Muni Credit News June 10, 2024
Joseph Krist
Publisher
CONGESTION PRICING CRASHES
With only four weeks until its expected commencement, Gov. Kathy Hochul is moving to delay the imposition of congestion pricing. The stated issue is concern over the impact on the revival of the Manhattan economy. There are still significant commercial and retail vacancies. Broadway has been slower to come back than was hoped. At the same time, a record number of shows are projected to open this fall. Restaurants, especially those in areas like Manhattan’s Korean and Chinese districts, have already been under pressure. They see a fair chunk of their demand tied to folks driving into Manhattan for dinner and/or a show.
A reversal would create a $1 billion yearly gap in MTA funding. Ms. Hochul suggested a tax on New York City businesses. Such a tax would require the approval of the Legislature. Procedurally, this would require either passage of new legislation this week or a summer special legislative session in Albany. It would also shift the burden of raising revenue to taxpayers in the City from a suburban and often out of state payor base.
Several pieces of litigation against the charge are making their way through the courts. Postponement of the charge may provide an opportunity for the litigation to be settled or adjudicated. It is clear that an opportunity exists to refine the plan and its implementation. And it provides a chance to reset the efforts at steering public opinion. The Governor also acknowledged that the approval of the scheme came before the pandemic in 2019. “Workers were in the office five days a week; crime was at record lows and tourism was at record highs. Circumstances have changed and we must respond to the facts on the ground.”
One first step might be putting a different face of the MTA forward. MTA head Jarod Lieber has been a poor front man with his bureaucratic demeanor and insistence that demands for exemptions should not be accommodated. An opportunity has been created for a complete rethink of the use of the city’s curb space. Things like delivery zones and delivery time limits can be revisited. Manhattan has always had traffic issues but the role of ride sharing services and the delivery economy in the current level of congestion cannot be ignored.
In the end, the MTA has to deal with the fact that it has no credibility with New Yorkers – historically corrupt, often inept, and opaque at best. At one point, it was estimated that the MTA loses as much to fare evasion as it would get in congestion pricing. The answer – spend more on fancier turnstiles but only explore remedies which don’t follow enforcement. Lost in all of this is that the facilities of the Triborough Bridge and Tunnel Authority have been subsidizing mass transit for years.
It comes down to the fact that the MTA is not trusted to execute the program or account for the money. It reflects the failure to explore alternatives. It reflects a lack of political will to create a tax structure that shifts the cost of the service. Now, MTA will use the pause to justify its dismal record of providing handicapped access (recent estimates put the achievement of full ADA access out until 2050), the ridiculous execution of the Second Avenue subway and a long history of delays and cost overruns.
BAY AREA TRANSIT FUNDING
Legislation dubbed the Connect Bay Area Act, would have authorized a November 2026 vote on a multicounty tax measure to raise as much as $1.5 billion a year to help pay for train, bus and ferry operations and for initiatives to help better integrate the 27 agencies that deliver those services. The bill would also pay for some street and highway work.
The proposal offered several alternatives: a half-cent sales tax, a parcel tax on property owners, a payroll tax to be paid by employers, or a future vehicle registration surcharge. The bill provided that tax proceeds would be funneled through the Metropolitan Transportation Commission. It guaranteed that during the proposed tax measure’s first five years, at least 70% of revenue generated in a county would be invested in projects and programs that benefited that county. That percentage would rise to 90% after the initial five years.
BART’s deficit in the fiscal year starting July 1, 2026, is currently projected at $385 million, with annual shortfalls of $350 million or more continuing into the foreseeable future. BART has said it may have to shut down two of its five lines, close some stations and run trains as much as 60 minutes apart. San Francisco’s Municipal Transportation Agency, which runs Muni transit service, expects its deficit to top $200 million during the same year. SFMTA chief Jeffrey Tumlin said earlier this week that major service cuts could begin next year.
The legislation was ultimately pulled from consideration in the current session. We are interested in the fact that Moody’s picked this week to announce a change in its sector outlook for the public transit sector. In the wake of the pandemic, the outlook had been negative. Now, the outlook has been upgraded to stable. Moody’s cites the overall recovery rate of 79% from the pandemic bottom. It also takes into consideration the impact of some funding increases in several jurisdictions.
Ultimately, it may be an issue of timing but the current period in the budget season is generating funding uncertainty. It seems a bit of a stretch to look at the “pause” of congestion pricing in New York and its impact on the nation’s largest transit system and see stability. We agree that there is a chance that some funding initiative will appear on the California ballot in November. Currently, BART and Muni will still be facing funding uncertainty. Chicago is dealing with operational issues and proposals to merge the city and commuter rail providers into a structure that looks more like the MTA in New York.
It is positive that there are funding initiatives making their way through legislatures in New Jersey and Pennsylvania. Our argument rests more on timing. All of this adds up to a fair amount of uncertainty for major issuers within the sector. Uncertain seems like a fairer assessment while these highly politicized situations play out.
Moody’s identified eight transit providers as being more fare-dependent pre-pandemic: New Jersey Transit, the New York MTA, The D.C.-area WMATA, Boston’s MBTA, the Chicago Transit Authority, the Southeastern Pennsylvania Transit Authority, the San Francisco Bay Area Rapid Transit District and the Bay Area’s Caltrain commuter rail line. Every one of them faces funding uncertainty. That’s a good chunk of the sector. A lot of that uncertainty will likely be resolved by the end of the budget process. A sector outlook change makes more sense then.
FUEL FOR THE NATURAL GAS DEBATE
Utilities and fuel producers continue to grapple with the need to reduce emissions while continuing to rely on some fossil fuels for generation. The most obvious cases are where large base load generators which run on coal are replaced with new base load generators. The debate stems from the proposed use of natural gas as a replacement. Gas has cost and relative emission production improvement over coal. This has not reduced opposition to new natural gas development and pipeline infrastructure.
Much of that opposition stems from the production of methane as a part of the process of extracting natural gas. After CO2 emissions, methane has been the next favorite target of environmentalists as a contributor to climate change. As large entities like the TVA and some municipal utilities consider the development of gas fired plants, the debate has increased. Some new data developed for and released by the US Environmental Protection Administration (EPA) will only fuel the debate.
The data shows that oil and gas extraction and refining emitted more greenhouse gases into the atmosphere than any other industrial subsector last year. At the same time, methane emissions from gas extraction fell by 37 percent. Overall greenhouse gas emissions, which count the industry’s considerable carbon dioxide releases, also fell, but by a more modest 14 percent.
The center of the gas extraction industry is the Permian Basin in Texas. Data specific to that area reflect Total hydrocarbon production in the Permian more than tripled from 2015 to 2022, and gas production rose by 163 percent. The overall emissions intensity of Permian energy production fell considerably. Methane intensity of gas extraction fell by 78 percent, and overall greenhouse gas intensity fell by 47 percent.
HOSPITAL PRESSURES CONTINUE
This was a rough week for hospital credits as they deal with the lingering impact of the pandemic on demand and utilization. A series of ratings actions showed that the pressures are across the board and not dependent upon location and/or size.
The DCH Health Care system in Alabama operates a 787 bed regional referral hospital in Tuscaloosa and two small facilities in the county. S&P announced that the Authority’s bond rating was lowered to BBB+ from A- and a negative outlook was maintained. The negative outlook reflects the continual operating losses and the expectation of weak operating performance over the outlook period, which could further negatively affect unrestricted reserves. The negative outlook also reflects DCH’s lower days’ cash on hand (DCOH) and reserves.
Mount Sinai in NY is a major provider which has been under continuing pressure as the result of the pandemic. In addition, it has been caught up in a regulatory problem over its decision to close one of its acute care facilities in Manhattan. These factors have combined to lead S&P to put the system’s low investment grade ratings on Credit Watch negative. “The CreditWatch placement reflects our view that there is at least a one-in-two likelihood of a downgrade within the next 90 days reflecting a trend of lower earnings at the flagship, MSH, and uncertainty around receiving necessary regulatory approvals to close Beth Israel Medical Center in July,”.
Baystate Medical Center in Springfield, MA is the major tertiary provider central and western Massachusetts. It’s has been long a highly rated credit. This week, S&P put a negative outlook on the system’s AA+ debt. “The outlook revision reflects our view of Baystate’s continued operating losses and thin maximum annual debt service coverage in fiscal 2023 that have continued into 2024. The outlook revision further reflects our view of lighter days’ cash on hand for the rating,”
COLLEGE CLOSING
The nearly 150-year-old University of the Arts in Philadelphia will close its doors as we go to press. “UArts has been in a fragile financial state, with many years of declining enrollments, declining revenues and increasing expenses.” Currently, it has 1,149 students and about 700 faculty and staff members. The Middle States Commission on Higher Education, which accredited the institution, indicated on Friday that it had revoked the University’s accreditation immediately.
The closing was the result of a mix of cash flow constraints that are typical of schools like UArts, which depend on tuition dollars. In addition, UArts faced significant unanticipated costs, including major infrastructure repairs. The school was created by the 1985 merger of the Philadelphia College of Art and the Philadelphia College of the Performing Arts.
Tuition for the 2023-2024 year was $54,010. The pandemic was especially damaging for this and other institutions whose courses were much less viable online. Looking forward, UArts like the many other schools faces the looming demographic cliff which is clouding the outlook for reversing demand declines.
U.S. Census data based on the 2020 census shows project steady declines in the years ahead. In 2022, there were 17.4 million people in the U.S. aged 14-17. That number is already trending lower and is expected to decline annually through 2035. That would be an 11% decline in the number of prospective students from current levels.
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