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Muni Credit News Week of November 25, 2019

Joseph Krist

Publisher

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NEW YORK UTILITIES DIMMING CREDIT OUTLOOK

Over recent months, National Grid has been engaged in a serious fight over its efforts to secure permits for natural gas pipeline expansion. In an effort to generate pressure on state politicians and regulators, National Grid decided to stop new natural gas connections in and around the New York metropolitan area. This is generating significant pressure from developers and potential business operators.

The state and the Governor in particular have maintained their opposition to the pipeline project. Now in the face of a continued moratorium on hookups, the governor has significantly raised the ante in the dispute. He has suggested that the franchise from the state under which National Grid is permitted to operate its gas facilities could be revoked.

The next step is not clear but at least one rating agency has weighed in on the impact of the Governor’s move. Moody’s has issued a warning that all the utilities operating under state franchises are now at risk of revocation. That is indeed technically true. It is also true that the risk of revocation is significantly higher for National Grid relative to the other utilities. Moody’s referenced a perception by the New York governor that NG did not look at finding alternative (short and medium term) measures to manage the supply constraints, absent the pipeline, such that the moratorium could be lifted; and its poor handling of the moratorium with its customers.

While the method may be different now, the state can arguably be said to be doing something it has done before. In many cases, the regulatory ratemaking process accomplished sufficient pressure as to lead to the eventual dismantling of the Long Island Lighting Company. It was succeeded by the public agency, the Long island Power Authority. We do not believe that the state’s ultimate goal is to revoke the franchise but it is a bold escalation of the conflict. Moody’s views political intervention as a material credit negative, especially when the intervention emanates from a governor’s or attorney general’s office.

AUTONOMOUS VEHICLES

The National Transportation Safety Board called upon federal regulators Tuesday to create a review process before allowing automated test vehicles to operate on public roads, based upon the agency’s investigation of a fatal collision between an Uber automated test vehicle and a pedestrian. The March 18, 2018, nighttime fatal collision between an Uber automated test vehicle and a pedestrian has focused much attention on both the technology but more importantly on the approach taken by the AV industry towards government’s role in managing its streets. The NTSB said an Uber Technologies Inc. division’s “inadequate safety culture” contributed to the crash.

The NTSB determined that the immediate cause of the collision was the failure of the Uber ATG operator to closely monitor the road and the operation of the automated driving system because the operator was visually distracted throughout the trip by a personal cell phone. Contributing to the crash was Uber ATG’s inadequate safety risk assessment procedures, ineffective oversight of the vehicle operators and a lack of adequate mechanisms for addressing operators’ automation complacency – all consequences of the division’s inadequate safety culture. “The collision was the last link of a long chain of actions and decisions made by an organization that unfortunately did not make safety the top priority.”

The really sad/annoying part of this is that the attitude towards safety takes us back over half a century to the days of the rear engine Corvairs and the arguments against seat belts. We are asked time and time again by companies like Uber to trust them or to learn how to think of things in different ways or to think outside of the box. So when you see the NTSB conclusions you can see why these companies whether they be AV producers or ride share companies cannot be trusted.

“The Uber ATG automated driving system detected the pedestrian 5.6 seconds before impact. Although the system continued to track the pedestrian until the crash, it never accurately identified the object crossing the road as a pedestrian — or predicted its path. Had the vehicle operator been attentive, the operator would likely have had enough time to detect and react to the crossing pedestrian to avoid the crash or mitigate the impact. While Uber ATG managers had the ability to retroactively monitor the behavior of vehicle operators, they rarely did so. The company’s ineffective oversight was exacerbated by its decision to remove a second operator from the vehicle during testing of the automated driving system.

SOUND TRANSIT

Sound Transit will continue to collect car-tab taxes Sound Transit will continue to collect car-tab taxes even after the success of Initiative 976, approved by voters statewide this month. Cities and counties, including Seattle, have already sued to challenge I-976, claiming it’s a “poorly drafted hodgepodge that violates multiple provisions of the Constitution,” including a ban on multiple-subject initiatives.

They’ve sought an injunction to block I-976 before Dec. 5, when much of the initiative is expected to go into effect. it would cut state funding for multimodal projects, ferries and state troopers; revoke city car-tab fees such as the $80 in Seattle for added bus service and roadwork; and remove 11% of Sound Transit’s roughly $2 billion yearly income. Sound Transit has pledged tax proceeds to the repayment of debt issued to finance the capital needs of the regional district which serves the greater Seattle metropolitan area.

Does it mean bondholders are at risk? Previous efforts to cut funding for Sound Transit through initiatives have succeeded at the ballot box but have not been able to stop tax collections related to bonds. The state Supreme Court agreed bond contracts signed in 1999 allowed the agency to collect the taxes until 2028 when those bonds expired.

Without court intervention, drivers whose vehicle registrations renew on or after Dec. 5 will see a tax cut —. They don’t have to pay city transportation-benefit district fees ranging from $20 to $80, such as Seattle’s voter-approved charges for extra bus service. Contrary to the image many have of Seattle as a progressive bastion, support for the car taxes in the metro area is far from unanimous. Unlike King County voters, majorities in both Snohomish and Pierce counties supported the initiative.

PUERTO RICO FACES DAUNTING CHALLENGE

The American Society of Civil Engineers (ASCE) Committee on America’s Infrastructure, made up of expert civil engineers, assigns grades using the following criteria: capacity, condition, funding, future need, operation and maintenance, public safety, resilience and innovation. It has also included Puerto Rico in its assessment and the results of its study show the scale of the capital finance challenges facing the Commonwealth.

The ASCE Puerto Rico Section announced a near failing grade of a ‘D-‘ for the island’s infrastructure. The Report Card graded eight categories of infrastructure: bridges (D+), dams (D+), drinking water (D), energy (F), ports (D), roads (D-), solid waste (D-), and wastewater (D+). None of this is a surprise in the aftermath of Hurricane Maria. Energy received the lowest grade of ‘F,’ meaning the system’s infrastructure is in unacceptable condition and has widespread advanced signs of deterioration.

The Puerto Rico Electric Power Authority (PREPA) proposed a $20 billion plan to renovate the energy grid on the island. How to finance and fund the needs is a different story. According to ASCE, “If the island wants to rebuild and modernize its infrastructure, it must increase received investment by $1.23 billion to $2.3 billion annually—or $13 to $23 billion over 10 years. However, when considering deferred maintenance and hurricane-related recovery projects, the investment gap is even larger. There is a dire need for the island to rebuild smarter by building to adequate codes and standards, acquiring funding from all levels of government, and incorporating resilience into infrastructure plans by using climate-resilient materials.”

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.

Muni Credit News Week of November 18, 2019

Joseph Krist

Publisher

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ASCENSION CAUGHT UP IN TECH DISPUTE

The Department of Health and Human Service’s Office for Civil Rights, the federal agency that enforces HIPAA, would “like to learn more information about this mass collection of individuals’ medical records with respect to the implications for patient privacy under HIPAA,” associated with “Project Nightingale”.

“Project Nightingale” is a project that Google launched last year. It analyses health data from patients who received care at St. Louis-based Ascension, one of the nation’s largest health systems. Ascension is a large issuing presence in the municipal bond space. Data reportedly includes patients’ lab results, medications and diagnoses. Google’s partnership with Ascension also involves a commercial contract to move Ascension’s on-premise data centers to Google’s cloud-computing system.

Here’s the problem, one not unlike many of the tech industry’s disputes with government. Ascension patients were not notified about the partnership with Google so they did not get a chance to opt out. According to Google the intended goal is to use Google’s artificial intelligence tools to recommend changes to a patient’s care, such as different treatment plans, diagnostic tests or additional physicians, as well as to flag unexpected deviations in the patient’s care.

Google has struck similar partnerships with the health systems of Stanford University, the University of Chicago and the University of California at San Francisco. The concern is that a higher level of detail is being analyzed under the arrangement with Ascension. The University of Chicago is being sued by a patient over its sharing thousands of medical records with Google for a research project on predicting patient outcomes, claiming that the health system had not properly de-identified patient information. Google and UChicago Medicine have maintained that they followed regulations, including HIPAA.

It is difficult to deal with the single mindedness of the tech entities in terms of their use of data. It’s the modern equivalent of and ends justifies the means approach whether is the management of public streets and roadways or whether it’s over issues of patient privacy. There just seems to be a lack of common sense manifested in the industry’s inability to see the concerns of the other parties they interact with.

Until the scale of the issues can be determined, it’s not possible to assess the level of risk to the Ascension credit if violations of HIPPA have occurred. Only then can the potential scale of the potential costs of any resulting litigation be determined. There should be some sort of trust penalty associated with Ascension. It seems inconsistent for a religiously based system that deigns to use its beliefs to deny certain medical services should have entered into such an arrangement with Google on what appears to be a secretive basis.

HIGHER EDUCATION REMAINS UNDER PRESURE

For some time we have commented on the potential for credit problems in the higher education sector. There have been several defaults and closures of institutions. So we are interested in comments made this week by Moody’s Investors Service based on its tenth annual tuition survey.

The data is stark. Median net tuition revenue will grow 1.0% and 2.3% for public and private universities, respectively, for fiscal 2020, according to the results. The continued trend of softening net tuition revenue growth for both public and private universities reflects enrollment and pricing challenges. Moody’s also cited factors we have been concerned about including flat numbers of high school graduates, a favorable economy drawing students into the workforce, and some declines in international student enrollment. These factors are not one offs but are rather reflective of trends.

The report highlights issues more specific to the private schools The median growth in net tuition revenue among private universities is likely to soften slightly, partially because of increasing competition reflected in continuously rising discount rates. » The first-year discount rate at private universities rose slightly to 51% for students entering in fall 2019. Overall, nearly one quarter of private university survey respondents reported a first-year tuition discount of 60% or higher, an indicator that private universities will struggle to sustain net tuition revenue growth.

Other more specific points include some focusing on the public universities. Among public universities, the median annual growth in net tuition revenue in fiscal 2020 is projected at 1%. This represents a decrease from 1.8% in fiscal 2019, due in part to relatively flat enrollment. Nearly two-thirds of public universities are projected to grow overall net tuition revenue at under 3% for fiscal 2020, our proxy for inflation in the higher education sector. This is almost double the level five years ago. Continued declines in the number of international students also contribute to more constrained revenue growth. Among our public university survey respondents, the median decline in international students for fall 2019 was 3.7%.

Overall, the public schools offer more safety. They have a larger constituency, the provide much research and support for economic drivers in state economies, they are the low or lower cost alternative for a larger segment of demand. They also have more a more diversified mix of undergraduate, graduate and professional programs. That drives demand as well.

MORE MONEY RAINS ON THE PRAIRIE

We have expressed concerns about the potential impact on state credits in the farm belt resulting from the ongoing trade war, primarily with China. early on the trump Administration disbursed aid to farmers for 50% of their estimated losses resulting from reduced demand for US agricultural products. Now as the trade disputes have dragged on well after previously announced potential settlement dates, the federal Agriculture Department will begin distributing another round of tariff relief payments next week to farmers and ranchers.

The aid payments have been coming across two years. The Administration has already paid farmers at least $6.7 billion for their 2019 production. It paid $8.6 billion for last year’s production and additional trade relief efforts like commodity purchases and marketing assistance. The first set of 2019 payments covered 50% of a farmer’s eligible production; the new funds announced will cover an additional 25%.

Hog and dairy farmers have been the primary recipients. They are on the front lines of the trade war but coincidentally are in areas key to the president’s reelection hopes so the additional funding is not a surprise. And they do help to mitigate the credit impact on the agricultural states. They are nonetheless a band aid. They also to some extent insult farmers. As one said to the Boston Globe, “I don’t know what socialism is if it’s not receiving a check from the government.”

TIME TO PAY FOR THE CPS CONTRACT

The news out of Chicago about the city’s ability to fund its recently negotiated labor contracts not good. – especially the one for the CPS teachers – was not good. It puts the already beleaguered tax base supporting both the City and CPS under even more pressure. The situation augers poorly for the ratings of the City and its associated underlying taxing entities. Mayor Lori Lightfoot and Chicago Public Schools leaders have agreed on where the funds to pay for the first year of new union contracts will be found. The problem is that some of those revenues are not recurring leaving a significant hole in future budgets.

The district is relying on the state to keep its pledge to increase school funding, which can change year to year. CPS also is relying on its own ability to significantly raise property taxes. The additional contract costs for the current school year total $137 million: $115 million for the CTU contract and $22 million for the SEIU contract. In addition, the district has to pay $60 million or so in teacher pension contributions formerly paid by the city.

CPS already budgeted $89 million to cover higher personnel costs clearly not enough to cover the full cost increase. By the fifth year of the CTU contract, CPS will need $504 million more a year to cover the added costs. For SEIU, that cost will be at least $54 million. That comes to $558 million in additional costs by the 2024 budget year — about 8% more than the $7 billion that the district spent last year.

PROPOSITION 13 CHALLENGE

When it was passed 40 years ago, there were many doom and gloom predictions about the credit impact of the limitations on property taxes enacted under Proposition 13 in California. As it turns out, Prop. 13 has not become an issue in terms generally of state and local credit in the Golden State. That does not mean that it is universally supported. The law’s reliance of assessed value based on the purchase price of the home has created inequities between the taxes paid by owners on property for which ownership has been extended versus those paid by properties which have recently turned over. Essentially, two very similar properties directly adjacent to each other may have significantly different tax bills. Now, this situation is generating more and more concern.

An effort is underway to address some of the perceived shortcomings of the law. Efforts are underway to place an initiative on the November, 2020 ballot which would allow county assessors to split their tax rolls into two lists. Homeowners and some small businesses would still receive the full Proposition 13 benefits: a 1% tax based on a property’s purchase value and annual tax increases of no more than 2%.

Commercial and industrial property owners would be subject to different rules. While their tax rates wouldn’t change, beginning in 2022 the levy would be based on the current market value of the real estate. Business property values would have to be updated by county assessors at least every three years. Some of California’s most powerful public employee unions — including Service Employees International Union, the California Teachers Assn. and the California Federation of Teachers. They represent those at the forefront of the affordable housing debate in California.

Proponents want to include provisions directing the application of the additional revenue to be derived from the proposed taxing changes. Schools would receive most of the new tax revenue while municipalities also would receive a share of the new property tax revenue. The allocation is not accidental. Initiative supporters see a connection in that public support for the idea of loosening the property tax limits on businesses increases in polls by as much as 10 percentage points if voters are told the money will go to education.

The ballot initiative will be strongly challenged and if on the ballot strongly opposed by the commercial business interests which will be impacted. The California Business Roundtable has promised California Business Roundtable an “aggressive” campaign to kill it. They suggest that the tax will create just another cost to retailers which will be passed onto consumers. The president of the nonpartisan Public Policy Institute of California offers some sage advice for handicapping this one. “Initiative campaigns often focus on the idea of unintended consequences,” he said. “To me, that’s what this is going to be all about. You’re going to hear that from both sides. And the voters will have to decide.”

Muni Credit News Week of November 11, 2019

Joseph Krist

Publisher

Last week marked the 300th edition of the municreditnews.com. Over the five years of its publication, we have tried to cover the entire range of issues which impact on the creditworthiness of state and local credits. We hope that you find our comments useful and informative. We appreciate your support. Let us know what you want to hear about.

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NORTH CAROLINA BUDGET

It isn’t a state normally in the news for budget trouble but these are not normal times. The North Carolina General Assembly adjourned without passing a biennial budget for fiscal 2019-21. The legislature could not overcome disagreements about teacher pay and Medicaid expansion among other things. The good news is that a full budget is not needed to ensure that things like debt service payments are made. A continuing appropriation and the passage of several standalone measures ensure that those payments will occur.

As a relatively state with historically stable finances, the ongoing budget dispute which played out in the summer did not garner much attention. It does however mark the second time in three bienniums that the state has not managed timely budget adoption. The direct impact on the state actually is most visible in its impact on programmatic implementation. One example is the fact that a planned launch of a Medicaid managed care plan this month has been delayed because of the budget impasse

The real losers in the dispute are the counties and localities in the state. Counties with new state funds included in the 2019-21 Appropriations Act may need to delay the start of intended capital projects. Counties could also find themselves under pressure to provide funding to local school districts. Counties routinely supplement the local BOEs’ operating budgets and are required by state law to provide for their capital needs. Local school districts may have to look to the counties to make up funding shortfalls. As a growing state, schools need to expand to keep up with demand. For those counties with already tight finances, school needs dictated by state law could run up against other expense requirements of the counties.

The dispute also comes at a time where the state’s steadily increasing exposure to climate change related capital demands is becoming more evident. The NC Department of Transportation (DOT) has requested general fund support because of large expenses related to storm damages, including Hurricane Dorian in early September. DOT must also fund settlements resulting from a state Supreme Court ruling that the DOT cannot reserve land for future roads without paying for the land. Landowners seeking compensation from the DOT have forced the DOT to find some additional funding to cover those costs estimated at up to $360 million.

To fund the settlement and storm related costs, legislation pending in the Legislature recommends transferring $360 million from the state’s general fund to help cover the settlements as well as another $300 million loan from the state’s savings reserve to help with projects delayed by Hurricane Dorian. The transfer of $360 million would equal about 1.5% of general revenue. At the same time, the Legislature passed two bills designed to reduce revenues to the state including a corporate franchise tax cut and increases in the standard deduction for income tax filers. At the same time, all of the spending bills passed by the legislature to date would result in fiscal 2020 appropriations similar to those in the budget vetoed by the governor, totaling nearly $24 billion.

NEW YORK BUDGET SHORTFALL

A cash report released by NYS Comptroller Tom DiNapoli’s office is a preliminary warning sign that the state budget is under increasing pressure. The source of that pressure is Medicaid spending. New York’s Medicaid program is on track for a $2.9 billion shortfall as the program has already spent more than 60 percent of its state-funded budget by the end of September, about $13.1 billion. That is only five months into the fiscal year.

The problem reflects both budget maneuvering and the realities of higher expenses tied to things like local minimum wage laws which are increasing costs for providers. The budget maneuver which benefitted FY 2019 results came from the Cuomo administration’s decision to delay $1.7 billion in Medicaid payments from the end of the 2018-19 fiscal year to the beginning of 2019-20. The impact was to effectively double expenditures for April.

Medicaid has been running over budget for at least the past year, which should have triggered across-the-board payment cuts under the state’s “global cap” statute. Pressures from providers (a powerful lobby in the state) drove the maneuver. Now however, it is time to pay the piper. A real answer will not come until the release of the governor’s Executive Budget in January for the FY beginning April 1.

NEVADA HITS RATINGS JACKPOT

Ten years after the Silver State was at the center of the mortgage and financial crisis, the State is finally reaping the benefits of the long economic recovery. Moody’s announced that it has upgraded to Aa1 from Aa2 the rating on the State of Nevada’s approximately $1.2 billion of outstanding general obligation (GO) bonds, which includes all bonds issued by the state described as general obligation (limited tax). Moody’s cited the state’s strong and growing economy as demonstrated by robust employment and population growth and an increase in rainy day reserves.

By all measures, the state economy has achieved consistently strong growth in both employment and income since the time of the financial crisis. It has a moderate debt and pension burden and favorable demographic trends. The state’s relatively favorable tax burden relative to states like its neighbor California continues to benefit the state and support current economic and employment trends. The significant role of the gaming/tourism industries does continue although the state has managed to attract a more diverse set of businesses attracted by relatively lower costs and the availability of land for distribution facilities for several online retailers. The reliance on the Las Vegas attractions is one potential concern but that would be more based in national trends in the economy rather than any action by the state.

The only real concerns expressed in support of the rating action revolve around the need to manage the state’s reserves and the potential negative impacts from a prolonged decrease in tourism, reduced visitor spending or severe economic stagnation.

SALES TAXES AS A CREDIT INDICATOR

Historically, sales tax revenue trends have been a great current indicator of overall conditions and likely trends in state revenues. They reflect current activity as they are collected and remitted without much lag time so they can often be the credit equivalent of a canary in a coal mine. So we looked with interest at sales tax revenue trends in Texas.

Texas Comptroller Glenn Hegar has released totals for fiscal 2019 state revenues, in addition to announcing monthly state revenues for August. State sales tax revenue totaled $2.99 billion in August, 4 % more than in August 2018. Total sales tax revenue for the three months ending in August 2019 was up 3.9 percent compared to the same period a year ago. Growth in August state sales tax revenue was led by remittances from the construction, manufacturing and wholesale trade sectors.

The data points to continued positive economic growth even as its energy sector seems to slow a bit. This is reflected in individual category data for August. In August 2019, Texas collected the following revenue from motor vehicle sales and rental taxes — $488.3 million, up 0.3 percent from August 2018; motor fuel taxes — $327.1 million, up 5.7 percent from August 2018; natural gas production taxes — $102.3 million, down 19.2 percent from August 2018; and oil production taxes — $355.5 million, down 6.2 percent from August 2018.

FLOOD FUNDS IN TEXAS

Voters approved a constitutional amendment to provide for a source of funding for flood control projects in the state. Support for such a measure grew out of the state’s experiences after Hurricane Harvey in 2017. The largest city, Houston, saw whole neighborhoods inundated when waters were released onto properties which probably should not have been developed. The much higher number of residential and small community properties which are subject to flooding from consistently heavier precipitation events created a broad base of support for the plan.

Proposition 8 authorizes the Flood Infrastructure Fund, which seeks to help the state recover from recent flooding while also preparing communities for future storms. It calls for the fund to receive a one-time, $800 million allocation from the state’s rainy day fund as a starting point, and lawmakers could refill it in the future. The author of the measure points to the fact that it creates a lockbox for those funds,” he said. This means future lawmakers can add to the fund, but they cannot drain it for other purposes, even if the money goes unused for multiple years.

The process would provide a source of state funding the use of which would not have to be reauthorized legislatively. This results from the State Legislature meeting only 60 days biennially. This extends the time between an event and the state’s ability to extend funding for projects. It is one of the weaknesses of the state’s legislative structure.

Muni Credit News Week of November 4, 2019

Joseph Krist

Publisher

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STATE OVERSIGHT SUCCESS

On October 24, the Massachusetts Executive Office of Administration and Finance announced that the state will end its financial oversight over the City of Lawrence . After 10 years of oversight, city management projects balanced operations with slight surpluses during fiscal 2020-24. Between 2008and 2011, the city accumulated over $27 million in operating deficits, equal to 10% of annual general fund revenue.

The City’s financial difficulties led to the appointment of a fiscal overseer in fiscal 2010 as part of special legislation. With a fiscal overseer, Lawrence fell under the second most intense level of state oversight of municipalities in Massachusetts. The fiscal overseer has supervised all financial operations in consultation with the city’s financial management team. The city’s financial challenges before oversight stemmed from weak budget management, including managing financial obligations tied to collective bargaining agreements, combined with limited operating flexibility to absorb state aid cuts.

The special legislation also authorized the issuance of deficit financing notes ($16.4 million outstanding as of 30 June 2019) to cure the accumulated operating deficits from 2008-11. Over the period of supervision, a five-year budget forecast and capital plan were updated annually, as well as formally adopted financial policies

City management’s projected surpluses are modest at less than 1% of the city’s $321 million annual budget. Even with outside supervision, Lawrence faces practical constraints on raising property taxes with a tax base that has a median family income equal to 59% of the US average and a high 24% poverty rate. The city is heavily dependent on state aid, which has grown 3% annually over the past 10 years. Rising costs associated with education, health insurance and pension contributions will continue to exert hard to control pressures on the operating budget. Management projects that annual pension contributions will increase 3.3% annually over the next five years.

State aid represented 70% of fiscal 2018 general fund revenue, with property taxes the second largest revenue source at 20%. Education is the largest expenditure, comprising 62% of fiscal 2018 general fund expenses followed by public safety at 8%.

Currently, the cities of Lynn (Baa1 stable) and Methuen (A3 negative) are each coordinating with a fiscal stability officer.

HOUSING IN CALIFORNIA

Apple announced a $2.5 billion plan to help address the housing crisis in California. The plan includes $1 billion for an affordable housing investment fund and another $1 billion to help first-time home buyers find mortgages. Facebook said last month that it would give $1 billion in a package of grants, and loans. In June, Google pledged $1 billion for a similar effort in California.

Apple’s plan is not just based on spending. Part of the $2.5 billion figure includes making available land it owns in San Jose, worth $300 million, for new affordable housing; $150 million to support affordable housing in the Bay Area, including long-term forgivable loans and grants; and $50 million to address the causes of homelessness in Silicon Valley.

Will all of this spending really put a dent in the State’s housing shortage? It is hard to say that this will be enough. The issues in California which lead to a housing shortage include issues of land availability relative to jobs, zoning issues which restrict the ability to develop affordable multifamily housing in coordination with transportation policies, and property tax policies which hinder movement. Only by addressing all of these issues in concert will California be able to make meaningful progress in the development of sufficient affordable housing in the state.

SALES TAXES ON THE BALLOT

A good test of the appetite for tax increases occurs in California as a number of localities are asking their voters to approve sales tax increases. In Irwindale, voters will decide on Measure I, a sales tax increase that will push the local rate to 10.25%, the state maximum. The tax increase could translate to an estimated $1.2 million annually and would help fund police protection, 911 emergency response and other public safety initiatives, senior citizen resources, parks, infrastructure and road improvements, transportation, recreation programs, maintaining library services and maintaining programs that create jobs and attract businesses.

In Monrovia, Voters will decide on Measure K, a sales tax increase that will push the local rate to 10.25%, the state maximum. If passed, Monrovia would yield about $4.5 million annually. It would be earmarked for projects that have been on hold. In Sierra Madre, voters will decide on Measure S, a sales tax increase that will push the local rate to 10.25%, the state maximum. Measure S may bring in a $225,000 a year, according to the L.A. County Registrar-Recorder. The potential monies would maintain police patrols, police, fire and paramedic response times, maintain emergency planning and response, maintain for parks, streets, sidewalks and parkway trees, maintain library services, recreation and senior programs and supplement general finances. In South Pasadena, voters will decide on Measure A, a sales tax increase that will push the local rate to 10.25%, the state maximum. The funds, if passed, would be used to maintain 911 emergency response times, focused on home break-ins and thefts, maintain neighborhood, school and park police patrols, fire and paramedic services, fire station operations and emergency preparedness, retain and attract local businesses, maintain streets and infrastructure and maintain general services and city finances.

In terms of property tax increases, in San Marino voters will decide on Measure SM, a parcel tax that is estimated to yield $3.4 million each year until 2025. The money would go for paramedic services, fire protection and prevention and police protection, according to the county registrar. Parcel taxes are a form of property taxes, based on the characteristics of the property — in San Marino’s case, primarily focused on zoning — instead of the value of it.

YONKERS

One of the historically troubled credits in New York State has been the City of Yonkers, located on New York City’s northern border. This proximity to the city has not yielded the benefits one might expect over the last half century. The city’s credit has reflected the decline of its jobs and housing base. It resulted in state oversight and the creation of security mechanisms for the City’s debt. It is this assistance which has maintained the City’s market access.

Now the City hopes to issue just under $100 million of debt. The City is rated A2 with a negative outlook by Moody’s. The credit was assigned a negative outlook. This despite the acknowledgement of a significant number of new multifamily rental and condominium complexes being built around the city’s mass transit centers. Moody’s notes that new high density complexes will bring a significant number of new residents which will increase income tax revenue and likely contribute to growth in sales tax revenue, two major revenue sources for the city.

Nonetheless, the city’s narrow reserve position, above average long-term liabilities and below average wealth and income profile relative to regional averages weigh on the credit. This is offset to some degree by significant state oversight, including the segregation of funds into a lock box for the payment of debt service. This is a key mechanism which effectively directs first property tax collections to the payment of debt service. Additional security is provided under the New York State Section 99-b Intercept Program.

The rating on the bonds reflects a quirk in the City’s security provisions. The bonds are secured by a General Obligation pledge as limited by New York State’s legislated Property Tax Cap (Chapter 97 (Part A) of the Laws of the State of New York, 2011) as well as by the city’s pledge of its faith and credit. However, the City’s rating does not get full credit for that pledge as Moody’s considers the current issues and the city’s outstanding debt to be GO Limited Tax because of limitations under New York State law on property tax levy increases. The absence of distinction between the GOLT rating and the Issuer rating reflects the city council’s ability to override the property tax cap and the faith and credit pledge in support of debt service.

Muni Credit News Week of October 29, 2019

Joseph Krist

Publisher

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CITY REVENUE OUTLOOK

The National League of Cities has released the results of its annual survey of City Fiscal Conditions. This year’s City Fiscal Conditions research looked at the fiscal conditions and factors across 500+ U.S. cities. It found that almost two in three finance officers in large cities are predicting a recession as soon as 2020. Cities’ revenue growth stalled in the 2018 fiscal year, but this year’s continued drop indicates mounting pressures on city budgets. The Midwest is bearing the brunt of declining conditions, the report found. Overall general fund revenues in Midwestern cities dipped by 4.4% in fiscal year 2018.

In fiscal year 2018, total constant-dollar general fund revenue growth slowed to 0.6 percent. Income tax and property tax revenues slowed, while sales tax revenue growth was unchanged from the prior year. Property tax revenues grew by 1.8 percent, compared to 2.6 % in FY 2017. Sales tax revenues grew by 1.9 %, compared to 1.8 % in FY 2017. Income tax revenues grew by 0.6 percent, compared to 1.3 percent in FY 2017. expenditures are climbing, increasing by 1.8 percent in fiscal year 2018. While that’s a growth rate is slightly lower than the prior three years, officials also expect it to climb again to 2.3 percent for fiscal year 2019. Infrastructure needs, public safety spending and pension costs are among the most significant expenditures.

The data shows the impact of the continuing decline in manufacturing and the impacts of tax and trade policies and their very detrimental effect on the Midwest. Overall, revenues in Midwestern cities declined 4.4%. Much of that appears to be driven by large revenue drops in big cities. Chicago, Illinois, recorded an 11.7 percent revenue decline in fiscal year 2018 while Minneapolis, Minnesota, dropped by 9.6 percent. According to the NLC survey, finance officers from large (63%) and larger mid-sized cities (49%) are more likely than finance officers from smaller mid-sized cities (38%) and small cities (35%) to predict that the next recession will occur in the next one to two years.

The NLC attributes the difference in outlook to a couple of factors. large cities are experiencing a bigger gap between revenue growth and spending growth than their smaller counterparts. Housing market growth is also reaching its peak in large cities and is already slumping in some large West Coast cities such as Seattle, Washington, and San Francisco, California. June home prices for major West Coast cities fell for the first time since 2012, declining by 1.7 percent. Business investment in 2019 is also on the decline, a metric which tends to hit larger cities first.

The report reiterates the leading pressures on local budgets. Infrastructure needs, public safety needs and pensions were reported as the top three burdens on city budgets in 2019. At the same time, the survey revealed several trends on the revenue side of the credit equation that should give one pause. Sales and income tax growth rates peaked in 2015 and growth rates for property taxes peaked a year later. Another source of concern is the growth of state level preemptions which limit local powers to tax and regulate. For example, this year the Texas state legislature signed into law a bill to cap local property tax revenue growth at 3.5%. In addition to preemptions that have been in place for years in states like Michigan and Colorado, new legislation was passed this year to cap local spending in Iowa, to require elections for tax increases in Texas, and to prevent cities from imposing their own commercial activity taxes in Oregon.

Put all of this together and one begins to ask, at current market conditions do I get paid for the risk I’m taking? It’s not so much a question of whether the market is most effectively pricing municipal debt relative to different asset classes but rather a question of whether current absolute rates generate a sufficient reward for the risk potentially being assumed. It’s clear that the best days for revenue growth have passed while the same pressures plaguing local budgets have not subsided and in many cases have increased. We don’t propose the end of the world as we know it but we do wonder when the market will wise up and asked to be paid for the risk they take.

NEW YORK MAKES ITS CHOICES

The war on mass transit continues in New York City. The MTA continues to scramble to find funding for projects expanding access in poor neighborhoods (the Second Avenue subway extension to 125th Street), improving accessibility for the disabled and the aging, and maintaining its capital plant in general. The affordable housing crisis continues with the revelation that there are some 110,000 homeless students enrolled in the City’s public schools ( that’s a lot more than the City’s regularly peddled number that there are 60,000 homeless overall in the City). Not to say that the NYCHA is in a bit of a funding pickle for capital themselves.

So what has the City government agreed on for $1.5 billion in spending over a ten year period? 250 miles of protected bike lanes. Lanes by the way which are paid for by some sort of user fee, right? Some form of safety regulation (helmets) or insurance requirement? Some form of revenue generated from the user base (even the farebox covers a much higher % of operating costs than most other US transit systems)? No. None of that. Instead, the City will spend this money which intentionally or not really covers a very specific cohort (white males under say 45) at the expense of other more diverse population cohorts.

In the end, it’s up to the City to do what it wants but it is fair to question the capital priorities especially when there is no connection between use and funding of an asset. It’s one side of the dilemma posed by the advances of various modes of micromobility. Until the issues of funding relative to utilization are more clearly established, issues not directly related to transportation will continue to intrude on the debate over the future of transportation.

CHICAGO BLUES

This is shaping up to be a tough budget season for the City of Chicago. The Mayor’s budget proposal is receiving lukewarm support from a variety of constituencies. Many are expressing concern about the need for the state to take actions in order to allow the City to address its revenue and pension problems. And the teachers strike against the Chicago Public Schools continues. The longer it goes the more vicious the cycle gets as more people will look for permanent alternatives to CPS schools. With each passing day, the district doesn’t get aid based on average daily attendance.

It can be hard to see through the rhetoric of this strike. The union is taking on a variety of issues outside of traditional workplace issues. They are attempting to direct funds from tax increment districts. According to the Chicago Tribune, TIFs now cover about one fourth of the city’s real estate, including some areas downtown. The city can redirect money from TIF districts that isn’t committed to specific projects through a process called declaring a surplus. Mayor Lightfoot has proposed declaring a record $300.2 million TIF surplus in 2020. That’s up from the $175.7 million this year that Emanuel included in his final budget. As the biggest taxing body, CPS stands to collect $163.1 million of the proposed $300.2 million surplus.

We do not take the view that the City is in danger of default. What we do however believe is that investors need to be compensated for the risks they are taking in connection with the direct debt of the City or the schools district. These entities are fortunate that absolute market levels provide reasonable borrowing costs for both new money and refunding purposes. In a market where rates rise and are expected to continue to do so, credits like the City of Chicago and the CPS are in a position to get hammered in terms of spread.

Muni Credit News Week of October 21, 2019

Joseph Krist

Publisher

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MAJOR SYSTEM SETTLES ANTI TRUST CHALLENGES

Sutter Health, a large Northern California nonprofit health care system with 24 hospitals, 34 surgery centers and 5,500 physicians, has announced a preliminary settlement agreement in an antitrust case brought originally by private interests but joined by California’s Office of the Attorney General. Sutter stood accused of violating California’s antitrust laws by using its market power to illegally drive up prices.

The case shone a light on many of the aspects of the issue of healthcare costs – what drives them and how they can be controlled. As systems grow and consolidation continues, many of the same issues raised in this case appear in the evaluation of other mergers. They involve a number of significant interests – the hospitals, insurers, state and federal government – all of whom are positioned to advance their particular interests.

Some aspects of the Northern California marketplace made Sutter a convenient target. The chain of health care facilities had $13 billion in operating revenue in 2018. A University of California, Berkeley study from 2018 found that health care costs in Northern California, where Sutter is dominant, are 20% to 30% higher than in Southern California, even after adjusting for cost of living.

The settlement is expected to address the issue of negotiations between providers and insurers. Sutter is known as an aggressive bargainer but that is true of other large systems across the country. Merger opponents seize on these negotiations as a source of price inflation. In terms of the immediate impact on the Sutter credit, that likely will not be publicly revealed until 1Q 2020. There were estimates that Sutter could have had monetary exposure of up to $2.7 billion according to press reports.

PROVIDENCE SCHOOLS FACE STATE CONTROL

It was recently announced that the State of Rhode Island would take over the operation of the Providence Public School System. The action comes after the release of an outside report produced by Johns Hopkins University (Aa2 stable that highlighted the system’s significant academic and administrative deficiencies., The state’s takeover, prompted by poor academic outcomes rather than financial difficulty, takes effect November 1 and will continue for at least five years. The school system is a unit of the city, which is responsible for its debt.

Schools are the largest single source of expenditure for the City. It is important to note that this action was not driven by finances. The state education department has sweeping powers to assume budgetary, governance, programmatic and personnel control of chronically underperforming school districts. The state education commissioner is crafting a turnaround plan for the Providence schools and the state is expected appoint a turnaround superintendent in the coming weeks. PPSD’s board comprises nine members appointed by the Providence mayor and approved by the City Council.

So this is not a credit event for the schools but it could have some benefit for the City’s overall financial position. In fiscal 2018 (ended 30 June 2018), 58% of PPSD revenue was from the state, 31% from local sources and 11% from federal funding. The state presence likely reduces the need for the city to increase its own funding of the school system, including the growing cost of educating English-language learners, which is considerable given the city’s diverse population. The action comes at a time when the City’s finances are still considered to be vulnerable. Moody’s correctly points out that a weak educational system generally has adverse social effects, making a city a less desirable place to live and less attractive to businesses. If the Providence takeover leads to material improvement in school quality, the city’s socioeconomic profile will improve.

The state has controlled the Central Falls School District (CFSD) since 1993, when CFSD was unable to meet financial obligations absent increased state funding.

PUBLIC POWER IN CALIFORNIA

The role of private utility generation and transmission assets as sources of wildfire risk has focused enormous attention on California’s investor owned utilities. This week, tens of thousands of Californians could be without power again this week as two major utility companies consider shutting off electricity to large swaths of the state amid heightened concerns that hot weather and strong winds could lead to wildfires. PG&E may shut off power in 17 California counties as dangerous winds return. More than 17,000 Southern California Edison customers in five counties — Los Angeles, San Bernardino, Orange, Santa Barbara and Ventura — are also under consideration for power outages in coming days.

One of the city’s without its own integrated public power system is San Jose. In San Jose, somewhere around 60,000 residents went without power for a couple days in the last series of rolling blackouts. This is motivating support for investigating alternatives to reliance on PG&E in the City. The mayor has announced that he is directing staff to study the feasibility of creating a municipal utility. That would potentially require the city to purchase power lines off of PG&E and to finance construction of microgrids and energy storage systems.

San Jose already buys energy outside of PG&E through its own provider, San Jose Clean Energy. But PG&E controls energy transmission. The mayor is trying to shift the city into increased reliance on solar even though the city also ranks third in the nation for solar power generation per capita.

The city of Santa Clara has run its own electrical utility for more than a century, offering lower rates and higher ratios of clean energy than PG&E. San Jose officials plan to poll residents in the fall to gauge public interest in having the city acquire PG&E’s distribution lines and invest in microgrids. If voters say they don’t want San Jose to buy PG&E infrastructure, the city will push forward on its efforts to develop microgrids.

SF HOUSING BOND

The median home sales price in San Francisco is $1.35 million. The median rent of a one bedroom apartment is $3,700 per month. The City’s affordable housing woes are well documented. The City has previously sought approval for bonding authority to address the crisis as recently as 2015. Now, the City seeks additional authority on the November 5 ballot.

If Proposition A passes, the city would borrow $600 million dollars to construct 2,800 new affordable housing units. Part of the money would go toward repairing existing public housing developments that have become dilapidated. Other parts would finance the building or buying of low income housing. The bonds would be paid from the proceeds of a tax on homeowners in San Francisco at nearly two cents for every hundred dollars in assessed property value. So if your house is worth that median $1.35 million, you’d pay about $256 in additional property taxes a year.

The proceeds would be spent as follows: $150 million for public housing, $220 million for low-income housing, $60 million for middle-income housing and preservation, $150 million for senior housing, and $20 million for educator housing. Another proposition, Prop. E would allow 100 percent affordable and educator housing to be built on public land.

Teacher unions have offered data which shows that 64 percent of its teachers pay more than 30 percent of their income on housing, making them officially rent-burdened, and almost 15 percent spend more than half. It is a phenomenon which is being replicated in cities across the country, impacting not only but teachers but the vast majority of municipal employees.

Muni Credit News Week of October 14, 2019

Joseph Krist

Publisher

Publisher’s Note: We took an unanticipated hiatus to deal with some medical issues. We should be back to our weekly publishing schedule. We appreciate your indulgence.

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NEWARK WATER

It did not seem to get as much publicity as one might expect given that it is the state’s largest city but the lead pipe contamination situation facing Newark, NJ is moving towards a resolution. There was rightfully much concern about the potential costs of a remediation for a city which has long faced financial difficulties. It was clear that the cost of remediation would be substantial and that the City would need some outside financial assistance to address the water problem.

So it was very positive to see the news that federal legislation was signed that allows the State of New Jersey to provide financial assistance to Newark that would help the city remediate lead in its drinking water, a credit positive. State assistance, combined with $155 million Newark will receive from a settlement with the Port Authority of New York and New Jersey , would be used to service $120 million in debt the city plans to issue for the lead remediation. The Port Authority settlement will generate $5 million upfront and $5 million per annum for 30 years.

The legislation permits the state to transfer certain federal funds to its drinking water revolving fund to be used for lead remediation. The state has not yet allocated or promised any of these monies to Newark. The $120 million debt issuance will increase Newark’s leverage, though the degree is limited. Debt will increase to 4.8% of fiscal 2019 equalized value or 1.06x 2017 current fund revenue, up from 4% and 0.88x.

The situation has shown that when governments get together to address situations like these, a resolution is possible. The Port Authority’s participation is key. So too is the fact that Essex County, where Newark is located, will be guaranteeing the city’s debt issuance. Because Essex has much stronger credit quality than Newark, the guarantee will help the city cut borrowing costs, which the city and county estimate could save Newark as much as $15 million over the life of the bond.

The situation in Newark has highlighted the significant use of lead piping especially to convey water to individual residences. The Governor has announced a plan to issue $500 million of bonds to pay for some of the costs of removal and replacement of existing lead piping. A proposal for a bond authorization would appear on the November 2020 ballot if such a plan is approved by the Legislature.

JEA PRIVATIZATION

Jacksonville Florida has taken the next step in its effort to divest itself of its integrated utility system. The City received 16 bids from a variety of private utility interests. Information about who the bidders are is not coming from the City which has adopted a somewhat opaque approach to the whole process. The bids were presented in sets of boxes which the City made a show of opening but concealing any details. JEA is using an unusual “invitation to negotiate” process that keeps information under wraps during the evaluation and negotiation stages. After JEA staff announces an intent to award all the records and tape-recordings of the meetings will become public record.

Nonetheless, some of the bidders disclosed their participation in the bidding. NextEra Energy, the parent company of Florida Power & Light, Duke Energy, and Emera, which owns Tampa Electric and Peoples Gas have disclosed that they have bid. JEA will need to cover costs of eliminating several billion dollars of debt, $400 million in one-time customer rebates, $132 million in pension benefits for employees, $165 million in retention bonuses for JEA workers and a cash payment of at least $3 billion to City Hall. Estimates are that To purchase the entirety of JEA’s electric and water operations, a bidder would need to be able to pay at least in the range of $6.8 billion to $7.3 billion.

There are arguments on both sides of the issue of the process being used by city officials. The opacity of the process is probably more comfortable for the private entities in the negotiation but it does raise issues of perception. This might raise some unnecessary barriers in the approval process. If the JEA board agrees to do a deal, it would go to the City Council for it to decide if the deal makes sense for city government and the community. The City Council can either approve or reject a deal. Approval would send the terms and conditions to Duval County voters for final say in a voter referendum.

The potential for unnecessary perception issues to arise has not gone unrecognized. The city Inspector General and Ethics Director have expressed their intention to sit in on the negotiations. The city is contacting inspector general offices throughout the country to see what “best practices” they use for such closed-door negotiations. The Authority intends to decide over the next two weeks which respondents will move to the next stage of entering negotiations with JEA.

CALIFORNIA UPGRADE

Moody’s Investors Service has upgraded to Aa2 from Aa3 the rating on the State of California’s outstanding general obligation (GO) bonds. Here’s their rationale. ” The upgrade of California’s GO bonds to Aa2 incorporates continued expansion of the state’s massive, diverse and dynamic economy and corresponding growth in revenue. The action also recognizes the state government’s disciplined approach to managing revenue growth indicated by its use of surplus funds to build reserves and pay down long-term liabilities. At the upgraded rating, these strengths balance several challenges that will persist. The most significant challenges include high revenue volatility given the state’s heavy reliance on income taxes, lower flexibility to adjust spending and raise revenue compared to other states, and above average leverage and fixed cost burdens. The upgraded rating still reflects certain social challenges relative to other US states. These include a high rate of poverty when accounting for the state’s elevated cost of living, and very expansive public support of the lower income population that would present the state with difficult spending and policy decisions in the event of reduced financial support from the US government.”

Well now we have until the next recession to see if the California credit has become any less exposed to its historic level of volatility, reflecting its income tax dependence on a relatively small percentage of taxpayers at the high end of the income scale. The State still faces awesome capital needs and its increasingly difficult housing market is becoming problematic for the economy. The state also faces issues from federal immigration policies which contribute to reductions in population in certain primarily urban areas. Historically in many cities, immigrants make up for the well documented phenomenon of population movements in search of more affordable housing costs. These, along with pension and climate related costs, weigh on a potentially higher rating.

PR CREDITORS HAVE THEIR DAY AT THE SUPREME COURT

The Supreme Court heard arguments in the challenge to the authority of the PROMESA financial control board. The creditors in this case contend that the board was appointed in violation of the US Constitution. The dispute is over whether the oversight board supervising Puerto Rico’s finances is actually a federal agency whose members must be presidential nominees confirmed by the Senate, or an entity structured by Congress under its authority to administer the U.S. territories. To date, it has operated as a Congressionally structured entity.

Aurelius has a heavyweight counsel representing them before the Court, Ted Olson. That didn’t prevent the justices from challenging the Aurelius arguments. Aurelius has historically taken aggressive stands in other sovereign debt cases. This time, Justice Brett Kavanaugh suggested that if the creditors’ definition of a federal officer requiring Senate confirmation was correct, it could put territorial self-government in jeopardy.

The Board argues that Congress specifically invoked its territorial powers in creating the board, directed it to work in Puerto Rico’s interest and insulated its members from political interference by giving them three-year terms during which they could be removed only for cause. This led to Justice Sotomayor to ask “How you can label this a territorial officer as opposed to a federal officer…when none of the people of Puerto Rico have voted?”

When the federal appeals court in Boston ruled in February that the board’s members were federal officers requiring Senate confirmation. At the same time, it suggested a remedy – the Senate could vote to confirm the members—President Obama’s appointees who, as a backstop, subsequently were nominated by President Trump. That was noted by the Justices who suggested that this could be accomplished quickly, obviating the need to dismantle the board and throw a huge delay into the debt restructuring process.

Muni Credit News Week of September 16, 2019

Joseph Krist

Publisher

Publisher’s Note: The MuniCreditNews is taking a couple of weeks off for repairs to the publisher. We’ll be back in October.

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$475,000,000

Municipal Electric Authority Of Georgia

Plant Vogtle Units 3&4 Project M Bonds, Series 2019A

Moody’s: “A2” stable outlook
S&P: “A” negative outlook
Fitch: “BBB+” negative outlook

Right up front, we take the view that Fitch is right on this one. We completely understand the value that is put on the general obligation of the participants. But we see it as inconsistent that the market is so concerned about the sanctity of special revenue bonds in a post Puerto Rico era but is wiling to hang it’s hat on the legals to support this credit.

The Votgle expansion is an economic sinkhole. Nuclear power right now is not viewed by the general public as green in terms of climate change. It is not even economic relative to its competitors. That may change but in the meantime the sunk costs of the expansion and increasing competitive forces pressuring large central utilities like MEAG will continue to weigh negatively on credits.

The reality is that MEAG management with support from politically conservative state officials were willing to bet their utilities credit that they could make nuclear power work. The issue isn’t whether nuclear is the most cost efficient (it’s not), whether its green (emission free is not the same as green), or whether it’s the best choice versus renewables or the dreaded “self-generation”. The issue is that nuclear power does not have a political constituency regardless of its technological merits.

Five pages of risk factors is a hint that this should be a credit that one should be compensated for owning. And this is where the value of the general obligation and the rating that is based on that comes into play. If this is a revenue bond, than it should trade through its equivalent GO security. If it’s a GO than it should trade behind a revenue bond. That, however, is not what the ratings reflect.

NYC REAL ESTATE

New York is viewed as being at some sort of historic apex in its existence with a rising population and seemingly unstoppable growth in real estate values. It’s impossible to get around Manhattan without navigating a street or side walk narrowed or blocked by residential construction. It would seem to be the best of times.

A new survey has cast some light on the subject which just might alter that image. A new analysis by the listing website StreetEasy estimates that of 16,200 condo units across 682 new buildings completed in New York City since 2013, one in four remain unsold. That’s roughly 4,100 apartments. Manhattan had the most unsold condos by far: Over 2,400 of the unsold units, about 60 percent, were in the borough, primarily in large luxury buildings.

This data comes at a time when the Manhattan retail vacancy rate has been a continuing concern. The two phenomena are not necessarily linked although efforts by developers to “manage ” their inventory make it difficult to know how much of the vacancies are due to soft demand or owners simply holding tight to their price demands.

This is all going on at a time when the City’s overall economy is still doing well. There is some cause for concern that employment in the financial sector will soften in the fourth quarter. This will likely further hamper the recovery of the real estate market as these cuts will impact a significant target group of real estate buyers. it reflects the still significant contribution to the City economy made by the financial industry.

The data also shows how the current shape of the New York real estate market drives the issue of affordability. The study showed a number of buildings that have decent sales percentages but that also have high proportions of those units on the rental market. This makes it more likely that these owners are investors rather than buyers with long term interests in the neighborhoods and local economies which they would normally support.

Factors driving the data include the City’s “mansion tax” (up from a flat 1% on million-dollar sales up to 3.9% for sales above $25 million)on those units and the loss of the SALT deduction. The current atmosphere around immigration also impacts the desirability of the market to foreign investors who play a large role in the City’s residential property market.

The impact from a downturn in the real estate market directly on the City’s real estate tax base is fortunately tempered by the use of averages over time to determine taxable value. This reduces volatility of the tax base through both ups and downs. The impact of lower incomes and higher end employment would be more rapidly felt.

GM STRIKE

The last time there was a nationwide strike against one of the major US automakers was in 2007. The financial crisis hadn’t fully unfolded and GM was still a solvent entity. But that was as they say a long time ago in a galaxy far away. The industry stands at the center of the issue of transportation and technological change and faces significant choices about its direction. Now that uncertainty has spread into the realm of labor management.

That is the light in which we view the UAW announcement of a nationwide job action against GM. That would impact 46,000 GM autoworkers at 55 facilities in the United States. In reality, the resolution of an agreement will be establishing a template for managing the impact of technological change on current jobs across the industry. A strike, if extended will be costly in terms of lost income and reduced economic activity. A UAW worker will get only $250 a week in strike wages. The union had $721 million in its strike fund in 2018 and temporarily increased dues in March this year to boost it to $850 million.

The strike is of interest because of the policy implications of what the workers ask for and achieve and how that stacks up against policy proposals from the Presidential campaign. Take health care. Research by the Ann Arbor-based Center for Automotive Research shows that an average UAW worker pays about 3% of his or her health care costs compared with 28% paid by the average U.S. worker. “Unallocated assembly plants” refers to GM’s decision announced last fall that it would indefinitely idle four of its U.S. plants.

The resolutions reached over these issues are more than a local or state credit issue. They have real significance that will influence a variety of political actions and reactions in light of the “threat” of job losses to technology whether it be through lower overall vehicle production (one potential outcome) or shifts in production based on the adoption of electric versus internal combustion vehicles. It’s about much more than whether local sales tax bond coverages are lowering.

CYBERSECURITY GOES TO SCHOOL

The first days of class should be the most exciting of the school year as new teachers, students, and subjects get introduced to each other. In the case on one Arizona school district, events were something more than exciting.

A ransomware attack on the Flagstaff, AZ school district led officials to close school for a couple of days while they addressed issues associated with the attack. the district ultimately chose to close schools out of an abundance of caution. It wanted to verify the integrity of systems related to the district ultimately chose to close schools out of an abundance of caution. What it did not do was pay the ransom. The district manages its data and information technology on a distributed basis between itself and various third parties including Northern Arizona University Coconino County and private vendors.

It is not clear how much but the District did have cyber security insurance. This will cover a portion of the remediation. The District is also allowed to use two of its budgeted five snow days to account for the two days the schools were closed. District management says the total financial cost will not be known for at least another month.

So hope fully there is something to learn from this school experience. We learned that the housing of data on a less concentrated basis may be safer than relying on one server or source. We learned that you can get cyber insurance. And we learned that a little financial flexibility (snow days in September) can go a long way as well. We also know that information like this does not necessarily compromise cyber security in and of itself. So why can’t investors get more of this? This incident could go a long way towards developing a disclosure template for municipal credits to follow.

Muni Credit News Week of September 9, 2019

Joseph Krist

Publisher

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SOUND TRANSIT FUNDING CHALLENGE

The Washington State Supreme Court will hear arguments on a challenge to the formula used to calculate the value of automobiles for the purpose of calculating the tax due to Sound Transit, the public transit agency in and around Seattle. Taxpayers who are plaintiffs in the lawsuit contend that the transit agency uses a formula that inflates the value of vehicles when it levies a motor vehicle excise tax. That value is used to establish the amount of what is known as the car tab.

Vehicle owners in urban parts of Pierce, King and Snohomish counties pay the tax through their annual vehicle registration, known as a car tab. The suit relies on an interpretation of procedural aspects of how a law is enacted. One provision says no law shall be revised or amended by mere reference to its title. The revised or amended law must be laid out “at full length.” The plaintiffs contend that this did not occur.

They seek the return of hundreds of millions of dollars collected from taxpayers since Puget Sound area voters approved the car-tab tax rate increase in 2016. Sound Transit also must be prohibited from collecting that tax in the future, unless the Legislature votes again on the matter. The car tab dates back to 1990, when the Legislature approved a new valuation schedule for the statewide car-tab tax that had been levied for decades. It overvalued the worth of a vehicle to raise more revenue for transportation projects.

Six years later, the Legislature enacted a law which authorized Sound Transit to collect a car-tab tax. Voters that year approved a 0.3 % car-tab tax to help pay for light-rail projects. Sound Transit used the state’s valuation schedule adopted in 1990. Opposition continued and in 2002, voters statewide approved Initiative 776, which repealed the state law authorizing locally imposed car-tab taxes, Sound Transit’s car-tab tax and the valuation schedule it used.

That initiative was overturned in the Washington Supreme Court in 2006. The Legislature then the Legislature approved a bill authorizing local governments to create regional transportation districts to build roads, in part through car-tab taxes. Four years ago, a bill passed giving Sound Transit authority for a voter-approved car-tab tax not to exceed 0.8 % — on top of the 0.3 % approved in 1996 — for a total of 1.1 % of the vehicle’s value. That bill did not use the schedule with the lower values for vehicles that lawmakers approved in 2006. That formula would have meant less revenue for Sound Transit.

The bill said the higher valuation schedule that Sound Transit had used since it began to collect car-tab taxes in 1997 temporarily would be in effect until its 30-year bond debt incurred in 1999 for light-rail projects is retired. The transit agency has said that will happen in 2028, when its 0.3 per cent car-tab tax is set to end. Voters will already get a chance to vote on transit funding. Initiative 976 would cap car-tab taxes at $30 and also would reduce several other transportation taxes. It has the same sponsor as did the previous failed initiatives to defund public transit.

NYC SPENDING

Two recent reports from New York’s Citizens Budget Commission shed light on spending practices by NYC under Mayor Bill DeBlasio. One highlights the City’s use of leasing to acquire much of its office space. CBC estimates that New York City government leases 22 million square feet (of an estimated 37 million square foot real estate portfolio) from private owners.1 Most leased space houses agency offices (13.5 million square feet), but the City also leases space for public services ranging from schools and day care centers to warehouses, tow pounds, and courts.

In fiscal year 2018 New York City spent more than $1.1 billion to lease space for public facilities and offices—an amount that has grown 40 percent since fiscal year 2014, far greater than the 20 % increase in the City budget, the 12 % increase in asking rents for office space, and the 10 % increase in the number of full-time City employees. The City Charter requires the Department of Citywide Administrative Services (DCAS) to maintain a list of leased and owned space; however, DCAS does not publish lease-level data on how much space the City leases, how much each lease costs, or how efficiently agencies use their space.

Leasing has been on the increase since 2009 under the Bloomberg administration but it accelerated at the start of the de Blasio administration. The City does not publish a complete record of leases and space use that includes each lease’s costs, square footage, and occupancy. DCAS only publishes data on the locations of buildings where the City leases space and the agencies located at each property.

At least some effort was made in the prior administration to address the concern over long term leasing by the City. The Bloomberg Administration launched the Office Space Reduction program to reduce the size of the City’s office portfolio by 1.2 million square feet. Through fiscal year 2012 the program reduced occupied office space by 400,000 square feet and saved $15 million in annual rent expenses and $4 million in energy costs.9 The average square footage occupied per employee declined 8.6 percent from a high of 280 square feet in fiscal year 2012 to 256 by 2016. The program was not renewed for fiscal 2017.

The real estate management issue joins several others as sources of opacity and a lack of accountability. The City can’t provide data on the efficacy of its tax incentive plans, it can’t (or won’t) account for spending under the billion dollar Thrive NY mental health program (run by the Mayor’s wife), and current real estate management initiatives did not set reduction targets and did not report metrics, such as square footage per employee, to track progress.

ALASKANS PAYING FOR THIS YEAR’S BUDGET

A new governor has undertaken an aggressive ideologically based approach to the management of the State’s finances. The most prominent example is the gutting of the University of Alaska’s budget which is resulting in the elimination of tenured faculty under financial exigency rules. That was not necessarily something that people explicitly voted for.

Now one of the main cogs in the State’s transportation system has been shown to be a target of the cuts. The Alaska Marine Highway System, (AMHS), released its winter schedule with fewer sailings and a new pricing system. The changes also include the use of dynamic pricing. This is a much loathed system of raising and lowering ticket prices based on perceived demand. The most visible examples are its use by airlines and sports teams.

The State Transportation Department has said “we had to reduce our service by one-third because we just don’t have, we don’t have funding.” The cut was just over $43 million. It means that some communities will lose ferry service for six months. Passenger fares could climb by as much as 30% while vehicle and cabin rates could rise as much as 50% on heavily booked sailings.

We are not talking about minimal expenses for passengers. A passenger going from Haines to Bellingham, Washington can expect a base fare of about $500. But that could increase to nearly $650 if the ship fills up. Fees will increase for changes or cancellations close to travel dates while fares will increase 10% for the days preceding and after special events.

There are communities which rely on the ferries for access to the mainland and at least one of them will lose service altogether. It is hard to see how this helps the Alaska economy, all in the name of raising the oil dividend. Except the dividend was not raised and remains at $1600. Putting political views aside what the math says is that if you live in one of the communities which is losing its winter ferry service, you lose access to the outside economy and other opportunities, your life gets much more inconvenient and expensive, and you do get $1400 to help you out even all of the cuts were supposed to get you the $1400. It makes no sense.

SCHOOL BUILDING COSTS IN THE AGE OF GUNS

The opening of the school year has been the occasion for several school facilities to be opened and publicized in an effort by both administrators and industrial interests to show off the latest in school building technology. It is hard in the current environment to criticize any effort to promote the safety of school children. I write this as a parent of a public school graduate and the spouse of an inner city teacher in both public and private schools.

Whenever new the technology has an opportunity to be introduced and profited from it will occur. In the wake of the Sandy Hook and Parkland incidents, significant efforts have been made on the part of vendors to have their ;products employed in an effort to provide security in schools. Whether it be surveillance equipment, reinforced materials, designers, or other technology vendors. As the chair of the Partner Alliance for Safer Schools, or PASS has said, “When you have an active shooter situation, I guarantee in the first couple days your inbox is going to have solutions from companies trying to market their technology.”

One school in western New York state is even employing facial recognition technology in spite of the global controversy over its uses and technological shortcomings. The trend of school districts being overwhelmed by vendors is reminiscent of the introduction of computers into classrooms. A whole industry has grown up around products including biometric screening, outdoor lighting optimized for video surveillance, and audio analytics .

The real capital expense comes with school renovation and construction. A discrete approach to architectural design for schools has developed. In Fruitport, Michigan, a newly renovated high school will be “the safest, most secure building in the state of Michigan,” according to a district superintendant. It reflects a current trend with limited sightlines, wing-wall protrusions for students to hide behind, and an all-seeing reception desk the architect calls an “educational entry panopticon.” The school features bulletproof glass and other reinforcements. It also costs $48 million.

In Indiana, one school is fitted out with strobes and horns are installed throughout the hallways and in every classroom for instant alert. Teachers wear “panic buttons” which can activate the system. each classroom features a hardened door system that will withstand an attack by pistol, rifle, shot gun and followed with using the butt of the shotgun to attempt to knock the vision window out. This door automatically locks when closed. If it sounds like a modern prison, that maybe because the design firm also designs prisons.

No one is saying that students and teachers shouldn’t be safe at school. The question is are these large expenditures being undertaken because they are effective or has what’s been effective is the marketing by the security industrial complex.

PREPA RESTRUCTURING MOVES CLOSER

The president of the fiscal control board overseeing Puerto Rico’s attempts to restructure its debt announced an agreement with the bond insurers Syncora Guarantee, Inc. and National Public Finance Guarantee Corp. to join the Restructuring Agreement (RSA), which was achieved earlier this year with several holders of PREPA and Assured Guaranty Corp. The agreement now accounts for 90 percent of the uninsured bondholders and all PREPA bond insurers.

Holdouts remain and they stand in the way of a conclusion to the deal. It remains however, an important step in that one less institutional block is an obstacle.

Muni Credit News Week of September 2, 2019

Joseph Krist

Publisher

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JUNK LAWSUIT AGAINST ILLINOIS DEBT REJECTED

On Aug. 29, Sangamon County IL Associate Judge Jack D. Davis II denied a request by individual plaintiff John Tillman together with Warlander Asset Management LP, (the money behind the case) to file suit to block the state from continuing to pay off $14 billion in “structural debt” bonds issued in 2003 and 2017. The complaint sought to argue the state violated Section 9 by failing to identify a “specific purpose” for the debt when issuing the bonds at question in the case.

The lawsuit named as defendants Gov. JB Pritzker, state treasurer Michael Frerichs and state comptroller Susana Mendoza. None of them were in office when the bonds were issued. The judge found “the legislation stated with reasonable detail the specific purposes for the issuance of the bonds and assumption of the debt as well as the objectives to be accomplished by enactment of the legislation.” “Despite Tillman striving mightily to do so, he cannot ignore the plain language of the statutes in question,” the judge wrote. “Tillman’s proposed Complaint is chock-full of conclusory and argumentative statements describing the financial condition of the state that are irrelevant and which the court must disregard. Indeed, it resembles far more of a political stump speech than it does a legal pleading.”

The judge went further declaring that allowing lawsuit to proceed would “result in an unjustified interference with the application of public funds” and would lead to a court substituting its interpretation of the constitution for the will of the General Assembly and other elected officials, which the judge said was a “non-justiciable political question.” None of this is surprising. It has also been alleged that Warlander Asset Management LP was hoping to profit from a short position if the lawsuit succeeds.

It is a reflection of how continually annoying it is to hear how non-traditional investors keep trying to bring their “better way” of trading and investing to the municipal bond market. These aren’t corporate entities you’re messing with they are providers of public goods which by their very nature are often essential. Junk lawsuits to facilitate a short are one “improvement” this industry can do without.

CALIFORNIA REVENUES

After finishing fiscal year 2018-19 above the 2019-20 Budget Act forecast by $1.041 billion, preliminary General Fund agency cash for July, the first month of the 2019-20 fiscal year, was $533 million above the 2019-20 Budget Act forecast of $7.794 billion. Personal income tax revenues for July were $364 million above the month’s forecast of $5.403 billion. Withholding receipts were $353 million above the forecast of $5.06 billion. Other receipts were $11 million higher than the forecast of $762 million. Refunds issued in July were $7 million lower than the expected $322 million.

Proposition 63 requires that 1.76 percent of total monthly personal income tax collections be transferred to the Mental Health Services Fund (MHSF). The amount transferred to the MHSF in July was $7 million higher than the forecast of $97 million. Sales and use tax receipts for July were $25 million above the month’s forecast of $1.732 billion. July is the firstn month of the 2019-20 fiscal year and includes the final payment for second quarter taxable sales, which was due July 31. Corporation tax revenues for July were $119 million above the month’s forecast of $357 million.

Estimated payments were $146 million above the forecast of $290 million, and other payments were $63 million lower than the $162 million forecast. Total refunds for the month were $36 million lower than the forecast of $95 million. Insurance tax cash receipts for July were $4 million above the month’s forecast of $22 million. Cash receipts fromn alcoholic beverage taxes, tobacco taxes, and pooled money interest were $15 million above the month’s forecast of $100 million. “Other” revenues were $6 million above the month’s forecast of $180 million.

STATE SELLING RAIL LINES

It is easy to forget that there was a long history of government participation in the local economy dating back to the early 1900’s. Cooperative farming entities and a strong mistrust of national institutions supported the notion that the state could have a role in directly supporting farm economies by providing access to markets. Long before the introduction of automobiles and the development of a serious road system, the primary source of transport for people and goods between markets was the railroad.

In reflection of that tradition, the approximately 533 miles for sale were purchased by the state four decades ago when railroad giant Milwaukee Road went bankrupt. Some lines were purchased and restored to service by other railroads once Milwaukee Road went under, but the state purchased the remaining essential lines that were not sold privately. The state is now looking for prospective buyers to take the rails off its hands with the ultimate goal of returning the rails to private sector ownership to boost traffic, tax revenues and job creation.

A total of six lines are for sale, and prospective buyers can propose to purchase a single line, combination of lines or portion of a line to the board. The longest stretch of rail for sale is the MRC Line, running 285 miles from Mitchell to Rapid City. The segments are operated by different operators under leases and subleases. Any sale will need to be approved by the state railroad board, the Governor, and the federal Surface Transportation Board.

ROADS TO NOWHERE

For years, development proponents have supported state financed road building as a tool to support their projects. The relationship between roads and development is well established. In the municipal bond market, the experience with toll road development projects which were ultimately designed to generate new development has been mixed at best. Failed projects linked to development have been experienced in Colorado, Virginia, Florida, and South Carolina.

Now in spite of those experiences, the forces behind road development are taking another stab at things. For years, Florida governors and legislators have been loath to approve a major expansion of toll roads throughout the State. Development supporters have championed an effort to undertake major expansions (300 miles) of roads to generate development. The latest iteration of the would extend the Suncoast Parkway to Jefferson County, another would extend Florida’s Turnpike to the Suncoast Parkway up to the Georgia border and a third would build an entirely new toll road from Polk County to Collier County.

There is only one small problem with the effort. It apparently does not have support from any of the major non-real estate constituencies which would be impacted. These include elected representatives from four of the counties to be impacted as well as the Florida Trucking Association (FTA). The FTA notes that existing Interstate 10 has wide swaths and many interchanges with “zero economic development.” State transportation officials acknowledged afterward that they have basic questions to answer about the proposed roads. The Department of Transportation does not have data showing the roads were needed.

And that brings us to the credit aspects of the proposal. Too many of them fail even in the presence of data purporting to show need. “There’s some obvious things we know we need to take a look at — the economic feasibility, the environmental impacts, that’s obvious,” a department spokeswoman said. In an age of data driven decision and policy making, this proposal fails to meet minimum tests of practicality. The access to information and data to the public should be driving government decision makers towards better processes for developing, permitting, and executing capital projects. This proposal fails that test.

CAN FREE MASS TRANSIT WORK?

A monthly pass good for riding anywhere in Kansas City, Mo., and its neighboring communities in Missouri and Kansas costs $50 on the regional bus system. A daily ticket costs $3. That doesn’t seem to be too much but ridership tells a different story. On the buses, most run below capacity even at rush hour. On the other hand, the light rail system is looking at expansion to reflect high demand. And the light rail is free.

The Kansas City Area Transportation Authority has been willing to test out a variety of pricing approaches in an effort to boost utilization. Veterans now ride free, as do many K-12 and college students. Partnerships with businesses and local safety-net providers allow them to distribute free rides to their clients. In all, about 25 percent of KCATA riders don’t pay to ride.

The light rail service which operates in downtown KC has a much better utilization rate. It is also free with operating costs covered through sales and property taxes levied in a special taxing district that extends for about a half-mile on either side of its route. As for the bus system, $8 million a year out of the KCATA’s $105 million operating budget is generated by fares. The city of KC, MO already collects two sales taxes that benefit transit, though not all of those funds are directed toward KCATA. About $2 million per year goes to the streetcar, and somewhere between $3–4 million goes to the city’s public works department. So right there is $6 out of the $8 million in potential “lost fares”.

Making up the remainder from other sources would seem to be feasible. The City of KC, MO already directs $17 million from the city’s general fund to subsidize parking garages. There is also the potential for more revenue from an expansion of light rail and the expansion of sales tax zones to fund the expansion as is the case with existing lines. There could be operational savings from the elimination of duplicative bus service along new light rail routes.

Were the KCATA to eliminate fares across the board, that would make Kansas City the first major city in the country—a few small college and resort towns have already done it—with a free transit system.

RENT CONTROL IN CALIFORNIA

One clearly emerging trend in state legislature since 2019 has been their willingness to legislate solutions to the issue of housing costs and rents in particular. Under an agreement announced by Gov. Gavin Newsom and legislative leaders, Assembly Bill 1482, would limit rent increases statewide to 5% plus inflation per year for the next decade. The law would also include a provision to prevent some evictions without landlords first providing a reason.

Enactment is however, not a sure thing. The bill is a more stringent version of proposed legislation on the subject. The California Assn. of Realtors, a major source of lobbying influence at the Capitol, had agreed not to oppose a weaker version of the legislation that would have capped rents at a higher percentage for a shorter time. The organization said after the deal was announced that it would lobby lawmakers to vote against the bill. At the same time, the California Apartment Assn., which represents landlords in the state, notes that the announced deal includes an agreement by the organization to no longer do so.

The proposed rent caps have yet to be formally incorporated into the bill, would not apply to properties built in the last 15 years, nor would they apply to single-family home rentals unless they were owned by large corporations. It would not affect existing rent control regulations, such as those in Los Angeles and San Francisco. The bill would extend caps to apartments in those cities not covered by the existing local measures.

The bill’s anti-eviction protections, which would limit evictions to lease violations or require relocation assistance, would take effect after a tenant has lived in an apartment for a year. A bill must be voted on by September 13.