Joseph Krist

Publisher

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ISSUE OF THE WEEK

$250,000,000

Michigan Finance Authority 

Henry Ford Health System

The system comes to market supported by a rating upgrade from Moody’s. The upgrade of existing ratings to A2 reflects Moody’s view that Henry Ford Health System will continue generating stronger margins and cash flow over the next year, leading to improved leverage metrics and stronger liquidity, despite the additional debt incurred with the proposed bond  transaction. Although it expect favorable performance trends to continue in both the provider and insurance divisions, Moody’s anticipates it will take some time for the insurance division to generate consistently stronger margins.

Henry Ford Health System is a large, fully integrated health system based in the Detroit metropolitan area. The system operates five acute care hospitals, two behavioral health hospitals, more than 60 ambulatory care and outpatient service facilities, a sizable health insurance business, and a large employed group physician practice. The flagship hospital, Henry Ford Hospital, is a tertiary/quaternary referral hospital located near downtown Detroit.

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SANCTUARY CITIES

A three-judge panel in a federal appeals court decided unanimously that most of California’s so-called sanctuary laws can continue to be enforced. The decision came in a case brought by the US DOJ against California’s decision to declare itself a “sanctuary state”. The far reaching law prohibits police and sheriff’s officials from notifying federal immigration authorities of the release dates of immigrant inmates.

That provision is of particular concern to sanctuary city opponents, something acknowledged by the court. According to the decision, the law “may well frustrate the federal government’s immigration enforcement efforts. However, whatever the wisdom of the underlying policy adopted by California, that frustration is permissible.” The law also requires that employers to notify workers of inspections by immigration agents.

“Only those provisions that impose an additional economic burden exclusively on the federal government are invalid,” the court said. The court did say that the state, in inspecting federal detention centers, cannot impose requirements on the federal government that will force it to spend money. It did note however, that the law did “not treat the federal government worse than anyone else; indeed, it does not regulate federal operations at all.”

The Trump administration could request an en banc hearing for its appeal. That would require the whole 9th Circuit to review the  ruling or ask the U.S. Supreme Court to overturn the decision. If it ultimately stands, the decision would be a victory for those jurisdictions which do not support the specific tactics of the federal government in its enforcement of immigration laws. It would reduce their financial exposure to the threat of cutoffs of funding from the federal government for a variety of purposes including law enforcement.

WHAT’S GOING ON WITH THE CENSUS?

One of the fears going into the 2020 national census has been that urban populations will be undercounted. It is based on a number of concerns not limited to illegal immigration but also to the millennial aversion to answering questions from the government especially if they are not in an online format. Those issues may be superseded by problems already emerging in terms of urban area counting.

Last week, the Census Bureau released its estimates of population trends. It appears that changes in the Bureau’s methodology may be producing less reliable data. The change in methodology meant to make one of the American Community Survey questions less ambiguous. Instead of asking people born abroad when they arrived in the United States, the bureau based its latest count on a more specific question: It asked where they lived a year ago.

That change is being blamed for an effective undercount. Major cities are clearly being impacted regardless of which region is located in. Chicago, New York, Houston, Dallas, greater Los Angeles, and San Diego are among the losers of population. This would seem to run contrary to the prevailing wisdom regarding the attractiveness of cities and the Sun Belt.

It is an important question which needs to be resolved. With localities facing increasing funding demands for issues including transportation, resilience, and adaptation to climate change, accurate data will be essential to allowing these localities to qualify for and receive federal funding under a plethora of programs.

One data point of interest is the growth in exurban areas. It reflects a growing trend of movement to more outlier locations. It is reflected in increased demand for services like rural broadband which support small business establishment and expansion in many rural areas. The Census data shows that many rural areas are experiencing net in migration as individuals seek a lower cost of living especially in terms of housing costs.

ANOTHER STEP ON THE ROAD TO RECOVERY

Stockton, CA saw its rating upgraded by Moody’s. The upgrade to A3 reflects the continued moderate growth in the city’s assessed value and improved financial position supported by healthy reserves and liquidity. The city’s five year average available operating fund balance is strong at 39.6% of operating revenues. The A3 rating incorporates the city’s sizeable and diverse tax base and weak socioeconomic indicators. The rating also reflects the city’s low debt burden and elevated pension burden. Rising pension costs and funding city infrastructure needs will also continue to be budgetary pressures.

The stable outlook reflects Moody’s expectation that the city’s assessed value will continue to benefit from moderate growth and a sound financial position supported by the city’s formal policy of maintaining a working capital reserve at 17%. The move comes even despite court decisions favoring pensioners over debt holders.  

THE UBER REALITY

A recent study released by Georgetown University documents a number of hurdles faced by jurisdictions trying to arrive at a regulatory scheme which satisfy the many competing interests resulting from the growth of the ride sharing industry. The study follows a group of drivers working for Uber in the District of Columbia. D.C. has been a leader in efforts to regulate the industry while accommodating some of its realities.

In 2014 the D.C. Council adopted regulations to govern Transportation Network Companies (TNCs). The Vehicle for Hire Innovation Amendment Act of 2014 (“VHIAA”) required background checks, set general vehicle standards, mandated insurance coverage, and arranged for the collection of 1% of gross receipts for all UberX rides provided in the city. The law has weaknesses however. Under the VHIAA, regulatory authority over TNCs was delegated to the Department of For Hire Vehicles. However, the Department is prohibited from requiring companies to submit a list or inventory of vehicles or operators.

To address some of these issues, in 2018 the D.C. Council approved a 6% tax on TNC services to support Metro, and passed a data-sharing requirement for ride-hailing services. The Private Vehicle-For-Hire Data Sharing Amendment Act of 2018 requires quarterly transmissions of data on: numbers of drivers; trip location pick-ups and drop-offs; dates and times of ride requests, pick-ups and drop-offs; total miles driven by drivers en route to a pick-up and during a ride (but not while waiting for a ride request); and average fares and distances driven.

The point of all of this is that even in a jurisdiction which seems to be proactive or  ahead of the curve, regulation is a difficult matter. Many of the hurdles to regulation,   operations, are imposed by the legislation enacted ostensibly to better regulate the services. Under the 2014 D.C. law, Reports on safety and consumer protection are prohibited from public release. Finally, journalists, researchers, and policymakers may not use the federal Freedom of Information Act to access basic information about the operation of TNCs in its jurisdiction. The 2018 law also seeks to impede inquiries under the Freedom of Information Act.

These provisions support the tendency of TNCs to observe secrecy as a prime modus operandi. It is difficult to square the position of the industry as a positive force when it is so resistant to simple informational requirements. We believe that the tendency towards opacity and secrecy will only impede the growth of technology especially in the transportation sector and its acceptance. Can you imagine if a public transit system refused to make operating data available or did not take responsibility for the background of the individuals it employs?

TOBACCO REGULATION GETS A NEW ALLY

The new realities of the tobacco industry can be summed up in this week’s news that Senator Mitch McConnell will introduce legislation to raise the legal age to buy tobacco from 18 to 21, calling it a “top priority” when the Senate returns from recess in late April. McConnell said he wants to change the law to discourage vaping and teenage nicotine addiction and improve Kentucky’s public health.

The news is interesting from a public health point of view but does little to change the overall trajectory of cigarette sales. The attraction of vaping to the next generation of nicotine consumers is troubling if this becomes the preferred nicotine conveyance method. As for tobacco credits, the preferred return of principal date should still be sooner than later. If anything, the trend towards vaping bodes poorly for those bonds with the longest maturity.

It’s the fact that McConnell represents the nation’s second largest producer of tobacco as much as his Senate leadership position that makes this move especially relevant. It means that he will probably get the bill passed given the bipartisan nature of current tobacco politics. That will address the variety of age-related sale and marketing restrictions existing under the current state based structure. So one gets a bit of regulatory consistency but also gets a bit of pressure on overall sales.

FITCH ON SPECIAL REVENUE BONDS

In response to the March 26, 2019 ruling by the United States Court of Appeals for the First Circuit regarding the bondholder protections provided by special revenue status under Chapter 9 of the U.S. bankruptcy code, Fitch Ratings has developed rating sensitivities corresponding to the likelihood and severity of potential rating changes resulting from a final court ruling upholding the decision. 

Fitch Ratings has placed the seven U.S. Public Finance ratings that are more than six notches higher than the Issuer Default Rating (IDR) for the associated local government on Rating Watch Negative. According to Fitch, The ratings placed on Rating Watch Negative have the highest ratings relative to their associated governments’ IDRs. Ratings on special revenue bonds that are closer to the associated government’s IDR are less likely to be affected by a re-evaluation of special revenue protections. While special revenues offer substantial protections in the event of a bankruptcy filing, the ruling creates uncertainty about full and timely payment of special revenue obligations during the bankruptcy of the associated government. 

Going forward, Fitch will offer one of three comments regarding the rating sensitivities corresponding to the likelihood and severity of potential rating changes resulting from a final court ruling upholding the decision.  Ratings for which the sensitivities are relevant are utility and tax-supported ratings that are higher than but within six notches of the related government’s Issuer Default Rating (IDR). 

For special revenue ratings between one and three notches above the IDR: “The rating is unlikely to be affected by a recent ruling by the United States Court of Appeals for the First Circuit regarding the protections provided to holders of bonds secured by pledged special revenues. Fitch believes those protections warrant a distinction in ratings above the IDR regardless of the outcome of the case.” 

For special revenue ratings between four and six notches above the IDR: “The rating may be affected by the recent appeals court ruling regarding the protections provided to holders of bonds secured by pledged special revenues. Fitch believes those protections warrant a distinction in ratings above the IDR regardless of the outcome of the case. However, a final decision consistent with the First Circuit’s ruling may result in security ratings closer to the IDR.”

For California school districts with ratings above the IDR that are not currently on Rating Watch Negative because of the ruling:  “The rating may be affected by the recent appeals court ruling regarding the protections provided to holders of bonds secured by pledged special revenues. Fitch believes those protections warrant a distinction in ratings above the IDR regardless of the outcome of the case. However, a final decision consistent with the First Circuit’s ruling may result in security ratings closer to the IDR. Given state constitutional and statutory restrictions, Fitch believes potential rating changes would be modest.”

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