Joseph Krist

Publisher

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Once again, government and its means of funding and financing public services is at the forefront of the response to the corona virus pandemic. Initially, attention will focus on the near term pressure on municipal finances – lower revenues and high immediate expense requirements. Longer term, state and local governments will be at the center of any recovery through their ability to regulate activity and tax and spend. The impacts of the pandemic on economic activity, on service needs and demands will serve as the basis for debate going forward over the role of government and the nature of its responsibilities. This reflects the stark divide which has emerged between haves and have nots.

The experiences resulting from the pandemic and its impact are likely to fundamentally alter the debate over the real role of government. We believe that the trend over the last 40 years shifting the responsibility for the provision of  services from the public to the private sector will be reexamined. Many of the obvious results of the pandemic in terms of its disproportionate impact on the poor can be best dealt with by government. One example is the education system. The reality is that schools are about much more than education – they are the center for programs enabling two parents in a family to working an economy which often requires that to be the case through its early morning and after school programs. The school system is the main vehicle for nutrition supporting poor communities. It is also likely to be the main source of healthcare services to poor children.

The health system will come under scrutiny. Lower income citizens tend to have poorer health and a lack of access to reasonable healthcare. we would not be surprised to see pressure grow for school based primary healthcare for children. The prevalence of serious ongoing health conditions in poor communities explains the disproportionate impact of the virus on those demographic cohorts. Part of the problem is that the increasing emphasis on private rather than public healthcare is not supported by a funding mechanism which supports institutions providing lower profit primary care to economically disadvantaged populations.

These issues would, in a logical world, lead to a reevaluation of the anti tax starve the beast mentality which has driven much of our politics and public policy over the last 40 years. It would examine the increasing reliance on individual taxation versus corporate taxation and it would consider the virtues of graduated rather than flat rate income tax schemes. It would shift away from property taxes as the primary source of school funding.

The pandemic has also highlighted the unpleasant reality that transit policies over the last decade have not reflected the interests of all demographic groups. The micromobility industry simply does not address the needs of all segments of society. The scooter and bike crowd remains primarily white, younger, and male. They live certain places and in certain ways which do not reflect the realities of poorer residents. You need access to the internet to remote learn, to communicate, to access goods and services, to bank. The lack of internet and broadband services has made the divide between rich and poor even greater.

The municipal market will have to deal with much of this. It will require analysts to put some of their own political and philosophical beliefs aside as they evaluate municipal credit in light of new circumstances. Not all private or business based approaches will be appropriate. In sectors like healthcare, student housing, transportation, and education, we are likely to see a new appreciation for the benefits of strong public education, heath, and transportation systems We need to remember the role that government services played in helping people manage the pandemic and its economic impacts.

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MTA BY THE NUMBERS

We are finally getting to see some real data on the impact of the corona virus pandemic on mass transit. The NYC Independent Budget Office has released some telling data.
Subway ridership was 32.2 million for the week ending February 28, 2020, two days before the first confirmed case of the Covid-19 virus in New York City. Ridership fell in every subsequent week, with the week ending March 27 serving only 4.6 million riders, a decrease of 86 percent from ridership levels seen four weeks earlier.

How does that translate to the revenue side of the ledger? Accompanying the drop in ridership is a reduction in fare revenue that IBO estimates will ultimately result in a decline of $970 million (21 percent) in NYC Transit subway and bus revenue in the current calendar year. This compared with fare revenue forecast by the transportation authority only a few weeks before in its February 2020 financial plan. IBO’s estimate assumes that most riders with 7-day and 30-day unlimited passes do not immediately renew when current passes expire, and that ridership remains depressed through early May and then creeps upwards again through mid-June, stabilizing at around 25 million weekly riders.

The wide ranging impact of the revenues generated by the MTA from all of its facilities is evident in the IBO comments. IBO notes that in addition to subway and bus fare revenue, the Metropolitan Transportation Authority uses the surplus toll revenue that remains after covering bridge and tunnel expenses to fund mass transit. That support exceeded $1.1 billion in 2019. The transportation authority has included a toll increase for 2021 in its latest financial plan. That will not help the current situation as toll revenue in 2020 is likely to take a major hit in the wake of the current shutdown.

It’s not just pure “transit” revenues which flow through to the MTA. The economic shutdown will have wide ranging effects as other revenues dedicated to transit, including taxes on real estate transactions and mortgage activity, a portion of the sales tax, and many other taxes and fees, will decline in response to the contraction of economic activity. Anticipating a financial shortfall, the Metropolitan Transportation Authority requested some $4 billion from Washington and is set to receive $3.8 billion from the recent federal aid package. IBO estimates that the $3.8 billion is equivalent to around 22 % of the transportation authority’s total operating budget (including debt service) projected for 2020.

The MTA is representative of many large urban transit systems which face significant declines in ridership. Cutbacks in service have occurred at all of the major systems especially those with subways.

REAL TIMETABLES FOR THE ECONOMY

The Congressional Budget Office (CBO) expects that the economy will contract sharply during the second quarter of 2020 as a result of the continued disruption of commerce stemming from the spread of the novel corona virus. Gross domestic product is expected to decline by more than 7% during the second quarter. If that happened, the decline in the annualized growth rate reported by the Bureau of Economic Analysis would be about four times larger and would exceed 28 percent. Those declines could be much larger, however.

The unemployment rate is expected to exceed 10% during the second quarter, in part reflecting the 3.3 million new unemployment insurance claims reported on March 26 and the 6.6 million new claims reported this morning. (The number of new claims was about 10 times larger this morning than it had been in any single week during the recession from 2007 to 2009). The analysis incorporated an expectation that the current extent of social distancing across the country would continue—on average, and with local variation—for the next three months. 

CITIES TAKE STEPS TO ADJUST TO LOWER REVENUE

One of the cities in the US which is quite dependent on tourism and recreation is San Diego, CA. The City has estimated that the pandemic would cost San Diego about $109 million: $83 million in lost hotel tax revenue and $26 million in lost sales tax revenue. To deal with the decline in tax revenues the City has furloughed some 800 employees in what are deemed nonessential services during this time. Most of the employees had been working at city libraries and recreation centers before those facilities closed. Some others worked for the city’s Transportation and Stormwater Department.

The City is allowing those employees using accrued vacation time to continue to be paid and it is hoping that federal aid would come soon enough to avoid layoffs. The San Diego Union Tribune estimated that using the average salary for city workers of $70,000, one month of furloughs for 800 employees would save the city nearly $5 million. If the furloughs last through June, the city’s savings could approach $15 million.

The news comes as the City of New York announced plans to reduce expenditures by some $1.3 billion. They include education, transportation, social services and benefit programs. They reflect the fact that transit use is down that the schools are closed, and that many programs such as summer job programs may be simply not feasible to operate. Nearly 10% of the reductions will come from a public sector hiring freeze and vacancy reductions.

The City is also likely to need to access the short-term markets to borrow for liquidity. Over recent years, short term borrowing has often been viewed as a negative credit event for both states and localities. The fact is that such efforts are a logical response to exogenous events like a pandemic. The press has been casting such plans in a negative light even though short term borrowing was a regular feature of municipal financial operations for decades.  

Detroit is facing an estimated $100million shortfall in revenues as the result of its dependence on the auto industry and casinos and the shutdown of those two industries in the face of social distancing regulations. The city’s three casinos released their report on March revenue that showed a 59% drop from last year. The city gets about $600,000 daily from the casinos. That doesn’t reflect the impact of employment losses associated with those industries. Even after facilities reopen, the loss of disposable income during the pandemic will have longer lasting effects. Municipal income tax revenue is Detroit’s largest single tax revenue source at $361 million in 2019 with gambling related revenue next at $184 million .

KANSAS BROADBAND FUNDING

The availability of serious rural broadband access has been a regular subject here and in other venues for sharing my thoughts. So we were interested in recent legislation dealing with the issue in the State of Kansas.

The Eisenhower Legacy Transportation Program (Program), as its name implies, is primarily concerned with transportation infrastructure. It authorizes the Secretary of Transportation, working jointly with the Office of Broadband Development within the Department of Commerce, to make grants for construction projects that expand and improve broadband service in Kansas. The law requires grants made by the Secretary to reimburse grant recipients for up to 50% of actual construction costs in expanding and improving broadband service. It establishes the Broadband Infrastructure Construction Grant Fund, to be used to provide grants for the expansion of broadband service in Kansas subject to appropriation. 

There is some concern that the Transportation Department might not be the best place to manage and administer a broadband development plan. While the law requires each county in the state to receive $8 million annually for infrastructure, there is no requirement for allocations to broadband. The law requires the Transportation Secretary to select projects for development every two years, but does not require the Secretary to construct every project selected for development. It  authorizes the Secretary to notify the Director of Accounts and Reports to transfer all remaining and unencumbered funds from the Broadband Infrastructure Construction Grant Fund to the State Highway Fund at the end of each fiscal year.

ENERGY AND THE PANDEMIC

The U.S. Energy Information Administration’s (EIA) publishes its Short-Term Energy Outlook monthly. The latest outlook estimates the impacts of the corona virus on demand for energy from a variety of sources. The data highlights some of the issues facing municipal credits as the result of pandemic driven steep declines in demand.

EIA expects U.S. motor gasoline consumption to fall by 1.7 million b/d from the first quarter of 2020 to an average of 7.1 million b/d in the second quarter, before gradually increasing to 8.9 million b/d in the second half of the year. U.S. jet fuel consumption will fall by 0.4 million b/d from the first quarter of 2020 to average 1.2 million b/d in the second quarter. U.S. distillate fuel oil consumption would see a smaller decline, falling by 0.2 million b/d to average 3.8 million b/d over the same period. In 2020, EIA forecasts that U.S. motor gasoline consumption will average 8.4 million b/d, a decrease of 9% compared with 2019, while jet fuel and distillate fuel oil consumption will fall by 10% and 5%, respectively over the same period.

That has significant implications for tax revenues derived from the sale of fuel for cars and airplanes. Severance taxes will also take a hit as EIA forecasts U.S. crude oil production will average 11.8 million b/d in 2020, down 0.5 million b/d from 2019. In 2021, EIA expects U.S. crude production to decline further by 0.7 million b/d. If realized, the 2020 production decline would mark the first annual decline since 2016. 

EIA expects retail sales of electricity to the industrial sector will fall by 4.2% in 2020 as many factories cut back production. Forecast U.S. sales of electricity to the residential sector fall by 0.8% in 2020. EIA forecasts that total U.S. electric power sector generation will decline by 3% in 2020. The pandemic has not fundamentally altered the move away from fossil fueled generation. U.S. coal production will total 537 million short tons (MMst) in 2020, down 153 MMst (22%) from 2019. EIA forecasts that total coal consumption will decrease by 19% in 2020, driven primarily by electric power sector demand, which will fall by 107 MMst (20%) in 2020. 

TEXAS HIGH SPEED RAIL

A group of some two dozen state lawmakers in Texas have signed a letter urging the U.S. Department of Transportation to end work related to a high-speed rail project projected to connect Houston and Dallas. The line is being undertaken by Texas Central Partners, a private entity. The legislators contend that TCP “simply does not have the financial resources required or expertise employed to continue with this project.”

The project has been mired in disputes with landowners along the project’s planned right of way (ROW) over efforts to acquire land for the project. There has been much opposition from landowners in areas which will not be served by the project to efforts to employ eminent domain if necessary to acquire ROW.  The company has said it has already secured 30% of land needed for the project, including 50% of the property needed in Grimes County.

Last month, Texas Central laid off 28 employees and announced that the project would be delayed because of pandemic-related issues with its partners in Italy, Spain and Japan. It said that it would resume its efforts at land acquisition and financing “when we have our permits and the financial markets have stabilized.”

PRIVATE STUDENT HOUSING AND THE PANDEMIC

Privatized student housing was a discussion topic in the last few months as one private sponsor/operator sought to sue the University of Oklahoma when the University declined to make up shortfalls in revenues from low occupancy at a  student housing facility. A recent Boston Globe story highlighted the nature of private versus university owned housing. It makes it clear that these facilities may be built to serve universities but are not run or owned or financed by universities.

LightView Apartments is a private residential complex built on Northeastern land across from campus to house the university’s undergraduates. Monthly rents start at $1300 per person. Leases at LightView run through August on a calendar, not the academic year, basis. So many students move in planning to be able to sublet their apartments to summer students to offset some of the room costs.The pandemic has thrown those plans out of whack. Northeastern, like nearly all higher education providers has moved to online learning to facilitate closures of campus housing. It also is not clear when for certain, the university will be able to return to its current structure. For those who lived in university owned and operated housing, it offered refunds on room and board payments. They can do that as the owner.

Here is where the unrealistic notions of investors and residents align. The private owners aren’t linked to any of the university’s policies so when Northeastern (or any other school for that matter) closes its facilities, the same policies don’t apply to private facilities. It’s as clear a delineation between private and school owned housing as you can get. So the university’s involvement is to waive its requirement that the operator only let Northeastern students live there.

Yes, the schools and developers of these projects are participants in their development but the whole purpose of these projects is to keep the liabilities off of university balance sheets. So no matter how these projects are marketed to tenants and investors that underlying premise should govern how one assesses the creditworthiness of these projects. They generate better yields than do those for projects which are owned by and part of university housing systems for a reason. The present situation illuminates that reason.

MICROMOBILITY

The Arizona Supreme Court unanimously rejected a challenge by the state’s attorney general who said the $4 pickup and drop-off fee that led Uber and Lyft to threaten to stop serving the Phoenix airport were unconstitutional. Attorney General Mark Brnovich argued that the fee increases violate a 2018 constitutional amendment that banned new fees on services. The city argued the higher fees are not taxes on services, but rather permissible charges for businesses to use the city-owned Sky Harbor International Airport. The city successfully compared the charges to the rental payments made by various concessionaires at the airport.

One non-financial issue that did make it through New York State’s budget process was a provision that would legalize throttle-based bikes and scooters. That legalizes electric scooters and bikes. The legislation would create three classes of e-bikes: Class 1 is pedal-assisted with no throttle; Class 2 is throttle-assisted with a maximum speed of 20 mph; and Class 3 is throttle-powered with a maximum speed of 25 mph. E-scooters would be capped at 15 mph, and riders under 18 years of age would be required to wear a helmet. Helmets would also be required for riders of Class 3 e-bikes.

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