Joseph Krist

Publisher

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MEDICAID WORK RULES REACH SUPREME COURT

Arkansas was one of the first states to receive permission from the federal government to require Medicaid recipients to meet minimum requirements to work in order to receive Medicaid benefits. More than 18,000 people lost coverage in Arkansas due to work requirements once the requirement was enforced. In February, a federal appeals court had found that the approval of the requirements in Arkansas was “arbitrary and capricious.” The court said the administration did not adequately account for loss of coverage that would stem from the requirements to work or volunteer. The D.C. Circuit reached a similar conclusion in May when New Hampshire’s work requirements were challenged.

The decisions reflected the operating realities of these programs which in large part need recipients to self-report on line their employment or volunteer efforts. Given that the program serves the poorest, access to the internet is far from a given for that cohort making it likely that those individuals would lose coverage. The philosophical legal issue is whether Congress intended for a law designed to increase access to health coverage to be used coercively to motivate work or volunteerism.

To date, the courts have found that that tying the issues of work and health coverage are not consistent with Congressional intent.

PANDEMIC CASUALTIES – CULTURAL FACILITIES

The New York Philharmonic projects that the cancellation of its 2020-21 season will result in $21 million of lost ticket revenue, on top of $10 million lost in the final months of its previous season this spring. Now, in light of these losses as well as the likelihood of a slow return to indoor events, The Philharmonic has reached an agreement with its musicians that includes substantial salary cuts.

The musicians will see 25% cuts to their base pay through August 2023. Pay will then gradually increase until the contract ends in September 2024, though at that point the players will still be paid less than they were before the corona virus pandemic struck.  It’s not clear how much this agreement will set a trend as the pandemic occurred coincident with the expiration of the existing labor contract. It is easier to negotiate these sorts of cuts within the context of an expired agreement versus reopening an existing contract.

It is nonetheless a sign of what may be to come for many of these institutions.  They will be under pressure even in the immediate aftermath of the pandemic. The Metropolitan Opera (the Philharmonic’s next door neighbor, is seeking 30% cuts in pay from several of its major unions until box office reaches pre-pandemic revenue levels, at which point the cuts will be reduced to 15%. 

These maneuverings reflect the larger reality that the economic recovery from the pandemic will be gradual and the magnitude of that recovery highly uncertain at present. The non-profit sector, especially its arts based component, is undergoing an unprecedented set of pressures which will dampen overall creditworthiness.

CONVENTION CENTERS

King County will look to bail out the Washington State Convention Center with a $100 million loan as sufficient private sources of funding have not materialized for the $1.9 billion expansion project in downtown Seattle.  The County had previously indicated the expansion project was $300 million short of its funding target and, without federal aid, could run out of money by the end of the year. The money would come from the county’s $3.4 billion investment pool, which invests funds for county agencies and school, water, sewer and fire districts.

Since the pandemic began, 67 conventions have been canceled, according to the Downtown Seattle Association. Downtown hotels have held only 10% to 20% of their normal guests, according to the Downtown Seattle Association, and revenues have been down more than 90% from last year. This directly impacts the credit supporting municipal bonds issued to finance construction as they are payable from local and county hotel taxes.

It is another way of funding the project without asking the taxpayers (currently) to fund it through increased tax revenues. That does not mean that all of the county’s stakeholders will be happy. Some will question the prioritizing of the convention center over things like transit and affordable housing. It will allow the project to continue so the facility is best positioned for any post-pandemic demand.

CLIMATE CHANGE AND CAR DEALERS

In September of this year, General Motors informed its 880 Cadillac dealers that they would be required to invest some $200,000 in their dealerships to accommodate electric car sales. The dealer network had until Nov. 30 to make the decision if they wanted to take a buyout. Some 150 dealers out of the 880 opted for the buyout. The impact on potential sales is not clear.

The choice comes as GM looks to sell more vehicles powered by electricity than by fossil fuels by the end of the decade.  Cadillac will be its primary outlet for electric vehicles initially. An electric crossover model is expected to be available in the first quarter of 2022. The investment GM is asking for would cover charging stations, training of employees and lifts that can carry the heavy batteries powering the vehicles.

Dealers are important sources of local tax revenue and a source of employment for non-college graduates. This is especially true in more rural areas so the loss of jobs and tax revenues is important. Now that the industry is coalescing behind a move to follow California’s increasingly heavy regulation of internal combustion powered vehicles, it is likely to accelerate acceptance of the Golden State’s pending restrictions on their sales.

It is just the largest most visible example of the trend. If they haven’t already, all of the carmakers will be undertaking similar efforts with their dealer networks. That is the reality of California’s policy ending internal combustion vehicles sales in 2035.

CLIMATE CHANGE AND PUBLIC POWER

Nebraska’s two large public utilities are moving forward on goals to get their operations down to net-zero  carbon emissions. The Lincoln Electric System has voted to achieve net-zero carbon emissions by 2040. Lincoln has been purchasing wind power from three facilities in Nebraska and two neighboring states since 2015. Since 2010, LES has reduced its carbon emissions 42%.

The other major public electric utility in the state – the Omaha Power District – has adopted a goal of net zero generation but by 2050.  The OPPD adopted its goal one year earlier than did Lincoln and it seems to have established a starting point for Lincoln. The 2040 date adopted there is a compromise between a 30 year goal favored by established businesses and a 20 year goal favored by newer energy based businesses.

In both cases, public utility ownership seems to be fostering a more direct public process in decision making that is hindered by the need to generate “profits”. This is in contrast to IOUs owned by a holding company parent dependent upon dividend generation by the local US utility.

FOSSIL FUEL FUTURE

For utilities public and IOU, the potential for having to deal with stranded assets under aggressive plans to move generation to renewables can be a real impediment toward achievement of climate goals. So we saw with interest research making a case that a 2035 electricity decarbonization deadline, as proposed by President-elect Biden and the 2020 Democratic party platform, would strand only about 15% of fossil capacity-years and 20% of job-years.

In 2018, 10,435 fossil fuel–fired generators produced 63% of U.S. electricity with 841 GW of capacity. They also emitted 1.9 billion tonnes of carbon dioxide, 1.3 Mt of nitrogen oxides, and 1.4 Mt of sulfur dioxide, while consuming 3.2 billion m³ of water for plant operations and fuel extraction. These facilities operated in 1248 of 3141 counties, directly employed about 157,000 people at generators and fuel-extraction facilities.

So the basis of the economic fear associated with decarbonization is obvious. The research shows that the end of coal generation may simply be rooted in operating reality as much or more than policy decisions. Look at the current landscape to see why this is the case. Of operable U.S. fossil fuel–fired generation capacity (630 out of 840 GW), 73% reaches the end of its typical life span by 2035 (810 GW, or 96%, by 2050; 100% by 2066). About 13% of U.S. fossil fuel–fired generation capacity (110 GW) operating in 2018 had already exceeded its typical life span. 

Those numbers make the case that blind political resistance to the move away from fossil fuels simply ignores reality. A key finding of this research is that a 2035 deadline for completely retiring fossil-based electricity generators would strand only about 15% (1700 GW-years) of fossil fuel–fired capacity life, alongside about 20% (380,000 job-years) of direct power plant and fuel extraction jobs remaining as of 2018.

Does this mean that there is no disruption associated with decarbonization? No. Requiring fossil generators to close by 2035 would result in limited, although sometimes locally impactful, asset stranding relative to typical life spans. 

PANDEMIC CASUALTIES – G.O. RATINGS

The second wave of the pandemic is underway in New York City. The closure of the schools last week and the threat of renewed restrictions on gatherings and economic activity like indoor dining have renewed pressure on the City’s finances. So, S&P has lowered its outlook on the City’s ratings from stable to negative.

S&P made it clear that this is a move related to the virus rather than a criticism of management. “The negative outlook reflects (S&P’s) opinion of uncertainties, such as a recent uptick in the virus transmission rate that could negatively affect the city’s financial forecast, the trajectory for global tourism trends and additional federal stimulus funding for state and local governments, service reductions at the Metropolitan Transportation Authority that could affect the economic recovery within the region, and weakness in property tax values that will not be evident until fiscal 2023.” 

That last point is important. Regardless of the difficulties currently underway in the City’s real estate sectors, the fact that property values for tax purposes are adjusted over a five year period rather than within the FY that valuation impacts occur has a supportive effect on property tax collections.  

Fitch also downgraded to rating on NYC general obligation debt to AA- from AA. “The downgrade of the city’s IDR to ‘AA-‘ from ‘AA’ and one-notch downgrade on associated securities reflects Fitch’s expectation that the impact of the corona virus and related containment measures will have a longer-lasting impact on New York’s economic growth than most other parts of the country. This view is informed by the weak rebound to date in employment, real estate transactions, tourism and mass transit usage. Very low rates of employees returning to offices and the potential for a longer-term trend of lower office usage could exacerbate current economic pressures on the city’s credit profile.”

Another city to see its rating impacted negatively is Milwaukee. The pandemic was seen as an impediment to the placement of a sales tax initiative on the ballot. Without the additional revenue from a sales tax, higher state aid, or substantial expenditure cuts, the concern is that the city’s currently adequate reserves will deteriorate. This led Moody’s to downgrade the rating to A2 from A1 on the city of Milwaukee, WI’s outstanding general obligation unlimited tax (GOULT) bonds. The lack of additional revenues comes as the City faces pension costs which are scheduled to significantly increase under the city’s current pension funding ramp up period.

SALT RIVER NUCLEAR DEAL

One public utility has found away to increase its nuclear generating capacity without the accompanying construction risk in Arizona. The Salt River Project announced that its board has approved the purchase of part of Public Service Co. of New Mexico’s ownership share of the Palo Verde Nuclear Generating Station in Arizona. SRP was already one of the owners of the plant. Its purchase of 114 megawatts of Palo Verde’s output will increase SRP’s share of the plant from 17.5% to 20%.

The purchase of most of the power is expected to be completed in January 2023, followed by the remainder in 2024. SRP specifically cited the lesser risk of purchasing a share in an existing facility versus the cost and risk of new nuclear generation.  SRP needs to lower its carbon emitting generation capacity to meet its 2035 Sustainability Goals which call for a reduction of CO2 emitted by generation by 65% by 2035 and 90% by 2050. 

For SRP, it achieves several short term goals while approaching  nuclear in a far more cost and risk effective way versus the strategies being followed by MEAG and SCPSA in the southeastern U.S.

MUNICIPALS AND FOSSIL FUEL INVESTMENT

A couple of recent announcements show that the drive to force divestment in the fossil fuel industry which had hit financial and educational institutions is beginning to have its impact on municipal investment activities. The latest examples are Summit County, CO and New York State.

While the scope and timing of the two divestment programs are substantially different, the underlying factors driving the decision are similar. The County formally passed an ESG resolution which provided mechanisms for divestiture. This after the County passed its Climate Action Plan in 2019. The Treasurer’s Office has completed the sale of its last holdings of fossil fuel stocks from the County’s managed portfolio of investments.

In the case of New York State, the continuing pressure on the earnings of fossil fuel entities has made it easier to make a case for divestiture. The State had been loathe to make the decision purely on a policy basis. Now, the State will require companies to meet new standards requiring them to show “future ability to provide investment returns in light of the global consensus on climate change.”  The Fund is committing to sell its investments in any oil, gas, oil-services and pipeline companies that do not have clear plans to abandon the fossil fuel business. 

The fund is committed to selling its stakes in firms – including utilities, manufacturing, transportation  – if they do not eliminate such emissions by 2040. This phase of climate related investments came in  the face of an effort by the legislature to mandate changes in the investment policy. The announcement by the Comptroller comes under a formal agreement with the Legislature under which pending legislation on this issue was withdrawn.

ILLINOIS DEBT CHALLENGE GOES ON

The effort by a hedge fund investor to take advantage of a short strategy using credit default swaps by having some $16 billion of State of Illinois general obligation debt invalidated will have its day in the Illinois Supreme Court. While the fund investor has dropped out of the appeal, a state political activist who was the straw plaintiff is pressing on.

The case has so far been decided on matters of plaintiff standing rather than on the “merits” of the plaintiffs case. The Illinois Supreme Court will now deal with the facts of the case. The complaint alleged that Illinois’s 2003 and 2017 GO Bond issuances violated a provision of the Illinois Constitution that requires long-term debt to be for a “specific purpose” (Il. Const. art. IX, § 9), arguing that “specific purposes” include only “specific projects in the nature of capital improvements, including roads, buildings, and bridges.”

The complaint further alleged that the 2003 issuance of “Pension Funding Bonds” failed to satisfy this “specific purposes” requirement, because it allocated bond proceeds to be used to reimburse the State’s General Fund for past contributions to the State’s retirement systems. The complaint similarly alleged that the 2017 issuance of “Income Tax Proceed Bonds” failed to satisfy this “specific purposes” requirement, because it allocated bond proceeds to be used to pay past due bills related to general operating expenses.

We believe that the bonds validity will be upheld. The real problem with the case is that the standard for granting leave to file taxpayer suits has been reduced , as the court focused specifically on whether the proposed complaint was “frivolous” or “malicious” and on whether the petitioner’s claims were merely “colorable,” rather than placing the burden squarely on the petitioner to establish that reasonable grounds existed for filing the suit. This makes it more likely that suits such as this might be brought primarily for the facilitation of investment strategies which pay off in the case of invalidation.

ROAD TO RECOVERY

California State University (CSU) was the first state university to decide to conduct its full fall 2020 semester on line. Now, CSU announced that it is planning for an anticipated return to delivering courses primarily in-person starting with the fall 2021 term. It cited ” light at the end of the tunnel with the promising progress on vaccines.”  The announcement comes as high school and transfer students have until December 15 to complete their applications for fall admission. 

In as much as the system was an “early adopter” in the pandemic response, we think that it is significant that the move is being announced during the ongoing pandemic surge in California. CSU is, after all, is the largest system of four-year higher education in the country, with 23 campuses, 53,000 faculty and staff and 486,000 students. is the largest system of four-year higher education in the country, with 23 campuses, 53,000 faculty and staff and 486,000 students. It serves as an excellent indicator for how many systems are likely to respond.

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