Joseph Krist

Publisher

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PA TURNPIKE FUNDING UPHELD IN COURT

Over the last decade, Pennsylvania has struggled with meeting the infrastructure needs of the state in the face of difficult overall budget pressures. One way that the Commonwealth chose to address it’s crumbling state road and bridge system was to apply revenues derived from tolls on the Pennsylvania Turnpike. Historically, the Turnpike had only rarely raised tolls and yet still achieved a strong credit position. Now the Turnpike is looked to as a major source of road funding for the state as a whole. This has led to regular annual toll increases.

When enacted, the plan to raise tolls to finance non-toll road facilities was controversial. Users did not like subsidizing other facilities. Bondholders did like seeing their credit security diluted. The Turnpike Commission (PTC) saw its rating lowered. The legislation provided that the funding would be temporary requiring the annual PTC transfer to the state to decline to $50 million from $450 million starting in fiscal 2023.

In the meantime, opponents took their case to the federal Courts. In April, the US District Court for the Middle District of Pennsylvania dismissed their lawsuit against the Pennsylvania Turnpike Commission (PTC, A1 senior and A3 subordinate stable) and the Commonwealth of Pennsylvania (Aa3 stable) brought by the Owner Operator Independent Drivers Association, Inc. (OOIDA). The plaintiffs claimed that the PTC and state (and others) violated the dormant Commerce Clause and the constitutional right to travel by charging higher tolls on the turnpike system to fund other state transportation needs, like capital needs of the state’s transit enterprises.

They appealed the dismissal. Last month, the US Court of Appeals for the Third Circuit affirmed the  April order. The appellate judge reasoned that since Congress expressly authorized the use of tolls for non-tolled purposes under the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), the dormant Commerce Clause does not apply. Also upheld was the dismissal of the claim that the plaintiff’s “constitutional right to travel” was violated because not all entry and exit points into and out of the state are “tolled” and thus there are methods to travel across the state that are free, though they may be less convenient. In sum, “the right to travel” does not mean “the most efficient and direct route.”

So the funding scheme remains intact. That is a short run positive for the Commonwealth’s budget. For the Turnpike Commission, the impact is less clear. Now that it has won its litigation challenge, will the Commonwealth amend the legislation and keep the funding scheme in place at its higher current level. The plan has not been positive for the PTC senior lien bond credit. For example, the Commission makes quarterly payments to the Commonwealth for non-PTC projects but recently the state had granted a waiver to the Commission while the litigation unfolded. Once the court handed down the original dismissal order, the waiver from the Commonwealth was not extended and the bill for 2019 and2020 came due. This forced the Commission to issue $712 million of subordinate bonds in June 2019 to pay the state its deferred fiscal 2019 Act 44 payments and the upcoming fiscal 2020 payments.

While the decision may be positive for the Commonwealth’s general credit, the Turnpike Commission remains under pressure. There is concern that the judicial support for the Act 44 funding plan will slow momentum in the effort to establish a more broad based funding plan that takes pressure off the Commissions ratings and bonding capacity.

PUERTO RICO

The Financial Oversight and Management Board for Puerto Rico has released its 2019 annual report. It documents the variety of actions which have occurred in the effort to restructure the Commonwealth’s debt. Our focus however is on the comments regarding the budget for the current 2020 fiscal year. They highlight the inherent conflict between “rightsizing” government relative to its resources with the political reality created by the government’s inordinately large role as a source of employment.

Total government spending of $20.2 billion is focused on the following priority areas: 21% for health, 17% for education, 13% for pensions paid via PayGo, 12% for families and children, and 5% for public safety. The areas prioritized make sense. Here’s where legitimate questions may be raised.  The budget, for example, provides for increased salaries and benefit contributions for police officers and incremental funds to purchase bullet proof vests, radios, and vehicles. Increased salaries during a period when the population at large faces  such huge difficulties?  Social Security is budgeted for all police as of July 2019 to provide them a more secure future retirement. In addition, the Certified Budget raises teachers’ and school principals’ salaries for the second  consecutive  year. This in a school system that faces contracting demand. It also raises the  salaries of firefighters.

The report references, among other places, the experience of New York City under a control board in an effort to prepare citizens for a long recovery period. It’s all well and good to make the reference but to refresh those who forget or do not really know the history, keep these items in mind. New York City made substantial cuts to basic public services in the immediate post-1975 crisis era. Raises? NYC police and firefighters were laid off. That is serious belt tightening.

STORM CLOUDS AHEAD

The outlook for state general obligation credits has been fairly solid up until now throughout the budget process.  We saw many favorable comments about reserves and taxes creating a strong foundation for states to fall back on. Well let’s hope that this do indeed hold up as the economic storm clouds gather at an inopportune point in the budget cycle.

US industrial production decreased 0.2% last month, according to the Federal Reserve, missing economists’ forecast of a 0.2% increase. Meanwhile, 77.5% of capacity was in use at factories, utilities and mines, the lowest figure since October 2017. Continuation of the trend will hurt earnings and tax revenues. Analysts have been cutting S&P 500 profit estimates for the second half of the year. According to FactSet, companies’ earnings will increase 1.5% this year at best, down from a January prediction of growth exceeding 6%.

And that is what could be the problem. Since many of the states budgeted based on best economic data available (which may have included some 1Q data) they weren’t able to account for the current negative impacts of the trade war. The retail industry’s freak out over tariffs is a clue to how fragile things are. Nine major world economies have entered a recession or are on the verge of one.

TECH REDLINING

It is a policy reminiscent of the bad days of urban development. The practice of redlining – the effective refusal of banks to make mortgage loans in certain, usually poorer and less white neighborhoods. The practice has rightly been criticized and has been greatly reduced. One would think that anything that smacked of redlining – no matter what the business – would be a practice which would not be undertaken by our progressive, technology educated brethren. Sadly, this is not the case.

A recent report on scooter use in SF – the epicenter of the micromobility industry – highlights a practice that walks, talks, and squawks of redlining. Despite a promise that it wouldn’t prioritize lucrative wealthy areas of San Francisco over low-income zones, electric scooter company Scoot has blocked drop-offs in two of the city’s poorest neighborhoods. Scoot is a scooter provider which was acquired by Bird – a micromobility provider which has yet to see a regulation it couldn’t ignore.

As a condition for joining the city’s scooter pilot program, Scoot specifically promised it would prioritize serving the Tenderloin and Chinatown as  “communities of concern. ” Scoot claims to only be thinking of the elderly. Communities in Chinatown and the Tenderloin had expressed concerns about potential hazards from scooters to older people and others, as well as possible pitfalls related to narrow sidewalks, so the company decided to exclude areas to address those worries. The no-drop-off zones don’t cover the entirety of either neighborhood, and scooters are available on the peripheries of closed-off areas, so the company believes it is serving those neighborhoods as promised in its permit application.

Bird also maintains red lines around areas of Oakland, its app shows, including Lake Merritt (the home of Barbeque Becky).  Numerous scooters have been deposited in the lake (likely by established neighborhood residents under gentrification pressure from newly arriving tech types). A company spokesperson claims it closed off those areas at the request of city and school district officials.

Lime also operates in Oakland and excludes Lake Merritt and Oakland Technical. A Lime spokesperson said city officials had asked it to close to drop-offs the area surrounding Lake Merritt, and exclude Oakland Technical. Lime also excluded all the other schools in Oakland.

So like Citibikes in New York, the scooter providers just cannot seem to find a way to serve all of a population. They continually reinforce the notion that electric scooters are not a real alternative to today’s public transportation option set but rather a plaything for white hipsters. It simply is not an effective model for developing, financing, and funding public transit.

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