Joseph Krist

Publisher

CYBER CRIME AND A RATING

Moody’s has affirmed Children’s Hospital Los Angeles’ (CA) (CHLA) Baa2 revenue bond ratings. The outlook has been revised to negative from stable. 

The negative outlook reflects challenges CHLA faces to stabilizing (and eventually growing) its unrestricted days cash on hand and total cash balances (inclusive of restricted funds) over the next several quarters owing to weak financial performance and high receivables balances related to the Change Healthcare cyber-attack. That attack occurred on February 21, 2024 but it was not until July 19, 2024, that Change Healthcare filed a breach report with OCR concerning a ransomware attack that resulted in a breach of protected health information. 

The most visible impact to the public was the interruption in processing charges and reimbursements to patients and providers. In this case, the difficulties at Change had a stronger impact. Like most of the children’s hospitals, CHLA’s reliance on state funding and reimbursement policies due to its high Medicaid exposure made it vulnerable to delays experienced by the State in receiving Medicaid revenues.

On top of the impact upon its non-Medicaid patient base, the result has been to pressure its unrestricted days cash on hand and total cash balances (inclusive of restricted funds) over the next several quarters owing to weak financial performance and high receivables balances related to the Change Healthcare cyber-attack.  

OAKLAND DOWNGRADE

Moody’s has downgraded the City of Oakland’s (CA) issuer, general obligation bond, and pension obligation bond ratings to Aa2 from Aa1. It also downgraded the city’s lease revenue bonds to Aa3 from Aa2. The outlook has been revised to negative from stable. It reflects Moody’s view that management has not made sufficient and timely budget adjustments to fully absorb the one-time pandemic relief monies that were used to fund operations, and declining revenue, in particular real estate transfer taxes. As such, the city has reduced its flexibility to address ongoing spending pressures.

Based on fiscal 2024 unaudited actuals, the city will record a $30.3 million deficit, and available general fund balance will remain solid at $211 million or 22% of revenue. While management has implemented a plan to reduce operating expenditures, they are still projecting to end fiscal 2025 with a $93.1 million deficit in their general purpose fund. The City is still feeling the effects of crime which accompanied the end of the pandemic. It had a major impact on economic activity and the City’s real estate market.

Underlying all of this is the political environment. The Mayor was recalled in November. While the City has a weak Mayor-strong Council structure, the recall in the midst of federal investigations still matters.

HOSPITAL RATINGS

Moody’s has affirmed Legacy Health’s (Legacy) (OR) A1 revenue bond rating. Legacy has approximately $700 million of debt outstanding. The outlook remains negative. We noted the potential merger of Legacy and Oregon Health & Science University earlier this year (6.17.24). Moody’s notes the strong possibility that a merger with Oregon Health & Science University (OHSU, Aa3 stable) will be completed by the middle of next year. 

Even with a merger, the resulting entity would still face lower than average profitability and cash position. This is blamed on high labor rates, the continued dependance on temporary labor, inflated length of stay, and unfavorable state regulations. All merger integration processes are complicated and rarely have they gone to plan. The merger agreement also includes provisions which would require a certain amount of Legacy’s unrestricted cash and investments to be transferred to an independent foundation. 

Over recent years, the trend towards consolidation by hospitals has reaffirmed the importance of larger balance sheets and liquidity. In some rural areas consolidation and scale allows providers to survive even in those tough markets and maintain credit quality. One example this week comes from North Dakota. Moody’s has affirmed Altru Health System ND’s (Altru) Baa3 revenue bond ratings.

Altru Health System is its region’s largest provider and is the primary referral hospital for a 17-county, 20,000+ square mile territory in northeastern North Dakota and northwestern Minnesota. While its patient base is spread over a huge area this does not totally offset very high leverage; a rural market with low population growth; somewhat challenging demographics; and a history of difficult physician, nursing, and staff recruitment given its remote location. Its sole community provider status does support better Medicare reimbursement. 

EV

General Motors will fold its Cruise subsidiary into its main operations and work to develop fully autonomous personal vehicles. It will bring to an end the company’s effort to develop an autonomous taxi model. It was one of these vehicles that hit and dragged a pedestrian during live street testing in San Francisco. Waymo, a unit of Google’s parent company, offers autonomous taxis in San Francisco, Los Angeles and Phoenix with plans to expand to Atlanta, Miami and Austin, Texas. 

CARBON CAPTURE

Project Tundra is a plan to install equipment that would capture emissions from Milton R. Young Station, a power plant near Beulah, North Dakota. The electric cooperative behind the project has estimated that it would cost $2 billion to complete. The U.S. Department of Energy has singled out Project Tundra as having national importance. The department’s Office of Clean Energy Demonstrations last year awarded the project up to $350 million to help cover costs if construction moves forward. 

TC Energy, the Calgary-based company whose portfolio also includes TransCanada pipelines, was the project’s lead contractor. It recently announced that it had decided to step away from the project. No reason was cited but the company referenced

Where are public power entities considering a carbon capture retrofit for operating coal plants? The Nebraska Public Power District continues to explore the possibility of placing a carbon capture system at Gerald Gentleman Station, the largest coal-fired power plant in the state with a summer capacity of 1,365 megawatts. There is no timetable for making a decision about whether to move forward with the project.

Two Illinois utilities are considering carbon capture. The city-owned utility in Springfield, Illinois, held a ribbon cutting ceremony in July to mark the beginning of testing and operation for the carbon capture system at the 205-megawatt Dallman coal plant. The Prairie State Energy Campus is also evaluating carbon capture at its plant. It must comply with a 2031 deadline for reducing emissions. Prairie State’s study includes an estimated capital cost of $2 billion to install a system that would capture and store 95 percent of the plant’s carbon emissions. In addition, the system would cost about $175 million per year for operation and maintenance.

SCOTUS COAL ASH RULING

The Supreme Court rejected a request from East Kentucky Power Cooperative to block an Environmental Protection Agency effort to address the health risks presented by coal ash. EKPC argued that the E.P.A. had exceeded its statutory authority by requiring monitoring and remediation at facilities that were no longer producing coal ash. That argument was rejected by an appeals court. The case before the SCOTUS was rejected for review.

EKPC says that monitoring required by the E.P.A. would cost some $16 million annually to operate. The E.P.A. estimated the cost at under $300,000. Either way, EKPC has time to develop a plan to abide by the ruling. “The earliest compliance deadline the cooperative faces is far down the line — well into 2028,” one of the briefs said. “And that deadline requires it to comply only with modest groundwater monitoring requirements.”

INTERNATIONAL ENROLLMENTS AND A TRUMP ADMINISTRATION

In the 2023-2024 academic year, there were 1.1 million international students. Students from India and China account for 54% of those students. Enrollment levels for these students are at an all time high. These students are attractive because in many instances they are “full fare” payers versus the significant number of domestic students needing financial aid.

A combination of much more restrictive immigration policies and the pandemic slowed and then reduced the number of international students. For the 2020 and 2021 academic years, these enrollments showed actual declines. Since the end of the pandemic and a new administration, international enrollments returned to more normalized growth.

Now many universities are advising their international students to return to campus from the holidays before Inauguration Day. One said, “A travel ban is likely to go into effect soon after inauguration. The ban is likely to include citizens of the countries targeted in the first Trump administration: Kyrgyzstan, Nigeria, Myanmar, Sudan, Tanzania, Iran, Libya, North Korea, Syria, Venezuela, Yemen, and Somalia. New countries could be added to this list, particularly China and India.”

CLIMATE LITIGATION

The efforts to make the fossil fuel industries pay what would effectively be reparations by governments continue. So far, the litigation initiated by states and cities has been launched against the oil companies. Those cases will continue in state courts as efforts to have the cases be handled in the federal courts have been unsuccessful. While these cases are litigated, a new class of defendant has been named in a suit filed by a small North Carolina town over many of the issues in the pending cases.

The Town Council of Carrboro accuses Duke Energy Duke Energy of intentionally spreading false information about the negative effects of fossil fuels for decades, despite knowing since the late 1960s about planet-warming properties of carbon dioxide emissions. It claims the power company funded trade organizations and climate skeptic scientists who created doubts about the greenhouse effect and obstructed policy and public action on climate change.

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