Joseph Krist

Publisher

THE CHRISTMAS THAT WASN’T

This year the schedule of the holiday’s – Christmas and New Year’s on Saturdays – set up well for those businesses and institutions which had been particularly hard hit by the surge in the latest CO VID variant. And then came reality.

The resurgence of the pandemic is now threatening a real recovery from the economic damage of it. We see limits, postponements, and cancellations of events including cultural as well as sporting events. While tourism had begun to recover, the transit and hospitality industries face great uncertainty again with cruises being shortened and/or altered. The resurgence of the pandemic is already impacting return to work timelines. The resulting economic impacts will increase the already high level of pressure that exist on small businesses fighting for their survival.

The hope is that the current state of the pandemic will be short lived. It is clear that the likelihood of an additional federal stimulus is low. The Biden Administration is taking the position that the states are expected to be the primary source of government action. That will make the governmental response that much more political. That is problematic. The impact on economies will vary as those more dependent upon traditional weekday economic patterns will take an additional blow in the short term.

The Baltimore Museum of Art, closed its galleries through Dec. 29 because of an increase in positive coronavirus tests. The Metropolitan Museum of Art said it would limit attendance to roughly 10,000 visitors per day because of the highly infectious Omicron variant. That would represent a 50% drop from historic daily holiday season averages.  At the start of Christmas week, nearly a third of all Broadway shows were canceled because of positive coronavirus tests among their casts and crews, and several are shut down through Christmas.

The resurgence of COVID as a source of limits on activities is quickly spreading. Initially, hospitality businesses especially restaurants were limited by staffing and supply issues. The sports world saw a host of postponements of games. The NHL dropped out of the upcoming Olympics. It is not clear what additional measures will have to be taken and what the potential economic/financial impact will be.

The real risk is that the virus wave will be prolonged after a major federal stimulus has occurred. It is not likely that another round of robust financial aid from the federal government will be available. That is true of both individuals and businesses. The pandemic has shone a very bright light on the role of the education system as child care provider. It follows that for businesses to open that staff have care for their children. In NYC, the major banks are reversing their insistence on a return to the office during January.

Atlanta opened its schools remotely. Los Angeles delayed vaccination requirements for students which would have taken an estimated 30,000 students out of in person learning. It not always the various districts’ call as Chicago and Philadelphia faced union hostility to return to classroom efforts. New York and Chicago are pinning their hopes on the distribution of home testing kits. The results from Chicago’s effort were discouraging in that some 25,000 tests were improperly used rendering the results useless. That made it hard to meet teacher demands for safety which resulted in a system closure

P3 TROUBLES IN VIRGINIA

The public-private partnership undertaking extension of the 95 Express Lanes in Virginia have announced a delay in project completion. Work on the $565 million project to bring high-occupancy toll lanes to Fredericksburg began in 2019 and was expected to be finished in October 2022. 

Now the project is caught up in a dispute between toll operator Transurban and its contractor Branch Civil and Flatiron Construction (BFJV). BFJV contends that geologic conditions in the construction zone have affected its ability to keep the project on schedule. The issue has gone to arbitration. The initial proceeding before the arbiter called for the Virginia DOT to offer an adjustment of the price and more time to complete the project because of the soil conditions.

In January, the arbiter is expected to decide the amount of the required financial adjustment. That decision will not be subject to appeal. In the interim, construction continues. This section of road is just one part of a multi-facility expansion program being undertaken primarily through P3 approaches. Delays here could have real financial impacts on a several toll-funded projects.

Virginia remains the center of toll financed express lane projects. With some 60 managed tolled lanes already in operation, an additional 35 miles of such roads is under construction. Now, the Commonwealth is proposing another 11-mile expansion of tolled express lanes to connect to the existing and emerging network. Virginia is on track to have 10 percent of the nation’s managed toll lanes as early as next year.

MEDICAID

The Biden administration on Thursday rejected work requirements for Medicaid recipients in Georgia, the last state to have a federal waiver for such restrictions. The waivers were granted to demonstration projects under Section 1115 of the Social Security Act.  The limits on economic activities and the virus itself made compliance with work requirements to not be feasible.

The Department of HHS previously revoked work requirements in the Medicaid programs of Arizona, Arkansas, Indiana, Michigan, New Hampshire and Wisconsin. Kentucky and Nebraska withdrew their applications for work requirements notwithstanding the fact that their requirements had been approved.

Arkansas is the only state currently challenging its revocation in the courts. That litigation remains on hold while the U.S. Supreme Court considers whether or not to hear Arkansas’ appeal. Regardless, Arkansas’s latest application to renew its waiver drops work requirements altogether, substituting in their place incentives aimed at encouraging work and healthier lifestyle choices.

One other outcome of policy change in a new Administration is the end, for now, of Tennessee’s experiment with block funding for Medicaid. Tennessee plan would have called for the State of Tennessee to receive a capped funding amount for its Medicaid program under its Section 1115 waiver. The approval provided that the State would be able to redirect a portion of any resulting cost savings to other health programs.

COLLEGES UNDER VIRUS PRESSURE AGAIN

A growing number of colleges nationally have announced plans to begin classes virtually after the winter break, and a few, including Yale and Syracuse universities, have announced that they plan to delay the start of classes until later in January. Howard University will delay the start of the spring semester until Jan. 18 when it will require everyone returning to campus from winter break to provide a negative PCR test result within four days of arriving. All faculty, staff and students are required to have a booster shot before the end of January if already eligible for one, or within 30 days after becoming eligible.

IS VACCINE POLICY A GOVERNANCE ISSUE?

Arkansas, Florida, Iowa, Kansas and Tennessee have carved out exceptions for those who won’t submit to the multi-shot coronavirus vaccine regimens that many companies now require. Historically, unemployment does not cover those who resign to avoid compliance with a company policy or are terminated for refusing. The action has been received poorly by both employers who will bear many of the costs of mitigation as the result of unvaccinated employees and by other workers.

This represents a reversal from policies followed by some of those same states when they tried to use limits on unemployment benefits to try to force workers back to work before the availability of vaccines. That sort of inconsistency makes a full-scale recovery slower and puts additional businesses at risk.

HIGH SPEED RAIL ON TRIAL

The Texas Supreme Court will hear arguments on January 11 in a case which will determine whether or not the proposed high speed rail link between Houston and Dallas can move forward. Opponents of the project – especially landowners along the proposed route – have been challenging the plans of the Texas Central Railroad Company to acquire land for a right of way. Land rights are a major cultural and political issue in the Lone Star State. The primary issue is that of whether the Company has the legal right to use eminent domain to acquire the needed land.

The State Attorney General has weighed in on the case on the side of landowners. “(Texas Central and an affiliated company) may only make preliminary examinations and surveys of private landowners’ properties for the purpose of constructing and operating a bullet train if they are either railroad companies or interurban electric railway companies. In the state’s view, the respondents are neither. They are not railroad companies because they do not operate a railroad. And they are not interurban electric railway companies because the high-speed train they intend to operate is not the small, localized, interurban railway expressly contemplated by statute.

The case was originally brought in Leon County where a local judge found in favor of the landowner contesting the proposed acquisition of a portion of his land. An appellate court subsequently ruled in favor of Texas Central, saying it is a valid railroad company and could therefore exercise eminent domain.

EDUCATION FUNDING

A bill was introduced in the California Legislature which proposes to tie education funding to annual enrollment rather than average daily attendance records. The move could bring in an additional $3 billion in annual state funding for schools. Supporters say that an enrollment-based policy is less volatile. Opponents see the change as lowering the pressure to address attendance issues.  The thought is that the daily average attendance provisions motivate schools to address truancy.

Twelve percent of California’s 6 million-plus K-12 students were marked “chronically absent” in 2018-19, meaning they missed at least 10% of the school year.  The legislation requires that at least half of any new funds schools receive under the new policy be put toward combating chronic absenteeism and truancy. The bill includes a “hold harmless” provision would maintain current funding levels but allow districts to apply for supplemental funding if enrollment totals are greater than the average daily attendance formula. The bill would go into effect in the 2023-24 school year.

The proposal comes in the wake of data which shows that school enrollments throughout the state declined by some 160,000 students in the 19-20 academic year. Given that the drop occurred during the pandemic, the data may noy be truly indicative of a longer-term trend. It did occur as California saw its population drop for the first time.

In November, the nonpartisan Legislative Analyst’s Office projected that K-12 schools and community colleges will receive more than $102.6 billion in the current fiscal year. The legislation is represented as generating some $3 billion of additional funding statewide.

NYC FISCAL OUTLOOK

We are among those who are concerned that the DeBlasio Administration’s spending – especially in light of the fact that much incremental new spending was paid for with one-time pandemic revenues. The fact that the local economy is still under significant stress at the same time the pandemic once again is spreading does not inspire confidence. It is against that backdrop that we will view the expected budget pronouncements from both the Governor and Mayor.

The NYC Independent Budget Office (IBO) has released its outlook for the City’s financial plan based on its review of the plan update from the DeBlasio administration in November. IBO projects that within the framework of the Mayor’s latest financial plan, the city has nearly enough resources available to balance each year of the plan without the need for tax increases or major cuts to city services. Only 18 months ago IBO and other fiscal analysts estimated that the city’s out-year budget gaps ranged from $4 billion to $6 billion.

At the same time, the IBO does share some concerns. The unprecedented influx of federal dollars enabled the de Blasio Administration to continue, and even exp and, many city services without the need for tax increases, which have been required during previous periods of fiscal upheaval. The receipt of billions of dollars of federal aid over the financial plan period masks much of the underlying fiscal uncertainty that the city faces. billions of dollars of federal aid over the financial plan period masks much of the underlying fiscal uncertainty that the city faces.

Much of that uncertainty reflects the current realities of the City’s economy. New York City’s economy has generally lagged the nation’s, particularly on employment, with only about 35 percent of the jobs lost in calendar year 2020 recovered by the end of 2021. IBO expects employment growth to diminish each year from 2022 through 2025; the city is projected not to recover all of the jobs lost in 2020 until late in 2025. IBO estimates that the city gained a total of 213,000 jobs in 2021, just over one-third of the 615,000 lost in 2020. IBO projects this growth to slow to 175,000 jobs in 2022 and 100,000 in 2023, and that pre-pandemic levels of employment will not be reached until late in 2025.

IBO estimates next year’s expenditures will actually be $1.6 billion less than in fiscal year 2022. Adjusting each year’s expenditures for the prepayment of expenses with prior-year resources as well as for other non-recurring expenditures, IBO estimates that spending in fiscal year 2022 will grow by 10.0 percent from the actual level of expenditure in 2021. Adjusted spending will decline in 2023 to $99.7 billion and then grow slowly over the final two years of the plan period, at an average annual rate of 1.4 percent.

AFTER THE FIRE THE FIRE STILL BURNS

Eric Adams took over as the Mayor of New York City. He inherits a $102 billion budget and the highest headcount in the City’s history. Contracts are expiring for many city workers with the uniformed services the most prominent. Indeed, municipal union contracts will be another early challenge for Mr. Adams. The Independent Budget Office estimates that a 1 percent increase in salaries could cost the city about $600 million in the next fiscal year.

The new Mayor will not be able to look outside to other levels of government to bail out the City budget is the pandemic cannot finally be controlled. The State of New York, like every other state, is being expected to fund the response to pandemic limitations if they are not soon eliminated.

And, by the way, Mr. de Blasio’s final budget also increased spending for the Police Department by $200 million, including a $166 million increase for overtime, bringing police spending to a total of $5.6 billion. 

ELECTRIFICATION REALITIES

The big push to reduce or eliminate fossil fuel use faces many hurdles. Those hurdles raise the cost of electrification and make the cost benefit analysis less favorable in the eyes of many residential electricity consumers. The recent release of a proposed plan to address climate change by New York State’s Climate Action Council focuses attention on the issues.

The use of heat pumps to replace traditional heating and cooling systems is getting a lot of attention. The Council recommends that the state develop codes prohibiting propane, gas and oil equipment from being installed in new single-family homes and low-rise residential buildings beginning in 2024, and adopting zero-emission standards that prohibit the replacement of this equipment in existing homes beginning in 2030.

That raises the issue of cost. Heat pumps are advertised as a more efficient source of heating and cooling but many are put off by concerns over price. One provider notes that 5 percent of people who request air-source heat pump installation were interested in lowering their carbon footprint. The remainder of demand was driven by rebate programs.  The Council acknowledges that it would take five to eight years for consumers to realize the savings from heat pumps versus fossil fuel systems.

Like electric cars, the initial adoption phase relies on rebates and/or tax credits. The argument over whether or not to subsidize electric vehicles was a significant stumbling block in the debate over the Build Back Better legislation. We see subsidies as a key to the move to electrify. Whether it be solar, heat pumps or electric cars, the initial cost in the current environment is a major limiting factor in electrification.

PUERTO RICO

The effort to resolve Puerto Rico’s Title III proceedings took several hits over the holidays. This year’s Feast of the Three Kings did not see any gifts exchanged between the parties. Puerto Rico’s Financial Oversight and Management Board (FOMB) filed a lawsuit against the governor in the U.S. District Court on the island to stop the government from implementing and enforcing pension laws the fiscal panel claims would add “unaffordable” retirement benefits for public employees. Pensions have long been a major source of contention between the Commonwealth and its lenders. Efforts to maintain pension levels have led to pensioners getting more favorable treatment in bankruptcy than bondholders.

Acts 80, 81, and 82 enacted provisions designed to encourage early retirements but at current levels of pension payments. The Board had opposed the new laws and there was thought to be an agreement to delay implementation until challenges to those laws were litigated. Instead, Joint Resolution 33-2021 was signed by Gov. Pierluisi last week to require the partial implementation of Act 80 within 30 days. 

The FOMB reviewed information provided by the administration its own analysis and the fiscal panel determined that Acts 80, 81, and 82 together could increase the commonwealth’s expenses by as much as $8.3 billion over the next 30 years. The oversight board pointed out that these additional costs would be in violation of the commonwealth’s board-certified fiscal plan and the proposed amended POA, which would reduce creditors’ claim by 80% but pay government pensions in full.   

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