Joseph Krist

Publisher

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NASSAU COUNTY

The Nassau Interim Finance Authority (NIFA) took control of the finances of the public benefit corporation running Nassau University Medical Center, saying the hospital’s condition “poses a material threat” to the county. NuHealth, the public benefit corporation that is the medical center’s parent, had a cumulative loss of $193.9 million between 2015 and 2018. The resolution adopted by the Authority allows NIFA to “take whatever actions they deem necessary or appropriate” to enforce the resolution placing NuHealth under NIFA’s control. This is effectively the kind of oversight which the Authority exercises over the County. They will not run the hospital but will have significant sway over those who do.

NIFA controls could lead to imposition of an employee wage freeze and requirements that NUMC submit contracts, budgets and union agreements to the control board for approval. NUMC showed cumulative losses of $193.9 million between 2015 and 2018, according to the NIFA resolution. It estimates operating losses were $46.6 million in 2018, compared with $25.7 million in 2017.

NIFA’s basis for intervening is the guarantee of some $188 million of debt by Nassau County. NIFA has determined that current trends will exacerbate the hospital’s problems and is an unacceptable risk for the County. There  is a long record of county owned and operated hospitals experiencing operating losses which were funded by the counties. Ultimately, those situations would have significantly hampered general county finances so spinoffs of those institutions generally resulted.

The decision to impose oversight comes at a time of great uncertainty for safety net providers in the State. Sharp increases in Medicaid costs are at the center of the State’s current budget debate as the Legislature grapples with an estimated $6 billion budget gap for the fiscal year beginning April 1. It is therefore unlikely that the County will be able to rely on additional outside funding for its operations. This makes the oversight role of NIFA even more important.

PUERTO RICO

An agreement with bondholders announced by the Commonwealth’s federally created financial oversight board Is estimated to effectively eliminate some $24 billion of debt. The deal would reduce $35 billion of bond debt and other claims to about $11 billion.  Bondholders would face average haircuts of 29% for GO bonds and 23% for PBA bonds. This is less than proposed  haircuts of 36% to 65% that were included in the September plan of adjustment. According to the PROMESA board, “lowers total debt payments relative to the agreement we reached last year, pays off commonwealth debt sooner, and has significantly more support from bondholders, further facilitating Puerto Rico’s exit from the bankruptcy that has stretched over three years.”

Pensions remain at the center of the negotiations. The board has been seeking a maximum 8.5% cut for retirees who receive more than $1,200 in monthly benefits. Pensioners and the Governor of Puerto Rico insist that if the bondholders position improved that their position should also improve.

Of importance to investors is that the deal if ultimately adopted calls for the Commonwealth to stop its efforts to have some $6 billion of Commonwealth debt declared invalid. Those bonds, issued between 2012 and 2014 were the subject of litigation which contended they were issued in violation of Puerto Rico’s constitutional debt limit. Under the terms of the revised proposal, creditors would receive $10.7 billion in new debt, divided between GO bonds and sales tax-backed junior lien bonds, along with $3.8 billion in cash. Positively, the plan also reduces the timeframe to retire the Commonwealth’s legacy debt to 20 years from 30 years.

Regardless of how negotiations over the restructuring of the Puerto Rico Electric Power Authority (PREPA) end up, it appears that a giant opportunity is being squandered to create a more sustainable and viable electric utility. This week, the executive director of the Fiscal Control Board, said that PREPA is “arms crossed” on the negotiations of renewable energy projects for Puerto Rico. “As of today, PREPA has not finished any discussion and, much less, some negotiation with renewable energy producers so that the people of Puerto Rico benefit from cheaper, cleaner and more reliable energy. To the extent that PREPA remains arms crossed, the people continue to be penalized while unsustainable rates are paid month by month.”

We have consistently argued since the immediate aftermath of Hurricane Maria that an opportunity had been created to reimagine the island’s utility grid. We advocated for the greater use of renewables to take advantage of Puerto Rico’s abundant wind and solar exposure. We also advocated for the creation of microgrids centered around diverse local sources of generation. Since that time, the recent experience of earthquakes highlighted the attractiveness and viability  of local generation and distribution. In the limited  number of jurisdictions with access to these modalities, the disruption from the earthquakes was mitigated. So the case is being made. Just like so many other things in Puerto Rico, populism and politics keep getting in the way.

The perception of a government less than focused on efficiency was supported by the news that the finance director of the government-sponsored Puerto Rico Industrial Development Company said in the police report that the island’s government had unwittingly handed over $2.6 million to thieves after being fooled by a bogus email message. An email message contained instructions to transfer money intended for the public pension system to a different bank account than had been used before. The finance director  said his office sent the money to a foreign account on Jan. 17. They are not alone. Another government entity, the Puerto Rico Tourism Company, had been fooled into transferring $1.5 million. 

It has been noted that training for the Commonwealth’s work force was less than sufficient. One observer noted “Training is forgotten because it costs. Hospitals have to have them because they have to comply with regulations. Government agencies have no regulations.”

TRANSPORTATION

Legal proceedings challenging Washington State Initiative 976 are underway. The Initiative passed in November. It limits most taxes paid through annual vehicle registration at $30 and largely revokes state and local authority to add new taxes and fees. A coalition of cities, King County and Garfield County’s transit agency sued to overturn the Initiative which the state Office of Financial Management estimates would cost the state and local governments more than $4 billion in revenue over the next six years.

While the legal process plays out, local transportation agencies have been raising the specter of unpalatable cuts. Seattle said it would have to cut 110,000 bus hours. Garfield County said it would have to halve the transportation services it provides to help seniors and disabled people.

The hearing follows a ruling from the same court in November that the initiative’s ballot title was misleading because it said the measure would “limit annual motor-vehicle-license fees to $30, except voter-approved charges.” The judge has already indicated that the litigation against the initiative would succeed.  He believes that the language in the initiative referring to “voter-approved charges” led some voters to believe that existing local funding sources would not be affected.

The effort to defend the Initiative is part of a long battle waged by an anti-tax activist who is now running for Governor. Previously, he had sued to stop the car tab taxes unsuccessfully. He believes that the initiative would allow for the end of voter approved taxes in the Puget Sound region used to expand Sound Transit.

Meanwhile, Seattle’s southern neighbor Portland, OR has decided to ask voters to approve a 10-cents-per gallon gas tax in May. The tax would continue the gas tax program for another four years. Portland voters approved the gas tax in 2016 with 56% of the vote.

WHO’S STREETS? OUR STREETS!

We will employ this headline for our ongoing observations of the transportation sector especially as it involves “micromobility”. We were struck by two recent themes we saw expressed in current literature on the subject. One put forth the view that cities have “lost” the technology battle. The other unwittingly showed where the problem lies.

In a sector that is evolving as quickly as the “micromobility” space, it is not realistic to expect that municipalities could be prepared for the essentially lawless approach that so-called transportation disrupters would take. It’s clear that the approach reflects a conscious decision that it is somehow better or easier to deploy a given modality without consideration for any regulatory process. Whether it is ride sharing, rental bikes, or motorized devices, the proven practice has been to deploy often without any attempt to engage with local jurisdictions. That is of course until the problems associated with them generate enough public support for action.

The question is what are local jurisdictions supposed to do when a particular player insists on deployment under its terms or not at all. A current example is the ongoing dispute between Uber and the City of Los Angeles over the City’s regulation of electric scooters. The City Council last year adopted a pilot program that regulates the number of electric bicycles and scooters each company can have in its fleet. After demonstrating compliance with program requirements and meeting certain performance criteria, LADOT can allow companies to increase their fleet size.

The approval of e scooters by the City accompanied the rollout of the City’s Mobility Data Specification (MDS) technology. It is designed to receive real time trip data each scooter is equipped to provide. It has been the subject of robust debate within the industry as providers struggle to placate the City while addressing the perceived privacy concerns of its users. MDS can be used to inform policy decisions, like where to put a protected bike lane or how to ensure low-income residents have access to dockless vehicles. It also allows the agency to use MDS to send instructions back to the mobility companies. That enhances the City’s ability to address issues like illegal parking of scooters especially in places like sidewalks.

Of the major scooter providers (Uber owns JUMP), only Uber refuses to provide the data. Consequently, the City has banned JUMP scooters and bikes from its streets. In keeping with its annoying history, Uber has chosen to fight the regulation in court. So how is this a failing on the part of the City? They made a rule, implemented and enforced a regulatory structure and one potential provider did not like it. Unsurprisingly, Uber suffered another defeat legally when a city hearing officer upheld the Los Angeles Department of Transportation’s temporary ban on Uber’s JUMP e-bicycles.

At some point, the industry will realize that they do not own the streets and that government has a duty to regulate the use of those streets. Especially, when private entities seek to exploit those streets for private gain at the expense of public facilities and services. For an example of how these things can work, look to the recent approval of a pilot program for electric bikes and scooters approved in Jacksonville, FL. The State of Florida legalized e-scooters and similar devices throughout the state in June through   House Bill 453 which provides for Florida cities to regulate micro mobility devices. For a company to install a corral and operate scooters in Jacksonville there will be permit, renewal and annual fees. The companies also will have to purchase performance bonds for each device up to $10,000. The program sets travel boundaries for the electric scooters and bikes.

TRUMP INFRASTRUCTURE PROPOSAL

The proposed FY 2021 budget from the Trump Administration includes an $89 billion budget request for USDOT FY 2021 funding – a nearly 2 percent increase above FY 2020 appropriations, of which $64 billion would come via the Highway Trust Fund (HTF). The request is step one in a proposed 10 year plan to invest $86 billion in infrastructure annually through 2030. The administration noted, however, that its request for $21.6 billion in discretionary transportation budget authority for FY 2021 is a $3.2 billion or 13 percent decrease from what was enacted for FY 2020.

The proposed $810 billion, 10-year surface transportation package would increase spending by 12% over the amount the Congressional Budget Office of current surface transportation funding projection based on existing law. That would produce an average annual investment of $60.2 billion for highways over the decade, with $15.5 billion yearly for transit, $2 billion for National Highway Traffic Safety Administration and Federal Motor Carriers Safety Administration, $1.7 billion for rail, and $100 million for pipeline and hazmat safety. A serious proposal would have included ideas for fully funding the program. Efforts to impose higher fuel taxes and/or vehicle mileage taxes should be at the center of any of those discussions and there is support for both.

Ironically, the budget does include non-fuel based fees for infrastructure financed through the Inland Waterways Trust Fund. Here the budget offers ideas such as a per vessel tax on commercial boats. Contrast this with the road proposals where the Highway Trust Fund is facing a cash shortfall in FY 2021 and FY 2022. This proposed budget for FY 2021 seeks to eliminate general fund supplements to transportation outlays made by Congressional appropriators in recent years and seeks to build those additional dollars into affected program baselines, supported by the HTF rather than the general fund.

AIRPORTS

The Des Moines, IA Airport board voted in 2016 to build a new terminal at the airport grounds and rebuild the runways. The total cost of the overhaul was estimated at about $500 million. Some $300 million in funding has been identified for the project relying on a combination of sources including cash on hand, passenger and airline fees, authority-issued bonds and grant money.  The last 40% of the funding gap has been hard to fill.

One source which will not be tapped is private facilities to be constructed at the airport. In the case of Des Moines, there was a proposal to build a casino and hotel on the airport’s grounds. The project proponents claimed that the project could generate some $194 million for the airport capital plan. Like so many projects like this, the motives of a proposed developer have gotten in the way much as they did in St. Louis.

Here’s the catch. There is one casino operating in Des Moines and Polk County. It originated as a race track and as that industry declined, casino gambling provided greater potential. So 16 years ago, Des Moines, Polk County and Prairie Meadows Casino and Hotel entered into an agreement that requires elected officials to reject any proposed new casino in the city or county in exchange for a share of gaming revenue from the casino. The city receives about $6 million in gaming revenue annually from the county-owned Prairie Meadows.

So this drives the airport board to look at traditional financing away from a P3. Federal and state grants and passenger facility charge revenues are the likely sources. This is where the current state of federal infrastructure policy (or more correctly the lack thereof) comes in and highlights the role of municipal bonds. The level of passenger facility charge caps is a constant source of conflict between air carriers and airports. Many airports would love to raise the charges above their currently capped $4.50 level. That would require federal legislation to lift the cap.

In the absence of some policy consensus at the federal level, raising the PFCs looks like the easy thing to do. Of course, this debate will occur during both an election year and a likely much less profitable year for the airlines as they grapple with the corona virus issue. So an increase in PFCs is hardly a foregone conclusion. If it does happen, we would expect to see a flurry of municipal bond financings for airport improvements.

RATINGS AND GOVERNANCE

We were struck by the juxtaposition of two headlines regarding recent developments in the credit supporting debt issued by the Town of Oyster Bay, NY. The first covered the engagement of a consultant to improve the City’s disclosure under the terms of a settlement agreement with the Securities and Exchange Commission (SEC). In November 2017, the SEC charged Oyster Bay and a former Oyster Bay supervisor with defrauding investors in Oyster Bay’s municipal securities offerings by hiding the existence and potential financial impact of side deals with a businessman who owned and operated restaurants and concession stands at several town facilities.  Oyster Bay agreed to settle the case by agreeing to permanent injunctions against violating the antifraud provisions of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and to the retention of an independent consultant to advise the town on its policies, procedures, and internal controls regarding its disclosures for securities offerings.

At the same time the formal engagement of the consultant was announced, Moody’s announced that it has upgraded the town’s issuer and general obligation limited tax (GOLT) ratings to Baa2 from Baa3. The outlook remains positive. According to Moody’s, “the upgrade to Baa2 reflects recent improvements to the town’s financial position resulting from cost cutting and substantial tax increases as well as improved liquidity eliminating the need for annual cash flow borrowing and successful resolution of the bulk of the town’s legal problems, including the SEC suit, without material ill effects. The issuer and GOLT ratings also reflect the town’s large tax base, strong resident wealth and income, exposure to litigation, and weak, albeit much improved, financial position.”

From our standpoint, the move essentially imposes no cost to the Town in terms of its ratings even though it engaged in practices intended to deceive. It might have been more appropriate to maintain the rating even with a positive outlook. This would recognize that the Town has indeed made fiscal progress without rewarding the governance failures which led to the SEC investigation and settlement. Let the Town put out clean financials and honest sale disclosure before effectively rewarding it.

Our view is that individual investors continue to put too much faith in the rating agencies to protect them from bad actors. Whether that is the appropriate role for rating agencies is up for debate but given the fact that they are trying to stake out positions and roles associated with the growth of the ESG sector on the buy side, they need to decide quickly what constitutes good governance. Oyster Bay was an opportunity to establish some benchmarks but instead the opportunity was passed up.

AUTONOMOUS VEHICLES

A House hearing on autonomous vehicle deployment served to highlight many of the issues holding back implementation and regulation of these vehicles. The testimony served to highlight the potential of AV technology to address issues such as safety and improved access for the elderly and disabled. At the same time, it also drew attention to the many areas of concern the public has with many aspects of AV deployment.

The hearing did not address measures that should be taken if a human needs to override; for example, if a human needs to take over and operate a vehicle, a steering wheel and pedals might be useful in this endeavor. Issues around cybersecurity were raised.  One Congressperson raised the potential for “bad actors to hack and commandeer vehicles.”

One other issue holding things back is the issue of liability. Current safety standards and insurance practices and regulations assume that humans are operating vehicles. As one witness put it, “the difference between an automated vehicle and a human-driven vehicle is a promise. It is a promise from the manufacturer of that automated driving system that they will operate the vehicle safely on our roads.”  

The resolution of insurance and regulatory issues will be a key to full implementation of AV technology on the nation’s roads. This places government at all levels at the center of the process of resolving these issues. It is another example of a question we asked earlier – Whose streets?

HEALTHCARE

The federal government continues its efforts to limit access to healthcare through the Medicaid program. In addition to its efforts to limit expansion of the program and overturn Affordable Care Act provisions supporting it, it is now using the regulatory apparatus to add layers of bureaucracy to the process. The latest example is this week’s announcement that the Centers for Medicare & Medicaid Services (CMS) has issued a proposed Medicaid Fiscal Accountability Rule (MFAR).

The rule would among other things establish requirements regarding state plan amendments (SPAs) proposing new supplemental payments, and addresses the financing of supplemental and base Medicaid payments through the non-federal share, including states’ uses of healthcare-related taxes and provider-related donations, as well as the requirements on the non-federal share of any Medicaid payment. 

States have reacted negatively. The proposed changes would make it harder for states to manage the use and allocation of its (as opposed to federal resources) own resources. The proposed amendment would clearly limit permissible state or local funds that may be considered as the state share to state general fund dollars appropriated by the state legislature directly to the state or local Medicaid agency; intergovernmental transfers (IGTs) from units of government (including Indian tribes), derived from state or local taxes (or funds appropriated to state university teaching hospitals), and transferred to the state Medicaid Agency and under its administrative control; or certified public expenditures (CPEs), which are certified by the contributing unit of government as representing expenditures eligible for federal financial participation (FFP).   

It is hard to see how the reporting and data production asks being made under the proposed rule reflect much more than a desire to cut the federal share of healthcare funding. That would likely result in a higher cost burden for states as they would be looked to for the funding of charity care in an era of lower overall reimbursements. That would be credit negative for both government and the provider sector.

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