Joseph Krist

Publisher

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ISSUE OF THE WEEK

$1,720,000,000

New York State Personal Income Tax (PIT) Bonds

State Personal Income Tax Revenue Bonds are secured by a pledge of payments made pursuant to a financing agreement entered into by DASNY and the state Director of Budget, backed by a dedication of 50% of New York State personal income tax receipts and 50% of receipts of the ECEP. The Employer Compensation Expense Program (ECEP) established a new optional Employer Compensation Expense Tax (ECET) that employers can elect to pay if they have employees that earn over $40,000 annually in wages and compensation in New York State.

The state created security for the bonds through statutory dedication of personal income tax revenues and more recently, ECEP receipts. The comptroller is required to deposit personal income tax withholding receipts and ECEP receipts into the dedicated revenue bond tax fund (RBTF) in an amount equivalent to 50% of the state’s total monthly receipts from each tax. In addition to withholding, personal income tax receipts include estimated taxes, delinquencies, and final returns. Financing agreement payments are made from the RBTF to the trustees for debt service.

The state comptroller deposits the dedicated personal income tax and ECEP receipts into the revenue bond tax fund upon certification of revenues by the commissioner of the state’s Department of Taxation and Finance. The funds are set aside daily from withholding or ECEP receipts to result in 50% of PIT and ECEP receipts set aside monthly. There must be a legislative appropriation to pay debt service and the monthly financing agreement payments must be made in order for receipts in excess of debt service requirements to be transferred to the general fund and used for any other purpose.

The lockbox structure has been a proven winner in terms of credit for the State of New York. Additional security stems from the enabling act which requires the comptroller to transfer funds from the general fund to satisfy debt service requirements if appropriated and certified receipts set aside for the bonds are insufficient to make the certified financing agreement payments. The comptroller is empowered to do so without appropriation. However, if funds are insufficient to pay debt service on the state’s general obligation bonds, the comptroller is also empowered to direct first revenues of the state to that purpose. If those revenues are insufficient, the comptroller may transfer funds from the dedicated PIT or dedicated sales tax funds to pay general obligation debt service. 

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One of our recurring themes is that consolidation remains a significant credit factor in the hospital sector. While it is not determinative, size is one way to mitigate credit risk as those entities with larger and stronger balance sheets remained the best positioned to withstand the various winds of change buffeting the industry. So to that end, here is a list of the 15 largest (by number of hospitals) non-profit hospital systems in the US.

1. Ascension Health (St. Louis) — 76 Aa2
2. Trinity Health (Livonia, Mich.) — 45 Aa2
3. Kaiser Permanente (Oakland, Calif.) — 37 AA-
4. Dignity Health (San Francisco) — 36 A3
5. Catholic Health Initiatives (Englewood, Colo.) — 33 Baa1
6. Adventist Health System (Winter Park, Fla.) — 31 A
7. Sutter Health (Sacramento, Calif.) — 26 Aa3
8. Providence Health and Services (Renton, Wash.) — 26 Aa3
9. Northwell Health (Great Neck, N.Y.) — 21 A3
10. Banner Health (Phoenix) — 20 AA-
11. Baylor Scott & White Health (Dallas) — 19 Aa3
12. CHRISTUS Health (Irving, Texas) — 19 A1
13. SSM Health Care (St. Louis) — 18 A+
14. Intermountain Health Care (Salt Lake City) — 17
15. Mercy Health (Cincinnati) — 17 A

The credits are all rated in at least the A category with the exception of one which has always been characterized by above average leverage. The larger systems tend to have balance sheets with significant resources to survive as they navigate mergers and expansions and changes in reimbursement. We are not surprised by the correlation.

LESS HEALTHCARE CONTROL FOR STATES

Certificates of Need were a significant tool used in the healthcare space to limit uncontrolled and eventually wasteful spending on health delivery facilities like hospitals and nursing facilities. In an era when efficiency is at the core of nearly every aspect of the provision of healthcare and its finance. While they have their detractors, there has largely been little public support for building additional hospital facilities. Current trends in the industry towards consolidation would seem to indicate a market view that the current rate of capital expansion works.

So it is interesting that in the face of those trends, The US Department of HHS’ new report about ways to improve “choice and competition” in the U.S. health care system includes repealing state laws that require providers to ask for permission to build new facilities.  Some observers believe tha tthe Administration might use requests for waivers as a vehicle for pressuring repeal on states.

The effort to repeal CONs is generally considered to be a conservative issue. Repeal would theoretically allow for the opening of more independent free standing facilities privately owned by physician groups.  These facilities have had checkered financial and health related outcomes so their revival would be an issue from a credit perspective.

WHILE HEALTHCARE SPENDING SLOWED DOWN

Overall national health spending grew at a rate of 3.9 % in 2017, almost 1.0 percentage point slower than growth in 2016, according to a study conducted by the Office of the Actuary at the Centers for Medicare & Medicaid Services (CMS). Medicare spending grew at about the same rate in 2017 as in 2016, while Medicaid spending grew at a slower rate in 2017 than in 2016. According to the report, overall healthcare spending growth slowed in 2017 for the three largest goods and service categories – hospital care, physician and clinical services, and retail prescription drugs. 

Hospital spending (33% of total healthcare spending) decelerated in 2017, growing 4.6 % to $1.1 trillion compared to 5.6 % growth in 2016. The slower  growth for 2017 reflected slower growth in the use and intensity of services, as growth in outpatient visits slowed while growth in inpatient days increased at about the same rate in both 2016 and 2017.

Physician and clinical services spending (20 % of total healthcare spending) increased 4.2 % to $694.3 billion in 2017. This increase followed more rapid growth of 5.6 % in 2016 and 6.0 % in 2015. Less growth in total spending for physician and clinical services in 2017 was a result of a deceleration in growth in the use and intensity of physician and clinical services.

Retail prescription drug spending (10 %of total healthcare spending) slowed in 2017, increasing 0.4 % to $333.4billion. This slower rate of growth followed 2.3 % growth in 2016, which was much slower than in 2014, when spending grew 12.4 %, and in 2015, when spending grew 8.9 %. These higher rates of growth in 2014 and 2015 were primarily the result of the introduction of new, innovative medicines and faster growth in prices for existing brand-name drugs. Retail prescription drug spending growth slowed in 2017 primarily due to slower growth in the number of prescriptions dispensed, a continued shift to lower-cost generic drugs, slower growth in the volume of some high-cost drugs, declines in generic drug prices, and lower price increases for existing brand-name drugs.

Closer to the hearts of municipal analysts are the subjects of Medicare and Medicaid.  Medicare spending (20% of total healthcare spending) grew 4.2 percent to $705.9 billion in 2017, which was about the same rate as in 2016 when spending grew 4.3 %. In 2017, slower growth in fee-for-service Medicare (Medicare FFS) spending (1.4 % in 2017 compared to 2.6 % in 2016) offset faster growth in spending for Medicare private health plans (10.0% in 2017 compared to 8.1 % in 2016). The trends in Medicare FFS and Medicare private health plan spending are attributed in part to an increasing share of all Medicare beneficiaries enrolling in Medicare Advantage.

Medicaid spending (17 % of total healthcare spending) growth slowed in 2017, increasing 2.9 % to $581.9 billion following growth of 4.2 % in 2016.  The slower growth in total Medicaid expenditures in 2017 was influenced by a deceleration in enrollment growth and a reduction in the net cost of Medicaid health insurance resulting from an increase in recoveries from Medicaid managed care plans for favorable prior period experience. State and local Medicaid expenditures grew 6.4 %, while federal Medicaid expenditures increased 0.8 % in 2017.  In 2017, states were required to fund 5 % of the costs of the Medicaid expansion population, while in prior years these costs were funded entirely by the federal government.

In 2017, the federal government’s spending on healthcare slowed, increasing 3.2 % after 4.9 % growth in 2016. The deceleration was largely associated with slower federal Medicaid spending due to lower Medicaid enrollment growth, a reduction in the federal government’s share of funding for newly eligible Medicaid enrollees, and a decline in the net cost of insurance for Medicare and Medicaid enrollees in private plans in 2017. 

CALIFORNIA AND PENNSYLVANIA NOVEMBER REVENUES

State Controller Betty T. Yee reported the state received $9.69 billion in revenue in November, exceeding projections in the 2018-19 fiscal year budget by 15.1 %, or $1.27 billion. Personal income tax (PIT), sales tax, and corporation tax –– the state’s “big three” revenue sources –– all were higher than expected in the enacted budget.

For the fiscal year, revenues of $44.97 billion are 5.4 % ($2.29 billion) higher than projected in the budget enacted at the end of June. Total revenues for FY 2018-19 thus far are 9.8 % ($4.02 billion) higher than through the same five months of FY 2017-18.

For November, PIT receipts of $5.96 billion were 22.3 % ($1.09 billion) more than expected in the FY 2018-19 Budget Act. Sales tax receipts of $3.52 billion for November were 12.4 % ($388.4 million) greater than anticipated in the FY 2018-19 budget.
November corporation taxes of $26.9 million were 2.8 %higher than FY 2018-19 Budget Act estimates. 

The Commonwealth of Pennsylvania’s Department of Revenue reported that year-to-date through November revenue collection in the state general fund had reached $12.4 billion for fiscal 2019, which started  July 1. The growth in total general fund revenue is the highest the state has recorded in almost 10 years. Current year revenue collection is trending 2.8%higher than the state had forecast through November of this fiscal year. Income taxes and sales taxes are growing at rates higher than in most years of the current decade. These are the two largest sources of General Fund revenue to the Commonwealth. Income taxes through November are below forecast, but only by 1.4%. Sales taxes are 3.1% higher than the state anticipated through November and up 9% relative to the same time last year.

How enduring a trend this is may be subject to question. Like many other states, federal tax law changes increased the pool of available taxable income. Businesses may have shifted some income from last year to this year to take advantage of the lower federal tax rate. The Commonwealth changed the way corporations report net income, which the state estimated would moderately increase corporate tax revenue.

Underlying all of this is a clear improvement in many of Pennsylvania economic performance metrics. While there has not been a significant improvement in Pennsylvania’s long-term manufacturing outlook,increases in healthcare employment (especially around the state’s medical centers Philadelphia and Pittsburgh) are generating higher incomes. It is also not a sign of significant budget improvement as FY 2018 showed a small surplus in the Commonwealth budget. This after the Commonwealth bonded out the previous accumulated deficit.

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

Joseph Krist

Publisher

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ISSUE OF THE WEEK

MUNICIPAL ELECTRIC AUTHORITY OF GEORGIA

$245,000,000

$175,000,000* Power Revenue Bonds

$70,000,000* General Power Revenue Bonds

Moody’s A1  Fitch A-

In the midst of ongoing dispute and litigation between and among owners of the Votgle expansion units, MEAG comes to the market with refunding bonds. According to Moody’s, these bonds have “the strongest bond security provisions versus peer agencies in the U.S.”. MEAG is unusual in that its participants have also pledged their general obligation to levy unlimited ad valorem taxes in order to meet their contractual obligations to MEAG. The contracts have been court tested and validated in the State of Georgia.

The bonds from this issue are refunding bonds. The refunded debt matures in 2026 but the refunding generates savings for the Authority by extending maturity. So while the refunding lessens the near term pressure on the participants, it offsets some of the benefit by extending the life of the liability. The extension exposes MEAG to greater risk from major regulatory changes or delays which push up costs significantly at MEAG Power’s existing generation facilities thus causing MEAG Power participants to question contract terms and affect their compliance.

Our issue with the credit has to do with concerns that substantial additional cost increases and delays will erode rate payer support for the credit. Yes the legal provisions are strong but legals which are not supported by strong underlying economic fundamentals are not enough to offset the economic issues. Legal provisions let you know where you are in line at bankruptcy court but they don’t magically create money.

What happens if JEA is successful in its efforts to extricate itself from its obligations to pay for now unwanted nuclear capacity? According to Moody’s, this risk is mitigated by the fact that in the case that JEA defaults on its obligation, MEAG Power would still be required to fund future construction costs related to what Project J had been scheduled to finance due to its 22.7% ownership interest. Provisions in a new agreement with GPC provide for up to $300 million of financing capacity to help address this worst case situation.

Additionally MEAG Power and its participants could decide to use available internal liquidity or access external liquidity to fund such a funding requirement. in the case that JEA defaults on its obligation, MEAG Power would still be required to fund future construction costs related to what Project J had been scheduled to finance due to its 22.7% ownership interest. Provisions in a new agreement with GPC provide for up to $300 million of financing capacity to help address this worst case situation. Additionally MEAG Power and its participants could decide to use available internal liquidity or access external liquidity to fund such a funding requirement.

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HOSPITAL MERGERS AND ACQUISITIONS

The California Department of Justice has given conditional approval to the ministry alignment agreement between Dignity Health and Colorado-based Catholic Health Initiatives. The resulting organization, CommonSpirit Health, will operate nearly 140 hospitals in multiple states, including 30 hospitals in California.

CommonSpirit Health is required to maintain emergency services and women’s health services for 10 years. The new entity must also create a health initiative to help homeless patients.

Community Health Systems, Inc. (NYSE: CYH) announced that subsidiaries of the Company have signed a definitive agreement to sell four South Carolina hospitals – 82-bed Chester Regional Medical Center in Chester, 225-bed Springs Memorial Hospital in Lancaster, 396-bed Carolinas Hospital System in Florence, and 124-bed Carolinas Hospital System – Marion in Mullins – along with related businesses, including physician clinic operations and outpatient services, to the Medical University Hospital Authority in Charleston, S.C.(A1 by Moody’s)

In calendar year 2017, the four hospitals combined delivered care through more than 129,000 emergency department (ED) visits, 159,000 outpatient visits (excluding ED visits), 18,800 hospital admissions, and 339,000 clinic visits with physicians. Once the acquisition is completed, MUSC will employ more than 16,400 team members throughout the state. MUSC is the South Carolina’s only comprehensive academic medical center. Founded in 1824, the university is located in Charleston and has awarded more than 36,000 degrees over its history.

The university includes six colleges with more than 1,700 faculty members and awards degrees in 50 specialties. MUSC includes University Medical Associates, a group practice for faculty and clinical professionals and MUSC Foundation, a fundraising organization that also aids in management of endowed funds. The academic medical center also includes Medical University Hospital Authority which owns and operates an over 700 bed full service hospital. When combined the organizations had operating revenue of over $2.3 billion in FY 2016. The medical center is an NCI-designated Cancer Center and Level 1 Trauma Center.

The Massachusetts attorney general approved the merger between Beth Israel Deaconess Medical Center and Lahey Health with various conditions. The combined system will be barred from raising prices beyond the state’s own healthcare cost growth benchmark, which is currently set at 3.1%. It must also participate in the state’s Medicaid program indefinitely, increase access to mental health and substance use disorder treatment and funnel significant investments to its safety net hospitals and programs.

Looking at it from an investment standpoint, the deal should be positive. The Massachusetts​ Health Policy Commission has said that BILH’s market share would nearly equal that of Partners HealthCare System (Partners), market concentration would increase substantially, and BILH would have significantly enhanced bargaining leverage with commercial payers.”

QUESTIONABLE NUMBERS FROM PUERTO RICO AGAIN

The Financial Oversight and Management Board for Puerto Rico announced that after its review of the pension forecasts and projected PayGo payments in the new fiscal plan it had certified on Oct. 23, it concluded that the pension forecasts and projected PayGo payments through fiscal year 2058 were understated by $3.35 billion. The revisions to the existing pension forecasts result in “no net material impact during the first 20 years of the projections (through 2038), and are concentrated in the last 20 years of projections (2039-2058),” according to the board.

The board said it will “further refine” the pension forecasts and projected PayGo payments after it “receives and analyzes more accurate information from the actuaries for the Commonwealth’s pension plans in the coming months.” It is yet another example of what can be so maddening about the effort to restructure the Commonwealth’s debt.

Now there are complaints from some quarters in Puerto Rico about the fact that Congress has been making suggestions to the fiscal oversight board about what actions could or should be take. It continues to astound that there is a view that when one asks for a financial bailout that the party being asked to provide the resources is not entitled to have input over how the funds are spent. In this case, some are objecting to the suggestion that PREPA be privatized. I have always compared this to a child asking a parent for money and then objecting to any strings being attached. One pretty much goes with the other.

It’s not condescending or taking a colonial attitude to want to make some suggestions as to how resources are expended especially when the funding is not generated locally. The unwillingness on the part of multiple administrations in Puerto Rico to admit that there was anything wrong is a large part of the story of how they got in the position in which they find themselves today. I have asked various representatives on multiple occasions about why cities like D.C. and New York had to accept restrictions and oversight in return for outside financial help but that somehow the idea of controls and oversight should not apply to Puerto Rico. We are still waiting for an answer.

REALITY BITES

The outgoing Governor of Maine has made the fight against Medicaid expansion in the Pine Tree State a centerpiece of his administration. Despite being term limited and being replaced by a pro-expansion candidate, he continues to fight on in court against being compelled to expand Medicaid under the ACA. This despite the fact that Maine’s voters approved expansion in a vote. Voters approved Medicaid expansion — a key component of the Affordable Care Act — 59 to 41 percent in the 2017 referendum.

The Maine Department of Health and Human Services requested a stay of a judge’s order that would compel the LePage administration to move ahead with Medicaid expansion. The judge hearing the case had ordered that Maine DHHS had to implement expansion by Dec. 5.  The LePage administration argues that because the federal government has yet to approve the state’s expansion plan, Maine would be at risk of paying the full cost of expansion from July through December, instead of 10 percent of the cost as required by the Affordable Care Act.

Medicaid expansion will cost state taxpayers about $50 to $60 million per year, but Maine will receive more than $500 million annually in federal funds to help pay for health care for newly-eligible Medicaid enrollees. The incoming Governor intends to implement expansion as one of her first official acts.

SMALL STEPS OF PROGRESS IN CYBERSECURITY

Two Iranian nationals were indicted by a federal grand jury for crimes in their connection with cyberattacks over recent months and years which affected a number of governmental and non-profit entities. The two men collected more than $6 million in ransom payments and caused $30 million in damages in attacks that began in December 2015.

“These defendants allegedly used ransomware to infect the computer networks of municipalities, hospitals, and other key public institutions, locking out the computer owners, and then demanded millions of dollars in payments from them”, according to federal prosecutors. Who are some of the victims? Hollywood Presbyterian Medical Center in Los Angeles; Kansas Heart Hospital; MedStar Health in Maryland; Nebraska Orthopedic Hospital; and Allscripts Healthcare Solutions in Chicago .

Atlanta, Newark, the Colorado Department of Transportation and the University of Calgary were among the government agencies attacked. The Atlanta and Colorado attacks were well publicized and this is the first reference we have seen regarding the source of the Atlanta attack which is one of the most extensive so far in terms of municipalities.

While a step forward on the law enforcement front, the news should serve as a warning to other municipal entities. It also reinforces the notion that cybersecurity is and should be a source of increased inquiry and analysis and hopefully will support the efforts of by some investors to press for far more disclosure about the risks of cyber attacks  against municipal credits.

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.

Joseph Krist

Publisher

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ISSUE OF THE WEEK

Water Replenishment District of Southern California Financing Authority, CA

Revenue Bonds

S&P: AA+

Fitch: AA+

The Water Replenishment District of Southern California Financing Authority, CA  has been serving for 60 years replenishing groundwater resources not replenished naturally by purchasing recycled or imported water and, to a lesser extent, through the capture of storm water runoff. Water is injected into the aquifers or spread on the surface to percolate down to the basins. There are 43 cities within the district’s boundaries that are groundwater pumpers, including the cities of Los Angeles and Long Beach.

The district derives the majority (95%) of its annual revenues through a replenishment assessment on each of the users based on their annual extraction.  Assessments saw significant increases over the last decade to address the rising cost of imported water and reduced groundwater pumping from the basins during the drought. In the next several years assessments are expected to continue to increase (5%-6%, annually) to provide for increased annual debt service costs.

In a time of drought and other climate changed events making water more scarce and reducing the reliability of water sources, the District’s role takes on greater importance. The recent updates to the Colorado River compact highlight the need to reduce the amount of water that southern California imports from outside and/or out of state sources. The latest bond issue occurs as the District’s Albert Robles Center  comes on line. The Center will purify approximately 10,000 acre feet (3.25 billion gallons) of tertiary treated (recycled) water annually to near-distilled levels through an advanced water treatment facility. Together, with another 11,000 acre feet (3.6 billion gallons) of recycled water, the District will deliver 21,000 acre feet of water to the San Gabriel Coastal Spreading Grounds where it will percolate into the Central Basin.

The bonds are payable from installment payments made by the district from its system net revenues, including replenishment assessments. The district’s obligation to make installment payments is absolute and unconditional as governed by the installment purchase agreement between district and the authority.

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BET THE INVESTORS WISH THIS WAS TRUE

The latest absurdity out of the White House is the existence of multiple reports that President Trump believes that aid from FEMA and other sources is covering Puerto Rico’s debt service requirements. Axios reports that Trump also told senior officials last month that he would like to claw back some of the federal money Congress has already set aside for Puerto Rico’s disaster recovery, claiming mismanagement.

We do not think that such an effort would be The comments are more likely a future indicator of the Administration’s willingness to ask for or authorize additional aid. The news of the President’s sentiments reinforces the views he expressed in a late October tweet. “The people of Puerto Rico are wonderful but the inept politicians are trying to use the massive and ridiculously high amounts of hurricane/disaster funding to pay off other obligations. The U.S. will NOT bail out long outstanding & unpaid obligations with hurricane relief money!”

The President apparently believes that any positive movement in prices in the secondary market for Puerto Rico debt reflects use of disaster funds for debt repayment. One would think that after the President’s extensive experience with defaulted debt and bankruptcy proceedings, he would have a better understanding of the process.

WHAT IS TRUE

The Puerto Rico legislature has approved a proposed COFINA restructuring agreement which has been submitted to the court overseeing Puerto Rico’s bankruptcy. The agreement, the first to be submitted to the court for approval, reduces COFINA debt overall by 32% and gives senior bondholders 93% of the value of the original bonds and junior bondholders 55%. It also saves Puerto Rico about $17.5 billion in debt service.

The approved bill establishes COFINA’s ownership of a portion of the island’s sales and use tax. It also creates a lien to benefit COFINA bondholders, establishes certain agreements in the name of the commonwealth and allows the sale of certain COFINA bonds held by the Puerto Rico Infrastructure Financing Authority.

A decision in the case is expected to be rendered in January.

BRIGHTLINE BECOMES VIRGIN USA

Richard Branson will become a minority investor but that is enough to cause the All Aboard Florida (AAF) high speed rail project to rebrand itself as Virgin USA. The partnership was announced as AAF faces a yearend deadline to secure tax exempt bond financing for its build out across the state. The company hopes to launch rail service along the Interstate 4 corridor from Tampa to Orlando in 2021 and it expects ridership to take two years to ramp up. Construction for the Tampa-to-Orlando service has an estimated cost of $1.7 billion.

Travel time between the two cities is projected to be an hour — Virgin’s trains will have a top speed of 125 mph — compared with 90 minutes by car and 2 hours and 5 minutes for Amtrak’s Silver Star. Travel time between the two cities is projected to be an hour — Virgin’s trains will have a top speed of 125 mph — compared with 90 minutes by car and 2 hours and 5 minutes for Amtrak’s Silver Star.

The project’s outlook remains cloudy as unaudited financial statements reveal Brightline struggled in the first half of the year, losing $28.2 million in the first quarter of this year and $28.3 million in the second quarter. It is reported that reported in October that Brightline’s passenger volume increased to 106,090 in April, May and June, up from 74,780 during the first three months of the year, but far below projections.

The partnership comes as Brightline’s major investors announced plans to buy the rights to build a high-speed railroad between Southern California and Las Vegas. Service there is to launch in 2022, and eventually could expand into the Los Angeles area, according to Brightline. Brightline says that “Virgin has built a respected and trusted brand in travel and hospitality.”

In Britain, there is no shortage of those who would beg to differ with that characterization. Virgin is one of the entities which took over rail lines when British Rail was privatized. That has produced at best mixed results in spite of promises to invest in equipment and improve operating performance. Virgin Group’s existing high-speed railroad in the United Kingdom, also called Virgin Trains, has had its own financial struggles and faced criticism earlier this year for accepting a government bailout.

Those issues have not received the same level of attention here on this side of the Atlantic. The hope seems to be that the Brightline’s below projection operating results will be boosted by “access to millions of customers with the potential for increased ridership from other Virgin branded travel and hospitality businesses, including Virgin Atlantic, Virgin Hotels and Virgin Voyages.”

LOOKING TO THE COURTS TO LOWER OBLIGATIONS

Platte County, Missouri sold $32 million in bonds in 2007 to provide up-front financing for two public parking garages. The bonds would be paid back over time by sales taxes generated at Zona Rosa. Zona Rosa is an approximately 500,000 square feet, mixed-use development located in Kansas City, Platte County, Missouri. The project opened in 2004 and was expanded by an additional 500,000 square feet in early 2009.

Now in the face of a changing environment in the retail sector, Zona Rosa has not generated enough in sales tax revenue to pay annual debt payments. The County is being looked to as a source of funds to cover the debt service shortfalls. The shortfall on the annual debt payment to bondholders, which is due on Dec. 1, exceeds $1 million.

Now Platte County is taking a fairly aggressive stance in court. The lawsuit asks a judge to declare that Platte County is not legally responsible for shoring up Zona Rosa’s debt, and that it would be unconstitutional for the county to do so. Explicitly, the suit states that “The decision of whether to pay will be made by the Platte County Commission based on the law and the best interests of Platte County taxpayers, not the demands of a Trustee representing investors that accepted the risks of their investments.”

The County has already felt the ratings impact of its position losing its investment grade status in the face of its initial opposition to making payments. Moody’s said in association with its action that “the downgrade of the county’s GOLT rating to Ba1 from Aa2 reflects the county’s lack of willingness to fulfill a contractual obligation to make payments sufficient to pay principal and interest on the Industrial Development Authority of the County of Platte County, Missouri Transportation Refunding and Improvement Revenue Bonds (Zona Rosa Retail Project), Series 2007 (NR), and the amount of any deficiency in the bond reserve fund, if the Trustee has not otherwise received sufficient funds. The county’s lack of willingness to honor its intentions under the financing agreement with the Industrial Development Authority (IDA) represents a lack of willingness to pay on an obligation that supported debt issued in the capital markets.

WHY PEOPLE IN NY ARE UPSET ABOUT THE AMAZON DEAL

Where do we begin? Questions about whether or not Amazon even needs the subsidies to want to be in the center of finance and the center of political power for a start. The same week that the $1.7 billion package of inducements was announced, the MTA announced that it would increase bus and subway fares 4%. Why? A funding shortfall of some $1 billion annually. So let’s see – the Amazon deal increases the mass transit burden facing the city and state. The amount of subsidies would actually cover about 1.7 years of revenue shortfall. So why wouldn’t current residents wonder if the fares could have been maintained?

In theory, Amazon’s 25,000 incoming employees might wonder about things like schools for their children. Well Amazon has pledged to donate space at its new Astoria campus for a school. Not funding for its construction or operation – just space. Likely space to be obtained through eminent domain. Housing? The recent experience in Seattle is instructive regarding its effort to generate funding from the tech industry.

So if you live by the Amazon site say in the nation’s largest public housing project, you might ask: Will this deal generate resources to improve my home or will it continue to be without heat but with lead for the winter? Will my child have a chance to go to a modern school equipped in order to enable my child to get a job across the street at this employment behemoth? Lacking that will my neighborhood have better transportation so that my child and I can get to better educational and employment opportunities?

These are reasonable questions to be asked not a cover for NIMBYism. Especially in light of the really mixed results from many other subsidy schemes. They are questions which should be asked by the neighborhood but also by objective analysts of the plan (muni analysts).

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.

We try each week to provide the observations and commentary which we think will be most useful for all who make their living in the area of municipal credit. With a light calendar and the many distractions of Thanksgiving looming over the whole week, here is some helpful information to help with your Thanksgiving meal.

https://www.offthegridnews.com/how-to-2/how-to-raise-and-slaughter-turkeys-on-your-homestead/

Enjoy your weekend. We return next Monday.

Joseph Krist

Publisher

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ISSUE OF THE WEEK

What caught my eye this week was not the underlying credit stories behind some of the deals but the number of sizable in the water sector.  The condition of older water systems and threats to local supplies as the result of infrastructure deterioration will likely drive more rather than less difficulty with issue surrounding the state of repair of the infrastructure. This week Los Angeles, Philadelphia, and the New York State Revolving Fund all provide examples of the service needs of varying types of systems.

Los Angeles which is dealing with long term supply concerns, the impact of droughts (climate change), and a continued growth in population reflect those issues. Philadelphia must deal with the constant need for upkeep of physical plant to insure delivery reliability and water quality. The NYS revolving fund program allows smaller often rural systems a source of financing for their water infrastructure needs. A small NY community was in the news in recent months over contamination issues with the community’s drinking water supply.

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S&P EXPLAINS ITS RECENT CHICAGO RATING ACTIONS

It is understandable that a criteria change at a rating agency which results in a significant downward adjustment in ratings is frustrating to issuers and bond holders alike. The latest instance in which such an action has occurred is in S&P’s treatment of the sales tax revenue bonds. Late last month, S&P lowered the rating of Illinois’ Build Illinois senior- and junior-lien sales tax bonds to ‘BBB’ from ‘AA-‘.

When the Build Illinois bonds were first issued they were hailed as a way to provide a secure and lower cost credit that would be somewhat insulated from changes in the general credit standing of the State of Illinois. As the state’s overall credit fundamentals of the State deteriorated over time, Build Illinois bonds provided a bit of a safe haven for investors. With this criteria change and its attendant negative impact on ratings, this is no longer the case.

So what has changed? The criteria change reflects a view that deterioration in an issuer’s general creditworthiness can reflect a diminished capacity to make all payments, including debt statutory or contractual claim on revenues with a higher priority than competing claims. Priority lien ratings factor in the fundamental credit quality of the obligor, not solely the revenue stream pledged to the bonds. Under the new criteria, a priority lien rating is limited to a maximum of four notches above the obligor’s creditworthiness (captured in an issuer’s general obligation [GO] rating), and four notches can only be attained in limited circumstances.

S&P cites the fact that the issuing entity collects its own priority-lien revenue and the revenue is used for general operating purposes (i.e., there is no lockbox arrangement). Second, after the priority-lien obligations are satisfied, there is no meaningful limitation on the use of the revenues. S&P takes the view that the State’s funding of pensions was a violation of state law which raises concerns about willingness to pay, despite legal structures supporting payment of the Build Illinois bonds. S&P notes that Illinois would first look to local share sales tax revenue reductions or violations of state law in times of liquidity distress.

Nonetheless, despite the level of coverage (1.82x) and favorable history of funding debt service the rating on the Build Illinois bonds is now tied directly to that of the State. The rating on the bonds now will move in tandem with the State’s GO ratings. So much for the insulation from the State’s problems which the credit was designed to address.

As for the Chicago the Sales Tax Securitization Corporation (STSC), Ill.’s outstanding sales tax securitization bonds issued for the city of Chicago, a different view prevails. S&P cites the Illinois Public Act 100-0023 authorization for home rule municipalities to sell their interest in revenues or taxes received from the state of Illinois to special purpose entities. This is meant to insulate bond holders from operational risk associated with Chicago.

Illinois Public Act 100-0023 authorizes home rule municipalities to sell their interest in revenues or taxes received from the state of Illinois to special purpose entities. The Illinois Department of Revenue collects revenues and then passes them directly to the corporation or its bond trustee. There is a legal opinion that  once sales taxes are sold, they are no longer property of the city and would not be treated as such in a bankruptcy case.

PENSION CHANGES IN ARIZONA

In 2017, the state enacted legislation which made numerous changes to benefits offered under the Corrections Officer Retirement Plan (CORP). Many participating employees in the CORP hired after 1 July 2018 no longer receive defined benefit pensions, which will gradually reduce pension risks, for the state and other sponsoring governments, associated with investment performance and employee longevity.

In aggregate, participating employers in CORP must currently contribute 29% of payroll to the pension system, 21% of which is to amortize past unfunded liabilities. In comparison, employer contributions to the defined contribution plan are only 5% of payroll, with no risk of future unfunded liabilities developing. New cost-of-living adjustment (COLA) formulas will apply prospectively to current employees and retirees.

The key to these changes is their prospective nature. Making changes going forward typically gets around statutory and constitutional issues which speak to the diminishment of benefits for retirees. There usually is no prohibition against changes made on a going forward basis. So when we look at the debate around public employee pensions, we wonder why so many jurisdictions spend their time spinning their wheels trying to diminish vested benefits when they could take the immediate step of closing existing schemes and imposing new terms for new employees while adjusting benefits on a going forward basis.

Had these types of steps had been taken there would still be a significant problem requiring substantial resources in the future. The scale of the problem would not be as severe as it is. Jurisdictions which have taken the approach of tiered benefits schedules are better off than those which have not. Even a union friendly state like New York has successfully implemented tiered approaches to pensions without producing the adversarial approach which so many states and municipalities currently face.

WHEN LOSERS ARE WINNERS

In the aftermath of the apparent decision by Amazon to build new headquarters facilities in northern VA and in New York City, the notion of whether or not those cities which did not make the cut actually win in the long run has taken hold. Those who believe that the Amazon facilities would be at best a mixed blessing are noting that both markets are already facing significant negative impacts in the form of increased demand on already overburdened housing stocks and mass transit systems.

Both proposed sites have much in common in terms of location near major centers of finance and politics. They both have significant cohorts of educated and younger workers. The areas both have significant rapid transit infrastructure. Both of those transit systems are however, better known for their poor service and deteriorated infrastructure. The adjacent airports are both slot limited and, while the closet to their respective downtowns are also limited as to their scope of service due to their small size relative to current airport designs.

Only time will tell if the way to win this competition was to lose competitively. It will be interesting to watch.

“Health care was on the ballot, and health care won.”

This is true from just about any perspective. Medicaid expansion won in the three states with initiatives designed to accomplish the task. It also won in terms of the election of governors in states like Maine where outgoing governor Paul Le Page has fought requirements to expand Medicaid pursuant to a 2016 initiative. Kansas elected a Democratic governor who supports the expansion of Medicaid. While the Trump Administration will continue its assault on the Affordable Care Act, we believe that the ballot box will out.

So who benefits? The provider system which will always be better off if everyone has insurance. Any reduction in the reliance on the emergency room as the primary patient entry point to healthcare system is a credit positive. The hospital sector will step back on stage and allow the pharmaceutical industry to occupy center stage in the effort to control healthcare costs. With the Administration and Congress in broad agreement on the need to lower prescription drug costs, we would expect to see a legislative effort in that direction.

When hospitals return to center stage, issues like the restoration of disproportionate share (DSH) payments for rural and safety net providers. Small rural hospitals can hope to get some relief through state expansion of Medicaid and restored DSH payments. There is a real crisis in the rural healthcare space which is now a significant source of default in the healthcare sector.

CALIFORNIA REVENUES

State Controller Betty T. Yee reported the state received $6.57 billion in revenue in October, falling short of assumptions in the 2018-19 fiscal year budget by 5.9 percent, or $412.2 million. This month, sales tax was the only major revenue source to come in higher than projected in the enacted budget. Personal income tax (PIT) and corporation tax –– the two other revenue sources in the “big three” –– were lower than assumed in the enacted budget.

Four months into FY 2018-19, revenues of $35.28 billion are 3.0 percent ($1.02 billion) higher than projected in the budget enacted at the end of June. Total revenues for FY 2018-19 thus far are 8.1 percent ($2.63 billion) higher than through the first four months of FY 2017-18. Sales tax receipts of $1.03 billion for October were 8.2 percent ($77.9 million) more than anticipated in the FY 2018-19 budget.

For October, PIT receipts of $5.13 billion were 8.4 percent ($472.0 million) less than expected in the FY 2018-19 Budget Act. October corporation taxes of $254.8 million were 10.9 percent ($31.1 million) below FY 2018-19 Budget Act estimates.

CHARTER SCHOOLS FACE HEADWINDS

One under the radar issue is the potential impact on the charter school movement and industry in light of the revised post-election map. The turnover of seven governorship and an increase in Democratic Party control would seem to result in a slowing of momentum for the industry. In some states, the issue was a significant one in the governor races.

Wisconsin’s rejection of Gov. Scott Walker replaces him with a much more union and public education friendly governor. Illinois Governor elect Pritzker is in favor of slower creation of charter schools and the incoming governor in Michigan has explicitly opposed the policies (pro charter) of Michigan resident and education secretary Betsy deVos.

For charter school operators the potential for more regulation and transparency in terms of their results and finances is seen by some as an unwelcome burden. That is the most likely significant result of “regime change” at the state level. The new regulations could include more stringent requirement and supervision of the provision of facilities to accommodate the disabled.

 

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

Joseph Krist

Publisher

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RURAL HEALTH

A Government Accountability Office report requested by U.S. Sen. Claire McCaskill reinforces our concerns for the rural hospital sector. The GAO found that although only about half of all rural hospitals are in states that didn’t expand Medicaid, 83% of the ones that closed from 2013 to 2017 were in those states. The data shows part of the story supporting voter initiatives which would seek Medicaid expansion under the Affordable Care Act.

Now the non-expansion state Kansas, is the site of another rural hospital closing. Mercy Hospital in Fort Scott is a 46 bed facility in eastern Kansas. Without expanded Medicaid these hospitals face a variety of pressures dealing with reimbursements and high rates of uninsured. Mercy Hospital says it spent $2.56 million in fiscal year 2017 on uncompensated care, as well as the traditional charity care write-offs it’s obligated to make to maintain nonprofit status. One estimate puts the benefit to Mercy of an expansion at an additional $2.7 million in revenue each year on average, according to the Kansas Hospital Association.

The current facility scheduled for closure opened in 2002. It has 230 employees who in 2017 admitted about 1,000 patients, performed about 1,500 surgeries and saw another 70,000 people on an outpatient basis. The hospital will close Dec. 31, including all inpatient services, the emergency department and ambulatory surgery.

Researchers from Northwestern Kellogg School of Management have found that hospitals in Medicaid expansion states saved $6.2 billion in uncompensated care, with the largest reductions in states with the highest proportion of low-income and uninsured patients. Consistent with these findings, the vast majority of recent hospital closings have been in states that have not expanded Medicaid.

There is not an initiative on the Kansas ballot regarding Medicaid expansion. It is seen as a major factor in the race for Governor. So while not a direct referendum on the issue, the Kansas governor vote can be grouped with the results of direct initiatives in Utah, Idaho, and Nebraska calling for Medicaid expansion.

CALIFORNIA PROPERTY TAX BALLOT INITIATIVES

The proposed California ballot initiative Proposition 5  amends the State Constitution to expand the special rules that give property tax savings to eligible homeowners when they buy a different home. Beginning January 1, 2019, the measure: allows moves anywhere in the State. Eligible homeowners could transfer the taxable value of their existing home to another home anywhere in the state.

It would allow the purchase of a More Expensive Home. Eligible homeowners could transfer the taxable value of their existing home (with some adjustment) to a more expensive home. The taxable value transferred from the existing home to the new home is adjusted upward. The new home’s taxable value is greater than the prior home’s taxable value but less than the new home’s market value.

It Reduces Taxes for Newly-Purchased Homes That Are Less Expensive. When an eligible homeowner moves to a less expensive home, the taxable value transferred from the existing home to the new home is adjusted downward. It also removes Limits on How Many Times a Homeowner Can Use the Special Rules. There is no limit on the number of times an eligible homeowner can transfer their taxable value.

According to the LAO, schools and other local governments each probably would lose over $100 million per year. Over time, these losses would grow, resulting in schools and other local governments each losing about $1 billion per year (in today’s dollars). Current law requires the state to provide more funding to most schools to cover their property tax losses. As a result, state costs for schools would increase by over $100 million per year in the first few years. Over time, these increased state costs for schools would grow to about $1 billion per year in today’s dollars.

The case for includes the view that as the measure would increase home sales, it also would increase property transfer taxes collected by cities and counties. This revenue increase likely would be in the tens of millions of dollars per year. Because the measure would increase the number of homes sold each year, it likely would increase the number of taxpayers required to pay income taxes on the profits from the sale of their homes. This probably would increase state income tax revenues by tens of millions of dollars per year.

RESILIENCE AS A CREDIT ISSUE

Austin, the Texas state capital, had to put into effect a boil water notice for all of its customers due to elevated levels of silt from last week’s flooding. This is the first time in the utility’s history that a notice of this kind has been issued for the entire system.  Nonetheless, the city was more concerned not with a surplus of water but with a real supply deficit. That is because the silty, debris filled river supplying Austin’s three water treatment plants is delivering more water than the plants may treat.

Normally, Austin Water can process more than 300 million gallons per day, but because of the extreme weather the utility was not able to process much more than 100 million gallons daily at the height of the flooding. Customers were asked to reduce water usage as much as possible.

This is a state capitol, home of the state’s flagship university, and a major economic center. So it is clear that resilience is an important issue as the city attempts to expand and modernize its economy.  Clearly, the greater frequency of major storms must be considered when any estimate of resilience is made. The likely solution is expansion of the regional flood management infrastructure. This will introduce extra costs onto the regional tax and economic base.

Meanwhile, The New York Academy of Sciences released the results of a study which reviewed the potential cost of climate change resilience for Los Angeles County. The report already has a high level of exposure to flooding (e.g. people, ports, and harbors), climate change and sea level rise will increase flood risk. The study covers a number of technical issues which we do not need to review here. What is important to us is the potential cost of resilience projects to manage this change. The research suggests three adaptation pathways, anticipating a +1 ft (0.3 m) to +7 ft (+2 m) sea level rise by year 2100. Total adaptation costs vary between $4.3 and $6.4 billion, depending on measures included in the adaptation pathway.

FLORIDA TOLL DISPUTE MOVES TO COURT

The Florida legislature passed the Florida Expressway Authority Act this and the previous summer which was designed to lower tolls on the state’s various toll roads. The legislation provides for a number of changes allowing for things like P3 partnerships but it also seeks to alter the process by which tolls may be raised. Included amendments, among other things, mandated a reduction in toll rates, limited the amount of toll revenue that can be used for administrative expenses, and changed auditing procedures.

Those changes in the ability of the individual issuers to raise revenues are now the subject of a lawsuit by the Miami Dade County Expressway Authority (MDX).  MDX alleges these tolling requirements should be rendered null, as they usurp authority granted to MDX via a transfer agreement signed in 1996. That agreement “granted to MDX full financial control” of the five expressways located in Miami-Dade County.

MDX is asking for a declaratory judgment that the amendments are unconstitutional. MDX claims that the toll provisions clash with non impairment provisions included in the bond resolution.

ATLANTIC CITY ON THE LONG CLIMB UP

Moody’s Investors Service has upgraded the City of Atlantic City, NJ’s Long-Term Issuer Rating to B2 from Caa3. The outlook remains positive. The upgrade is a positive notch in the belt of the state overseers managing the city’s finances. The mid-B rating still takes into account the city’s continued, albeit reduced, financial and economic distress. The agreement with the city’s casinos securing payments in lieu of taxes is a positive as is material budgetary improvements undertaken under State oversight.

The city still needs to further its economic diversity to reduce reliance on the casino industry. The gaming industry is still seeing new entities coming into the regional marketplace and those facilities while not achieving their projected operating results still serve as a source of serious competition for the marginal gaming dollar.

DOMINION OFFERS TO MANAGE SANTEE COOPER

Dominion Energy, a major Virginia investor owned utility, has offered to buy SCANA, the parent company of South Carolina E&G. That would place them in  the position of managing the Sumner nuclear expansion which was put on hold earlier this year. Now, Dominion is making an offer to the other major utility partner in the project – South Carolina Public service Authority (Santee Cooper) to manage Santee Cooper to help it save costs after the state-owned power company racked up $4 billion in debt on the failed nuclear project.

The letter including the proposal makes some bold promises. The offer would save Santee Cooper’s electric customers “hundreds of millions of dollars in overhead, fuel and capital related costs.” It purports to provide a vehicle to stabilize rates especially for large industrial and electric cooperative customers. Santee Cooper retail customers already pay an additional $5 monthly due to Sumner costs and face an additional $13 monthly until project related debt is retired.

Dominion claims that this proposal is superior to a sale of Santee Cooper to an investor owned utility. Dominion would not say whether the offer would stand if the Virginia-based power utility does not complete its proposed purchase of Cayce-based SCANA. According to the state, a handful of utilities privately have expressed interest in buying it.

The offer is a bit of an end run around the framework established by a South Carolina state committee charged with evaluating alternatives to the status quo. Dominion asked the S.C. Public Service Commission to reject Santee Cooper’s request for a $351 million payout if the Virginia-based utility is allowed to buy SCAN. Dominion claims that the arrangement would allow Santee Cooper to remain state owned, tax exempt and keep an “A+” credit rating.

BROWARD HEALTH MANAGEMENT UPHEAVAL

Broward Health which runs the former North Broward Health System has dismissed its chief counsel. The move comes as doctors complained that her office’s failure to get contracts through was costing the system essential physicians and Broward Health’s own chief executive complained about a “pervasive culture of fear” that the counsel helped create.

The board was a creation of outgoing Governor Rick Scott whose antipathy to the public provision of health services is well established. At the same time, five current and former Broward Health leaders indicted last year on charges of violating Florida’s open-meetings law. One of them is the departing chief counsel.

The counsel had angered board members with a series of investigations undertaken by outside attorneys whose fees were paid by the district. These investigations were seen as a part of an effort to discredit board members who oppose some of the Governor’s health policies. The period of oversight by the board – appointed by Scott – has included a massive federal fine, the suicide of its CEO, the decline of its bond rating and unending controversies and investigations.

The move to fire the counsel comes amidst charges that patient care has suffered, as physicians fled its hospitals and a failure to sign contracts on time cost the system necessary medical equipment. The negotiation and execution of contracts was under the purview of the counsel.

In the meantime, the district’s tax supported Baa2/BBB+.

MEDICAID UNCERTAINTY IN CALIFORNIA

The California State Auditor has released results of its payments that the Department of Health Care Services (Health Care Services) made from 2014 through 2017 because it failed to ensure that counties resolved discrepancies between the state and county Medi-Cal eligibility systems. Counties are generally responsible for determining Medi-Cal eligibility and for recording this information in their eligibility systems, which then transmit the beneficiaries’ information and Medi-Cal eligibility to the State’s eligibility system. Health Care Services uses the information from the State’s eligibility system to determine the amount that it pays for Medi-Cal beneficiaries.

Statewide comparison of Medi-Cal beneficiary eligibility data identified pervasive discrepancies between the state and county systems. Specifically, the analysis of 10.7 million Medi-Cal beneficiary records from December 2017 revealed more than 453,000 beneficiaries marked as eligible in the State’s eligibility system although they were not listed as eligible in the counties’ eligibility systems for at least three months. Upon examining the data for these beneficiaries from 2014 through 2017, we found that 57 percent of these discrepancies had persisted for more than two years. Many of these discrepancies resulted from Health Care Services failing to ensure that counties had evaluated the Medi-Cal eligibility of beneficiaries transitioning from other programs. One reason counties failed to complete those evaluations promptly was because of the implementation of the federal Patient Protection and Affordable Care Act which created a backlog of Medi-Cal applications and eligibility redeterminations.

It is not clear as to whether a County has any financial obligation as the result of these “overpayments”. If they do, then Los Angeles County is one to look at as some 50% of the questionable eligibility cases are concentrated there. Ironically, LA County is one of three who blame their eligibility problems on implementation of the Affordable Care Act. Effectively, the counties claim that the expansion created an unmanageable burden for them. State law gives the county of residence the responsibility for determining eligibility and providing ongoing case management; however, health care providers use the state’s Health Care Services’ records to authorize care.

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$1,306,200,000

SALES TAX SECURITIZATION CORPORATION

Chicago will sell this issue which is designed to appeal to a very wide range of investors both domestic and international. Nearly $400 million of the issue will come in the form of taxable debt. The deal is structured with many of the features which appeal to taxable investors. As a securitized deal, the structure offers a security and redemption package with which those investors are familiar. They include make whole call provisions. In a number of discussions and presentations, these are the sort of relatively mundane issues which are raised as possible impediments to a fuller expansion of the municipal bond market beyond its traditional buyers.

This type of flexibility will be of enormous importance as the municipal market undertakes to shoulder a greater portion of the nation’s financing burden for infrastructure. With tax policy at the federal level effectively diminishing the attractiveness of municipal bonds to traditional buyers, the ability of the municipal market to innovate and adapt to a changing investment environment will be tested as never before.

The bonds are rated AA- by S&P and AAA by Kroll based on the strength of the lien securing the revenues for the benefit of bondholders. The Act and the City’s home rule powers provided the legal mechanisms by which the City: created the Corporation; assigned and effectively accomplished a “true sale” of the pledged Sales Tax Revenues; and irrevocably directed the State to distribute the pledged revenues directly to an account of the Trustee for these Bonds. Further, the Act provides covenants by the State to refrain from impairing these mechanisms or altering the basis upon which the City’s share of transferred revenues is derived. The Act also provides that Bonds issued by the Corporation are secured by a “statutory lien” on those transferred revenues, providing additional protection to bondholders in the unlikely event of a City bankruptcy.

The issue also takes advantage of the relatively calmer perception of the credit position of the State which has had benefits for the City as well. Whether that perception is well founded – the ship may not be taking on any more water but it’s not as if the water is not still deep – remains to be seen.

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ECONOMIC DATA SENDS MIXED SIGNALS

The recent GDP report indicated that growth is still strong at 3.5% but there are signs of slowdown in the economy. Growth in the second quarter was over 4% but that was before the full implementation of tariffs. Now there are signs that those tariffs are having a negative effect on incomes across the economy, especially in the farm belt.

Based on many reports we have seen, even ardent supporters of the tariff based trade policies acknowledge that they will cause short term pain for the agricultural sector. prices for crops are lower and the Administration’s $12 billion farm bailout is not replacing even half of the income lost to tariffs. Now it appears that the woes of the agricultural sector are impacting the broader economy especially for manufacturers who sell to farmers.

The latest example is Caterpillar. It’s third quarter earnings release indicated that Cat sees tariffs negatively impacting its bottom line. The company specifically cited the rising cost of basic steel and aluminum inputs as dampening demand and expected profits. “Manufacturing costs were higher due to increased material and freight costs. Material costs were higher primarily due to increases in steel prices and tariffs,” the company says.

The company said the impact of tariffs for third-quarter material costs was about $40 million. “For the full year of 2018, we expect the impact of recently imposed tariffs will be at the low end of the previously provided range of $100 million to $200 million,” the company said. Cat will raise prices having informed its dealers in the third quarter of an upcoming price action of 1 to 4% worldwide on machines and engines with certain exceptions. The new, higher prices will take effect in January 2019.

Over the past year, a 36% rise in the price of hot rolled steel has impacted heavy machinery producers. We will monitor the impact of the tariffs on state budgets from those states with significant agricultural components to their economies.

MEDICARE PROVIDER SEES WEAKENED CREDIT

Temple University Health System (TUHS) is the largest Medicaid provider in the Commonwealth of Pennsylvania. Located in Philadelphia, the system’s finances have always been precarious reflecting the ebbs and flows of the Philadelphia economy. With the vast array of changes challenging hospital credits, weaker players have less flexibility to deal with them and less financial resilience. TUHS is a $1.8 billion academic health system anchored in northern Philadelphia. The Health System consists of TUH-Main Campus; TUH-Episcopal Campus; TUH-Northeastern Campus; Fox Chase Cancer Center, an NCI designated comprehensive cancer center; and Jeanes Hospital a community-based hospital offering medical, surgical and emergency services. TUHS also has a network of community-based specialty and primary-care physician practices. TUHS is affiliated with the Lewis Katz School of Medicine at TU.

Now, Moody’s Investors Service has revised its outlook on THUS’ Ba1 rated credit from stable to negative.

Moody’s cites ” elevated execution risks as TUHS pursues major changes to its corporate structure and business model during a period of weak margins and growing competition. Despite some recent improvement, expectations of continued deep operating deficits in the absence of one-time favorable events, will continue to foster TUHS’ heavy reliance on Commonwealth supplemental funding. Though Temple University (TU) engaged consultants and has appointed a Chief Restructuring Officer to improve operations, adjust the system’s business model and right size operations, efficiencies will be difficult to realize as industry headwinds grow and consolidation in the Philadelphia market further disadvantage TUHS.”

THUS isn’t going anywhere due to the unique socioeconomic profile of its patient base. moody’s notes that It is also anticipated that TUHS will be challenged to grow revenues due to disproportionately high exposure to governmental payers at nearly 75% of gross revenues. Without significant operating improvement, capital spending will be constrained and/or liquidity will likely decline over time. So the rating is maintained at its current level.

The membership of the obligated group reflects the high level of change which has been a constant feature of the Philadelphia health landscape over the last two to three decades. The obligated group consists of Temple University Hospital, Inc.(TUH), TUHS, Jeanes Hospital, the Fox Chase Entities, Temple Health System Transport Team, Inc. and Temple Physicians, Inc. Each member of the obligated group is jointly and severally liable for all obligations issued under or secured by the Loan and Trust Agreement.

Each member of the obligated group has pledged its respective gross receipts as security for the obligated group’s obligations .

PUERTO RICO ECONOMY SLOWS

The Economic Development Bank for Puerto Rico (EDB) published the Economic Activity Index (EAI) for August, which remained above the threshold of 100, indicating expansion, and remained virtually unchanged when compared with July and August 2017.

The EDB-EAI is made up of four indicators: Total Payroll Employment (Establishment Survey/ Thousands of employees). The establishment survey provides employment, hours, and earnings estimates based on payroll records of business establishments in Puerto Rico. Total Electric Power Generation (Millions of kWh). This indicator includes the electric power generation produced by petroleum, natural gas, coal and renewable energy sources. Cement Sales (Millions of 94-pound bags) and Gas Consumption (Millions of gallons) round out the data set. The bank says that the index “is highly correlated to Puerto Rico’s real GNP [gross national product] in both level and annual growth rates,”

Average nonfarm payroll employment for August 2018 was 859,900 employees, an increase of 0.2% over the month of July 2018 and a reduction of 2% when compared with August 2017. The preliminary estimate for gasoline consumption in August was 75.7 million gallons, or 9.2% less than in July and a 4.9% reduction from August 2017. Power generation was of 1.52 billion kWh in August, or 2.2% less than in July and 10.9% less than in August last year.

SANCTUARY CITIES

With all of the attention on the immigration front focused on family separations and the “caravans” moving toward the border, the ongoing issue of sanctuary cities and the Administration’s effort to thwart their goals can recede into the background. A federal court has ruled against the Trump administration in a lawsuit over funding for the cities of Seattle and Portland, the two plaintiffs named in the lawsuit.

The decision found that part of President Trump’s executive order to end federal grant funding for sanctuary cities is unconstitutional. Seattle filed its lawsuit in March 2017 seeking to clarify Trump’s executive order. The order gave the Justice Department and Department of Homeland Security the power to withhold federal grants to cities that did not comply with federal immigration law.

“Because Section 9(a) of Executive Order 13,768 directs Executive Branch administrative agencies to withhold funding that Congress has not tied to compliance with 8 U.S.C. § 1373, it would be unconstitutional for Executive Branch agencies to withhold appropriated funds from plaintiffs Cities of Seattle and Portland pursuant to Section 9(a) of the Executive Order.”

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

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$447,200,000

Tarrant County (TX) Cultural Education Facilities Finance Corporation

Revenue and Refunding Bonds

Moody’s: A1

CHRISTUS is a Catholic not-for-profit health system. The system owns and/or operates facilities in four states in the United States (Texas, Louisiana, Arkansas and New Mexico), and in Mexico, Chile and Colombia. The health care facilities owned and operated by members of the system include general acute care hospitals, long term care facilities, skilled nursing and nursing home facilities, and clinics with an aggregate of 5,963 available beds (1,534 of which are located in Mexico, Chile and Colombia), as well as independent facilities for the elderly with an aggregate of 251 units (all figures as of June 30, 2018). Texas operations account for nearly 71% of revenue, 15% Louisiana, 9% New Mexico and 5% Latin America. The largest market as measured by both bed count and revenue base is Northeast Texas which includes recently acquired Trinity Mother Frances and Good Shepherd Medical Center.

The bonds are secured by a pledge of the obligated group members’ gross revenues, including their respective accounts receivables and receipts, as defined in the bond documents. The obligated group members include: CHRISTUS Health Northern Louisiana, CHRISTUS Health Central Louisiana, CHRISTUS Health Southeast Texas, CHRISTUS Health Ark-LA-Tex Health System, CHRISTUS Santa Rosa Health Care Corporation, CHRISTUS Spohn Health System Corporation, Mother Frances Hospital Regional Health Care Center, The Good Shepherd Hospital, Inc., CHRISTUS Good Shepherd Medical Center and Good Shepherd Health System Inc.

The bonds will provide some funding for future capital improvements but the majority of the proceeds will refinance bank lines, construction financing, and some existing debt. The financing also allows for the amendment of the Master Trust Indenture  securing the debt. These amendments include a change in the amount of bond holders required to request acceleration of debt in an event of default (from 25% to 50%), a change in the number of years the system must be below a 1.0x debt service coverage (from 1 year to 2 years) to constitute an event of default, and a restatement of the definition of “expenses” that removes non-cash items related to the pension plan. Additional financial covenants that remain unchanged include a 75 days cash on hand, 65% debt to capitalization, and 1.0x MADS.

The rating outlook was lowered to negative from stable. The change was based on a view of higher proforma leverage and the absence of a longer track record of sustained operating improvement to support incremental debt. Moody’s warned that an  inability to generate further cash flow improvement and at least maintain proforma liquidity levels could result in a downgrade.

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FOREIGN CHEMICAL MAKERS BENEFIT FROM TAX EXEMPT BONDS

Rates are in the midst of their upward adjustment in the face of aggregate data pointing towards a booming economy. Many perceive the end to be closer than the beginning so those among them desiring to lock in more favorable borrowing costs on outstanding debt. This would be especially true for businesses requiring favorable cyclical turns in the economy to support the debt.

So on the basis of all these factors we are not surprised to see some of the more exotic projects and credits take their shot at a municipal refinancing. Should the initial signs portend a trend, the upcoming refinancing for the Mission (TX) Economic Development Corporation. The debt to be issued will refinance construction debt which built a 5000 ton per day methanol production facility.

The market for methane and its role in the development of fertilizer give producers access to their products on a global scale. Much of the primary production infrastructure is owned by non-US companies. The significant growth in the market for methane and its derivatives is occurring in China. Given the current Administration attitude has been toward trade in general and China in particular, this raises a risk long-term.

The reliance of the end market for many if not all methane based products is commercially and industrially driven produces a cyclical risk to changes in regional and global economies. This plant was built in a period of favorable  market trends however, operations only commenced in April of this year. Plant economics would seem to depend on those metrics remaining positive.

There are also issues which raise concerns among the socially minded or oriented investors prior financings in the large scale fertilizer production industry. those concerns range from safety related to political. The perceived safety image associated with the production of volatile yet highly demanded chemical products gives others pause. There has even been a national security concern on the part of some investors. Much of the production and demand for chemicals comes from the politically volatile Middle East. The corporate entities which produce and market their product are subject to a higher than typical level of scrutiny which has in the past raise concerns about the ultimate end buyers for these products. These concerns have worked against regulatory approval and/or public support for these facilities.

PUERTO RICO

Luc Despins was hired by the island’s fiscal oversight board to negotiate a settlement between commonwealth bondholders and those holding COFINA debt. Recent comments by Mr. Despins may have complicated efforts to reach a consensual settlement in the dispute between the parties. After months of litigation and mediation, on June 5, 2018, Despins and COFINA’s agent executed an agreement in principle to resolve their respective party’s dispute, in which each side agreed to share sales and use tax revenues.

Now Mr. Despins is challenging the authority of the oversight board to file a motion seeking approval of its settlement of the Commonwealth-COFINA Dispute. The agent says that the board’s move to revised the May 30 fiscal plan’s long-term projections “materially downward” in connection with another certification of the fiscal plan on June 29, 2018 “renders a settlement along the lines of the Agreement in Principle neither feasible nor desirable.”

Understandably, the COFINA bondholders are upset with the Agent’s move. “While it’s disappointing the Commonwealth Agent is looking to delay the very deal it negotiated and filed with the Court, we hope for the sake of the island the path to plan confirmation will be speedy and efficient. The Agent cannot dictate to the congressionally-established Oversight Board and the democratically-elected government how and when to settle its debts and free up its sales taxes from ongoing litigation.”

While the scale of the default and potential settlement are huge, politics would seem to be an even greater hurdle. This was one of the great concerns overhanging any potential settlement process. The oversight panel also announced it certified, by unanimous consent, a revised fiscal plan for COFINA.  COFINA’s is the first adjustment plan submitted in the debt restructuring process under Promesa, and “covers the totality of the $17.6 billion in COFINA debt, which in turn represents 24% of the total of Puerto Rico’s bonded debt to be restructured,”

The fiscal board has said the terms agreed to by the parties, now contained in this Plan of Adjustment, provide for more than a 32% reduction in COFINA debt, gives Puerto Rico approximately $17.5 billion in debt service savings, enables local retail bondholders in Puerto Rico to receive a significant recovery and paves the way for achieving a consensual restructuring of COFINA debt by the end of 2018.”

BIG CATHOLIC HEALTH MERGER RECEIVES VATICAN BLESSING

The merger and acquisitions sector takes potential regulatory approval requirements as standard operating procedure as a part of that process. In the tax exempt  sector, the religious orientation of some entities primarily hospitals introduces some unique “regulatory” hurdles into the approval process. The latest example of this is the pending CHI-Dignity Health merger for which a definitive agreement was announced last November. When it was announced, the Archbishop of Denver issued a list of six conditions which must be met in order for the merger to be approved. The “nihil obstat”  (Latin for nothing stands in the way) outlined six conditions be met to ensure that CHI would not be cooperating with any “morally illicit” procedures as part of the deal.

One of those conditions was that the proposed merger be reviewed by the Vatican’s Congregation for the Doctrine of Faith. That review and approval has been delivered. As a result, the Archbishop announced that as long as the other five conditions continued to be met, his nihil obstat will no longer be considered conditional.

The remaining hurdles primarily consist of state regulatory approvals. One can argue as to which is the “highest authority” overseeing the merger but the Vatican approval was likely the highest hurdle to overcome. In the meantime, Dignity’s 15,000 unionized employees have reached and ratified new labor agreements settling issues of pay (13% raises spread over five years, a 1% bonus in the second year, and insurance (they will maintain their defined benefit pension).

HURRICANE IMPACT ON STATE FINANCE

In the wake of Hurricane Florence, North Carolina has enacted the 2018 Hurricane Florence Disaster Recovery Act. The Act will provide aid to local governments and public higher education institutions. The entities will receive state aid to help pay for recovery costs related to Hurricane Florence The state spending package will cover hurricane recovery costs not covered by federal aid or private insurance.

The immediate impact on the state’s finances have become clearer. A total of $756.5 million will be transferred to the Hurricane Florence Disaster Recovery Fund from the state’s rainy day fund, reducing the fund’s projected balance at the end of fiscal 2019 to $1.3 billion from $2.0 billion. The remainder of the $850 million allocation will come from other various state funds, including $65 million from the highway fund. North Carolina’s $850 million allocation is equal to approximately 3.6% of the state’s fiscal 2019 (ending 30 June 2019) general fund budget.

These expenditures are not seen as having long term negative impacts on the State’s finances. Of the $454.9 million appropriated thus far, $60 million has been allocated to the Department of Public Instruction, which will benefit public K-12 schools. The package also allocates about $30 million for the University of North Carolina (UNC) system campuses most affected by the hurricane: UNC Wilmington (Aa3 stable), UNC Pembroke and Fayetteville State University. The universities anticipate that the state’s $30 million, along with insurance coverage and FEMA assistance, will cover a significant portion of damage at each campus. UNC Wilmington, which was closed to students for about four weeks, is likely to receive the largest share of these funds given the extent of the damage to its campus, which is currently estimated to be $140 million.

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

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$850,000,000

State of Connecticut

Special Tax Bonds

Pledged revenues include taxes and fees on motor vehicle fuel, casual vehicle sales and licenses. All taxes on oil companies’ gross earnings and a designated portion of the statewide sales tax are now deposited directly to the State Transportation Fund (STF) and pledged to bondholders; the sales tax deposit was phased in through fiscal 2018. The 2018 legislature accelerated by two years the five-year phase-in of the sales tax on motor vehicle purchases at dealerships deposited to the STF, which had been agreed to in a 2017 special session, and changed the rate of the deposits to the fund. The phase-in began in fiscal 2019, from the earlier fiscal 2021, and will reach 100% in fiscal 2023.

The state estimates a beginning $29 million addition to the STF in fiscal 2019, escalating over the phase-in period to $368 million in fiscal 2023. In 2017, the legislature also referred a constitutional amendment for voter consideration in November 2018 that would ensure that all monies once deposited to the STF are solely applied to transportation purposes, including debt repayment. The legislature would retain the ability to adjust rates and revenue allocations prior to pledged revenues deposit to the STF.

The issue sells as the State faces continuing financial pressure and continuing pressure to maintain if not lower current tax rates. As of fiscal 2018 estimates, the major revenues in the STF consist of motor fuels tax (30%), motor vehicle receipts (15%), oil company tax (19%), license, permit and fee revenues (8%), and a portion of statewide sales tax (20%). Sales tax revenue as a component of the STF is expected to increase to 32% in fiscal 2022 as part of the most recent agreement.

The ballot initiative comes as the state faces significant choices as it attempts to maintain infrastructure (Let’s Go CT), stop erosion of the economic base, and work to reduce its significant unfunded pension liability. With some uncertainty about the economic outlook, investors should recall that interdependence with the state general fund has led to revenue or cost shifts during periods of general fund fiscal stress, most recently in fiscal 2016. Although the “Let’s Go CT!” initiative included the statutory designation of the STF as a perpetual fund, limiting the use of resources to only transportation, the new designation did not prevent the state from delaying the originally planned sales tax allocation phase-in to address general fund revenue underperformance.

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MEAG DISPUTE HITS JACKSONVILLE RATING

The City of Jacksonville is caught between a rock and a hard place as it attempts to deal with the fallout of its decision to sue MEAG in the face of the decision to plunge forward with the Votgle nuclear plant upgrade. That fallout includes Moody’s announcement that it was reducing its rating on the City’s $2.1 billion of debt. The action was directly attributed to the MEAG dispute.

The city is a participant as a plaintiff in litigation with JEA, a component unit of the city, against Municipal Energy Authority of Georgia (MEAG), in which JEA and the city are seeking to have a Florida state court invalidate a “take-or-pay” power contract between JEA and MEAG. The city’s action calls into question its willingness to support an absolute and unconditional obligation of its largest municipal enterprise, which weakens the city’s creditworthiness on all of its debt and is not consistent with the prior Aa rating category. The contract in question was signed in 2008 and is the sole source of repayment for $1.4 billion of outstanding MEAG Power Project J debt bonds.

JEA continues to make payments in full and on time for amounts billed by MEAG Power under the PPA and intends to do so unless and until a court invalidates the PPA. So it must be frustrating to the City to see that its only potential avenue to rid itself of the obligation to pay for what seems more and more of a failed project. Perhaps the involvement in the project should have been more of as rating issue since the risks and factors which were associated with participation in a nuclear power plant construction were pretty clear from the start.

ILLINOIS PENSION WOES CLAIM ANOTHER LOCAL CREDIT

The Village of Oak Lawn’s current pension contributions are not in compliance with state law and therefore state revenues could be diverted if requested by the local pension boards. While such a diversion is reportedly not imminent, such risk is heightened by the village’s limited reserve position. The village does have a degree of budgetary flexibility given declining debt service costs and certain operating revenues designated for capital that could be redirected to operations.

The situation led Moody’s to downgrade the City’s debt from Baa2 to Baa3. The outlook was listed as negative. Village actions to increase pension funding will slow the rate at which unfunded liabilities are growing, plan status will continue to worsen and potentially strain the village’s budget over the next several years. The outlook also considers the direct risk to liquidity created by current funding levels given the village is not in compliance with state law.

We will see more of these actions without significant improvement in the overall state and local pension situation.

PHILADELPHIA

The last time the City Controller commented on the City’s financial management those comments concentrated on what was described as lost or unaccounted for cash. Now the Controller has released the results of a review which paint a more positive picture of the City’s cash position. The Office of the City Controller released its first Cash Report, a quarterly review of Philadelphia government’s cash position (available liquid assets). This interactive report focused on the City’s cash position at the end of the fourth quarter of fiscal year 2018 (FY18), as of June 30, 2018, comparing the City’s end-of-fiscal year cash balances to end-of-fiscal year data back to fiscal year 2007. The report shows the City’s cash position as historically strong.

In FY18, the City saw substantial gains to its cash balances. It was the first time in the last ten years that the General Fund, Grants Fund and Capital Fund all saw increases in their end-of-fiscal year balances. The General Fund, with revenues generated primarily from local taxes and costs including employee payroll and benefits, pension payments, purchases of service and equipment and supplies, had a cash balance of $769 million, the highest balance in a decade. This is attributable to continued economic growth and tax rate increases.

The General Fund balance ($769 million) represents 18% of annual cash expenditures, or a little over two months-worth of General Fund expenditures. The combined total of these three major funds, plus some additional smaller funds, make up the Consolidated Cash account balance, which was also noteworthy in FY18. After the largest single-year increase since 2007, Consolidated Cash had a fiscal year closing balance of $993 million – the highest balance since before the Great Recession.

PORTLAND OR MULLS PENSION BOND

In late June, Portland Community College’s elected board approved the issuance of $200 million in new pension obligation bonds, an amount that would roughly equal its entire unfunded liability with Oregon’s pension system. Since it’s not a general obligation bond, and no new taxes are being imposed to repay it, the additional debt does not require voter approval.

Last year, PCC’s total pension outlay was $23.5 million, or more than 10.5 percent of its total expenditures. Come July, those costs will increase by another $6 million annually. The idea to use pension bonds is being pushed hard by bankers who the local press notes have become the major source of pension funding advice. We see no need to harp on the obvious conflict of interest associated with relying on a banker for policy advice. We will note that with rates rising there is some timing pressure on potential issuers. At the same time as they evaluate the rate risk associated with waiting, the recent week’s action in the equity markets should give any investor pause. While the recent year’s results in  the stock market have been favorable, we note that we are likely closer to the end of the cycle than the beginning. This does introduce an element of risk for the District as they will need to get their assumptions right as they also cope with potential market risk.

It should come as no surprise to regular readers that we look askance at the plan.

CALIFORNIA REVENUE UPDATE

State Controller Betty T. Yee reported the state received $12.10 billion in revenue in September, exceeding projections in the 2018-19 fiscal year budget by 5.1 percent, or $582.4 million.  This month, all of the “big three” revenue sources –– personal income tax (PIT), corporation tax, and sales tax –– came in higher than assumed in the enacted budget.

For the first quarter of the 2018-19 fiscal year, revenues of $28.71 billion are 5.2 percent ($1.43 billion) higher than projected in the budget enacted at the end of June. Total revenues for FY 2018-19 thus far are 10.8 percent ($2.79 billion) higher than for the first quarter of FY 2017-18.
For September, PIT receipts of $8.44 billion were 3.7 percent ($297.4 million) more than expected in the FY 2018-19 Budget Act.

September corporation taxes of $1.30 billion were 11.2 percent ($130.9 million) above FY 2018-19 Budget Act estimates. Sales tax receipts of $2.00 billion for September were 10.6 percent ($191.9 million) more than anticipated in the FY 2018-19 budget.

SALT LAKE CITY AIRPORT

Salt Lake City is planning to finance the latest airport modernization and expansion. SLC is considering issuing approximately $875 million of tax-exempt fixed-rate Airport Revenue Bonds. Bonds will be payable from and secured by a pledge of Net Revenues of the Airport. The project is being funded by user fees–primarily by airlines serving SLC–as well as savings, car rental fees, passenger facility charges and airport revenue bonds. No local tax dollars are being spent on the project.

SLC is the 23rd busiest airport in North America and the 85th busiest in the world. More than 340 flights depart daily to 95 nonstop destinations. (SLC) serves more than 24 million passengers a year. The proposed expansion includes new terminals as well as new parking and car rental facilities. In that sense it represents the current “state of the art”.

It is notable that the only real nod to the coming impact of technology on transportation is that Salt Lake City International Airport has installed 24 electric vehicle (EV) charging ports for public and employee use. The 12 EV charging stations are dual port, Level 2 with standard connectors to accommodate all models of electric vehicles. Each port supplies up to 7.2 kilowatts of power and there is no charge to use the stations. Thanks to Rocky Mountain Power is covering 50% of the project costs.

HOUSTON MOVES ON TAXES BEFORE THE BALLOT

Houston City Council approved a nominal increase in the city’s property tax rate, the first rate hike at City Hall in two decades. The increase comes as the City faces a potentially  turbulent Election Day. A battle over whether to grant firefighters the same salaries as police of corresponding rank and seniority — the “parity” referendum is Proposition B on the Nov. 6 ballot.

The mayor, who has sheparded pension reform through the local and state legislatures says that passage of the parity measure would cost the city more than $100 million a year and force the layoff of as many as 1,000 city employees, including firefighters and police. The firefighters union disputes that cost and has called the layoff estimates a scare tactic

The City continues to send mixed signals. It has instituted a hiring freeze, saying there is no point hiring people who would be laid off if the parity measure passes. At the same time, the mayor and council approved a new police contract this month that will give officers a 7% raise over the coming two years and another 2% raise the following year if a new deal is not struck by the end of 2020 — raises that would drive up the costs of Prop. B.

All of this must happen within the limits of the voter approved property tax cap limiting the City’s ability to raise taxes.

 

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

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$340,935,000

ILLINOIS FINANCE AUTHORITY

REVENUE REFUNDING BONDS

(OSF HEALTHCARE SYSTEM)

Moody’s: A2   S&P: A

This credit comes to market with a negative credit outlook. Moody’s is concerned that OSF would not be able to achieve and sustain stronger margins that would be sufficient to offset high leverage for the rating category. Moody’s believes ongoing capital investments would likely impede deleveraging over the coming years.

OSF Healthcare System operates thirteen acute care hospitals and a large multi-specialty physician group. Twelve of the system’s hospitals are located in Illinois; OSF also owns a small critical access hospital in the Upper Peninsula of Michigan. The System’s largest hospital, OSF Saint Francis Medical Center in Peoria, Illinois, is a 629-licensed bed tertiary care teaching hospital. OSF’s newest hospitals, a 174 bed facility in Danville and a 210 bed facility in Urbana, were acquired from Presence Health in February 2018.

The acquisition of the Presence Health facilities is a bit of a double edged sword. The acquisition will add some scale and potential upside opportunity, but will also hinder deleveraging and expose OSF to a market dominated by the Carle Foundation. The system is expected to maintain overall good volume trends, and a solid, albeit more moderate level of investments.  Some of the risk is offset by  its leading market positions in several markets including its key Peoria market.

The issue will refund long term debt issued in 2007 and 2009 and will bond out shorter term debt issued to initially fund the acquisition of the Presence facilities.

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ANOTHER MAJOR HEALTHCARE COMBINATION

Henry Ford Health System and Wayne State University  have signed a letter of intent to affiliate. The potential deal would unite two of the major providers in the greater Detroit metropolitan area. The affiliation would designate Henry Ford Hospital in Detroit as the primary institutional affiliate for Wayne State University’s School of Medicine, College of Nursing and Eugene Applebaum College of Pharmacy and Health Sciences.

The agreement would create the health sciences center to be a separate operating and governance structure with a president, board, budget and governing committees.” It would oversee management and financial coordination of the partnership’s clinical, research and educational programs and activities. The affiliation under discussion is not a merger or acquisition. Both Wayne State and Henry Ford would continue to work with other contracted partners, including DMC.

For Wayne State, the deal offers a way to reduce its relationship with DMC which has become more fraught in recent years. This has been especially true since DMC went under the ownership of Tenet Healthcare Corp. It had become clear that the public and for profit relationship was mutually agreed to be a poor fit. Now there is an opportunity for Wayne to partner with a not for profit academic medical center which is hoped to result in a much lower level of cultural friction between two institutions.

For Henry Ford, the partnership would expand its opportunities for participation in research. The plan would create a $341 million-plus research enterprise that would rank 74th-largest in the nation.

AND AN UPDATE ON ANOTHER

The Massachusetts Health Policy Commission (HPC) has rendered a preliminary opinion as to the potential impact of the proposed merger between Beth Israel Deaconess Medical Center and Lahey Health. After the transaction, BILH’s market share would nearly equal that of Partners HealthCare System, market concentration would increase substantially, and BILH would have significantly enhanced bargaining leverage with commercial payers. BILH’s enhanced bargaining leverage would enable it to substantially increase commercial prices that could increase total health care spending by an estimated $128.4 million to $170.8 million annually for inpatient, outpatient, and adult primary care services. Additional spending impacts would be likely for other services; for example, spending for specialty physician services could increase by an additional $29.8 million to $59.7 million annually if the parties obtain similar price increases for these services. These would be in addition to the price increases the parties would have otherwise received. These figures are likely to be conservative.

The parties could obtain these projected price increases, significantly increasing health care spending, while remaining lower-priced than Partners. Plans to shift care to BILH from other providers and to lower-cost settings within the BILH system would generally be cost-reducing and proposed care delivery programs may also result in savings, but there is no reasonable scenario in which such savings would offset spending increases if BILH obtains the projected price increases.

Achieving all of the parties’ care redirection goals could save approximately $8.7 million to $13.6 million annually at current price levels, or $5.3 million to $9.8 million annually with projected price increases. The scope of care delivery savings is uncertain; however, the parties have estimated that their care delivery plans will save an additional $52 million to $87 million. The parties have stated that BILH would achieve internal savings and new revenue that would allow them to invest in these plans and enable BILH to be financially successful without significant price increases. Nonetheless, to date, the parties have declined to offer any commitments to limit future price increases.

NEW JERSEY BENEFIT AGREEMENT

New Jersey has announced that a deal has been struck between the governor’s office and the state’s public-sector unions representing local, state and county employees; college professors; and school employees. It is estimated that the plan will save nearly half a billion dollars on health care costs over the next two years. Savings will include $274 million in cost reductions for public employees and retirees in the coming health care year, which starts Jan. 1. The state will also save $222 million in the 2020 calendar year by adopting Medicare Advantage for retirees of both the state health benefits program (SHBP) and the school employees health benefit plans plan (SEHBP).

In the 2019 fiscal year, the state expects to save $37 million in the SHBP by adopting a number of formula changes adopted in 2016, which have to do with the use of generic medication and out-of-network reforms. The deal is designed to reflect the provisions of Chapter 78, enacted in 2011 to establish a framework for addressing New Jersey’s unfunded pension position liabilities. Chapter 78 requires public employees and retirees to field a larger share of their health care premiums, which is phased in during a multiyear period and depends on the participant’s income level.

The new health plans are to cover more than 800,000 current and retired state and local government employees — nearly 1 in 10 New Jerseyans. Health care premiums for the state’s teachers are expected to decrease 1% next year, after a 13% increase this year, while prescription co-pays will decrease even more according to the Governor’s office. The savings will be achieved by pushing Medicare-eligible retirees from preferred-provider plans to Medicare Advantage, and by making it more costly for employees and retirees to use out-of-network specialists and brand-name prescriptions. Employees and retirees will have no co-pays for in-network doctors and $3 co-pays for generic prescription drugs. The state is spending $15,680 this year on health care for the average employee and $12,988 for the average retiree, according to figures from the state treasurer’s office. Private-sector employers in New Jersey spend an average of $4,747 per employee for health insurance, according to the Kaiser Family Foundation.

ANOTHER CONVENTION FINANCING

They have a checkered past and, like stadiums, evoke different views of their impact on local economies and finances. So it is interesting to see that Sacramento’s City Council approved spending up to $328 million to renovate the city-owned Sacramento Convention Center and Community Center Theater. The theater has been the subject of litigation over the issue of disabled access.

The mayor says that the city’s investment in the renovations will generate at least $22 million annually back into the city. The construction and the expanded venues will also create 2,800 jobs. There is no real way to evaluate the claim. Likely many of the jobs in that total are construction jobs which are not long term contributors.

The debate is coming at a particular point in the economic and rate cycles. From the City’s standpoint, interest rates remain favorable (if rising) and the economy is at a level where the project looks viable. Whether those conditions remain is a risk for the project. Should the completion of the project coincide with a negative economic turn, the project will have a harder time generating performance metrics consistent with debt service coverage requirements. a

BROADBAND P3 UNDER FIRE IN KENTUCKY

As the discussion continues about the viability and efficiency of public-private partnerships (P3), the news out of Kentucky regarding the commonwealth’s P3 for broadband development in the state’s rural areas is not good.  The program known as KentuckyWired is the subject of an audit by the Commonwealth chief auditor and the results are not good from either a financial or policy point of view.

The auditor’s report includes nine major findings: that the structure of KentuckyWired departs from usual public-private partnerships and the original design of the project; that important terms more favorable to Kentucky and its taxpayers were changed during procurement; that the role of private sector funding has been publicly overstated; that the public was directly misled about revenue streams that would help finance the project; that the project has encountered significant cost overruns; that Kentucky has proceeded with the project despite “unrealistic” contract terms regarding its execution; that KCNA, overseeing the project, has inadequate financial analysis and monitoring of costs; that an $88 million settlement with one of the contractors lacked sufficient analysis; and that Kentucky is relying on speculation about wholesale revenues.

Among the issues cited for criticism – the KentuckyWired project would net the state $1.3 billion in revenue. The auditor report contends that that figure is based on a highly “conceptual” model KCNA failed to verify, profits are subject to sharing with the Center for Rural Development, Inc., and even then, the model is based on constantly increasing wholesale prices that would be passed on to consumers.  The project management  admits to several shortcomings.

The state did indeed rely heavily on the expertise of private partners, including Macquarie Capital. One private vendor has refused to respond to requests for information about its role in producing erroneous maps which caused the vendor to attempt to negotiate easements for properties not in the project’s right of way. This despite the fact that the Commonwealth has a contractual right to audit the project via the Finance and Administration Cabinet, and exercising that contractual right is how the Auditor of Public Accounts came to perform this Special Examination.

The situation highlights many of the issues which P3 opponents raise in their opposition to these arrangements. They include the knowledge gap between municipal entities and private vendors in terms of both project execution and negotiations of terms. The public rightly questions the terms of P3s generally when they see deals such as this one generating the problems it has. The resulting lack of support stymies efforts by the Trump Administration and its congressional supporters to support an increased role for private interests in the provision of public goods.

SEATTLE SPORTS

Washington state’s King County Council has approved $135 million in public funding for improvements at Safeco Field where the Seattle Mariners have played for the last 19 seasons. The team had originally asked for $180 million in funding to fix wear and tear at Safeco in association with a 25-year extension with the Public Facilities District that oversees the ballpark.

The funding comes as the Seattle City Council unanimously approved a $700-million arena renovation project that will take place at the site of the current KeyArena, and if all goes according to plan, the building should be ready for NHL action in October 2020. Opposition came from housing advocates who seek increased public resources to address Seattle’s increasing housing affordability crisis.

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.