Joseph Krist

Publisher

The federal fiscal response to the pandemic allowed credit to recede as a concern Fears about cash flow and borrowing requirements were replaced by issues around how to spend the gusher of money that the response produced. Now, issuers will return to the more familiar level of prepandemic federal funding while new spending undertaken during the pandemic remains in place. At the same time, expense baselines are being impacted by inflation which is already affecting capital projects.

All of this produces a more interesting credit environment going forward relative to the recent past. A more challenging environment will create opportunities to trade on.

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SAN FRANCISCO

There has been so much focus on New York and its recovery from the pandemic that it can overshadow similar situations in other major cities impacted by the pandemic. The other municipality to be as heavily impacted is San Francisco. There the return to the office has been slower than it has been in most other major cities. The concentration of the workforce in the technology sector has exacerbated this impact. The result has been a significantly reduced number of people in the city on any given day.

San Francisco is projecting a $728 million budget gap over the next two fiscal years as reduced economic activity attributable to remote work becomes entrenched. The City is now expecting business taxes over the next two years to decline by $179.3 million from previous estimates. Property taxes are now projected over the same period to drop by $261 million from the earlier forecast. 

The city expects costs to rise from employee wages and pensions. Another source of fiscal stress is a ballot initiative approved by voters in November to set aside grants for school students. Funding for that comes at the expense of the City’s general fund. The process will unfold as the economic pressure on the tech industry continues. The latest example is the company which built the City’s tallest building in recent years.

Salesforce is the largest private employer in San Francisco. It had already announced plans to sublease space in its new building. Now, Salesforce said this week that it planned to lay off 10 percent of its work force, or about 8,000 employees, and scale back-office space because of concerns about the economy. Salesforce employed just under 80,000 people at the end of October, up from about 48,000 three years earlier. They join the more than 150,000 tech workers laid off last year.

SMALL COLLEGE BLUES

Cazenovia College, a small liberal arts college in Cazenovia, New York announced that it would close at the end of the upcoming spring semester, after 200 years of operation. Cazenovia’s defaulted on a $25 million bond payment in October. Contributing to the problem was a five-year enrollment drop of about 40% from a peak of more than 1,000 students. The College issued debt as recently as 2019 and defaulted in2022. The college reported operating losses of $3.3 million in the fiscal year ending June 30, 2020. It sustained another $2 million operational loss in the 12 months that ended June 30, 2021.

Holy Names University in Oakland, California also announced that it would close next year, after 154 years of operation. Like Cazenovia, it too issued debt as recently as 2019. The decision was caused by rising operational costs, declining enrollment, and an increased need for institutional aid. 520 undergrads and 423 graduate students were enrolled at Holy Names University. However, only 449 in total were enrolled for spring 2023, according to the school. 

Birmingham-Southern College in Alabama is a liberal arts college, founded in 1856 and affiliated with the United Methodist Church. It has asked for $37.5 million in public funds to remain open. The requested funds would come in the form of $12.5 million from the American Rescue Plan Act, $17.5 million from the state’s Education Trust Fund, $5 million from the City of Birmingham and $2.5 million from Jefferson County.

OCEAN’S TWO?

For a long time, many have been concerned about the targeting of the electric grid by terrorists. The focus has been on things like transmission line towers or the potential for cyber attacks on operating systems. Recently, a smaller scale but rather insidious risk – that of physical attack from vandals or terrorists has arisen. The latest incident is the second in weeks. It targeted four rural substations. These small facilities are a familiar sight in rural areas, usually protected by limited fencing.

In Ocean’s 11 (the modern remake), the gang induces a power outage impacting their targets. The blackout created access and cover for the impending robbery. In Washington state, two men damaged four different substation facilities cutting off power to thousands on Christmas night. They used the resulting blackout to execute a small-scale robbery. Ultimately, they were caught and face federal charges and the prospect of real prison time.

Two of the substations that were targeted are operated by Tacoma Power, the municipal utility serving the city. The damage at those stations is estimated to cost at least $3 million and will take up to 36 months to repair. requiring the power company to use mobile transformers while repairs/replacements are undertaken.

According to a POLITICO analysis of US Department of Energy data, the number of physical or cyber attacks or threats against utility infrastructure reported through August of this year is nearly 70 percent higher than the 60 reported in the same period last year. Last year saw a total of 97 reported attacks, including seven cyberattacks, according to the DOE data. Those followed a total of 96 attacks in 2020 and 81 in 2019.

GAS TAXES

Taxes on gasoline at the pump were back in the news. New York State’s six month moratorium on its 16 cent per gallon tax ended on December 31. There appears to be no appetite to extend it. In Colorado, the governor’s budget proposal includes the reinstatement of a 2 cent per gallon increase in the state gas tax. That increase was scheduled for July of this past year but was suspended in the face of high gas prices. That suspension ends on July 1 unless the Legislature renews the suspension.

In Connecticut, truckers face a new tax. The tax applies to large commercial trucks, which carry a classification between Class 8 and Class 13, with fees ranging from 2.5 cents per mile for vehicles weighing 26,000 to 28,000 pounds to 17.5 cents per mile for trucks weighing more than 80,000 pounds. The first payment is due by Feb. 28. The General Assembly passed the highway use tax in June 2021following a failed effort to institute general highway tolls. The new tax is expected to generate about $90 million per year for transportation improvements in Connecticut.

MASS TRANSIT’S PROBLEM COMES INTO FOCUS

Much of the attention being paid to pandemic impacts on public transit utilization has been focused on New York’s Metropolitan Transportation Authority (MTA). In reality, the MTA is far from the only mass transit system facing real operating issues in the face of reduced demand. The reductions in ridership are being evidenced across the country.

The latest example is Seattle. The City was an early pandemic hotspot and the tech orientation of major employers like Amazon and Microsoft led to wide spread adoption of remote work. Now, a combination of resistance to returning to the office and significant layoffs are serving to hold own a return to prepandemic

Metro and Link light rail have seen utilization rebound but the return has been limited. Commuter rail has been most heavily impacted. Sound Transit’s commuter line is recovering more slowly than other modes, hovering at roughly a third of pre-pandemic ridership.

The phenomenon is evident across the country. Fall ridership is running at about half of 2019 numbers on Chicago’s “L,” which logged 87 million passengers through October. Washington’s Metro carried roughly 225,000 daily passengers through October, two-fifths of its 2019 ridership. The mayor in D.C. recently asked for the federal government to end remote work to address the Metro’s demand problems.

P3 PROGRESS

The private consortium engaged to execute the replacement of six bridges in the Commonwealth of Pennsylvania has reached a significant milestone. The project consists of the design, build, financing, and maintenance of six bridges in critical need of replacement across the Commonwealth – I-81 Susquehanna, I-80 Nescopeck Creek, I-78 Lenhartsville, I-80 Lehigh River, I-80 Canoe Creek and I-80 North Fork – plus related roadway and supporting infrastructure.

It recently announced that the project has reached “financial close”. The project sponsors will contribute $202 million in equity and raised $1.8 billion in private activity bonds (“PABs”).  This puts the financing in place and allows the project to move forward. Design and construction can now commence.  

The latest P3 proposal comes from the US Virgin Islands. The USVI announced an RFP for the redevelopment and operation of its primary airports in St. Thomas and St. Croix. The selected operator will perform Part 139 inspections on behalf of VIPA and ensure compliance with FAA requirements. It will negotiate future airline lease and use agreements as well as concession agreements with new tenants.

VIPA will establish a shortlist of no more than four qualified respondents. VIPA intends to select one of the qualified respondents to enter into two related agreements covering both Airports: a long-term lease and development agreement for the terminal facilities and a long-term operation and maintenance agreement for airfield and landside operations.  

CARBON CAPTURE

The process of approval for a proposed pipeline through several states continues. The likelihood of a quick approval grows less likely every day. The route permit Summit Carbon Solutions applied for is for a 28 mile stretch from an ethanol plant in Fergus Falls, Minnesota, through Otter Tail and Wilkin Counties, up to the southeastern state border.   The Summit Carbon Solutions pipeline would connect six ethanol plants in Minnesota to a carbon storage site in North Dakota.

The Minnesota Public Utilities Commission will require Summit Carbon Solutions to prepare a full environmental impact statement. The statement will cover only a portion of the pipeline as the result of a compromise between the company and regulators. In Minnesota Summit does not have the eminent domain power it has in other states. Summit had 11 open eminent domain cases in North Dakota in mid-September. Summit has yet to acquire pipeline route permits in any of the five states on the proposed pipeline route – Iowa, Minnesota, Nebraska, North Dakota and South Dakota.

The South Dakota PUC voted unanimously this week to set hearing dates for Sept. 11-22 of this year. There are about 478 miles of the pipeline planned for South Dakota. Summit said in November it has obtained voluntary easements for more than half the route. The process has resulted in measurable delays in construction and potential operation of a year.

FEDERAL BRIDGE SUPPORT

The Brent Spence Bridge carries Interstates 71 and 75 traffic from northern Kentucky to Cincinnati. When it was constructed in the 1960s, it had a fifty-year expected life. It carries about 160,000 vehicles daily, twice the amount of traffic it was designed for when constructed. Like a similar bridge in New York (the old Tappan Zee Bridge), the structure was handling such a high and growing level of traffic that replacement became a necessity. That has not been an issue. What has is the cost of a replacement and the funding for it.

That issue was the subject of an announcement this week. The Brent Spence Bridge Corridor Project is receiving $1.6 billion in federal infrastructure grants.  The funding comes from the bipartisan Infrastructure Investment and Jobs Act enacted by Congress last year. That grant represents some 45% of the projected cost. Added to money from the states of Ohio and Kentucky, this completes project funding. Groundbreaking is planned for later this year with an estimated six-year construction period to follow.

The grant reflects issues around the use of tolls to finance a project like this. A previous recent project to replace a bridge between Kentucky and Evansville, IN relies on tolls. Political blowback has been significant from that project. It influenced the effort to fund this project which will not require tolling. The grant effectively replaces the capital costs which would have required tolls. That is why Mitch McConnell and Joe Biden were smiling at the grant announcement.

HOSPITALS AND LABOR

The hospital sector has known that post-COVID, its costs were likely to go up. Shortfalls in supplies and drugs were exacerbated by inflation. As inflation impacted the overall economy it was inevitable that labor was going to be a much higher cost center as contracts ran out. It is one of the key factors which has driven rating agency outlooks on the sector to turn negative.

As we go to press, the latest manifestation of this phenomenon is playing out in New York. All of the large hospital systems in the NY metropolitan market have been negotiating with their union employees with the focus of these talks shining on nurses. The threat of a strike by nurses is already influencing elective surgeries and decisions to export patients to facilities with settled contracts.

The outlook for hospitals is colored by the current state of the labor market, higher supply costs, and a potential economic downturn. Tread carefully in the sector. We expect that COVID related issues will still be a source of pressure. As contracts come up for renewal, we expect that labor issues will be a continuing source of operating pressure.

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