Joseph Krist

Publisher

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We would like to say that we are optimistic about the economic and pandemic outlooks but it is difficult to do so given the data we see. The attempt to open college campuses to significant on campus activity is already proving quite problematic. Early openers were among the most adamant supporters of doing so but they have stepped back. At the K-12 level, only New York among the nation’s largest cities is holding on to the idea of a significant in person presence. Experience to date in Chicago and Arizona indicates that it will likely be the teachers making the final call.

The implications of these failed reopenings, along with reopening fueled resurgences of the virus for the economy is clear. The return to pre-pandemic normal is increasingly farther away with all the negative implications which stem from them for state and local revenues. Even the positive trend in initial unemployment claims reversed this week. As for municipal credits, they remain in the eye of the storm as governments must manage the demand for services in a greatly reduced resource environment. The need for additional support from the federal government could not be clearer.

From a policy perspective, California will unfortunately provide another test of the impact of recent political decisions which will hurt the ability of the federal government to respond to disaster. The President is funding his unemployment extension plan with the money which was earmarked for FEMA. So in that sense it is fair to ask where disaster aid funding might be coming from? Just in the last two weeks, significant storms have hurt the northeast, Iowa, and now California is on fire. So it is not a regional or partisan issue.

We remain concerned by the current credit environment which simply does not compensate investors for the risk they hold. That makes these perilous times for those considering an increase to their exposure to risk. Tread carefully.

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TRANSIT TECHNOLOGY

Fairfax, VA is about to join sixteen other U.S. cities in the testing of an autonomous passenger shuttle. The vehicle will travel a one-mile long route, between a transit station and a downtown commercial area. The test reinforces a trend across the country. Since 2016, the National Highway Traffic Safety Administration (NHTSA) has granted permission for the testing of 87 self-driving vehicles as part of 89 different projects in 20 states. The projects include 64 publicly operating low-speed shuttles in 45 cities. In Fairfax, the 12-passenger shuttle will serve two stops, cross only two intersections, and cannot go faster than 15 mph.

The cost of the test will be divided among the Commonwealth of Virginia and Fairfax County. Dominion Energy, which would benefit from increased electric vehicle use owns the shuttle.  The shuttle’s manufacturer has experienced some problems with the vehicle’s operations. This winter, the National Highway Traffic Safety Administration suspended passenger operations on all of the manufacturer’s  autonomous shuttles in the United States. A passenger fell aboard one that was part of a pilot program in Columbus, OH when the shuttle made an emergency stop.

The agency in May allowed passenger operations to resume after additional safety enhancements were made, including corrective actions to increase awareness that sudden stops can happen, more signage and audio announcements, and retrofitting the vehicles with seat belts. A “safety steward” will always be on board. Nonetheless, officials in Columbus were recently quoted as saying that the test in the Columbus project revealed some limitations of existing technology. Left-hand turns in traffic were cited as a nonstarter and a safety driver would always need to be stationed behind the wheel.

One of the issues which has clouded the debate over autonomous vehicles is the perceived difficulty that AVs have outside of urban and suburban areas. Most of what we have seen concerns the benefits of AVs for primarily urban situations, for congestion relief or pollution reduction. What we have not seen much of is the issue of how LIDAR based systems handle the realities of rural driving. If you have ever gotten a speeding ticket based on LIDAR technology, you know how many things can impact the accuracy of that equipment.

Those systems will now be put to the test in rural settings. University of Iowa researchers with the National Advanced Driving Simulator (NADS) are preparing for an upcoming demonstration study about automated driving on rural roads. A $7 million US Department of Education grant will fund the study. As the director of the UI program put it, “There is a big difference between driving in Iowa than in Silicon Valley or states where there are 12 months of sun.”

This study, scheduled to begin in 2021, will use a custom vehicle equipped with scanning lasers known as LIDAR, computer vision systems, RADARs, and high definition maps. It will follow a 47-mile route through parts of Iowa City, Hills, Riverside, and Kalona. The study is intended to see how the technology handles things like sharp curves, gravel, weather, and farm equipment on the roads.

The Iowa study will have a significant focus on how AVs will improve mobility for aging populations in rural areas. If the industry can address the concerns of this cohort, it will go a long way towards building support and demand for the technology.  

LIABILITY AND THE PANDEMIC

One of the issues which has supposedly held up negotiations on an additional federal stimulus package is the issue of liability. Whether it be employers looking for immunity as they push workers to come back to work or institutions like colleges, the issue of liability is emerging as a major point of contention. A recent piece in the Boston Globe shed light on the effort by higher education institutions to protect themselves from liability claims from students who return to campus while the pandemic continues.

The story cited numerous examples. Bates College in Maine requires students to assume “any and all risks that notwithstanding the college’s best effort to implement and require compliance with these prevention and mitigation measures.” any and all risks that notwithstanding the college’s best effort to implement and require compliance with these prevention and mitigation measures.” The state university system of New Hampshire has asked students coming to campus to sign an informed consent form. 

Alternative approaches are being taken by some schools. Northeastern University is asking students to sign a commitment to wear masks, report any symptoms, and abide by the school’s testing and quarantining requirements. Boston University is not requiring students to fill out risk or liability waiver forms or agreements. The actions come in the wake of the American Council on Education’s  letter to Congress asking for targeted and temporary liability protections to ward off “excessive and speculative lawsuits.”

The debate comes as The University of North Carolina at Chapel Hill announced that it was reversing its plan to conduct in person classes. One week into the new semester, 177 cases of the dangerous pathogen had been confirmed among students, out of hundreds tested. Another 349 students were in quarantine, on and off campus, because of possible exposure to the virus.  Three dormitories and a fraternity house developed clusters.

UNC will allow students to leave campus housing without penalty. The dean of public health said, “We have tried to make this work, but it is not working.” UNC is housing about 5,800 students in campus housing — less than two-thirds of capacity — with many more students living off campus.

As the week went on, the perils of the in person approach became clear. Notre Dame was one of the schools to take an aggressive position towards school reopening (and football) but that has blown up in its face. School opened on August 10 and now the university will go to an online only format for at least two weeks. Michigan State planned on on-campus classes but the school President acknowledged that “it has become evident to me that, despite our best efforts and strong planning, it is unlikely we can prevent widespread transmission of COVID-19 between students if our undergraduates return to campus.”

The differences in approach are yet another reflection of the lack of a national approach to so many of the issues associated with the pandemic.

JACKSONVILLE ELECTRIC MEAG SETTLEMENT

At least some of the details of the settlement of litigation between the Jacksonville Electric Authority and MEAG Power have been released. In connection with the settlement of the litigation, MEAG Power and JEA executed an amendment to the Project J Power Purchase Agreement pursuant to which MEAG Power and JEA agreed to an increase in the “Additional Compensation Obligation” payable by JEA to MEAG Power of $0.75 per MWh of energy delivered to JEA. That  Additional Compensation Obligation is not pledged to the payment of either the Bonds or the DOE Guaranteed Loan which have financed the Votgle Plant expansion

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An additional agreement grants to JEA a right of first refusal to purchase all or any portion of the entitlement share of a Project  Participant to the output and services of the Project J in the event that any Participant requests MEAG Power to effectuate a sale of such entitlement share. On August 12, 2020, JEA, the City of Jacksonville, Florida, and MEAG dismissed the litigation among the parties in both the United States District Court for the Northern District of Georgia and the United States Court of Appeals for the Eleventh Circuit. As part of the settlement, the parties agreed to accept without challenge or appeal the June 17, 2020 order of the district court determining that the Project Power Purchase Agreement is valid and enforceable.

It is hoped that after the twin failures of a botched sale of the utility and the settlement of this litigation that attention can now be paid to the management of JEA going forward. Clearly the path it was on was not favorable for investors. Management is conducted on an interim basis as the City looks for a new manager. As it stands, JEA is not really any better off than it was at the start of the process and now likely has fewer options going forward. The Votgle expansion will continue to weigh on the JEA credit for a long time and it should serve as a continuing weight holding back any real improvement in the JEA credit outlook.

RATINGS AND THE PANDEMIC

Ratings are always going to be a lagging indicator. Through their history, the worst of a massive event is often over before the rating agencies take action to lower ratings. We expect that the pandemic will be no different in that regard. So while we are not seeing widespread downgrades yet, we are seeing the signs of validation of our view expressed some weeks ago about which sectors have greater vulnerability to the limitations on economic activity which have resulted from the pandemic.

The latest action we see as strictly pandemic related is the switch in outlook for the Moody’s rating on the New Orleans Port Board of Commissioners. The current A2 rating was maintained but the outlook was shifted to negative from stable. The coronavirus pandemic has significantly affected the port’s cruise business; the current economic contraction is pressuring the port’s container and rail segments; and the port’s breakbulk business remains significantly pressured by tariffs, with throughput down 25% in the fiscal year ended June 30, and down 45% in the last five years. 

Given its location near the mouth of the Mississippi River, the Port serves a significant role in the export of commodities from the Midwest. The board operates as a landlord port authority for a deep-water, multi-purpose port complex located on the Mississippi River in New Orleans. The board’s facilities are located along 22 miles of waterfront on the Mississippi River and the Inner Harbor Navigation Canal (IHNC) and include 52 berths, 23.3 million square feet of cargo-handling area, 3.1 million square feet of covered storage area and 1.7 million square feet of cruise terminal and parking area.

Some of the pressure on the rating comes from capital spending decisions made before the pandemic existed. For example, the port is adding debt to fund capital spending, and is anticipating a robust recovery in cruise that will enable it to match the increase in debt service over the next three years. Moody’s estimates that  lower than anticipated cruise revenue, and potentially lower cargo and rail revenue, combined with more than $7 million of new debt service by fiscal 2023 will require significant spending adjustments – upwards of $10 million, or more – in order for the port to maintain total debt service coverage ratios (DSCRs) near its target of 2.0x.

The negative outlook reflects significant uncertainty around the timing and level of recovery in cruise, continued material pressure on breakbulk cargo (goods that must be loaded individually, and not in intermodal containers nor in bulk as with oil or grain) and cyclical but steep declines in container and rail activity. The Port’s situation is an example of the sort of decisions which will be faced by port operators so long as the economy is held down by the impact of the pandemic.

DEFUNDING THE POLICE

A number of cities have tried to begin the process of “defunding the police” with local legislatures enacting budgets with cuts in budgets for local police departments. The effort comes obviously in the midst of the massive debate over policing in the U.S. As the site of some of the largest demonstrations and some of the more prominent “economic” violence incidents, New York City was at the debate’s center. Mayor deBlasio made a pledge to defund the police to the tune of some $1 billion.

So we were interested to see what actually happened in connection with the defunding movement and the budget enacted by the City for the FY beginning July 1. The City’s Independent Budget Office (IBO) has provided some of the answer to that question. IBO has compared planned police spending in the April Executive Budget with the budget adopted on June 30. This comparison only covers the police department’s operating budget, which totals $5.2 billion.

The operating budget for the police, like that of other city agencies, excludes costs such as fringe benefits and pension contributions for staff, and debt service, all of which are budgeted centrally by the city. IBO estimates that for 2021, city spending on these items will total $5.4 billion for the department and brings total police expenditures to $10.6 billion this year.

The 2021 adopted budget for the police department was $420 million less than what was planned in April. Including centrally budgeted spending for the department, IBO estimates that total planned police-related spending for 2021 fell by $472 million from April to June. The city’s financial plan for police spending in 2022 through 2024 changed even less from April to June, shrinking the department’s budget by only $83 million each year.

The largest recurring savings comes from eliminating one police academy class. Not adding 1,163 recruits reduces the police department budget by $55.0 million in direct salary expenses in 2021. Forgoing this class means that after allowing for usual attrition, the number of uniformed officers would fall to 35,007 by June 30, 2021, down from 36,263 in April 2020.

Although the Mayor’s announcement of the budget agreement highlighted the shift of school safety staff and school crossing guards—along with $350 million to pay for their salaries–from the police department to the Department of Education, other than a $6 million cut in planned school safety overtime, no sign of this shift appears in the city’s financial plan.

GREEN CULTURAL SHOOTS

Museums and other cultural institutions will be allowed to open in New York City starting on Aug. 24. Institutions will be required to keep the buildings at 25% occupancy and to use a timed ticketing system, which would allow museums to carefully regulate how many people are entering at once. Face coverings will be compulsory. The directive does not allow theaters and other performing arts venues to open.

The Metropolitan Museum of Art will reopen Aug. 29; the Met’s Cloisters site in upper Manhattan will open on Sept. 12. Other reopening dates for the city’s museums include The Museum of Modern Art (Aug. 27), with free admission for the first month. The Museum of the City of New York plans to open on that day as well. The American Museum of Natural History will open on Sept. 2 for members and Sept. 9 for the general public.

CANNABIS

A petition in Montana to legalize recreational marijuana for adults 21 and older has qualified for the state ballot in November. Initiative 190 and Constitutional Initiative 118 will be eligible for state residents to vote on. It is impressive that the ballot items qualified given the limitations of the pandemic. The initiative reportedly required 25,000 verified signatures to qualify, while the constitutional amendment needed around 50,000.

The initiative would legalize the sale and possession of limited marijuana quantities while adding a 20 percent tax on the sale of non-medicinal pot products in the state. Supporting organizations estimate that sales would generate $48 million in tax revenue for the state by 2025. Much as was the case when Prohibition was ended in the midst of the Great Depression, initial moral objections to the legalization of alcohol were overcome by the need for state revenues during a time of economic distress. Current state and local government fiscal conditions are creating a similarly based source of support for legalization of marijuana.

CHICAGO’S NEXT PROBLEM

It was big news when the City of Newark, N.J. found that it faced significant fun ding needs to remediate the health impacts resulting from the use of lead piping to deliver water to individual customers. The resulting outcry led the state and other issuers to put together a financing package to address the situation quickly without harming the credit of the City. That program is underway and the City of Newark just saw the outlook on its credit raised from stable to positive.

Now the City of Chicago finds itself in a similar position. Chicago has the most lead service lines in the United States, largely because the city’s plumbing code required the use of lead to connect single-family homes and two-flats to street mains until Congress banned the practice in 1986. The City uses chemicals in the treatment of the municipal water supply that form a protective coating inside lead pipes connecting homes to cast-iron street mains.

The City estimates that some 360,000 Chicago homes have lead service pipes. The cost of line replacement is estimated at $8-billion-to-$10-billion. That is money that the City certainly does not have. The estimates also come at a time when the State of Illinois is in no position to fund such a project and the federal government remains hostile at best to the City and to issues of environmental remediation.

It is a political nightmare. It was City regulations that drove the use of lead piping. That will make it difficult to generate support for a plan which would require customers to bear some of the funding  burden directly. A formal plan to address the problem is expected over the next few weeks but ideas are being floated in the media. The issue was debated during the campaign for Mayor but like so many other things in Chicago, it competes for funding and attention.

With each day, the perception of the City’s (let’s be honest, the Mayor’s) ability to deal with its range of pressing issues becomes less favorable. The media and political establishment are increasingly questioning the Mayor’s ability to address the multiple challenges facing the City. This is a public health issue and after Flint, MI, one that simply will not go away.

It is just one more drag on the City’s credit.

WHAT UBER’S FIGHT WITH CALIFORNIA IS REALLY ABOUT

Uber and Lyft announced that they will have to leave the California market if they are forced to comply with state laws governing their relationship with their drivers. They have been continuously litigating over their non-compliance with California law requiring them to reclassify contract drivers and grant them the benefits and protections afforded to regular employees. The companies complain that they cannot comply in time with the law and that they need at least another year to do so.

Transportation network companies have been at the center of the debate over the future of transportation, in particular the future of public transportation. The debate has been driven by the ability of these companies to artificially cap the cost of a ride. What all of these legal efforts should make clear is that the business model for these companies relies on an exploitive relationship with their drivers.

At one point, Uber tried to make the argument that “drivers’ work is outside the usual course of Uber’s business.”  The takeaway from this line of argument is that TNCs do not work if workers are paid fairly and the cost is passed to the consumer. So the question has to be asked, is the TNC model truly a viable competitor to public transit?

If the answer is not really, then transit systems need to stop cowering before these companies. Uber and Lyft’s growth in NYC came at the expense of massive increases in congestion while they subsidized the cost of rides.  History shows that private vendors have a very mixed record of success in providing public transportation.

The current model for public transit in NYC came about through the failure of the private sector to succeed in the 1960’s. Previously, a number of private companies provided bus service throughout the city. The continued resistance to regulation by the industry especially in the area of how it compensates its drivers shows just how vulnerable the current TNC model is.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.