal issuers and municipal credits. A single regulatory mandate does not fairly address everyone and every credit. That is not what the investing community is asking for and it is simply disingenuous to imply otherwise. And it becomes tiresome to hear arguments about the massive costs that good disclosure would create for ” taxpayers and rate payers who end up paying more for necessary infrastructure projects.” Please do not tell me that if it wasn’t for those pesky municipal bond analysts we could magically have more infrastructure.

There are reasons why private entities remain so when they are staring out or as they remain successful but at a smaller scale. These  entities often survived and thrived without the use of or access to private capital. They also have to provide less ongoing financial disclosure. Many of the sources of finance which supported those ventures have admittedly changed and become more concentrated. At the same time, the overall level and global availability of capital has created a whole new universe of funding outlets.

That creates opportunities for those who are prepared to compete in the current digital world. Instead of creating never ending hurdles to disclosure, the issuer  community would be better served putting its efforts into trying to generate and provide the kind of information which would serve to expand rather than limit our market. With every day the financial markets become more globalized. It may be that some levels of municipal bond issuer may not be able to access those markets (especially the international space). That means that there needs to be a better match between issuer and investor. That may mean that less fulsome and timely disclosure may still satisfy some investor classes while restricting access to others. Sorting that out is what markets do.

The challenge to issuers is to find and if necessary develop demand for their debt at a level of disclosure which is mutually satisfactory.  That could be bond banks, direct loan relationships with private lenders both bank and non-bank, or with state or municipally owned banks. The answer for those who trade and invest through the public markets should never be one which encourages less transparency.

NYS BUDGET

With some 40 days to go before the New York State budget must be enacted, the State Comptroller Tom DiNapoli has weighed in with his analysis of the Governor’s proposed fiscal 2021 budget. School Aid would increase by $826 million, or 3%, to $28.5 billion in the coming school year. This increase is less than the 4% growth allowable under a statutory limit related to personal income in the state. Funding for most local governments aid programs would be held flat, continuing a trend in recent years of decreases or level funding in such areas. These include Aid and Incentives for Municipalities, also known as AIM, the largest unrestricted aid program for local governments, as well as major funding for streets, highways and bridges.

Total capital spending over the current and next four years is projected at $66.7 billion, little changed from the estimate based on the SFY 2019-20 Enacted Budget. Projected transportation spending is increased $3.3 billion, partly offset by certain unspecified reductions from the previous plan. The budget would appropriate $3 billion for the Metropolitan Transportation Authority’s 2020-2024 capital program, although funding sources are not identified. 

The State’s own spending on Medicaid rose by nearly $10 billion through the decade ending in State Fiscal Year (SFY) 2018-19. While most of that growth was expected, unplanned cost increases more recently led to deferral of $1.7 billion in Medicaid payments from the end of SFY 2018-19 into the current year. The Division of the Budget anticipates a second consecutive deferral of $1.7 billion, into the coming fiscal year. The SFY 2020-21 Executive Budget Financial Plan relies on unspecified actions to generate $2.5 billion in Medicaid savings during SFY 2020-21, with the savings amount projected to rise to $3.5 billion within three years.

The budget recommends presenting a $3 billion Restore Mother Nature General Obligation (GO) Bond Act to the voters that, if approved, would provide funding to restore habitats, reduce flood risks, improve water quality, protect open space, expand the use of renewable energy and support other environmental projects. The budget would authorize an additional $10.3 billion in new state-supported debt, all to be issued by public authorities except the proposed $3 billion Restore Mother Nature GO Bond Act. Outstanding state-supported debt is projected to rise 20.3%, and annual debt service 48.4%, by SFY 2024-25. The Executive anticipates elimination of 2,500 state prison beds in the coming fiscal year, and a $181.5 million reduction in spending for the Department of Corrections and Community Supervision, partly reflecting budget language that would authorize additional prison closures. The Financial Plan assumes a deposit of $428 million to the Rainy Day Reserve Fund at the end of the current fiscal year.

The State has long been a utilizer of creative accounting maneuvers and the coming year is no exception. The Comptroller gives particular attention to recent actions In recent years which he feels serve to obscure actual spending increase amounts. The Executive has set a non-statutory goal of limiting annual growth in State Operating Funds spending to no more than 2%. The Financial Plan includes a number of budget actions – including timing-related adjustments, program restructurings, shifts and new categorizations of spending and other steps – that cloud the picture of spending growth. The readily identifiable actions described in this report are expected to reduce SFY 2020-21 State Operating Funds expenditures by a net of approximately $1.1 billion. Adjusting for such differences, State Operating Funds spending in the coming year would increase by 3.1 percent, compared to the 1.9 percent presented in the Executive Budget Financial Plan.

SANTEE COOPER SALE UNDER CONSIDERATION

The South Carolina Legislature has received information on three bids which have been submitted for the purchase of the South Carolina Public service Authority from the State. Dominion Energy, and NextEra energy of Florida were both chosen as possible companies that could take over. Santee Cooper itself also submitted a bid that is still on the table as it hopes to stay its own entity.

The bid from NextEra seems to be getting the most attention. NextEra is ready to pay off the Santee Cooper’s debt, provide refunds and rebates to customers, and settle an important class-action ratepayer lawsuit over a failed nuclear plant expansion. At the same time, NextEra wants the Legislature to “pre-approve” 800 megawatts of new solar generation; an expansion of Santee Cooper’s Rainey gas-fired power station in Anderson County; and the construction of a new, 1,250-megawatt gas-fired plant in Fairfield County. Here’s the catch. NextEra also wants assurances that it can bill customers for those plants if the projects are scrubbed because of state or federal regulatory changes, like a nationwide tax on carbon emissions.

The plan also anticipates that it would cut more than 40% of Santee Cooper’s workforce — some 700 employees. Dominion Energy also entered an offer to take over Santee Cooper’s management but leave the utility under state ownership. The House and Senate’s budget committees each must pick their preferred bid within the next month. Santee Cooper has already charged its direct customers and the members of South Carolina’s 20 electric cooperatives roughly $670 million for the abandoned Sumner nuclear project. Santee Cooper’s nuclear-related debt now stands at $3.6 billion.

State officials reached out to 55 companies and received interest or bids from 10 businesses. The Governor has thrown his support behind the NextEra bid. As for bondholders, the choice would be between the Santee Cooper bid and the investor owned utility bids. A private owner would have to defease the existing Santee Cooper debt. If Santee Cooper remains the owner, the debt would remain outstanding and the bondholders would continue to face the risk of potential litigation. NextEra’s proposal offers slightly higher rates in the long term but, it provides money to settle a major lawsuit brought by ratepayers over the failed V.C. Summer project. The Santee Cooper offer features lower rates over the next 20 years but no certainty as the utility heads to court in April. 

CANNABIS GROWS

The Colorado Department of Revenue’s Marijuana Enforcement Division reported that 2019 generated $1.75 billion in sales of legal cannabis. This represents a new high in sales and is a 13% increase in sales from 2018. Since legalization and the commencement of sales in 2014, sales have totaled $7.78 billion.

Taxes, license, and fee revenues for 2019 accruing to the State were $302,458,426. This raised the State’s total revenue take from these sources at $1,207,966,842. For FY 2015-16, the first $40M of the Retail Marijuana Excise Tax revenue was distributed to the PSCCAF. Excise tax collections in excess of $40M, $2.5M for FY 2015-16, were transferred to the Public School Fund. For FY 2016-17, the first $40M of the Retail Marijuana Excise Tax revenue was distributed to the administered by the PSCCAF. Excise tax collections in excess of $40M, $31.6M for FY 2016-17, were transferred to the Public School Fund.

For Fiscal Year (FY) 2017-18*, the first $40M of the Retail Marijuana Excise Tax revenue was distributed to the Public School Capital Construction Assistance Fund (PSCCAF) administered by the Colorado Department of Education’s Building Excellent Schools Today (BEST) program. Excise tax collections in excess of $40M, $27.8M for FY 2017-18, were transferred to the Public School Fund. Starting FY2018-2019, pursuant to HB18-1070, the greater of $40M or 90 percent of excise tax revenue will be credited to the PSCCAF. Any excess will be transferred to the Public School Fund.

On the regulatory front, the U.S. Department of Transportation (DOT) issued a notice clarifying that workers in safety-sensitive positions under its regulations will not be tested for CBD. The federal legalization of hemp means that cannabidiol derived from the crop is no longer a controlled substance. The notice made three specific points.

DOT “requires testing for marijuana and not CBD.”  Workers should remain wary of using CBD products because they are not currently regulated by the Food and Drug Administration and “labeling of many CBD products may be misleading because the products could contain higher levels of THC than what the product label states. The department said “CBD use is not a legitimate medical explanation for a laboratory-confirmed marijuana positive result.” So, if an employee using CBD that contains excess THC tests positive, it cannot be defended as a medical use.

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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NASSAU COUNTY

The Nassau Interim Finance Authority (NIFA) took control of the finances of the public benefit corporation running Nassau University Medical Center, saying the hospital’s condition “poses a material threat” to the county. NuHealth, the public benefit corporation that is the medical center’s parent, had a cumulative loss of $193.9 million between 2015 and 2018. The resolution adopted by the Authority allows NIFA to “take whatever actions they deem necessary or appropriate” to enforce the resolution placing NuHealth under NIFA’s control. This is effectively the kind of oversight which the Authority exercises over the County. They will not run the hospital but will have significant sway over those who do.

NIFA controls could lead to imposition of an employee wage freeze and requirements that NUMC submit contracts, budgets and union agreements to the control board for approval. NUMC showed cumulative losses of $193.9 million between 2015 and 2018, according to the NIFA resolution. It estimates operating losses were $46.6 million in 2018, compared with $25.7 million in 2017.

NIFA’s basis for intervening is the guarantee of some $188 million of debt by Nassau County. NIFA has determined that current trends will exacerbate the hospital’s problems and is an unacceptable risk for the County. There  is a long record of county owned and operated hospitals experiencing operating losses which were funded by the counties. Ultimately, those situations would have significantly hampered general county finances so spinoffs of those institutions generally resulted.

The decision to impose oversight comes at a time of great uncertainty for safety net providers in the State. Sharp increases in Medicaid costs are at the center of the State’s current budget debate as the Legislature grapples with an estimated $6 billion budget gap for the fiscal year beginning April 1. It is therefore unlikely that the County will be able to rely on additional outside funding for its operations. This makes the oversight role of NIFA even more important.

PUERTO RICO

An agreement with bondholders announced by the Commonwealth’s federally created financial oversight board Is estimated to effectively eliminate some $24 billion of debt. The deal would reduce $35 billion of bond debt and other claims to about $11 billion.  Bondholders would face average haircuts of 29% for GO bonds and 23% for PBA bonds. This is less than proposed  haircuts of 36% to 65% that were included in the September plan of adjustment. According to the PROMESA board, “lowers total debt payments relative to the agreement we reached last year, pays off commonwealth debt sooner, and has significantly more support from bondholders, further facilitating Puerto Rico’s exit from the bankruptcy that has stretched over three years.”

Pensions remain at the center of the negotiations. The board has been seeking a maximum 8.5% cut for retirees who receive more than $1,200 in monthly benefits. Pensioners and the Governor of Puerto Rico insist that if the bondholders position improved that their position should also improve.

Of importance to investors is that the deal if ultimately adopted calls for the Commonwealth to stop its efforts to have some $6 billion of Commonwealth debt declared invalid. Those bonds, issued between 2012 and 2014 were the subject of litigation which contended they were issued in violation of Puerto Rico’s constitutional debt limit. Under the terms of the revised proposal, creditors would receive $10.7 billion in new debt, divided between GO bonds and sales tax-backed junior lien bonds, along with $3.8 billion in cash. Positively, the plan also reduces the timeframe to retire the Commonwealth’s legacy debt to 20 years from 30 years.

Regardless of how negotiations over the restructuring of the Puerto Rico Electric Power Authority (PREPA) end up, it appears that a giant opportunity is being squandered to create a more sustainable and viable electric utility. This week, the executive director of the Fiscal Control Board, said that PREPA is “arms crossed” on the negotiations of renewable energy projects for Puerto Rico. “As of today, PREPA has not finished any discussion and, much less, some negotiation with renewable energy producers so that the people of Puerto Rico benefit from cheaper, cleaner and more reliable energy. To the extent that PREPA remains arms crossed, the people continue to be penalized while unsustainable rates are paid month by month.”

We have consistently argued since the immediate aftermath of Hurricane Maria that an opportunity had been created to reimagine the island’s utility grid. We advocated for the greater use of renewables to take advantage of Puerto Rico’s abundant wind and solar exposure. We also advocated for the creation of microgrids centered around diverse local sources of generation. Since that time, the recent experience of earthquakes highlighted the attractiveness and viability  of local generation and distribution. In the limited  number of jurisdictions with access to these modalities, the disruption from the earthquakes was mitigated. So the case is being made. Just like so many other things in Puerto Rico, populism and politics keep getting in the way.

The perception of a government less than focused on efficiency was supported by the news that the finance director of the government-sponsored Puerto Rico Industrial Development Company said in the police report that the island’s government had unwittingly handed over $2.6 million to thieves after being fooled by a bogus email message. An email message contained instructions to transfer money intended for the public pension system to a different bank account than had been used before. The finance director  said his office sent the money to a foreign account on Jan. 17. They are not alone. Another government entity, the Puerto Rico Tourism Company, had been fooled into transferring $1.5 million. 

It has been noted that training for the Commonwealth’s work force was less than sufficient. One observer noted “Training is forgotten because it costs. Hospitals have to have them because they have to comply with regulations. Government agencies have no regulations.”

TRANSPORTATION

Legal proceedings challenging Washington State Initiative 976 are underway. The Initiative passed in November. It limits most taxes paid through annual vehicle registration at $30 and largely revokes state and local authority to add new taxes and fees. A coalition of cities, King County and Garfield County’s transit agency sued to overturn the Initiative which the state Office of Financial Management estimates would cost the state and local governments more than $4 billion in revenue over the next six years.

While the legal process plays out, local transportation agencies have been raising the specter of unpalatable cuts. Seattle said it would have to cut 110,000 bus hours. Garfield County said it would have to halve the transportation services it provides to help seniors and disabled people.

The hearing follows a ruling from the same court in November that the initiative’s ballot title was misleading because it said the measure would “limit annual motor-vehicle-license fees to $30, except voter-approved charges.” The judge has already indicated that the litigation against the initiative would succeed.  He believes that the language in the initiative referring to “voter-approved charges” led some voters to believe that existing local funding sources would not be affected.

The effort to defend the Initiative is part of a long battle waged by an anti-tax activist who is now running for Governor. Previously, he had sued to stop the car tab taxes unsuccessfully. He believes that the initiative would allow for the end of voter approved taxes in the Puget Sound region used to expand Sound Transit.

Meanwhile, Seattle’s southern neighbor Portland, OR has decided to ask voters to approve a 10-cents-per gallon gas tax in May. The tax would continue the gas tax program for another four years. Portland voters approved the gas tax in 2016 with 56% of the vote.

WHO’S STREETS? OUR STREETS!

We will employ this headline for our ongoing observations of the transportation sector especially as it involves “micromobility”. We were struck by two recent themes we saw expressed in current literature on the subject. One put forth the view that cities have “lost” the technology battle. The other unwittingly showed where the problem lies.

In a sector that is evolving as quickly as the “micromobility” space, it is not realistic to expect that municipalities could be prepared for the essentially lawless approach that so-called transportation disrupters would take. It’s clear that the approach reflects a conscious decision that it is somehow better or easier to deploy a given modality without consideration for any regulatory process. Whether it is ride sharing, rental bikes, or motorized devices, the proven practice has been to deploy often without any attempt to engage with local jurisdictions. That is of course until the problems associated with them generate enough public support for action.

The question is what are local jurisdictions supposed to do when a particular player insists on deployment under its terms or not at all. A current example is the ongoing dispute between Uber and the City of Los Angeles over the City’s regulation of electric scooters. The City Council last year adopted a pilot program that regulates the number of electric bicycles and scooters each company can have in its fleet. After demonstrating compliance with program requirements and meeting certain performance criteria, LADOT can allow companies to increase their fleet size.

The approval of e scooters by the City accompanied the rollout of the City’s Mobility Data Specification (MDS) technology. It is designed to receive real time trip data each scooter is equipped to provide. It has been the subject of robust debate within the industry as providers struggle to placate the City while addressing the perceived privacy concerns of its users. MDS can be used to inform policy decisions, like where to put a protected bike lane or how to ensure low-income residents have access to dockless vehicles. It also allows the agency to use MDS to send instructions back to the mobility companies. That enhances the City’s ability to address issues like illegal parking of scooters especially in places like sidewalks.

Of the major scooter providers (Uber owns JUMP), only Uber refuses to provide the data. Consequently, the City has banned JUMP scooters and bikes from its streets. In keeping with its annoying history, Uber has chosen to fight the regulation in court. So how is this a failing on the part of the City? They made a rule, implemented and enforced a regulatory structure and one potential provider did not like it. Unsurprisingly, Uber suffered another defeat legally when a city hearing officer upheld the Los Angeles Department of Transportation’s temporary ban on Uber’s JUMP e-bicycles.

At some point, the industry will realize that they do not own the streets and that government has a duty to regulate the use of those streets. Especially, when private entities seek to exploit those streets for private gain at the expense of public facilities and services. For an example of how these things can work, look to the recent approval of a pilot program for electric bikes and scooters approved in Jacksonville, FL. The State of Florida legalized e-scooters and similar devices throughout the state in June through   House Bill 453 which provides for Florida cities to regulate micro mobility devices. For a company to install a corral and operate scooters in Jacksonville there will be permit, renewal and annual fees. The companies also will have to purchase performance bonds for each device up to $10,000. The program sets travel boundaries for the electric scooters and bikes.

TRUMP INFRASTRUCTURE PROPOSAL

The proposed FY 2021 budget from the Trump Administration includes an $89 billion budget request for USDOT FY 2021 funding – a nearly 2 percent increase above FY 2020 appropriations, of which $64 billion would come via the Highway Trust Fund (HTF). The request is step one in a proposed 10 year plan to invest $86 billion in infrastructure annually through 2030. The administration noted, however, that its request for $21.6 billion in discretionary transportation budget authority for FY 2021 is a $3.2 billion or 13 percent decrease from what was enacted for FY 2020.

The proposed $810 billion, 10-year surface transportation package would increase spending by 12% over the amount the Congressional Budget Office of current surface transportation funding projection based on existing law. That would produce an average annual investment of $60.2 billion for highways over the decade, with $15.5 billion yearly for transit, $2 billion for National Highway Traffic Safety Administration and Federal Motor Carriers Safety Administration, $1.7 billion for rail, and $100 million for pipeline and hazmat safety. A serious proposal would have included ideas for fully funding the program. Efforts to impose higher fuel taxes and/or vehicle mileage taxes should be at the center of any of those discussions and there is support for both.

Ironically, the budget does include non-fuel based fees for infrastructure financed through the Inland Waterways Trust Fund. Here the budget offers ideas such as a per vessel tax on commercial boats. Contrast this with the road proposals where the Highway Trust Fund is facing a cash shortfall in FY 2021 and FY 2022. This proposed budget for FY 2021 seeks to eliminate general fund supplements to transportation outlays made by Congressional appropriators in recent years and seeks to build those additional dollars into affected program baselines, supported by the HTF rather than the general fund.

AIRPORTS

The Des Moines, IA Airport board voted in 2016 to build a new terminal at the airport grounds and rebuild the runways. The total cost of the overhaul was estimated at about $500 million. Some $300 million in funding has been identified for the project relying on a combination of sources including cash on hand, passenger and airline fees, authority-issued bonds and grant money.  The last 40% of the funding gap has been hard to fill.

One source which will not be tapped is private facilities to be constructed at the airport. In the case of Des Moines, there was a proposal to build a casino and hotel on the airport’s grounds. The project proponents claimed that the project could generate some $194 million for the airport capital plan. Like so many projects like this, the motives of a proposed developer have gotten in the way much as they did in St. Louis.

Here’s the catch. There is one casino operating in Des Moines and Polk County. It originated as a race track and as that industry declined, casino gambling provided greater potential. So 16 years ago, Des Moines, Polk County and Prairie Meadows Casino and Hotel entered into an agreement that requires elected officials to reject any proposed new casino in the city or county in exchange for a share of gaming revenue from the casino. The city receives about $6 million in gaming revenue annually from the county-owned Prairie Meadows.

So this drives the airport board to look at traditional financing away from a P3. Federal and state grants and passenger facility charge revenues are the likely sources. This is where the current state of federal infrastructure policy (or more correctly the lack thereof) comes in and highlights the role of municipal bonds. The level of passenger facility charge caps is a constant source of conflict between air carriers and airports. Many airports would love to raise the charges above their currently capped $4.50 level. That would require federal legislation to lift the cap.

In the absence of some policy consensus at the federal level, raising the PFCs looks like the easy thing to do. Of course, this debate will occur during both an election year and a likely much less profitable year for the airlines as they grapple with the corona virus issue. So an increase in PFCs is hardly a foregone conclusion. If it does happen, we would expect to see a flurry of municipal bond financings for airport improvements.

RATINGS AND GOVERNANCE

We were struck by the juxtaposition of two headlines regarding recent developments in the credit supporting debt issued by the Town of Oyster Bay, NY. The first covered the engagement of a consultant to improve the City’s disclosure under the terms of a settlement agreement with the Securities and Exchange Commission (SEC). In November 2017, the SEC charged Oyster Bay and a former Oyster Bay supervisor with defrauding investors in Oyster Bay’s municipal securities offerings by hiding the existence and potential financial impact of side deals with a businessman who owned and operated restaurants and concession stands at several town facilities.  Oyster Bay agreed to settle the case by agreeing to permanent injunctions against violating the antifraud provisions of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and to the retention of an independent consultant to advise the town on its policies, procedures, and internal controls regarding its disclosures for securities offerings.

At the same time the formal engagement of the consultant was announced, Moody’s announced that it has upgraded the town’s issuer and general obligation limited tax (GOLT) ratings to Baa2 from Baa3. The outlook remains positive. According to Moody’s, “the upgrade to Baa2 reflects recent improvements to the town’s financial position resulting from cost cutting and substantial tax increases as well as improved liquidity eliminating the need for annual cash flow borrowing and successful resolution of the bulk of the town’s legal problems, including the SEC suit, without material ill effects. The issuer and GOLT ratings also reflect the town’s large tax base, strong resident wealth and income, exposure to litigation, and weak, albeit much improved, financial position.”

From our standpoint, the move essentially imposes no cost to the Town in terms of its ratings even though it engaged in practices intended to deceive. It might have been more appropriate to maintain the rating even with a positive outlook. This would recognize that the Town has indeed made fiscal progress without rewarding the governance failures which led to the SEC investigation and settlement. Let the Town put out clean financials and honest sale disclosure before effectively rewarding it.

Our view is that individual investors continue to put too much faith in the rating agencies to protect them from bad actors. Whether that is the appropriate role for rating agencies is up for debate but given the fact that they are trying to stake out positions and roles associated with the growth of the ESG sector on the buy side, they need to decide quickly what constitutes good governance. Oyster Bay was an opportunity to establish some benchmarks but instead the opportunity was passed up.

AUTONOMOUS VEHICLES

A House hearing on autonomous vehicle deployment served to highlight many of the issues holding back implementation and regulation of these vehicles. The testimony served to highlight the potential of AV technology to address issues such as safety and improved access for the elderly and disabled. At the same time, it also drew attention to the many areas of concern the public has with many aspects of AV deployment.

The hearing did not address measures that should be taken if a human needs to override; for example, if a human needs to take over and operate a vehicle, a steering wheel and pedals might be useful in this endeavor. Issues around cybersecurity were raised.  One Congressperson raised the potential for “bad actors to hack and commandeer vehicles.”

One other issue holding things back is the issue of liability. Current safety standards and insurance practices and regulations assume that humans are operating vehicles. As one witness put it, “the difference between an automated vehicle and a human-driven vehicle is a promise. It is a promise from the manufacturer of that automated driving system that they will operate the vehicle safely on our roads.”  

The resolution of insurance and regulatory issues will be a key to full implementation of AV technology on the nation’s roads. This places government at all levels at the center of the process of resolving these issues. It is another example of a question we asked earlier – Whose streets?

HEALTHCARE

The federal government continues its efforts to limit access to healthcare through the Medicaid program. In addition to its efforts to limit expansion of the program and overturn Affordable Care Act provisions supporting it, it is now using the regulatory apparatus to add layers of bureaucracy to the process. The latest example is this week’s announcement that the Centers for Medicare & Medicaid Services (CMS) has issued a proposed Medicaid Fiscal Accountability Rule (MFAR).

The rule would among other things establish requirements regarding state plan amendments (SPAs) proposing new supplemental payments, and addresses the financing of supplemental and base Medicaid payments through the non-federal share, including states’ uses of healthcare-related taxes and provider-related donations, as well as the requirements on the non-federal share of any Medicaid payment. 

States have reacted negatively. The proposed changes would make it harder for states to manage the use and allocation of its (as opposed to federal resources) own resources. The proposed amendment would clearly limit permissible state or local funds that may be considered as the state share to state general fund dollars appropriated by the state legislature directly to the state or local Medicaid agency; intergovernmental transfers (IGTs) from units of government (including Indian tribes), derived from state or local taxes (or funds appropriated to state university teaching hospitals), and transferred to the state Medicaid Agency and under its administrative control; or certified public expenditures (CPEs), which are certified by the contributing unit of government as representing expenditures eligible for federal financial participation (FFP).   

It is hard to see how the reporting and data production asks being made under the proposed rule reflect much more than a desire to cut the federal share of healthcare funding. That would likely result in a higher cost burden for states as they would be looked to for the funding of charity care in an era of lower overall reimbursements. That would be credit negative for both government and the provider sector.

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

Joseph Krist

Publisher

________________________________________________________________

NEW YORK CITY PROPERTY TAXES

New York City’s property tax scheme has always created wide disparities in how individual properties are valued and taxed. This has created tax burdens unrelated to ability to pay and has wound up creating valuations in high value neighborhoods which result in lower tax burdens for those with the ability to pay versus those who face constrained incomes. One example – Co-ops and condos are not taxed at their true market value under the current system, but rather on the income generated by similar rental buildings.

The Commission recommends moving coops, condominiums and rental buildings with up to 10 units into a new residential class along with 1-3 family homes. The property tax system would continue to consist of four classes of property: residential, large rentals, utilities, and commercial. It calls for a sales-based methodology to value all properties in the residential class and for assessing every property in the residential class at its full market value. It wants annual market value changes in the new residential class be phased in over five years at a rate of 20% per year, and that Assessed Value Growth Caps should be eliminated. A partial homestead exemption for primary resident owners with income below a certain threshold is another recommendation. The exemption would be available to all eligible primary resident owners in the residential class and would replace the current Coop-Condo Tax Abatement.

The changes could affect 90 percent of all homeowners in New York City, according to the commission chairman. The City Council and the State Legislature would both have to approve any changes which create significant hurdles to implementation. For that to happen, lots of opposition on the ground will have to be overcome as there is no constituency for paying more especially with the Legislature up for reelection in November.

NYC IBO BUDGET ANALYSIS

The Independent Budget Office for the City of New York has released its preliminary review of Mayor Bill de Blasio’s proposed budget. IBO projects a fiscal year 2020 surplus of $2.66 billion—$65 million less than the  de Blasio Administration. It estimates a surplus of $240 million in 2021 and a shortfall of $1.7 billion in 2022. IBO’s forecast of tax revenue exceeds the de Blasio Administration’s by $210 million this year, rising to $644 million in 2021 and $906 million in 2022. IBO forecasts tax revenue growth of 5.0 percent this year, slowing to increases of 2.6 percent and 3.4 percent over the next two years. It projects that tax revenues will increase more rapidly than city-funded expenditures from 2019 through 2024.

On the expenditure side, IBO projects that the city’s cost of providing shelter for the homeless will be $216 million more in 2021 than budgeted by the de Blasio Administration. That finding combines with a less optimistic view of the city’s budget cushion than that of the Mayor. IBO projects the fiscal year 2020 surplus will total $2.66 billion, $65 million less than expected by OMB. This as IBO forecasts a sharp decline in employment growth over the next two years. That reflects projected slower employment growth across all private-sector industries. education and health services are expected to be the primary employment drivers but the health sector could be negatively impacted by proposed state budget cuts.

CYBER SECURITY RISKS NOW CLEAR

The credit risk associated with a ransomware attack has now been made clear to municipal bondholders. Pleasant Valley Hospital in West Virginia was the victim of such an attack. It now is reporting that the cost of recovering from the attack and the ransom demand it ultimately resulted in have materially impacted its credit. Because of the attack, the hospital was forced to spend about $1 million on new computer equipment and infrastructure improvements. It has occurred at a time when the hospital was already experiencing a decline in patient volumes which negatively impacted revenues.

The result is that financial performance has been inadequate and the bond trustee for the hospital has notified bond holders that the hospital’s debt service coverage for the fiscal year that ended on Sept. 30 to fall to 0.78 times. That is substantially below the 1.20 times debt service coverage the loan agreement requires, according to the material notice to bondholders.

This event shines a light on the problems our industry has had with dealing with the issue of cybersecurity risk. While the hospital has disclosed about the level of unplanned remedial spending it was forced to do, it did not answer one key question which investors should be interested in – was the ransom paid. The hospital declined to deal with that leaving its cybersecurity insurer to answer which it declined to do.

If cyber attack victims begin to be seen as willing payers of ransoms, we believe that the level and volume of these incidents will continue. Recent incidents have led to payments (mostly healthcare providers) in response to demands. Governments have seemed less willing to do so. This will increase the risk associated with healthcare credits even more if they make themselves into a target rich sector.

CALIFORNIA DAMS BACK IN THE NEWS

The California State Auditor recently issued the results of an audit of conditions and inspection practices at the over 1200 dams in the state. Unsurprisingly, it found that the State’s flood control structures, like the highway system, are aging and deteriorating. California experienced exceptional levels of precipitation in the winter of 2016–17 caused by a series of atmospheric rivers that caused flooding throughout the State and exposed vulnerabilities in the flood control infrastructure. In early 2017, after multiple storms, a large hole broke open in the main spillway of the Oroville Dam. Dam operators decreased the outflow to minimize the damage, but with the heavy rain and quickly rising water levels on Lake Oroville, the reservoir filled and water crested over the emergency spillway for the first time in the dam’s history. The runoff caused the upper portion of the hillside below the emergency spillway to erode rapidly, and county officials ordered the evacuation of approximately 180,000 downstream residents until the risk of flooding could be reduced.

Oroville Dam is just the most prominent example. According to the Auditor, most of the major dams in the State are vulnerable, with a median construction date of 1955. Data from the dams safety division show that, as of August 2017, 98 of the 1,249 dams throughout California are in less‑than‑satisfactory condition due to seismic, structural, and other deficiencies. Many of the dams in less‑than‑satisfactory condition are near urban areas in the Bay Area, Southern California, and the Central Valley and, as a result, pose an extremely high downstream hazard potential. Data from the dams safety division show that it has placed restrictions on 39 percent of the dams in the State that are in less‑than‑satisfactory condition.

It must be noted that a significant number of these structures are privately owned and operated. Although the State is responsible for regulating and supervising the construction and repair of major dams, improvements to dams are ultimately the responsibility of their owners, who are generally not state or federal agencies. The state requires that by 2021 all dams—except those with low hazard potential—must submit emergency action plans and make those plans publicly available. That will provide a better measure of the potential level of demand for capital investment needed to address the problem.

It is likely that municipal bond financing will be involved.

PENNSYLVANIA TURNPIKE COURT VICTORY

On 27 January, the US Supreme Court denied the Owner Operator Independent Drivers Association’s (OOIDA) petition for a writ of certiorari to review the Third Circuit’s decision to affirm the lower court’s dismissal of OOIDA and other plaintiffs’ lawsuit against the Pennsylvania Turnpike Commission  and the Commonwealth of Pennsylvania. The denial of OOIDA’s petition is credit positive for the PTC and the state because it provides near final clarification on the legality of the funding laws that use PTC tolls for non-system needs, including other transportation and transit needs in the state.       

After a long period of infrequent toll increases, the Commonwealth decided earlier in the last decade to raise tolls and generate excess revenues to be used to address local capital needs supporting the state’s road system. This funded an annual transfer from the Turnpike Commission of $450 million. That raised the ire of the trucking industry which felt it was being singled out as a source of funding as they believed that the bulk of the increased toll burden fell on them. Hence, the litigation against the PTC and the commonwealth. The plaintiffs alleged the PTC, the state and others violated the dormant commerce clause and the constitutional right to travel by charging higher tolls on the turnpike system to fund other state transportation needs, like capital needs of the state’s transit enterprises.

Existing state statute requires the annual PTC transfer to the state to decline to $50 million from $450 million starting in fiscal 2023. To address the issue of funding for local roads, Act 89 identified the Motor Vehicle Sales and Use Tax as the replacement source of revenue to fill the funding gap that will materialize when the transfers decline.  The funding plan to use turnpike revenue had real negative credit impacts for the PTC. The PTC currently has $6.7 billion of subordinate debt outstanding that was issued to fund these transfers to date and it will rise through fiscal 2022. The pressure to support that debt and maintain the Turnpike led to rating declines. The favorable court decision is credit positive for the PTC.

Nonetheless, the impact of the litigation outcome is uncertain. In the aftermath of the decision, there are concerns that the unsuccessful legal challenge could still encourage the Legislature to abandon plans to use different revenues to fund the state’s local road needs. While this is a legitimate concern, the current atmosphere in the State legislature supports speeding up the shift from turnpike revenues to the fuel revenues. This uncertainty will slow actual rating improvement but the current environment makes for a better trading environment for Turnpike debt.

PUERTO RICO

Holders of municipal bond debt issued on the behalf of the Puerto Rico Employees Retirement System have had a bad run in the federal courts. The latest blow to their case occurred when a U.S. Appeals Court ruled that bondholders’ claim on the assets of Puerto Rico’s public employee pension system ended when the system filed for bankruptcy in May 2017. The First Circuit Court of Appeals affirmed Federal Judge Laura Taylor Swain’s June, 2019 decision that bondholders’ claim on employer contributions to the U.S. commonwealth’s Employees Retirement System (ERS) did not extend into bankruptcy.

ERS’s assets include certain properties and investments that it had before requesting bankruptcy-like protection under Title Three of PROMESA, in May 2017. The First Circuit ruling clearly denies the access of SRE creditors to Public pension contributions. Those contributions include payments from employees so employees were effectively pitted against bondholders. Increasingly in recent bankruptcies, that has been a losing proposition for bondholders.

The financial oversight board took the view after the ruling that ” the commonwealth has no obligation to pay bondholders other than the value of encumbered assets in ERS when it commenced its case under Title III of PROMESA.” As things currently stand, the plan of adjustment the board filed in court in September for Puerto Rico’s core government debt and pension liabilities included an 87% haircut or value reduction for ERS bonds. 

The bondholders continue to face legal adversity. They are appealing the decision of Judge Swain who is overseeing the Title III proceedings from Jan. 7 denying their motion for the appointment of a trustee to pursue ERS claims arising from the oversight board’s role in the system’s bankruptcy.

The PREPA restructuring has hit another roadblock as the Governor and the Legislature’s leadership have come out against any rate increase for retail customers that might be part of a debt restructuring. Disagreements over rate increases have delayed hearings on a proposed restructuring have been delayed on five occasions as the parties attempt to marshal political support necessary to any restructuring agreement implementation. The existing proposal for an agreement with PREPA bondholders begins in the first year with a Settlement Charge of 1 cent per kilowatt hour. Then it increases to 3.46 c / kWh from the 2nd to the 4th year and to 3.7 c / kWh in the 5th year. This includes the basic Transition Charge plus the Subsidy Charge, which reaches up to 25% of the Transition Charge.

OHIO OPEB COST SHIFT

The Trustees of the Ohio Public Employees Retirement System approved changes in the funding of retiree health costs. Beginning January 1, 2022, for retirees who are Medicare-eligible — ages 65 and older — the monthly allowance provided by OPERS to offset health care costs will be reduced. The allowance currently ranges from $225 to $405, depending on age, years of service and retirement date. The lower allowances will range from $178 to $315.

Retirees under the age of 65 will no longer be covered by a group plan, where OPERS picks up between 51 percent to 90 percent of the cost. On average, retirees are paying $354 a month. Those employees will be expected to apply a monthly stipend towards the purchase of insurance on the open market and through the Affordable Care Act.

Clearly the state is shifting its cost base from itself to Medicare. Without the changes, OPERS projected that its $11.3 billion health care fund would run out of money by 2030. OPERS has $94 billion in assets for pension benefits and serves 1.14 million people. OPERS covers most of the city, county and state workers, has provided health care coverage to retirees since 1974.

In addition to the reduced healthcare benefit, OPERS hopes to have legislation enacted which would  eliminate the cost of living allowance given to retirees in 2022 and 2023 and delay the COLA for two years for all new retirees. 

Like many approaches to the “reform” of pension and OPEB funding, this one puts the onus of the recipients. It acknowledges that the political reality is that trustees want to explore the idea of asking lawmakers to increase the employer contribution rate to generate funds for health care coverage. Lawmakers and taxpayers are considered unlikely to embrace such a change.

Moody’s has declared the changes to be credit positive. We agree that reduced funding requirements are good for the state’s finances but the changes do create a couple of areas of risk. One is that the Trump Administration is focusing on supporting litigation to invalidate the Affordable Care Act. Should it succeed, one of the pillars of Ohio’s plan will be destroyed. Along with efforts to eliminate protections for patients with preexisting conditions, the availability of insurance for many individuals would be in question. If that occurs with no replacement, the state’s Medicaid burden could be significantly impacted.

We think that it will take an extended period to see if the overall health insurance structure which emerges over the next few years actually is positive for Ohio. If it is not, the economic impact on the state will be quite negative. Case in point follows below.

PROPOSED FEDERAL MEDICAID CHANGES

Medicaid has been in the news as it is at the center of the Fiscal 2020 budget process in New York State. While the State seeks to adjust and shift cost responsibilities for the program to county and local governments (a large chunk would come from New York City), a major wrench has been thrown into the works with the release of proposed changes from the Centers for Medicare and Medicaid (CMS).

This week, CMS released a proposal to states which would significantly alter federal funding for the program. CMS proposes to effectively cap annual federal spending for Medicaid by converting the funding mechanism to a block grant formula. According to CMS, the changes are intended “to provide states with a menu of maximum up-front flexibilities with which to design their program. It is clear from the letter containing the proposal that the goal is to limit spending, restrict access, and encourage the use of non-hospital facilities to provide services. The language belies the magnitude of the proposed changes.

Here are some examples:  The ability to impose additional conditions of eligibility, such as community engagement requirements for non-elderly, non-pregnant adult Medicaid beneficiaries who are eligible for Medicaid on a basis other than disability. That is bureaucratic speak for work rules. This despite consistent court rulings against the imposition of such requirements. In addition, states are finding that work requirement enforcement has not been successful due to difficulties with verification. Another is the ability to make certain changes in benefits, premiums, and co-payments during the course of the demonstration without the need for state plan or demonstration amendments and further approval by CMS. Providers are going to love that one whether they be individual practitioners or hospitals. Nothing helps financial planning or credit stability like the uncertainty such a system would provide.

Another would provide the ability to change eligibility and enrollment processes, such as eliminating retroactive eligibility. The changes would also provide the ability to make certain administrative changes during the course of a demonstration under the proposed changes, such as certain changes in provider payment rates and application of claims review prior to making payment, without amendments or further approval by CMS. providers would be unable to determine how much they might receive over the course of a year which would likely make it less likely that providers would like to participate.

Bottom line is that while some states see these proposals positively, the expansion of Medicaid has been an unqualified political success. Just about every time voters have had an opportunity to support Medicaid expansion under the ACA, they do. The do it in red states especially (Utah and Idaho, e.g.). Once Kansans got rid of their ideologue governor, Medicaid expansion was supported there as well. So the idea that the federal efforts to restrict healthcare access is not only a political winner but also a financial winner for states and counties just does not stand up to the facts.

The proposed cuts would hurt hospitals by reducing their revenues, reducing incentives to get care outside of a hospital setting (emergency rooms), and forcing them to rely on state funding to cover the increased charity care burden which will result. All of that is credit negative for hospital credits.

RURAL WOES CONTINUE

Now that the Muni Credit News has moved its headquarters to upstate New York, our existing focus on the unique credit and infrastructure needs of rural areas becomes more intense. In the midst of trade wars and commodity price uncertainties, we now have additional evidence of the difficulties facing rural economies. The latest evidence comes from Farm Bureau, an independent, non-governmental, voluntary organization which advocates for farmers. 

According to the Farm Bureau, while well below historical highs, Chapter 12 family farm bankruptcies in 2019 increased by nearly 20% from the previous year, according to recently released data from the U.S. Courts. Compared with figures from over the last decade, the 20% increase trails only 2010, the year following the Great Recession, when Chapter 12 bankruptcies rose 33%.

During the 2019 calendar year there were 595 Chapter 12 family farm bankruptcies, up nearly 100 filings from 2018 and the highest level since 2011’s 637 Chapter 12 filings. Given that there are slightly more than 2 million farms in the U.S., the 2019 bankruptcy data reveals a bankruptcy rate of approximately 2.95 bankruptcies per 10,000 farms, slightly below the rate of 2.99 filings per 10,000 farms in 2011.

During the fourth quarter of 2019, there were 147 Chapter 12 bankruptcy filings, which was up 14% from the prior year but down 8% from the third quarter of 2019. On a year-over-year basis, Chapter 12 filings have increased for five consecutive quarters. The continued increase in Chapter 12 filings was not unanticipated given the multi-year downturn in the farm economy, record farm debt, headwinds on the trade front and recent changes to the bankruptcy rules in 2019’s Family Farmer Relief Act, which raised the debt ceiling to $10 million.

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

________________________________________________________________

HEALTHCARE

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

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

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

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

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

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

STATE BUDGETS ALREADY GENERATING TRENDS

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

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

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

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

DETROIT

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

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

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

PRIVATE COLLEGE RATING PRESSURE

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

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

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

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

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

INFRASTRUCTURE “PLAN” FROM DEMOCRATS

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

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

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

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

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

HOTEL TAXES

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

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

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

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

DEMOGRAPHICS AND CREDIT

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

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

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

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

COAL TAKES ANOTHER HIT

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

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

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

ROCHESTER, NY SCHOOL DISTRICT

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

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

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

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

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

Joseph Krist

Publisher

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PUBLIC HIGHER ED GETTING MORE EXPENSIVE

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

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

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

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

PUBLIC POWER COTINUES TO LEAD ON COAL

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

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

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

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

Tri State is rated A- by S&P.

 NEW YORK STATE SCHOOL DISTRICTS

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

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

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

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

ARIZONA TAX INCREASE FOR TRANSIT UPHELD IN COURT

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

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

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

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

PUERTO RICO

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

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

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

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

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

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

MARYLAND P3 MOVES FORWARD

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

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

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

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

NEW YORK STATE BUDGET

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

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

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

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

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

WHO OWNS THE STREETS?

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

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

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

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

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

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

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

Joseph Krist

Publisher

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RURAL CREDIT AND BROADBAND

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

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

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

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

NYC BUDGET

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

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

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

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

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

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

HEALTHCARE

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

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

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

TRANSIT DEVELOPMENTS CULTURAL REALITIES

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

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

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

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

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

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

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

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

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

CALIFORNIA SCHOOL DISTRICT FRAUD

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

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

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

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

PENSIONS CLAIM ANOTHER ILLINOIS RATING

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

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

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

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

CALIFORNIA SCHOOL DISTRICTS BENEFIT FROM LEGISLATION

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

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

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

CLIMATE CHANGE FOLLOW UP

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

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

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

NEW  YORK CAPITAL DEMANDS RISE

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

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

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

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

HIGH SPEED RAIL

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

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

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

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

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

Joseph Krist

Publisher

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

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ATLANTIC CITY

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

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

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

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

MEDICAID EXPANSION IN KANSAS

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

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

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

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

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

PRIV ATIZATION FAILS IN JACKSONVILLE

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

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

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

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

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

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

NEW ENGLAND HEALTHCARE

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

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

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

UTILITIES – MORE BAD NEWS FOR COAL

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

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

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

CLIMATE CHANGE AND MUNI CREDIT

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

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

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

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

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

CALIFORNIA BUDGET

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

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

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

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

LOUSIANA P3

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

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

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

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

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

Joseph Krist

Publisher

RECENT STATE DEMOGRAPHICS

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

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

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

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

MICROMOBILITY

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

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

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

SUTTER HEALTH BURIES SETTLEMENT UNDER CHRISTMAS WRAP

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

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

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

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

P3s

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

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

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

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

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

CYBER ATTACK NETS RANSOM

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

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

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

CANNABIS

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

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

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

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

ANOTHER PRIVATE COLLEGE IN TROUBLE

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

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

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

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

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

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

NYC BUDGET OUTLOOK

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

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

QUICK THINGS TO LOOK FOR IN 2020

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

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

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

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

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

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

This is our last post of 2019. We wish you a hopeful Christmas and a brave New Year. The MCN will return in  the first week of January.

Joseph Krist

Publisher

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CORPORATE AND MUNI CREDIT CONVERGENCE

As much of the analytical work current being done on municipal credit increases its focus on legal provisions after Detroit and Puerto Rico, the differences between our markets emerges. There is extensive case law on Chapter 11 but the number of completed municipal bankruptcy cases is perhaps 1,000. That lack of case law became painfully apparent in the Detroit case when bondholders were pitted against employee pensions. The concerns raised about special revenues in the Puerto Rico bankruptcy reinforce the lack of substantial case law.

Much will ride on the outcomes of the various proceedings involving Puerto Rico and its investors. Decisions which produce results which threaten long established norms in terms of the relative strength and standing of various creditor claims will clearly be a concern. At the same time there is enough about the Puerto Rico bankruptcy relative to that of states given its Commonwealth status to see a bit less concern. The different local governmental structure versus those of the lower 48 states puts a number of key municipal functions under central government rather than state/local control. The applicability of the outcome in Puerto Rico is not clear.

One thing which the Puerto Rico experience has done is to lessen the attractiveness of a Chapter 9 filing by a state from the investor standpoint. It is not clear how much weight legal provisions including constitutional provisions could be given if maximization of creditor recoveries were subjugated to other creditor classes (pensions and benefits versus debt service). We believe that state bankruptcies are not a likely result (no Illinois is not going Chapter 9). If we believe that Puerto Rico will have limited applicability, it still means that one basic credit tenet will remain true. That is the fact that if you make an investment based on sound economics, they will trump legal provisions every time.

What this does however, is make the case that harmonization of ratings between the municipal and corporate sectors will remain difficult. We think that the differences in accounting, reporting, and disclosure standards and scheduling will effectively block full harmonization.

FLORIDA GEORGIA WATER DISPUTE

As drought impacted the southeastern US earlier in the decade, the State of Florida and the State of Georgia found themselves at odds over the State of Georgia retention of water by Georgia which eventually flow to Florida. The dispute was submitted to the federal courts where the State of Florida had suffered defeats in its effort to have Georgia’s water restrictions overturned on environmental grounds. Florida had appealed adverse decisions to the US Supreme Court.

The Supreme Court held, however, that a prior Special Master had applied too strict a redressability standard. In light of that holding, the Court remanded the dispute to a new Special Master with instructions to make findings concerning the following questions on remand: (1) whether Florida suffered harm caused by decreased water flow into the Apalachicola River; (2) whether Florida showed that Georgia’s use of the Flint River is inequitable; (3) whether that potentially inequitable use harmed Florida; (4) whether an equity based cap on Georgia’s use of Flint River waters would materially increase stream flow in the Apalachicola River given the Corps’ operational rules or reasonable modifications that could be made to those rules; and (5) whether such additional stream flow in the Apalachicola River may significantly redress the economic and ecological harm that Florida has suffered.

Now the Special Master has issued his findings to the Court. He did  recommend that the Supreme Court grant Florida’s request for a decree equitably apportioning the waters of the ACF Basin because the evidence has not shown harm to Florida caused by Georgia; the evidence has shown that Georgia’s water use is reasonable; and the evidence has not shown that the benefits of apportionment would substantially outweigh the potential harms. The complaining state must demonstrate by clear and convincing evidence “that it has suffered a threatened invasion of rights that is of serious magnitude.”

Florida was attributing declines in its oyster industry to lower water flows. Florida alleged that lower flows in the Apalachicola River (the “River”) have harmed the ecosystems in both the River and the Apalachicola Bay (the “Bay”). Florida highlights the collapse of the Bay’s oyster fishery, but Florida has not proved that the harm to the oysters resulted from “the action of [Georgia].”

The Special Master said that ” Florida has pointed to harm in the oyster fishery collapse, but I do not find that Georgia caused that harm by clear and convincing evidence. Next, although Georgia’s use of the Flint and Chattahoochee Rivers has increased since the 1970s, Georgia’s use is not unreasonable or inequitable. Last, I have determined that the benefits of an apportionment would not substantially outweigh the harm that might result. This is especially true given that the Army Corps’ reservoir operations on the Chattahoochee River would prevent most stream flow increases from reaching Florida during the times when more stream flow is needed to alleviate Florida’s alleged harms.

As time goes on and climate change impacts water supplies and demands, the use and distribution of water from sources in multiple jurisdictions will continue to be a flashpoint for disputes. Although not the case in this dispute, other water disputes could definitely have credit implications.

PUERTO RICO

The bankruptcy judge overseeing Puerto Rico’s efforts to restructure and eliminate its debt has approved a scheduling plan proposed by a court-appointed mediation team. the mediator has recommended that the case be  litigated after efforts to avoid that did not succeed. The mediation team will submit an amended report by mid-January.

The action follows the mediator’s recommendation last month that litigation should proceed over the rights of owners of revenue bonds against the U.S. commonwealth, as well as the validity of general obligation and Public Buildings Authority bonds and whether bondholders’ claims were secured or unsecured.

The mediator said bond-related issues “have the potential to drive overall restructuring outcomes.” As the litigation unfolds, negotiated settlements of the items in dispute could occur but we see it as more likely that the litigation will determine how the parties pursue their claims. The debt subject to the litigation currently include commonwealth general obligation, Highway and Transportation Authority, and Public Building Authority bonds. 

Litigation will establish creditor classes and hopefully will provide clarity over the status of special revenue  bonds. It is the special revenue bond question which seems to have most perplexed the market. There are significant worries that a resolution of Puerto Rico’s fairly unique credit issues would lead to a significant change in the treatment and application of special revenues could establish a very negative precedent for holders of revenue bonds nationwide. The likelihood that an unfavorable litigation result through efforts by nontraditional investors with much more short term perspectives than are the case for the vast bulk of municipal bond investors is a huge concern which will overhang the market into 2020.

IOWA UTILITY P3 MOVES FORWARD

The demise of the public/private partnership concept when it involves a public university had been predicted by some after a couple of private student housing projects failed financially. The likelihood that this would be the case was lessened by news out of Iowa this week. The Board of Regents for the University of Iowa recently approved the establishment of a $1.165 billion public-private partnership (P3) with the University of Iowa (UI) utility system and ENGIE North America and Meridiam.

Under the agreement, ENGIE and Meridiam will pay $1.165 billion to the University of Iowa for a 50-year operating agreement for its utility system. Most of this upfront payment will be placed into an endowment. Annual proceeds from this endowment are projected at $15 million by the University. The UI retains ownership of the utility system and operation of the utility system will return to the university following the 50-year deal. No university staff positions will be eliminated under this agreement.

The University of Iowa will pay ENGIE and Meridiam a $35 million annual fee in years one-through-five of the deal, with the fee increasing by 1.5% annually thereafter. The UI will use $166 million of the lump sum to pay off existing utility bonds and consulting fees. The deal also addresses environmental issues. ENGIE and Meridiam will adopt the UI’s existing goal of operating coal-free by 2025 or sooner and continue campus-wide sustainability efforts. 

The project has been supported by the Governor as a way to increase university funding from other than state sources.  

WHAT WE’RE LOOKING AT FOR 2020

Here are the topics we think that municipal bond investors concerned about credit should watch.

Chicago – The largest city with the most serious credit problems. A diverse range of issuers rely on a common tax and revenue base and their demands on that base individually and collectively will cause significant strains. The flexibility these issuers have is limited both legally as well as practically and we expect that the City especially will be in the news all year. Strap in.

California – the state is facing a potentially huge disruption to and reconfiguration of its electric supply system. The PG&E bankruptcy and the state’s political environment could easily lead to a resolution which sees PG&E’s physical assets and their operation moved to a public rather than a private entity.  The move towards a public power resolution is gaining momentum and political support. There is also a strong likelihood that Proposition 13 will come under assault from a proposed ballot initiative. If adopted, the local financial picture would be significantly altered.

New York – The state is facing a significant projected budget gap for FY 2021. It is the first state to adopt a budget each year. This year policy issues will complicate the budget process as congestion pricing details have to be adopted for NYC to put its proposed scheme into effect. The budget will also be a mechanism for addressing ongoing capital needs for mass transit and public housing in NYC.

Florida – Just as California considers a public power option for tat state, Jacksonville, Florida is undertaking a proposed sale of its municipal utility to private interests. The proposed sale is controversial and there are already signs of pushback from the City Council which must approve any transaction. A sale would have to address outstanding debt from the Jacksonville Electric Authority.

Transportation and Micro Mobility – The ongoing battles between providers of ride sharing and individual mobility modalities will continue. The continuing practices of service providers which essentially ignore local regulatory concerns will insure that the currently contentious environment in which these issues are dealt with continues.  Mass transit will continue, especially in the Northeast, to face significant capital demands even as utilization slows or even declines. Systems in D.C., Boston, and New York face significant rolling stock and basic infrastructure needs which will require significant debt issuance.

TAX INCENTIVES UNDER SCRUTINY AGAIN

The past year saw a turn in the trend of municipalities and states falling all over themselves to offer tax incentives to businesses to locate within their boundaries. Opponents of a massive tax incentive plan to lure Amazon to build its headquarters 2 facility in the borough of Queens were successful in their opposition to a large tax “giveaway”. The issue continues to be debated as Amazon locates distribution facilities throughout the city while it has just announced an agreement to lease space in Manhattan to house 1500 employees. And they are doing it without direct tax incentives.

Now in Wisconsin, the state and Foxconn are engaged in a new dispute after a heavily incentivized facility has undergone a change of plans. Originally intended as a large screen production facility, the company has shifted its emphasis away from large screen to small screen products. This after it appeared that such a facility would not deliver the number and type of jobs originally promised but at lower average salaries to boot. A Governor took office in January, 2019 after the companies leading ally in the state lost his bid for a third term as Governor. The new administration has taken a dim view of the plans to reconfigure the plant away from its originally conceived form.

This has led the current administration to respond to a recent request from Foxconn to receive tax credits under its agreement for some $150 million of contracts which have been let to commence construction. In response, the state has informed Foxconn that the new project doesn’t qualify for incentives under the existing contract. The scaled-down factory in Wisconsin won’t qualify for tax credits unless the Taiwanese electronics giant renegotiates with the state. The Wisconsin Economic Development Corporation is taking the position that WEDC hasn’t evaluated the Generation 6 project (the downsized version) or properly contracted for it. As such the project is ineligible for tax credits under Wisconsin law.

Past experience with Foxconn in other states, particularly Pennsylvania where Foxconn did not deliver on its promises of new facilities in exchange for tax incentives, made many in Wisconsin cautious. Perhaps the Pennsylvania experience made Foxconn think that they could change the terms of its deal with Wisconsin without any ramifications.

We think that it is perfectly legitimate for states and cities to rethink tax incentives in the event of project changes. The history of tax incentives has yielded such a mixed bag of results versus promises that it is refreshing to see at least one jurisdiction trying to get the phenomenon under control.

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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MASSACHUSETTS CONSIDERS GAS TAX ALTERNATIVES

The Commonwealth of Massachusetts is considering legislation which would allow it to join with states like Oregon in implementing mileage based taxes on automobiles. The impact of alternative vehicles and increased fuel efficiency on gas tax revenues is well established. Now a bill has been offered to create a pilot program to test fees based on the miles people travel rather than the amount of gas used.

The idea is being considered as a part of a package of increased revenues for transportation. One plan would instruct the Department of Transportation to report on the feasibility of implementing all-electronic tolling on state and interstate highways “not currently subject to a toll.”  A second bill would expand tolls to stretches of Interstate 93, Interstate 95 and Route 2 in an attempt to apply equal charges to drivers across the Boston region. That bill also calls for implementation of dynamic “peak pricing” where the toll varies based on road conditions.

Another bill would increase the fees on ride-sharing companies such as Uber and Lyft. The state currently assesses a flat 20-cent fee on each ride through those services, regardless of length. The legislation would change that to a scaled percentage of the overall fare. Under the proposal, the fees would be 4.25 % of the total fare paid for shared rides and 6.25 % of the fare for a single passenger trip.

Reactions to the plan show the split in approaches between and among the ride sharing companies. Uber has come out general in favor of congestion pricing versus limits on the number of vehicles (like in NYC). In this case, Lyft  said in a statement that the company believes higher fees will not significantly reduce congestion. Such a position favors the ride sharing companies as it reduces funding for mass transit which has been the primary competitor targeted by these companies.

The Metropolitan Area Planning Council in July said the MBTA missed out on more than $20 million in foregone fare revenue from passengers who substituted  TNCs for public transit.  It is just another example of the clash of interests between private providers profiting through use of the public streets and providers of public mass transit. It is a battle without an apparent end.

However this saga ends, it highlights the ongoing need to fund public transit in an environment where many of those best positioned to fund or use it pursue alternatives. Until states and cities come up with a regulatory and taxing scheme which reflects the real benefit to the TNCs, transit funding will continue to be a clash with no real winners.

HEALTHCARE SPENDING DATA DRIVES CAUTIOUS CREDIT OUTLOOK

A colleague observed this week that AA and rated hospital credits traded anywhere from 40 to 100 basis points wide to AAA general obligation yields. We think that there is ample reason to ask for additional yield return when holding healthcare credits. Here is some data from the Centers for Medicare and Medicaid about costs which should give one pause.

National health expenditures (NHE) grew 4.6% to $3.6 trillion in 2018, or $11,172 per person, and accounted for 17.7% of Gross Domestic Product GDP).Medicare spending grew 6.4% to $750.2 billion in 2018, or 21 percent of total NHE. Medicaid spending grew 3.0% to $597.4 billion in 2018, or 16 percent of total NHE.

Private health insurance spending grew 5.8% to $1,243.0 billion in 2018, or 34 percent of total NHE. Out of pocket spending grew 2.8% to $375.6 billion in 2018, or 10 percent of total NHE. Hospital expenditures grew 4.5% to $1,191.8 billion in 2018, slower than the 4.7% growth in 2017. Physician and clinical services expenditures grew 4.1% to $725.6 billion in 2018, a slower growth than the 4.7% in 2017. Prescription drug spending increased 2.5% to $335.0 billion in 2018, faster than the 1.4% growth in 2017.

The largest shares of total health spending were sponsored by the federal government (28.3 %) and the households (28.4 %).   The private business share of health spending accounted for 19.9 % of total health care spending, state and local governments accounted for 16.5 %, and other private revenues accounted for 6.9 %. That state and local share poses a real risk to the states.

Under current law, national health spending is projected to grow at an average rate of 5.5 % per year for 2018-27 and to reach nearly $6.0 trillion by 2027. Health spending is projected to grow 0.8 percentage point faster than Gross Domestic Product (GDP) per year over the 2018-27 period; as a result, the health share of GDP is expected to rise from 17.9 %in 2017 to 19.4 % by 2027.

The report also provided a wide look at the geography behind the data although it is noted that the most recent year in the 15 year record was 2014. Nonetheless, in 2014, per capita personal health care spending ranged from $5,982 in Utah to $11,064 in Alaska.   Per capita spending in Alaska was 38 percent higher than the national average ($8,045) while spending in Utah was about 26 percent lower; they have been the lowest and highest, respectively, since 2012.

Health care spending by region continued to exhibit considerable variation. In 2014, the New England and Mideast regions had the highest levels of total per capita personal health care spending ($10,119 and $9,370, respectively), or 26 and 16 % higher than the national average.   In contrast, the Rocky Mountain and Southwest regions had the lowest levels of total personal health care spending per capita ($6,814 and $6,978, respectively) with average spending roughly 15 % lower than the national average.

So now the data provides a map of where higher growth in the expense side of the income statement might occur geographically. Combine that with the demographic trend of a longer lived aged population and the potential for limits on revenues and you have a risk profile which demands compensation. And remember, the elderly were the smallest population group, nearly 15 % of the population, and accounted for approximately 34 % of all spending in 2014. The question is how long will it be politically sustainable for healthcare to account for 1 out of every 5 dollars of economic activity?

PG&E WILDFIRE SETTLEMENT

Pacific Gas & Electric on Friday announced a settlement with insurers and others for several Northern California wildfires including the wine country blazes in 2017 and the fire that nearly destroyed the town of Paradise in 2018. The wine country fires in 2017 impacted more than 200,000 acres mostly in Napa County, destroyed or damaged more than 5,500 homes, displaced 100,000 people and killed at least 41. The Camp fire, which raced through Paradise in 2018, killed 86 people and destroyed more than 13,900 homes. 

PG&E already had agreed to pay $1 billion to cities, counties and other public entities, and $11 billion to insurance companies and other entities that have already paid claims relating to the 2017 and 2018 wildfires. This settlement is intended to help victims with no insurance and victims whose insurance was not enough to cover their losses. People have until Dec. 31 to file initial claims for a share from the trust fund that the settlement will create.

The settlement will largely reimburse insurance companies who have been largely taking the lead in funding recovery from the fires. Some $11 billion of the settlement will cover those costs. This highlights the importance of insurance in the recovery process highlighting the concerns around the willingness of the insurance industry to write business in the state. A one year regulatory halt to non-renewals is only a band aid while the industry and the state seek to craft longer term solutions to the ongoing wildfire risks in California.

Insurers have responded by raising rates, re-underwriting the risk, purchasing additional reinsurance if available and reconsidering risk models. The moratorium applies retroactively to the October 2019 state of emergency declared by current Governor Gavin Newsom, and insurers will need to offer to reinstate or renew the policies that have not been renewed or were canceled since October because of wildfire exposure.

OIL STATES TAKE DIVERGENT REVENUE PATHS

Texas sales tax revenue for November set a record for any month at $3.18 billion, an increase of 6.2% over the same month last year, state Comptroller Glenn Hegar reported. In the same month, neighboring Oklahoma recorded its first drop in monthly receipts in more than two and a half years, Treasurer Randy McDaniel reported.

The drop in revenue in Oklahoma is another sign of the weakness in reliance on one major industry. Oklahoma’s less diverse economy has already seen negative impacts in its agricultural sector due to the ongoing trade wars. Less prominent has been the fact that lower oil prices are impacting the state economy as well.

The news about declining Oklahoma revenues comes in the wake of recent announcements by Halliburton that it was making permanent the loss of some 1500 jobs in the state. These were not layoffs but absolute cuts in headcount. Oil services are an important source of well paying jobs so this does not bode well for Oklahoma’s near term revenue outlook. Recent moves by international producers to prop up prices highlight the weakness in oil pricing.

On the positive side, the Texas economy continues to reflect the increasing diversity of its economy. The Lone Star state benefits from migration and increasing employment away from the oil industry. That accounts for the positive revenue growth trend in Texas versus the negative trends in Oklahoma.

PRIVATE STUDENT HOUSING

Another private student housing deal has come under credit pressure as colleges and universities confront pricing and demand issues. The latest is at Claremont College in California.

A privately operated and financed housing facility saw the rating on outstanding debt (NCCD – Claremont Properties LLC’s (CA) University Housing Revenue Bonds) from 2017 was downgraded by Moody’s to Caa2. The rating change reflects  insufficient project revenues to cover operating expenses and debt service obligations, weak market position and demand that will prolong financial distress, and an imminent tap to the debt service reserve fund (DSRF) to supplement net operating income to pay semi-annual bond debt service.

Moody’s cited the fact that “the project’s 60% occupancy rate generates insufficient revenue to cover budgeted operating expenses and debt service obligations. As a result, the borrower has requested that pledged revenue be disbursed to pay operating expenses prior to required deposits to the bond fund for debt service.” Most importantly, the rating also incorporates that there is no express or implied guaranty from the universities. Though The Claremont Colleges, Inc. (Aa3 stable), Keck Graduate Institute (KGI), and Claremont Graduate University (CGU, Ba1 negative) have entered into cooperation agreements with the project, the institutions do not provide any assurances that it will take any actions to avoid a default of the project’s bonds.

The lack of a guaranty is not unusual nor is it unusual that existence of cooperation agreements does not lead to financial pledges. This has been an item of concern especially for private partners in these transactions who have often operated under the erroneous assumption that promises to direct students or to include privately operated living facilities in the array of choices available to students of a given institution imply an obligation to provide financial support to these projects when they fail to meet occupancy and/or profitability targets established by those operators.

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