Joseph Krist

Publisher

________________________________________________________________

IS CONGESTION PRICING HITTING A ROADBLOCK?

It has been the expectation that the era of congestion pricing in the US would officially begin on January 1, 2021. When the NYS Legislature authorized the City of New York to impose a scheme of congestion pricing to fund part of the Metropolitan Transportation Authority’s (MTA) massive capital funding needs, the goal was for the charges to begin on that date. This would provide time for the Legislature to work out the details of such a plan and the expectation was that the State’s budget process would lead to  the development of a full mechanism for the collection of the charges and the distribution of any resulting funds.

Now it looks as though achieving a January 1 start will be difficult if not impossible. That is because the pricing scheme must be approved by the US government – the Department of Transportation – as the result of federal funding for the MTA. That approval process also includes an environmental impact component. Therein lies the rub. The State and the City would be responsible for producing an analysis of the environmental impact of the plan. It would help if they knew to what level of analysis the feds would require any assessment to meet. Alas, the federal government has sat on the decision for the last ten months  and now the planning process is held up.

The issue is – does New York State and New York City have to undertake a more limited environmental assessment or a complete “environmental impact statement? It is a big deal because of the serious time implications of such a decision. A report by the National Association of Environmental Professionals on reviews concluded in 2018 cited academic data that showed that for agencies like the MTA that have conducted environmental impact statements with the Federal Highway Administration, it took an average of 2,691 days to complete the process. The shortest time any agency completed such a review with any agency in the federal government was 637 days.

With the State and the Trump Administration at virtual war right now over immigration policy, it would not be realistic to expect any help from the Administration. So it becomes increasingly unlikely that we see any monies paid until the approvals are secured. There also has to be time reserved for the inevitable flow of  litigation which the final regulations should generate. Those are ironically not anticipated to be made public until mid- November.

The situation begs the question of whether or not a full environmental review process just should have been part of the process to begin with. It is easy to become suspicious of just what everyone is afraid of as the result of a full review? Would proponents case for environmental benefit be undercut? Would the impact on the economy cause opposition? Would it support expanded use of the concept both in New York City and in other jurisdictions nationally? Why can’t supporters of significant policy changes based on issues like the environment just do the research, make the case, and then get on with making it successful?

It is a sign of how politically rather than policy driven so much of the current debate over climate, environment, and issues like “car culture”, “micromobility”, and the like find themselves. Government finds itself in the middle of the implementation conundrum. It is easy to criticize government – especially smaller less sophisticated levels of government – for their response to cultural and technological change. The situation in which New York’s congestion pricing scheme finds itself illustrates the difficulty government and therefore municipal credits face when  dealing with these sorts of issues.

FLORIDA UTILITIES

HB 653 is a bill pending in the Florida legislature which would forbid cities from using utility revenue for anything other than the maintenance and upgrade of the utility system’s infrastructure. Attention is being paid to the bill which does not have a companion bill in the Senate as local officials are rallying against it. The debate highlights a phenomenon which has been around for a long time.

Utilities have long been used to keep property tax rates lower primarily for residential properties. The political logic is pretty clear. The idea was that the electric rates paid by large commercial/industrial customers would not be such a significant marginal cost to those entities that they would care. Over the years, cities came to be reliant on often significant annual transfers of revenues out of municipal utilities.

How reliant? Recent press accounts cite examples like the State Capital in Tallahassee where $31 million was transferred to the City’s general operating funds, Jacksonville transferred $118 million to the city’s general revenue fund this fiscal year, and Gainesville’s utility provided $38 million (30%) for general revenue. So it is a significant issue in the Sunshine State. That easily explains the effort to derail the bill early in the legislative process. For utility investors, such a ban would reduce the level and timing of future rate increases. These would expect to be offset by a payment in lieu of taxes mechanism of some other which would require the utility to generate revenues for direct city use.

Nonetheless, the cities should be concerned. Obviously, that level of concern should reflect the proportion of operating funding derived from transfers. It’s generally a subject which comes up in times of fiscal stress on the part of entities on either side of the equation. When those pressures lead one side of the equation to seek changes in the rate of transfer, real credit implications can result.

More recently, it reflects the increasing attention being paid to the issue of infrastructure and the electric grid in particular. The understanding on the part of electric consumers and their desire for more flexibility in their own utility sourcing decisions increases daily. This places more attention on operating and economic efficiency with direct pressure on costs. This will only increase with the development of battery technologies, microgrids, and less centralized generation. Those pressures will be driven from the bottom up as climate change, sustainability, and other environmental issues alter the utility landscape.

PUERTO RICO

“The elected government of Puerto Rico does not support a plan based on the [February] Plan Support Agreement because the government has concluded that the current terms — standing alone — are not in the best interests of the people of Puerto Rico. And, without government support for the PSA and Amended Plan [of Adjustment], the Amended Plan cannon become a reality.” So now we see where the political establishment stands in what should be seen as a reinforcement of the belief that until populism ceases to be the primary driving force in the debt resolution process, that process will not result in resolution of the Commonwealth of Puerto Rico’s debt problems.

Puerto Rico’s Fiscal Agency and Financial Advisory Authority filed an objection to a central government debt-restructuring plan. Cutting through the technicalities, the motion indicates that further concessions to bondholders can only be seen as being detrimental to pensioners. Other legal moves saw the Ad Hoc Group of General Obligation Bondholders, Ad Hoc Group of Constitutional Debtholders, Assured Guaranty Corp, Assured Guaranty Municipal Corp., and Invesco Funds filed a motion to dismiss the board’s and the Unsecured Creditors Committee’s challenges to late vintage GO and Public Building Authority bonds.

It seems that there is little appetite for negotiation outside of legal proceedings. That is not positive at all.

PRIVATE HIGHER ED CREDIT SIEGE CONTINUES

We have hammered the point home for some time in a variety of forums about the enormous pressure small private college/university credits are under. Demographics are trending against maintaining demand over the short run. Those institutions depending on ongoing demand to generate tuition revenues will continue to display rating distress. We saw yet another example with the recent action by Fitch Ratings to downgrade the ratings on Immaculata University  to ‘BB-‘ from ‘BB’.

Immaculata was the first Catholic women’s college established in the Philadelphia area and it celebrates its centennial in 2020. recent times have not been kind as full time equivalent (FTE) enrollment declined by about 18% between fiscal years 2016 and 2019. That trend did end with a 3% increase in enrollments but it was achieved through an acceptance rate of over 80%. That is because on 20% of those accepted enroll.

The fundamental credit weakness in  the current environment is the fact that student-generated revenues constitute approximately 90% of university operations. Fitch notes that ” Immaculata’s student base exhibits an elevated level of price sensitivity, as even modest increases in net tuition and fee revenues are likely to result in further demand pressure.”  

Currently FTE enrollment is approximately 1,700 students in 53 undergraduate majors, seven master’s degree programs, three doctoral degree programs, and over 40 additional professional endorsement, certificate and certification programs. This puts the University right in the middle of a large pool of comparably sized and oriented private institutions competing for a currently limited demographic cohort.

We continue to believe that this sector is one to currently avoid. This is more evidence in support of that view.

INTERNATIONAL STUDENT ACCESS UNDER PRESSURE

Each year, the International Educational Exchange releases its Open Doors report on enrollment trends for international students. International students make up 5.5% of the total U.S. higher education population. According to data from the U.S. Department of Commerce, international students contributed $44.7 billion to the U.S. economy in 2018, an increase of 5.5 percent from the previous year. Because of that economic impact and the importance of these usually “full fare” students, they have become increasingly important to universities in particular.

There have been ongoing concerns that the immigration policies of the Trump administration might put a damper on demand from that sector. There have been a variety of reports on the difficulties students from a wide variety of countries have experienced with obtaining visas and visa renewals.  Overall, data shows that international student enrollments in the US increased 0.05% in 2019. One would have expected more robust demand absent conflicts with China and nation specific limits and bans.

One institution which is not happy with the current regime is the University of Illinois at Urbana-Champaign. It has the fifth-largest population of international students in the country. , according to the 2019 Open Doors. More than 15,000 are enrolled in the university system, including the Chicago campus. UI is at the forefront of a group of presidents and chancellors from nearly 30 colleges and universities in Illinois are pushing for lawmakers to do more to help international students and scholars who face new obstacles tied to immigration policy.

The group has sent a letter to the Illinois congressional delegation expressing “concern about changes in immigration policy and procedures that undermine the ability of our institutions — and the state of Illinois — to continue benefiting from the important skills and contributions of international students and scholars.”  That concern reflects academic concerns but also the fact that more than 53,000 international students went to colleges and universities in Illinois, according to the Open Doors report – contributing $1.9 billion to the state’s economy. 

It matters and is a situation worth continued monitoring.

DISCLOSURE

Recently, the various facets of the disclosure issues facing the municipal bond market were indirectly debated in an industry publication. And as expected, it featured the usual litany of reasons why investor demands for timely information are so difficult to fulfill. After some five decades in the municipal credit analysis sector, I have to admit to a high level weariness with the laments of issuers of various sizes and structures and their difficulties in meeting those demands.

My views are built on a foundational view that one knows the rules associated with access to the public securities markets. It is not that we don’t understand that there is a very wide range of municipal issuers and municipal credits. A single regulatory mandate does not fairly address everyone and every credit. That is not what the investing community is asking for and it is simply disingenuous to imply otherwise. And it becomes tiresome to hear arguments about the massive costs that good disclosure would create for ” taxpayers and rate payers who end up paying more for necessary infrastructure projects.” Please do not tell me that if it wasn’t for those pesky municipal bond analysts we could magically have more infrastructure.

There are reasons why private entities remain so when they are staring out or as they remain successful but at a smaller scale. These  entities often survived and thrived without the use of or access to private capital. They also have to provide less ongoing financial disclosure. Many of the sources of finance which supported those ventures have admittedly changed and become more concentrated. At the same time, the overall level and global availability of capital has created a whole new universe of funding outlets.

That creates opportunities for those who are prepared to compete in the current digital world. Instead of creating never ending hurdles to disclosure, the issuer  community would be better served putting its efforts into trying to generate and provide the kind of information which would serve to expand rather than limit our market. With every day the financial markets become more globalized. It may be that some levels of municipal bond issuer may not be able to access those markets (especially the international space). That means that there needs to be a better match between issuer and investor. That may mean that less fulsome and timely disclosure may still satisfy some investor classes while restricting access to others. Sorting that out is what markets do.

The challenge to issuers is to find and if necessary develop demand for their debt at a level of disclosure which is mutually satisfactory.  That could be bond banks, direct loan relationships with private lenders both bank and non-bank, or with state or municipally owned banks. The answer for those who trade and invest through the public markets should never be one which encourages less transparency.

NYS BUDGET

With some 40 days to go before the New York State budget must be enacted, the State Comptroller Tom DiNapoli has weighed in with his analysis of the Governor’s proposed fiscal 2021 budget. School Aid would increase by $826 million, or 3%, to $28.5 billion in the coming school year. This increase is less than the 4% growth allowable under a statutory limit related to personal income in the state. Funding for most local governments aid programs would be held flat, continuing a trend in recent years of decreases or level funding in such areas. These include Aid and Incentives for Municipalities, also known as AIM, the largest unrestricted aid program for local governments, as well as major funding for streets, highways and bridges.

Total capital spending over the current and next four years is projected at $66.7 billion, little changed from the estimate based on the SFY 2019-20 Enacted Budget. Projected transportation spending is increased $3.3 billion, partly offset by certain unspecified reductions from the previous plan. The budget would appropriate $3 billion for the Metropolitan Transportation Authority’s 2020-2024 capital program, although funding sources are not identified. 

The State’s own spending on Medicaid rose by nearly $10 billion through the decade ending in State Fiscal Year (SFY) 2018-19. While most of that growth was expected, unplanned cost increases more recently led to deferral of $1.7 billion in Medicaid payments from the end of SFY 2018-19 into the current year. The Division of the Budget anticipates a second consecutive deferral of $1.7 billion, into the coming fiscal year. The SFY 2020-21 Executive Budget Financial Plan relies on unspecified actions to generate $2.5 billion in Medicaid savings during SFY 2020-21, with the savings amount projected to rise to $3.5 billion within three years.

The budget recommends presenting a $3 billion Restore Mother Nature General Obligation (GO) Bond Act to the voters that, if approved, would provide funding to restore habitats, reduce flood risks, improve water quality, protect open space, expand the use of renewable energy and support other environmental projects. The budget would authorize an additional $10.3 billion in new state-supported debt, all to be issued by public authorities except the proposed $3 billion Restore Mother Nature GO Bond Act. Outstanding state-supported debt is projected to rise 20.3%, and annual debt service 48.4%, by SFY 2024-25. The Executive anticipates elimination of 2,500 state prison beds in the coming fiscal year, and a $181.5 million reduction in spending for the Department of Corrections and Community Supervision, partly reflecting budget language that would authorize additional prison closures. The Financial Plan assumes a deposit of $428 million to the Rainy Day Reserve Fund at the end of the current fiscal year.

The State has long been a utilizer of creative accounting maneuvers and the coming year is no exception. The Comptroller gives particular attention to recent actions In recent years which he feels serve to obscure actual spending increase amounts. The Executive has set a non-statutory goal of limiting annual growth in State Operating Funds spending to no more than 2%. The Financial Plan includes a number of budget actions – including timing-related adjustments, program restructurings, shifts and new categorizations of spending and other steps – that cloud the picture of spending growth. The readily identifiable actions described in this report are expected to reduce SFY 2020-21 State Operating Funds expenditures by a net of approximately $1.1 billion. Adjusting for such differences, State Operating Funds spending in the coming year would increase by 3.1 percent, compared to the 1.9 percent presented in the Executive Budget Financial Plan.

SANTEE COOPER SALE UNDER CONSIDERATION

The South Carolina Legislature has received information on three bids which have been submitted for the purchase of the South Carolina Public service Authority from the State. Dominion Energy, and NextEra energy of Florida were both chosen as possible companies that could take over. Santee Cooper itself also submitted a bid that is still on the table as it hopes to stay its own entity.

The bid from NextEra seems to be getting the most attention. NextEra is ready to pay off the Santee Cooper’s debt, provide refunds and rebates to customers, and settle an important class-action ratepayer lawsuit over a failed nuclear plant expansion. At the same time, NextEra wants the Legislature to “pre-approve” 800 megawatts of new solar generation; an expansion of Santee Cooper’s Rainey gas-fired power station in Anderson County; and the construction of a new, 1,250-megawatt gas-fired plant in Fairfield County. Here’s the catch. NextEra also wants assurances that it can bill customers for those plants if the projects are scrubbed because of state or federal regulatory changes, like a nationwide tax on carbon emissions.

The plan also anticipates that it would cut more than 40% of Santee Cooper’s workforce — some 700 employees. Dominion Energy also entered an offer to take over Santee Cooper’s management but leave the utility under state ownership. The House and Senate’s budget committees each must pick their preferred bid within the next month. Santee Cooper has already charged its direct customers and the members of South Carolina’s 20 electric cooperatives roughly $670 million for the abandoned Sumner nuclear project. Santee Cooper’s nuclear-related debt now stands at $3.6 billion.

State officials reached out to 55 companies and received interest or bids from 10 businesses. The Governor has thrown his support behind the NextEra bid. As for bondholders, the choice would be between the Santee Cooper bid and the investor owned utility bids. A private owner would have to defease the existing Santee Cooper debt. If Santee Cooper remains the owner, the debt would remain outstanding and the bondholders would continue to face the risk of potential litigation. NextEra’s proposal offers slightly higher rates in the long term but, it provides money to settle a major lawsuit brought by ratepayers over the failed V.C. Summer project. The Santee Cooper offer features lower rates over the next 20 years but no certainty as the utility heads to court in April. 

CANNABIS GROWS

The Colorado Department of Revenue’s Marijuana Enforcement Division reported that 2019 generated $1.75 billion in sales of legal cannabis. This represents a new high in sales and is a 13% increase in sales from 2018. Since legalization and the commencement of sales in 2014, sales have totaled $7.78 billion.

Taxes, license, and fee revenues for 2019 accruing to the State were $302,458,426. This raised the State’s total revenue take from these sources at $1,207,966,842. For FY 2015-16, the first $40M of the Retail Marijuana Excise Tax revenue was distributed to the PSCCAF. Excise tax collections in excess of $40M, $2.5M for FY 2015-16, were transferred to the Public School Fund. For FY 2016-17, the first $40M of the Retail Marijuana Excise Tax revenue was distributed to the administered by the PSCCAF. Excise tax collections in excess of $40M, $31.6M for FY 2016-17, were transferred to the Public School Fund.

For Fiscal Year (FY) 2017-18*, the first $40M of the Retail Marijuana Excise Tax revenue was distributed to the Public School Capital Construction Assistance Fund (PSCCAF) administered by the Colorado Department of Education’s Building Excellent Schools Today (BEST) program. Excise tax collections in excess of $40M, $27.8M for FY 2017-18, were transferred to the Public School Fund. Starting FY2018-2019, pursuant to HB18-1070, the greater of $40M or 90 percent of excise tax revenue will be credited to the PSCCAF. Any excess will be transferred to the Public School Fund.

On the regulatory front, the U.S. Department of Transportation (DOT) issued a notice clarifying that workers in safety-sensitive positions under its regulations will not be tested for CBD. The federal legalization of hemp means that cannabidiol derived from the crop is no longer a controlled substance. The notice made three specific points.

DOT “requires testing for marijuana and not CBD.”  Workers should remain wary of using CBD products because they are not currently regulated by the Food and Drug Administration and “labeling of many CBD products may be misleading because the products could contain higher levels of THC than what the product label states. The department said “CBD use is not a legitimate medical explanation for a laboratory-confirmed marijuana positive result.” So, if an employee using CBD that contains excess THC tests positive, it cannot be defended as a medical use.

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.