Joseph Krist
Publisher
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ISSUE OF THE WEEK
The Brightline debt train finally picked up passengers this past week with a $2.7 billion private activity bond issue. The bonds were said to be strongly oversubscribed with ultimate yields above 6.5% on the long dated maturities. In this market, that represents a significant yield premium even for high yield municipal bond debt generally. That reflects the relatively strong market conditions and generally narrow credit spreads which characterized the municipal market throughout the first quarter of 2019.
The market seems a bit entranced with the participation of Richard Branson’s Virgin Group in the Brightline project. As we pointed out to the Associated Press, “Branson is a huge branding success — and that’s not to say he hasn’t been an economic success,” Krist said, calling him a “genius” when it comes to getting Virgin’s name in front of the public. “His brand as an innovative, somewhat thinking out-of-the-box kind of guy has survived regardless of the absolute level of operating success achieved by his various businesses.” I also noted that while Branson has had success in widely divergent fields, from recording to transportation, his British train operation has had a mixed record over 20 years.
The completion of the financing does answer one major credit concern – will project completion to Orlando be funded? The adoption of the Virgin brand does create some more opportunities for ridership but the risk of underperformance continues to be tipped against the bondholder. Only time will answer the overarching question shadowing the enterprise – has the municipal market once again fallen for a technology and a plan which supposedly wiser heads chose to decline participation in?
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HEALTHCARE TECH GETS A GENTLE NUDGE
Those who subscribe to economic nudge theory will be heartened by the news that the Centers for Medicare and Medicaid Services is moving to expand the range of beneficiaries eligible for telemedicine benefits. Telemedicine has been proceeding forward at a less than rapid pace and the move by CMS to nudge hospitals to more widely adopt the services is seen as enhancing the adoption of the technology on a wider scale.
The new rule, scheduled to go into effect in the 2020 plan year, will allow Medicare Advantage to offer telehealth services as part of their basic benefits package, providing patients more options to receive healthcare services from locations like their home. This is a significant change from current policy which historically had been limited to beneficiaries in rural areas with limited access to brick-and-mortar care facilities.
Medicare Advantage plans previously had the flexibility to provide telehealth services under their supplemental benefits banner. The new rule shifts remote visits to a core part of the benefits covered by CMS. Under the current rules MA plans are not permitted to directly allocate federal dollars to telehealth services.
CONGESTION PRICING – CREDIT POSITIVE?
There seems to be a discernable wave of academic/professional support for the congestion pricing proposal adopted by the NYS Legislature. We choose our words carefully as it is important to emphasize was that what was approved was a serious concept but nowhere near a detailed plan. The devil as always will be in the details and significant interests have staked out potentially difficult implementation issues.
Despite the lack of detail – the level of charge and the potential exemptions from the base – are the most prominent issues to be left to an “independent” board. The likelihood is that a plan will be adopted and implemented by the scheduled January 1, 2021 start date. It is likely that there will be substantial exemptions for a variety of transit cohorts so it is difficult to estimate a real sustainable revenue stream the plan will provide.
If it succeeds in reducing congestion in a meaningful and clearly manifest way, than congestion pricing will be credit positive for a variety of New York credits including those of the City and State of New York. Recently, Moody’s indicated that it views a congestion pricing plan as credit positive. We agree with a significant amount of Moody’s comments in support of its view. We differ in that in the absence of real details about who pays how much under whatever final scheme emerges, we are less comfortable estimating future funding realities and their implications for the MTA credit and that of its related credit partners.
ONE SMALL COLLEGE FIGHTS THE TREND
One college in New Rochelle NY is in the news for its announced closing and criminal financial mismanagement. It could be just one more chapter in the recent history of small college financial difficulties. There are always exceptions to trends. In this case one does not have to leave New Rochelle to find another small college with a credit that is on the way up.
Moody’s Investors Service has revised Iona College, NY’s outlook to positive from stable and affirmed the Baa2 rating on roughly $74 million of outstanding revenue bonds. According to Moody’s, ” The revision of the outlook to positive incorporates the combination of continued solid operating cash flow, material growth in flexible reserves fueled by retained surpluses, and modest but steady debt reduction achieved over the past several years. The college’s management has a track record of strong fiscal discipline, consistently generating robust debt service coverage. This is particularly impressive given that the college’s student market position, which accounts for over 80% of revenue, is experiencing strong competition and has limited ability to generate net tuition revenue gains. That competition is reflected in a very high selectivity rate of 88%, a very low matriculation rate of 9.6%, and volatility in enrollment and net tuition revenue. Despite those challenges the college’s liquidity continues to improve and its spendable cash and investments provide a good cushion to debt and expenses.”
COMMUNITY HOPSITAL FIGHTING CHOPPY WATERS
Milford Regional Medical Center is a 145 bed community hospital located approximately 40 miles southwest of Boston and 15 miles southeast of Worcester, Massachusetts. The obligated group also includes Milford Regional Physician Group (MRPG), a multi-specialty physician group practice with 94 employed physicians across multiple sites. It has some $102 million of debt outstanding rated below investment grade at Ba2 after a recent downgrade.
Like so many hospitals of this size, high financial leverage id a significant issue. At the same time, incremental debt borrowings associated with a new IT project hurt the credit but are likely necessary as technology becomes more and more prominent in the provision of direct patient care (see our earlier comments on CMS changes in funding) . It competes with the high level Boston institutions for patients but struggles with its ultimate level of profitability. Ultimately, significant profitability is not likely.
SINKING FERRY SERVICE
The NYC Comptroller has proposed that the city’s Department of Transportation “immediately explore” taking over NYC Ferry. The DOT, he said, already has experience running the 202-year-old Staten Island Ferry and could improve the efficiency of NYC Ferry’s six routes. The service has been controversial due to the high level of subsidy provided by the City to support low fares on the ferries.
The Citizens Budget Commission found the ferry service costs city taxpayers $10.73 per ride, compared to $1.05 for each subway ride. Critics have noticed that the contract with the operator finds the City having committed to buy boats from the operator. Recent press reports indicate that a runner-up bid for the ferry contract could have saved money by providing its own boats. The contract was won with a bid that was about $30 million lower than its competitor’s. But that bid left city taxpayers on the hook for $232 million to purchase 38 vessels, with another $137 million allocated for future ferry purchases.
It is one thing to push for expanded means of public transport. It is another to be open about the full economic implications of any alternative transit program. In this case the continued level of high individual ride subsidy indicates that the economics of public ferry service at its current scale just does not make a lot of sense. It makes less sense when that level of individual ride subsidy applied to the subway would fund lots of capital upgrades.
METRICS MATTER IN A DATA DRIVEN AGE
One of the challenges facing the municipal market is the increasing reliance on data by all participants – underwriters, raters, investors, analysts – to evaluate the creditworthiness of borrowers and to accurately price risk. When municipal bonds come under attack as they did in the tax cut debate in Congress in 2017, it is often hard for proponents of municipal bonds to make the case for the positive impact of municipal bonds on society as a whole.
So in the middle of this kind of debate, it is important that cities and other borrowers employ data to monitor performance and impact of major programmatic initiatives. That is why it is so disappointing to see the lack of such data on two major program initiatives undertaken by NYC mayor Bill DeBlasio and his wife Chirlaine McCray. Recent hearings conducted by the NYC Council shined a spotlight on the difficulties facing those seeking to evaluate the efficacy and impact of large social service programs.
In 2017, The Mayor announced New York Works, a plan to create 100,000 jobs paying an average of $50,000 per year. The $850 million initiative should be subject to normal oversight with metrics established to measure to efficiency and impact of that level of spending. Alas that is not the case. Officials from the Economic Development Corporation, the agency charged with delivering upon the mayor’s plan say it is “impractical for the city to track specific jobs created.”
The second program is Thrive NYC, a program with the very laudable goal of increasing awareness and treatment of mental health issues especially among lower income residents. Led by the Mayor’s wife, that program has received some $250 million in funding. Recently, the NYC Council criticized the management of the program citing a lack of transparency as to spending and programmatic results.
These two programs are in the spotlight in the wake of the ending of a program known as Renewal. Renewal was an effort to turn around failing schools that cost $773 million over three years but improved only a quarter of the schools in the program. That program was also plagued by a lack of good supporting data.
Why do we care? The three programs have in common high levels of spending, poor results relative to promises, and questionable management. “Renewal Schools is failing to renew. ThriveNYC is failing to thrive and New York Works is failing to work,” according to one Councilperson, “because there is a pattern of failing to measure outcomes.” It is not an accident. According to the NY Times, officials from the economic development agency said they had chosen “not to burden” companies “with tracking every single job created by their actions,” since “further actions” are often required by the city’s partners to create the jobs.
In today’s market, a municipal borrower just cannot consume resources without some accountability to those who provide those resources. If you wonder why there is such suspicion about the implementation of things like congestion pricing to fund mass transit, look no farther than the Mayor’s office and its lack of data transparency to understand why.
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