Joseph Krist

Publisher

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ISSUE OF THE WEEK

$150,000,000

Norfolk Economic Development Authority, VA.

Revenue Refunding Bonds, Series 2018

The bonds are secured under a Master Trust Indenture (MTI), whereby the parent company (Sentara Healthcare) is the only Obligated Group Member. Sentara Healthcare’s obligation is essentially an unsecured general obligation from a parent corporation with limited assets and revenues. The MTI, in turn, requires that each Obligated Group Affiliate (Sentara Hospitals and Sentara Enterprises) pay, loan or transfer sufficient financial resources to the Obligated Group to pay the principal and interest on all obligations outstanding under the MTI (‘Funding Agreements’). Rockingham Memorial Hospital and Martha Jefferson Hospital have each entered into a Funding Agreement with Sentara; each are dated as of November 28, 2011. Potomac Hospital has entered into a Funding Agreement with Sentara, dated July 2, 2012.

Sentara Healthcare reflects the strength inherent in a regional system. Its primary service area is around Hampton Roads, and comprises an approximately 1,600 square mile area in southeastern Virginia where Sentara controls seven hospitals and its secondary service area known as the Blue Ridge Service Area, where Sentara controls the Sentara RMH Medical Center in Harrisonburg, Virginia, and Sentara Martha Jefferson Hospital in Charlottesville, Virginia. Additionally, Sentara controls certain physician groups; Sentara Halifax Regional Hospital in South Boston, Virginia; and, Sentara Albemarle Medical Center in Elizabeth City, North Carolina. Through its subsidiaries and affiliated companies, Sentara operates a total of twelve hospitals, as well as skilled and intermediate nursing and assisted living facilities, numerous diagnostic and rehabilitative programs, physician offices and clinics, neighborhood medical centers, home health services and two health maintenance organizations.

We continue to believe that those hospital credits which are supported by geographically diverse revenue and demand bases will the credits best able to perform in the current environment of reimbursement pressures and technological advancement.

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PENSIONS ARE NOT JUST A LOCAL ISSUE

In the current environment, the funding and level of pensions has served as a source of much debate. One aspect of the discussion which does not come up that much is the issue of where that money goes. Where do the retirees receiving the pensions actually live? Is a state or city exporting its wealth through pension payments or does that money largely stay within local economies?  Is New York for instance, shoveling significant amounts of money to places like Florida? Some interesting data recently published by New York City’s Independent Budget Office provides some answers to those questions.

In 2017, New York City’s five pension systems for municipal employees paid $12.9 billion in benefits to more than 332,000 retirees or their beneficiaries.  There are no residency requirements for the receipt of one’s pension. Of the $12.9 billion in payments made by the city’s pension funds in 2017, $5.5 billion, or 43 percent, was paid to recipients living in New York City. Payments to municipal retirees within the state of New York equaled $9.3 billion, or 73 percent of total payments over the year.

The average per capita payment to all beneficiaries in 2017 was $38,711, with a median of $34,259. The comparable figure for New York State was $40,098. Among the states with at least 100 city retirees, pensioners living in Hawaii received the largest average payment: $41,700. Among municipal retirees still living in New York City, per capita benefit payments averaged $36,092. Of the 25 largest counties by recipient population nationwide, Orange County, New York, had the highest per capita payments, $55,524. The County is one of the most popular places for retired law enforcement officers.

About 46 percent of retirees receiving pensions from the city live in one of the five boroughs. An additional 22 percent live in one of the six nearby New York State counties. Of the top 10 counties in which New York City pension recipients resided, only one was outside of New York State—Palm Beach, Florida, with 7,868 city pensioners. Other leading counties home to New York City government pensioners included Broward County, Florida; and Ocean, Monmouth, and Bergen counties in New Jersey.

After New York and Florida, the eight other states with the most New York City government retirees are New Jersey, North Carolina, Pennsylvania, South Carolina, Georgia, Virginia, California, and Connecticut. All 50 states and the District of Columbia have New York City pensioners residing within their borders, from 5 in North Dakota to the 35,410 Floridians who were paid $1.3 billion in pension benefits in 2017. The 1,601 beneficiaries living in Puerto Rico received $42 million in benefits, while an additional $24.4 million was paid to 866 retirees living outside the United States and its territories.

So New York’s pension payments remain significant contributors to the metropolitan area economy. They provide a steady flow of income to support local economies and tax bases throughout the region. The idea that all of these employees break family ties and escape the cold weather just is not borne out by the facts. Something to think about when forming one’s views about government employee pensions.

NEW YORK CITY EXECUTIVE BUDGET

Now that the State has concluded its budget process, the Mayor of New York City has released his executive budget. The release was characterized by a number of complaints about how the City was treated in the State budget including areas such as mass transit and public housing. these have been ongoing areas of dispute in the long running feud between the governor and the Mayor. In spite of the picture painted by a the Mayor of a City under siege, the budget actually represents a significant increase on a year over year basis.

The budget includes spending of $89 billion, some $3.82 billion larger than the budget adopted last year. It adds 1,700 more employees. It is also an increase over the $88.7 billion preliminary spending plan that Mr. de Blasio introduced in February. The plan includes $349 million more for homeless services in addition to $300 million for homeless services that was added in February’s preliminary budget. The money covers the 2019 fiscal year, along with some costs from the current fiscal year.

The budget does appear to build in increased spending without sustainable sources of revenue to cover it, The gap for the coming fiscal year was covered by what all seem to agree is an $800 million one-time revenue boost. In spite of the Mayor’s view of state support, we note that nearly 17% of planned spending is funded by revenues from the State.

Education accounts for 35% of spending with social services and criminal justice combining with schools to account for 68% of local spending. The State Budget provides $250 million for capital projects and other improvements at the New York City Housing Authority (NYCHA) in accordance with the development of an emergency remediation plan under the Governor’s Executive Order. Total spending on housing is $7.8 billion.

Capital investment benefits from authorization of more efficient procedures. The State Budget grants the New York City Department of Design and Construction and NYCHA two years of design-build authority to remediate certain conditions. The budget also authorizes design-build for the rehabilitation of the Brooklyn-Queens Expressway and the construction of borough based facilities to facilitate Rikers closure plans.

The City will contract out a significant amount of services to private and non-profit providers. The 2019 Executive Contract Budget contains an estimated 17,664 contracts totaling over $16.17 billion. Over 76 percent of the total contract budget dollars will be entered into by the Department of Social Services, the Administration for Children’s Services, the Department of Homeless Services, the Department of Health and Mental Hygiene and the Department of Education. The Administration for Children’s Services has over $1.76 billion in contracts, approximately 66 percent of which represents contracts allocated for Children’s Charitable Institutions ($470 million) and Day Care ($696 million). Of the over $7.15 billion in Department of Education contracts, approximately 46 percent of the contracts are allocated for Transportation of Pupils ($1.23 billion) and Charter Schools ($2.09 billion).

From a credit perspective, the Plan essentially maintains the status quo. It does not anticipate significant economic changes or represent any significant rethink of how and what the City funds. We see nothing in the budget that will significantly address the primary concerns impacting day to day life in the City. Given the state of affordable housing and transportation, these are not positive for the City. Given those factors, the lack of any sense of anticipation of any serious impacts from higher interest rates and/or moderating economic growth is troubling. The Mayor’s continued expansion of the workforce and blindness to the sentiment against him in Albany are reflective of his lack of foresight. The City’s finances are now much more vulnerable to outside factors than has been the case for some time.

EDUCATION FUNDING WILL NOT GO AWAY

Arizona joined the ranks of states whose teachers have taken a front line role in the effort to increase salaries in particular and education in general as many school districts closed as teachers protested in the state capital. They were joined by teachers in Colorado where the legislature is considering legislation to make job actions by teachers illegal. The growing movement across the country is more than a straightforward labor dispute. The walkouts have addressed salary levels it is true but also have highlighted issues over funding of facilities and supplies as well as the impact of the student loan crisis.

Teachers in both states have referred to the need to pay student loans in association with their demands for better compensation. According to the state’s auditor general, the average teacher salary in Arizona was $48,372 last year, well below the national average.  Also, per pupil funding was estimated at $8,141 per pupil in 2017, well below the national average. The starting salary for teachers in Arizona was about $35,000.

In Colorado, union leaders note that half of the districts in the state now have four-day school weeks, and the state’s low teacher pay has helped create a 3,000-person staffing shortage. The state teachers’ union, the Colorado Education Association, says the state has shorted the education system $6.6 billion since 2009.

The strikes have tended to have received widespread support from the public. The difficulties at the legislative level have arisen when the hard decisions as to how increased funding can be achieved. The movement to increase school funding highlights the general debate over levels of taxation and the increasing competition for funds to pay for growing costs of things like pensions at the state level.

PENNSYLVANIA STATE UNIVERSITY SYSTEM STUDY

The Pennsylvania Legislative Budget and Finance Committee in the State’s general Assembly commissioned a study by the Rand Corp., a conservative think tank to review the existing structure of the Commonwealth’s state university system. The State System was established in 1982 and is the largest provider of higher education in the Commonwealth of Pennsylvania.  Like so many state systems of higher education it faces funding and cost pressures in an era of scarce resources at the state level.

Students are paying a greater share of costs because state appropriations are limited and have declined.  System enrollment has declined 13 percent between 2010 and 2016. As of 2016, 11 of the 14 State System universities are operating in deficit (although some of this effect may stem from 2015 changes in accounting rules for retiree pensions).

The study explored five options ranging from maintaining essentially the status quo with marginal changes to merger of  the State System universities into one or more of the state-related universities as branch campuses. One option would place the State System and all its institutions under the management of a large state-related university, building on their strong performance, possibly for a defined period of time such as ten years. Rand recommended the adoption of one of those two options if large, state-related universities are willing.

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