Joseph Krist

Publisher

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ISSUE OF THE WEEK

$1,000,920,000

New York City Transitional Finance Authority (TFA)

Building Aid Revenue Bonds

Educational projects in New York City’s education capital plan, including new construction, building additions, and rehabilitations, are eligible for state building aid.  The State Education Department (SED) determines the amount of confirmed building aid payable annually by applying a building aid ratio to the amount of aidable debt service for the year. These funds are pledged to the payment of debt service on the bonds. The state aid intercept provision of Section 99-B of the School Finance Law is available to these bonds.

Each year the state annually appropriates money to New York City to pay for educational needs of the city’s students. A portion of this aid constitutes the state building aid. The state does not distinguish between the payment of education aid and building aid, making lump sum payments to the city. To secure the bonds and separate building aid from the rest of the education aid, the city, TFA, SED and the state comptroller entered into an MOU specifying procedures to determine the amount included in each general education aid payment that is attributable to state building aid. Prior to each general education aid payment, the TFA is required to calculate and certify to the SED, the comptroller and the state budget director the amount of the building aid payment payable to the TFA..

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THE JANUS CASE WON’T INSURE LABOR PIECE – MAYBE THE OPPOSITE

For years, vocal observers have blamed public employee salary and pension costs on unions and the collective bargaining process. Those who hold that view have placed their hopes on a decision in favor of the plaintiff in the recently argued Janus case in the US Supreme Court. Such a decision would be seen by proponents as the last nail in the coffin of public sector employee unions and their ability to bargain effectively on behalf of their employees. It is viewed as potentially ushering in a more “rational” environment for the setting of public employee salaries and benefits.

Recent events in West Virginia may reveal a serious weakness in that view. The strike being conducted by the state’s school teachers is not being conducted in support of a standard collective borrowing process. After all, West Virginia is not a collective bargaining state for its public employees. The current job action is not being led or sponsored by the teachers’ union. Costs to striking teachers are being funded through The WV Teachers Strike Support Fund, an independently created and funded organization. As of early last week, the Fund had a GoFundMe page for the striking workers which had garnered more than $218,000 by midday Monday.

The Fund had reviewed 174 requests and approved more than $71,000 — to teachers and school service personnel to cover strike costs, child care, medical bills, lost pay for aides and substitutes, re-stocking food pantries, and other efforts to support children and families during the strike. Those teachers were apparently having some success. The WV House approved a 5% raise suggested by the Governor and the Senate approved a 4% raise. The $13 million difference between the two levels of raise is the gap to be bridged in order to end the strike.

The ability of the teachers to achieve a raise outside of the typical collective borrowing process could be seen as a template for future job actions by public employees in other jurisdictions which have or hope to curtail union bargaining rights. The ability of employees to use technology and the internet to raise funds could ultimately mitigate the restrictions on union abilities to raise funds through the mandatory “dues check off”.

COAL CONTINUES LONG TERM DECLINE

For states like West Virginia and Wyoming, the handwriting is on the wall for their major commodity industry – coal. The U.S. Energy Information Administration (EIA) expects the share of U.S. total utility-scale electricity generation from natural gas-fired power plants to rise from 32% in 2017 to 33% in 2018 and to 34% in 2019. The forecast generation share from coal in 2018 averages 30%, about the same as in 2017, but then falls to 29% in 2019. The nuclear share of generation was 20% in 2017 and is forecast to average 20% in 2018 and 19% in 2019. Nonhydropower renewables provided slightly less than 10% of electricity generation in 2017 and is expected to provide about 10% in both 2018 and 2019. The generation share of hydropower was almost 8% in 2017 and is forecast to be about 7% in both 2018 and 2019.

Wind generated an estimated 691,000 megawatthours per day (MWh/d) of electricity in 2017. EIA projects that generation from wind will rise to an average of 705,000 MWh/d in 2018 and 765,000 MWh/d in 2019. If project conditions hold, generation from conventional hydropower is projected to average 730,000 MWh/d in 2019, which would make it the first year that wind generation exceeds hydropower generation. EIA projects that total solar electricity generation will increase from an estimated average of 209,000 MWh/d in 2017 to 240,000 MWh/d in 2018 and to 287,000 MWh/d in 2019.

It is clear that the forces working against employment in the coal industry continue. Much of Wyoming’s supply is mechanically surface stripped while underground mines continue to increase the use of automation to extract the mineral. Combined with steadily decreasing demand from the power generation industry, the outlook for mining employment remains grim.  It is anticipated that energy firms will retire coal-fired power plants that account for 20 gigawatts of power, about 10 percent of the total amount of U.S. coal capacity.

This will continue pressure on West Virginia’s economy and fiscal outlook.

GUAM UNDER THE GUN

S&P Global Ratings has placed its ‘BB-‘ rating on the Government of Guam’s general obligation (GO) debt and its ‘B+’ rating on the government’s various certificates of participation (COPs) on CreditWatch with negative implications. S&P cited the government’s disclosure that its cash flow will be extremely constrained over the next several months, and perhaps even longer, and also reflects its view that the government’s ability to meet its ongoing obligations could be impaired. The fiscal stress is due to an estimated $67 million decrease in general fund revenue for fiscal 2018 due to the effect of The Tax Cuts and Jobs Act of 2017, signed into law by President Trump on Dec. 22, 2017.

The government’s total general fund balance was negative $106 million as of audited fiscal 2016 (ended Sept. 30), equal to negative 14% of expenditures, with the unreserved or unassigned portion growing for a third-consecutive year to negative $215

million. Audited financial statements for fiscal year-end (Sept. 30) 2017 are not yet available. S&P is looking for evidence from Guam officials addressing a history of structural imbalance in its general fund, including recurring deficits, a very large negative general fund balance, and massive long-term liabilities.

NYC IBO REVIEWS NYC BUDGET PROPOSAL 

Based on the Independent Budget Office’s (IBO) reestimates of city spending and revenues, the budget for 2018 is projected to be $88.3 billion rising to $89.3 billion in 2019 (all years are fiscal years unless otherwise noted). Based on its analysis, the budgets for both years are not only balanced, but are projected to end with surpluses. IBO’s estimates yield smaller budget gaps in 2020 and 2021 than those estimated by the Mayor, while in 2022 it estimates a surplus.

What are the risks?  The Governor’s current budget assumes millions of dollars less for the city than the Mayor estimates in his current financial plan. If these changes were to be adopted, the city would have to find ways to make up for these lost funds, either through reduced services or by finding other funding sources, most likely from the city itself. IBO, following the Office of Management and Budget (OMB), has assumed that the city will drop some links to the federal tax system so as to avoid impacts on the city’s own revenues, but these steps would still leave many high-income city residents facing major changes in their federal taxes.

IBO has raised its forecast of near-term U.S. economic growth. It projects an acceleration of real growth to 2.9 percent in 2018, and somewhat slower growth of 2.6 percent in 2019. New York City’s economy added 67,000 jobs in 2017—an impressive ninth consecutive year of employment growth. But the pace of employment growth—1.5 percent— was slowest since the recession. IBO forecasts continuing but diminishing employment gains in the city, from 62,400 in 2018 and 50,000 in 2019 declining to 36,900 by 2022. The bright spots for city employment growth in 2017 were health care services (+22,700), accommodation and food services (+12,800), construction (+10,000), and finance and insurance (+9,500). The latter includes an increase of 7,500 jobs in the securities sector.

Tax revenues, which are projected to grow by 6.8 percent from 2017 to 2018 account for much of the growth in total revenue. The city’s total own source revenue—excluding state, federal, and other grants—is projected to grow by 5.1 percent. For 2019, IBO anticipates a smaller gain of 1.2 percent in total revenue to $89.3 billion, pulled down by declines in city revenue from miscellaneous sources and federal grants. Tax revenue growth is expected to outpace total revenue growth with $60.2 billion in tax revenues projected for 2019, a $2.2 billion (3.8 percent) increase over the forecast for the current year. The city’s own non-tax revenues (primarily fees, fines, and sales) are projected to fall by 3.7 percent from 2018 to 2019, to $6.7 billion.

Noncity revenues in 2019 are expected to be 4.7 percent lower than in 2018, largely the result of an anticipated decrease in federal grants, which are expected to shrink by 13.8 percent. Much of the drop is due to the winding down of Sandy-related recovery aid. Annual growth of total revenue will average 3.2 percent over the last three years of the financial plan period, driven by city tax revenues growing at an average annual rate of 4.1 percent over that period, with other city revenues nearly flat (0.2 percent). Growth in noncity revenue sources is projected to average 1.1 percent annually in 2020 through 2022.

The real question for investors relates to the City’s ability to service its debt. Over the last five years the city has paid an average of $5.8 billion annually through its operating budget to service its outstanding debt, which as of June 30, 2017 totaled $86.3 billion. The preliminary budget assumes that over the next five years debt service will rise from $7.1 billion in 2019 to $8.8 billion in 2022 and cost the city an average of $7.6 billion annually. New debt the city expects to issue from 2018 through 2022 is the main driver of increases in debt service over the plan period. While higher interest rate assumptions also account for some of the increase, most of the growth is primarily the product of the city’s aggressive plan to sharply increase capital expenditures over the next few years.

IS LOUISIANA THE NEXT KANSAS?

The Louisiana Legislature gave up on addressing the state’s budget crisis on March 5 and adjourned two days before their special session was scheduled to end. The legislators left Baton Rouge without any solution to an expected budget of $994 million. The regular session of the legislature, when lawmakers write the budget that goes into effect July 1, starts next week. It’s not yet clear what services will be prioritized for funding.

Many fear that targets will leave college students, people with disabilities, hospitals, district attorneys and local sheriffs with more uncertainty about the future of their state funding. The focus is on cuts because tax bills cannot be taken up during the regular session, which opens March 12 and is supposed to end by June 4. To get around that restriction, the Governor, House Speaker, and Senate president favor adjourning the regular session 10 to 20 days early to hold another special session to raise taxes before June.

The current stalemate is about politics. The House rejected a sales tax hike for a second time in one week. Both parties  appeared to be in agreement that a sales tax hike and change in state income tax deductions should be approved. But House members could not agree on the order in which those two bills should be voted upon Sunday night. The parties were concerned that if the other side got their preferred tax bill approved and out of the House, that the other group would then block the second tax bill from moving forward.

The situation is also complicated by the compromise struck in 2016 when over $1 billion worth of temporary taxes in 2016 were passed. Those taxes expire June 30, creating the current looming financial problems. At the root of all of it is the failed supply side experiment undertaken by prior Governor Bobby Jindal. In an effort to raise his national profile he convinced the state that massive tax cuts, primarily for corporations in the state would stimulate so much economic activity that the lost tax revenues would be replaced. Like so many other state supply side experiments, these results failed to come to pass.

The result is a negative rating outlook for the State and a high degree of uncertainty for bond holders.

TaaS AND HEALTHCARE

Much has been made about the potential impacts of the ride share industry on public transit and the perception of the industry to positively impact transit and related outcomes. the implication is that the benefits are so clear that existing transit models are doomed with associated negative impacts on transit related municipal bond credits. The idea has gained currency with the latest announcement that Uber is teaming up with health care organizations to provide transportation for patients going to and from medical appointments. The rides can be scheduled for patients through doctor’s offices, by receptionists or other staffers. And they can be booked for immediate pickup or up to 30 days in advance.

Uber Health will send its passengers’ ride information through an SMS text message. The company also plans to introduce the option for passengers to receive a call with trip details to their landline instead.  Sounds like a no brainer, especially in addressing the needs of older, lower income patients who might not have current access to current technology communication devices.

Reality, may be different. JAMA Intern Medicine earlier this month published the results of a study conducted in Philadelphia as to the relative efficacy of ride sharing services relative to reliance on existing forms of transit to get patients to doctor appointments. The study asked what is the association between offering rideshare-based transportation services and missed appointment rates for primary care patients? The finding was that the missed appointment rate was not significantly different between patients offered rideshare-based transportation services compared with controls.

Transportation barriers contribute to missed primary care appointments for patients with Medicaid. Rideshare services have been proposed as alternatives to nonemergency medical transportation programs because of convenience and lower costs. 786 Medicaid beneficiaries who resided in West Philadelphia and were established primary care patients at 1 of 2 academic internal medicine practices located within the same building were included.

Patients assigned to both arms received up to 3 additional appointment reminder phone calls from research staff 2 days before their scheduled appointment. During these calls, patients in the intervention arm were offered a complimentary ridesharing service. Research staff prescheduled rides for those interested in the service. After their appointment, patients phoned research staff to initiate a return trip home.

The uptake of ridesharing was low and did not decrease missed primary care appointments. This does not mean that the idea is without merit. Rather it means that further study is warranted before the death of mass transit is prematurely declared. It also means that TaaS may not be as meaningful an impact on the healthcare delivery model as may be thought. We believe that current trends towards consolidation, scale, and diversity of entrance points will continue to be the drivers of healthcare credits. Technology will have much to offer the industry but transportation will not have the short term impact on credit that some advocates believe.

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