Joseph Krist

Publisher

PANDEMIC THREATS RETURN

It was always an uncertain process with the potential for “many a slip, twixt cup and lip” as the economy tried to rebound from the limits of the pandemic. Nonetheless, the recent surge of the “Delta variant” has put a lot of the best laid plans of FY 2021 budget makers at all levels of government in jeopardy. Now we may see ourselves in a politically charged environment which will influence limits on economic activities. A push to keep as many businesses open as possible is likely.

The pressures on school districts will be enormous as we believe that they are the foundation of any permanent recovery. There are still some 7 million fewer people employed than prior then prior to the pandemic. Many were in jobs requiring physical presence. It’s why the hospitality industry is having such a hard time hiring. Childcare needs are likely as much a factor as extended jobless benefits when deciding whether to return to work. A safe open school environment will be a key need to be addressed going forward.

The corporate world will also have a role in dealing with the pandemic. While much emphasis has been placed on businesses requiring some or full in office presence, the resurgence of the virus and the “Delta variant” is already leading some significant employers to extend or make permanent remote work structures. The resurgence also imperils operations at higher education institutions and health facilities. The return to campus will be important for revenues at the schools. The healthcare system is again overwhelmed by new cases and that will likely exacerbate the negative impact on both healthcare revenues and patient health that have stemmed from the pandemic.

Unfortunately, the ultimate responsibility for responding to the pandemic is now primarily in the hands of the private sector and local government. That does create risks especially in states like Florida and Texas as their governors threaten pay and school funding if masks are mandated by local elected school districts. In many cases, local governments are requiring vaccinations or testing. The need to lead by example so that schools can reopen and economies fully reopen. It’s a bizarre way to deal with the multiple issues the pandemic raises.

GIG WORK ON THE BALLOT AGAIN?

The transportation network companies (TNC) are trying to build in their victory in California and have moved to place an item on the Massachusetts ballot affirming the right to classify their drivers as independent contractors rather than employees. So far, the industry has been successful in the U.S. (at least in CA) but has lost its argument in Britain. Last year, Massachusetts sued Uber and Lyft, claiming they misclassified drivers as independent contractors and that litigation is continues.

The Massachusetts Coalition for Independent Work, proposes exempting gig workers from being classified as employees but offering them some limited benefits, including minimum pay of $18 per hour spent transporting a rider or delivering food. If the TNC are successful, the ballot item could appear on the November, 2022 ballot.

EV REALITIES

Only 9.7% of people in the 50 largest U.S. cities have a public charger within a five-minute walk of home. Remove the two top performers — New York City and LA — and the figure drops to 6.2%. There is $7.5 billion in funding for them in the bipartisan infrastructure bill. In Los Angeles, more than 24% of the population has close-by access to more than 3,100 charging stations, which is twice as many as any other city. In New York City, 18% of the population has such access — although most chargers are on the crowded island of Manhattan, and many come with an access fee in commercial parking garages.

So far, the deployment of charging infrastructure has been reflected in local demographic data. The better off an area is, the more likely there will be demand for charging infrastructure. So, the private sector has reacted just as one would expect. They follow the money. Given the price of electric vehicles, the fact that the EV phenomenon is pretty much a rich, upper middle-class thing is not a shock.

What it does do is to make a case for government to provide such infrastructure. In water, much the same way as mass transit expansion fostered development in the 20^th century, electric charging infrastructure expansion could support more demand for electric vehicles.  This is especially true in rural and less populated areas.

COLORADO AND CLIMATE

Two opposite but related natural phenomena are occurring at the same time in Colorado which highlight the complexities of management of climate change. Last week, a mudslide closed I-70 the maim interstate highway link through Colorado. The State is facing significant costs in clearing the road, estimating damage, and funding and conducting repairs. I-70 is known for its unique design which minimized its footprint through Glenwood Dam and it is that area that the damage occurred. The State has petitioned the federal government for some $116 million to fund the repairs.

At the same time, the impact of the log-term drought plaguing the West is creating an opposite set of issues. Some 32 entities in Colorado are facing limits on the availability of electric power generated by hydroelectric generators at the Reidu Reservoir some 20 miles from Aspen. Water levels at Reidu Reservoir could fall so low this winter that the city of Aspen could have difficulty making hydroelectric power and those who own water in the reservoir could see shortages. The U.S. Bureau of Reclamation operates the reservoir as a storage and flood control mechanism. It also generates electricity for purchase by among others, municipal electric systems.

Those systems buy the power to achieve green power goals. Now the U.S. BOR is warning that officials estimated the reservoir will fall to around 55,000 acre-feet this winter. A year ago, the reservoir stood at 96,000-acre feet. So, within some 30 miles of each other we have too much moisture to hold the hillside over an interstate but steadily declining water and power availability. And in that relatively small area, the entire climate issue can be neatly summarized.

NEW YORK AND CALIFORNIA SITTING IN LIMBO

A year ago, no one would have predicted that New York and California could both be headed by new governors by this Fall. It is a certainty in New York where Governor Cuomo has resigned. It is a possibility in California where Governor Newsome retains a slim majority in recent polls in his effort to defeat a potential recall vote next month. While the circumstances leading to this predicament could not be more different, the results of changes in management which would result present similar challenges to each of the potential replacements.

Assuming that the recall in California is successful, both New York and California would be being run by short-term replacements. Both would be facing scheduled elections for their new offices in November, 2022. That will lead to even more highly charged political atmospheres in Sacramento and Albany at times when both states will be remerging from the limits and impacts of the pandemic and its resurgence. A political vacuum would exist which would limit the ability of either governor to respond in real time as effectively as might be the case.

In New York, the fraught relationship between the Mayor of NYC and the state government will be complicated by the first term status of the new mayor and the temporary status of the Governor. With the City and the State’s recovery at stake and massive decisions about housing and transit funding to be taken, it is a bad time for the jockeying and posing which can be expected as the result of this unanticipated opening.

California already went through this once when Gray Davis was recalled in 2003 and replaced by Arnold Schwarzenegger. Schwarzenegger was able to be elected to a full term and governed less ideologically than was expected. Schwarzenegger signed the Global Warming Solutions Act of 2006, creating the nation’s first cap on greenhouse gas emissions. In the end, he wasn’t able to substantially address the state’s fiscal issues especially its pension underfunding situation.

We do not believe that either of these potential changes present major credit issues for the states. The New York budget process will remain “three people in a room” but as was the case this year, one of those people will be politically weaker than the others. Long term, the issue is who will be Governor as of January 1, 2023. This will make the 2022 legislative election, the real place to watch. If veto proof majorities are maintained in the Legislature, the next Governor will have a hard time getting their priorities through if they do not match the goals of the legislative leaders.

In terms of municipal bond credits backed by revenues, the governorship of New York carries with it a raft of appointments to major issuers. Primary among them are the Metropolitan Transportation Authority and the Port Authority of New York and New Jersey. Many forget that the MTA is a state not local entity. The Governor’s role in appointing board members puts the Governor at the center of NYC and metropolitan NY transit policy decisions. The governors of NY and NJ are unusually positioned to address the region’s transit needs.

In terms of specific projects, both Newsome and Cuomo were driving forces behind major transit projects which may or may not succeed. The California High Speed Rail project has been a huge disappointment and is viewed by many as an endless financial drain. It is used as a cudgel against Governor Newsome. The New York legacy is a bit different. As he leaves office, a major rail link to LaGuardia Airport remains in limbo and is less likely to happen without Governor Cuomo. At the same time, several successful bridge and airport public/private partnership projects must be credited to Governor Cuomo.

MISSOURI SPITTING INTO THE WIND

A Missouri county court justice issued an order that said that officials must implement the voter-approved Medicaid expansion immediately in Missouri. A decision by that same judge was overturned recently by the Missouri Supreme Court. The new decision was in response to that decision which ordered him to “issue a judgment for the plaintiffs.” 

An estimated 275,000 people in Missouri are now eligible to gain Medicaid coverage. The state argued it needed time to develop a plan to accept newly qualified people in the Medicaid program and asked for a two-month delay in implementation of the expansion. It was noted that the Governor had initially submitted a plan for expansion to the federal government before withdrawing the paperwork in May.     

The constitutional amendment makes adults between the ages of 19 and 65 eligible for Medicaid if they make 133 percent of the federal poverty level — or about $35,200 for a family of four. It also prohibits the state from enacting work requirements for Medicaid recipients. And the federal government will cover 90% of the additional costs of expansion in its first year.

RAISE A GLASS OF WATER FOR NEWARK

As Congress considers the infrastructure bill, one example of what it seeks to fund is the replacement of lead water pipes. Lead water pipes are one of the leading sources of lead poisoning and elevated levels of lead in children. The negative impacts of lead exposure in childhood have been well known. In the 1960’s, the primary source of exposure was lead paint in residences. Now, testing for lead exposure especially through lead paint is an important part of the home purchase process. This reflects the enactment of legislation throughout the country limiting the use of lead paint.

As these efforts slowly paid off, it became clear that there was still risk from lead exposure especially in older homes. This stemmed from the use of lead pipes to connect individual homes and businesses. Many of those pipes are located in areas of older homes which tend to be owned by lower income residents. While the need for replacement was clear, the funding for replacement was not. Simply stated, most residents who were at risk from potential lead exposure from pipes could not afford the cost of replacement.

In 2016, elevated lead levels were found in the water supplied to several public schools in Newark. At the end of 2017, Newark, N.J. was informed by the federal government that Newark was in violation of the federal action level for lead in drinking water for a second consecutive water monitoring period. The City was required to undertake the replacement of thousands of pipes connected to water mains. According to the EPA, the average cost of replacing just one line is $4,700.

The problem was coming up with the funding for the cash strapped city and its water customers. Here is where municipal bonds played their role. To pay for the project, an agreement was made with the state that Essex County, of which Newark is the county seat, would issue $120 million in bonds were issued through the county’s improvement authority. That plan also came with legislation that allowed the lead lines to be replaced without the consent of the property owners. That was an important factor in a city where 74 percent of the population are renters. 

Now two years after the plan was created and implementation began, the replacement of nearly all its 23,000 lead service lines, which had tainted the drinking water, and replaced with copper pipes.  The City may have been dragged kicking and screaming to undertake this project but once a viable funding and financing source was identified, it moved aggressively.

PENSION RETURNS MIRROR STOCK MARKET

The strong performance of equities over the last year especially in 2021 clearly benefitted state and local pension funds. After single digit returns in FY 2020, the turnaround in performance was remarkable. States like New York and Minnesota had returns in excess of 30%. Double digit returns were the rule rather than the exception.

The positive returns will show up in improved unfunded liability ratios. This should take have some positive impacts on annually required contribution levels. The majority of funds have return assumptions of between 6% and 8% so these results are well above those thresholds. Now the issue becomes one of will on the part of legislators. Maintaining current funding levels in the face of these extraordinary returns will be an important credit issue going forward.

HIGH SPEED RAIL

The Brightline high speed rail service will resume running trains in November after suspending service in March 2020 because of the coronavirus pandemic. Schedules and fares would be similar to those before the suspension. Riders will have to wear masks onboard and the company will also require Covid vaccines for its employees. 

In Illinois, Gov. J.B. Pritzker recently signed a bill authorizing the formation of the Illinois High-Speed Railway Commission. The commission is tasked with conducting a ridership study and issuing its findings and recommendations concerning a governance structure, the frequency of service and implementation of the high-speed rail plan. The goal is the development of a system which would start at O’Hare International Airport in Chicago and offer a 127-minute ride to reach downtown St. Louis. Trains would stop in Champaign-Urbana in less than an hour and in Springfield in 78 minutes. The line would be integrated with existing Amtrak, Metra and intercity bus services, and connect the Illinois cities of Decatur, Moline, Peoria and Rockford. 

In California, the infrastructure bill will not include any new funding specifically for the California High Speed line. There is some $12 billion of funds available for unspecified intercity rail development but the federal government is not bailing out the line. The hope is that some funding could be generated to allow the state to finish the existing portion under construction in the Central Valley.

MORE INTERSTATE REGULATION ISSUES AND CLIMATE

Montana has enacted legislation which effectively requires owners’ unanimous consent to close a coal-fired power plant. In this case, the Oregon and Washington based co-owners of the Colstrip coal fired power plant are asking a federal judge for a preliminary injunction to stop the Montana attorney general’s office from enforcing a law they say changes the terms of their private ownership contract.

Utilities in those two states are under pressure to divest from fossil-fuel fired generating plants. At the same time, efforts to move from fossil fuels in Washington are facing a potential vote in November in eastern Washington. If approved by city voters in November, the Spokane Cleaner Energy Protection Act, or Proposition One, would preemptively prohibit the Spokane City Council from enacting a ban on natural gas service or hydroelectric power for homes and businesses in Spokane.

A volunteer group formed under the City Council’s direction, included a proposal to ban “gas hookups from all new commercial and multifamily residential buildings by 2023, and from all new construction by 2028” in a draft “action plan” released earlier this year. This led to the development of the proposed initiative.

The legal action seeks an injunction to prevent the measure from appearing on the ballot, and alleges that the initiative is illegal in three ways. The initiative would stand in the way of the city’s quest to meet greenhouse gas reduction goals outlined by the state legislature, the lawsuit argues, and local initiatives cannot threaten “to interfere with city or county efforts to implement state policies.”

The plaintiffs also contend that by preventing the city from amending its own building codes, the initiative would deprive the Spokane City Council of the authority granted to it by the state legislature. The third contention is a matter of process, as the groups argue that the issue is an “administrative matter.”

This all comes at a time when climate change is at the forefront of concerns. Over the past three decades, more than 600 local governments across the United States adopted their own climate action plans setting greenhouse gas reduction targets. These pledges were in addition to America’s commitment to the 2015 Paris Agreement.

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