Joseph Krist

Publisher

________________________________________________________________

MASSACHUSETTS CONSIDERS GAS TAX ALTERNATIVES

The Commonwealth of Massachusetts is considering legislation which would allow it to join with states like Oregon in implementing mileage based taxes on automobiles. The impact of alternative vehicles and increased fuel efficiency on gas tax revenues is well established. Now a bill has been offered to create a pilot program to test fees based on the miles people travel rather than the amount of gas used.

The idea is being considered as a part of a package of increased revenues for transportation. One plan would instruct the Department of Transportation to report on the feasibility of implementing all-electronic tolling on state and interstate highways “not currently subject to a toll.”  A second bill would expand tolls to stretches of Interstate 93, Interstate 95 and Route 2 in an attempt to apply equal charges to drivers across the Boston region. That bill also calls for implementation of dynamic “peak pricing” where the toll varies based on road conditions.

Another bill would increase the fees on ride-sharing companies such as Uber and Lyft. The state currently assesses a flat 20-cent fee on each ride through those services, regardless of length. The legislation would change that to a scaled percentage of the overall fare. Under the proposal, the fees would be 4.25 % of the total fare paid for shared rides and 6.25 % of the fare for a single passenger trip.

Reactions to the plan show the split in approaches between and among the ride sharing companies. Uber has come out general in favor of congestion pricing versus limits on the number of vehicles (like in NYC). In this case, Lyft  said in a statement that the company believes higher fees will not significantly reduce congestion. Such a position favors the ride sharing companies as it reduces funding for mass transit which has been the primary competitor targeted by these companies.

The Metropolitan Area Planning Council in July said the MBTA missed out on more than $20 million in foregone fare revenue from passengers who substituted  TNCs for public transit.  It is just another example of the clash of interests between private providers profiting through use of the public streets and providers of public mass transit. It is a battle without an apparent end.

However this saga ends, it highlights the ongoing need to fund public transit in an environment where many of those best positioned to fund or use it pursue alternatives. Until states and cities come up with a regulatory and taxing scheme which reflects the real benefit to the TNCs, transit funding will continue to be a clash with no real winners.

HEALTHCARE SPENDING DATA DRIVES CAUTIOUS CREDIT OUTLOOK

A colleague observed this week that AA and rated hospital credits traded anywhere from 40 to 100 basis points wide to AAA general obligation yields. We think that there is ample reason to ask for additional yield return when holding healthcare credits. Here is some data from the Centers for Medicare and Medicaid about costs which should give one pause.

National health expenditures (NHE) grew 4.6% to $3.6 trillion in 2018, or $11,172 per person, and accounted for 17.7% of Gross Domestic Product GDP).Medicare spending grew 6.4% to $750.2 billion in 2018, or 21 percent of total NHE. Medicaid spending grew 3.0% to $597.4 billion in 2018, or 16 percent of total NHE.

Private health insurance spending grew 5.8% to $1,243.0 billion in 2018, or 34 percent of total NHE. Out of pocket spending grew 2.8% to $375.6 billion in 2018, or 10 percent of total NHE. Hospital expenditures grew 4.5% to $1,191.8 billion in 2018, slower than the 4.7% growth in 2017. Physician and clinical services expenditures grew 4.1% to $725.6 billion in 2018, a slower growth than the 4.7% in 2017. Prescription drug spending increased 2.5% to $335.0 billion in 2018, faster than the 1.4% growth in 2017.

The largest shares of total health spending were sponsored by the federal government (28.3 %) and the households (28.4 %).   The private business share of health spending accounted for 19.9 % of total health care spending, state and local governments accounted for 16.5 %, and other private revenues accounted for 6.9 %. That state and local share poses a real risk to the states.

Under current law, national health spending is projected to grow at an average rate of 5.5 % per year for 2018-27 and to reach nearly $6.0 trillion by 2027. Health spending is projected to grow 0.8 percentage point faster than Gross Domestic Product (GDP) per year over the 2018-27 period; as a result, the health share of GDP is expected to rise from 17.9 %in 2017 to 19.4 % by 2027.

The report also provided a wide look at the geography behind the data although it is noted that the most recent year in the 15 year record was 2014. Nonetheless, in 2014, per capita personal health care spending ranged from $5,982 in Utah to $11,064 in Alaska.   Per capita spending in Alaska was 38 percent higher than the national average ($8,045) while spending in Utah was about 26 percent lower; they have been the lowest and highest, respectively, since 2012.

Health care spending by region continued to exhibit considerable variation. In 2014, the New England and Mideast regions had the highest levels of total per capita personal health care spending ($10,119 and $9,370, respectively), or 26 and 16 % higher than the national average.   In contrast, the Rocky Mountain and Southwest regions had the lowest levels of total personal health care spending per capita ($6,814 and $6,978, respectively) with average spending roughly 15 % lower than the national average.

So now the data provides a map of where higher growth in the expense side of the income statement might occur geographically. Combine that with the demographic trend of a longer lived aged population and the potential for limits on revenues and you have a risk profile which demands compensation. And remember, the elderly were the smallest population group, nearly 15 % of the population, and accounted for approximately 34 % of all spending in 2014. The question is how long will it be politically sustainable for healthcare to account for 1 out of every 5 dollars of economic activity?

PG&E WILDFIRE SETTLEMENT

Pacific Gas & Electric on Friday announced a settlement with insurers and others for several Northern California wildfires including the wine country blazes in 2017 and the fire that nearly destroyed the town of Paradise in 2018. The wine country fires in 2017 impacted more than 200,000 acres mostly in Napa County, destroyed or damaged more than 5,500 homes, displaced 100,000 people and killed at least 41. The Camp fire, which raced through Paradise in 2018, killed 86 people and destroyed more than 13,900 homes. 

PG&E already had agreed to pay $1 billion to cities, counties and other public entities, and $11 billion to insurance companies and other entities that have already paid claims relating to the 2017 and 2018 wildfires. This settlement is intended to help victims with no insurance and victims whose insurance was not enough to cover their losses. People have until Dec. 31 to file initial claims for a share from the trust fund that the settlement will create.

The settlement will largely reimburse insurance companies who have been largely taking the lead in funding recovery from the fires. Some $11 billion of the settlement will cover those costs. This highlights the importance of insurance in the recovery process highlighting the concerns around the willingness of the insurance industry to write business in the state. A one year regulatory halt to non-renewals is only a band aid while the industry and the state seek to craft longer term solutions to the ongoing wildfire risks in California.

Insurers have responded by raising rates, re-underwriting the risk, purchasing additional reinsurance if available and reconsidering risk models. The moratorium applies retroactively to the October 2019 state of emergency declared by current Governor Gavin Newsom, and insurers will need to offer to reinstate or renew the policies that have not been renewed or were canceled since October because of wildfire exposure.

OIL STATES TAKE DIVERGENT REVENUE PATHS

Texas sales tax revenue for November set a record for any month at $3.18 billion, an increase of 6.2% over the same month last year, state Comptroller Glenn Hegar reported. In the same month, neighboring Oklahoma recorded its first drop in monthly receipts in more than two and a half years, Treasurer Randy McDaniel reported.

The drop in revenue in Oklahoma is another sign of the weakness in reliance on one major industry. Oklahoma’s less diverse economy has already seen negative impacts in its agricultural sector due to the ongoing trade wars. Less prominent has been the fact that lower oil prices are impacting the state economy as well.

The news about declining Oklahoma revenues comes in the wake of recent announcements by Halliburton that it was making permanent the loss of some 1500 jobs in the state. These were not layoffs but absolute cuts in headcount. Oil services are an important source of well paying jobs so this does not bode well for Oklahoma’s near term revenue outlook. Recent moves by international producers to prop up prices highlight the weakness in oil pricing.

On the positive side, the Texas economy continues to reflect the increasing diversity of its economy. The Lone Star state benefits from migration and increasing employment away from the oil industry. That accounts for the positive revenue growth trend in Texas versus the negative trends in Oklahoma.

PRIVATE STUDENT HOUSING

Another private student housing deal has come under credit pressure as colleges and universities confront pricing and demand issues. The latest is at Claremont College in California.

A privately operated and financed housing facility saw the rating on outstanding debt (NCCD – Claremont Properties LLC’s (CA) University Housing Revenue Bonds) from 2017 was downgraded by Moody’s to Caa2. The rating change reflects  insufficient project revenues to cover operating expenses and debt service obligations, weak market position and demand that will prolong financial distress, and an imminent tap to the debt service reserve fund (DSRF) to supplement net operating income to pay semi-annual bond debt service.

Moody’s cited the fact that “the project’s 60% occupancy rate generates insufficient revenue to cover budgeted operating expenses and debt service obligations. As a result, the borrower has requested that pledged revenue be disbursed to pay operating expenses prior to required deposits to the bond fund for debt service.” Most importantly, the rating also incorporates that there is no express or implied guaranty from the universities. Though The Claremont Colleges, Inc. (Aa3 stable), Keck Graduate Institute (KGI), and Claremont Graduate University (CGU, Ba1 negative) have entered into cooperation agreements with the project, the institutions do not provide any assurances that it will take any actions to avoid a default of the project’s bonds.

The lack of a guaranty is not unusual nor is it unusual that existence of cooperation agreements does not lead to financial pledges. This has been an item of concern especially for private partners in these transactions who have often operated under the erroneous assumption that promises to direct students or to include privately operated living facilities in the array of choices available to students of a given institution imply an obligation to provide financial support to these projects when they fail to meet occupancy and/or profitability targets established by those operators.

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.