Joseph Krist

Publisher

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We value your feedback as we move forward into the new year. Let us know what you think. Tell us what you would like to see covered. E mail me directly @ joseph.krist@municreditnews.com.

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ATLANTIC CITY

Four years into its five year recovery program overseen by the State of New Jersey, Atlantic City has seen the effort to support and reform its finances bear some fruit in the form of a rating upgrade. Moody’s upgraded the City of Atlantic City, NJ’s Long-Term Issuer Rating to Ba3 from B2. The outlook has been revised to stable from positive.  The outlook has been revised to stable from positive. This means that if the City were to issue unenhanced general obligation debt it would come at that rating. Currently, all of the City’s outstanding GO debt is secured under state enhancement programs.

The rating reflects not only the City’s fiscal difficulties but also its location as a coastal community. The upgrade “reflects the city’s continued, albeit reduced, financial and economic stress. The upgrade reflects the successful settling of long-term, open-ended liabilities and the concomitant improvement in city finances, the successful implementation of the casino PILOT program, the recent health of the casino industry, and the ongoing efforts to diversity. The rating is also informed by the continued, strong oversight by the State of New Jersey.”

Moody’s also commented specifically on climate related impacts on the rating. This reflects growing interest by the market in climate change related impacts on municipal credits. It follows Moody’s acquisition of climate data providers which it will now incorporate as a factor in its formal rating process. In the case of Atlantic City, “the rating is heavily influenced by the city’s exposure to environmental, social, and governance risk. The city is located on the Jersey Shore and is exposed to rising sea levels and extreme weather events. Income inequality is starkly evident in the city’s juxtaposition of high unemployment and poverty and opulent casinos. Finally, the city’s governance structure is of paramount importance; the city’s ongoing recovery has been largely masterminded by extraordinary state oversight which is set to expire in less than two years.”

In spite of the clear reference to climate change, it is not clear what the ultimate impact of this emphasis will be. Will it act as a hard cap on how high a rating can go for a coastal community? It will be  an evolving process as a variety of entities and funding sources would have to be employed to combat climate change. So it is not clear what the limits are in terms of what an individual entity (like Atlantic City) and its ultimate responsibility for mitigating climate change related impacts on its credit. This introduces a level of uncertainty into the ratings process which will take some time to be resolved.

MEDICAID EXPANSION IN KANSAS

It has taken a change in administrations and a more responsive electorate but as we go to press the Kansas legislature is considering a proposal to expand Medicaid under the  reached a deal with Republicans who control the Legislature to expand Medicaid under the Affordable Care Act. The agreement includes provisions to help Medicaid recipients find jobs. It does not however, include a work requirement that some Republicans in Kansas and other states have long called for.

The Kansas House passed a version of Medicaid expansion last year. In 2017, a Medicaid expansion passed but was vetoed. Since then, four rural hospitals in the state have closed. The New York Times cited one that closed in Independence, Kan., in 2015 would have received an estimated $1.6 million a year if Medicaid had been expanded. 

This plan is a true compromise. The Governor gets a relatively straightforward expansion which is estimated to allow some 150,000 to enroll. The legislature gets a program that has been proposed for driving down private health insurance premiums to make it less likely people would drop existing private plans for Medicaid. The proposal would allow the state to charge new Medicaid participants a premium of up to $25 per individual and $100 per family. It also would ask hospitals to contribute $35 million a year to cover the state’s costs.

The agreement provides for a one year period to fully develop the premium reduction plan and develop a source of funding for it. It does not include a prior plan to increase the state’s tobacco taxes including a $1 increase in the cigarette tax. The new expansion proposal would extend Medicaid coverage on Jan. 1, 2021, to Kansas residents earning up to 138% of the federal poverty level, or $29,435 for a family of three.

As the legislature debates the issue, the Journal of the American Medical Association published a study which finds that counties in states that accepted the Medicaid expansion under the Affordable Care Act (ACA) had a 6% lower rate of opioid overdose deaths compared to counties in states that did not expand Medicaid. It found that Medicaid expansion may have prevented between 1,678 and 8,132 deaths from opioid overdoses between 2015 and 2017. For comparison, there were 82,228 total opioid overdose deaths in that time period, the study states.  

PRIV ATIZATION FAILS IN JACKSONVILLE

In July, 2019, the Jacksonville Electric Authority initiated a process by which it would explore the privatization of the city’s municipal electric utility. JEA’s board of directors unanimously has since voted in late December  to stop its efforts to sell the city-owned utility. Thus ends a process which cost $10 million and yielded no discernable benefits. The cancellation  came as the local press discovered that the head of the utility had positioned himself to financially benefit from a sale to a private entity.

That executive had taken a number of controversial steps including threatening layoffs if a privatization was not allowed to be pursued. Over one fourth of the workforce was at risk. A plan also came to light where employees of JEA would receive “bonuses” from the sale. The plan would have allowed employees to purchase “shares” of JEA, much like an employee stock option, that could grow in value and be cashed in if JEA hit certain financial benchmarks. Auditors said the financial goals were too easy to reach and that limitless nature of the plan could result in employees receiving $315 million if JEA was sold for $4 billion.

The whole mess has cast privatization proponents in a poor light and reinforce the worst fears of customers of public entities considering privatizations. The local state attorney has announced that her office “is — and has been — looking into matters involving JEA.” JEA decided to cancel the bonus plan after the city attorneys determined the plan wasn’t legal under local and state laws.

If public/private partnerships or privatizations are going to have a significant role in the development and expansion of the nation’s infrastructure, the kinds of issues which have arisen in Jacksonville (and to a lesser extent with the St. Louis, MO airport) cannot continue. The use of questionable private business practices especially in terms of a lack of process transparency will only raise suspicions and mistrust on the part of the public who are the ultimate consumers of the service in question.  

The change in course comes at a tumultuous time for JEA. It is still engaged in litigation that tries to void an agreement JEA signed to purchase power from the Vogtle nuclear plant expansion in Georgia for a 20-year period. JEA spent about $5 million through Sept. 30 on litigation and related negotiations in that lawsuit.  JEA set aside $10 million in the budget that started Oct. 1 to continue on that legal track.

The two new Plant Vogtle reactor units are being built through an ownership partnership of Georgia Power, Oglethorpe Power, the city of Dalton, Ga., and the Municipal Electric Authority of Georgia (MEAG). JEA entered into a contract with MEAG to purchase electricity generated by a 206 megawatt portion of the two units, which is one-tenth of the 2,200 megawatt capacity of both units. There would be a significant impact to ratepayers if the purchase cannot be voided. All in all a fairly credit negative environment for the JEA credit.

NEW ENGLAND HEALTHCARE

Partners HealthCare System is in the process of changing its name to Mass General Brigham. Regardless of the label, the current System is the legal obligor on a significant upcoming bond issue. The system has been at the center of the healthcare finance debate. Healthcare advocates have viewed the System as a source of many of the perceived problems in terms of costs, pricing, and business practices with which universal health insurance advocates often take issue.

In the midst of the unfolding debate, Partners is issuing a total par amount of bonds expected to be approximately $1.3 billion and bonds are expected to have a final maturity in 2060. The bonds come with a Aa3 long term rating. Partners is the sole member of the following entities: Massachusetts General Hospital (MGH), Brigham Health (parent of Brigham and Women’s Hospital and Brigham and Women’s Faulkner Hospital), NSMC HealthCare, Inc. (parent of North Shore Medical Center), Newton-Wellesley Health Care System, Inc. (parent of Newton- Wellesley Hospital), Foundation of the Massachusetts Eye and Ear Infirmary, Inc. (MEEI), Partners Continuing Care (parent of several non-acute service high level providers, including the Spaulding Rehabilitation Hospital Network), AllWays Health Partners (f/k/a Neighborhood Health Plan), Partners Medical International and Partners HealthCare International. 

These are institutions with international reputations and historically strong finances which underpin the credit. Given those characteristics, the rating is where it is because of high leverage, competition, and an expectation of moderating results in fiscal 2020. Nonetheless, Partners finds itself in an increasingly challenging environment given its position between all of the various interest groups in the healthcare debate. The bond sale will allow the market to render its verdict.

UTILITIES – MORE BAD NEWS FOR COAL

The Associated press reported that the Colstrip Steam Electric Station in Colstrip, Mont., will close two of its four units by the beginning of this week, or as soon as they run out of coal. The plant employs around 300 people, some 15% of town of Colstrip, with a population of some 2,300 people. The six utilities that own shares of the two remaining units are making plans to stop operations as soon as 2025.

One of the issues associated with the closure of these facilities is the need for protracted environmental remediation. The AP reports that large amounts of ash from burning coal at Colstrip has contaminated underground water supplies with toxic materials and will cost hundreds of millions of dollars to clean up. The same is true of nuclear facilities when they close. These generate significant legacy impacts which can become hindrances to efforts to move the impacted economies forward.

The immediate impact will be on property value as a non-operational facility becomes significantly less valuable. The resulting lower tax obligation for the plant’s owners can result in significant hits to the host community’s tax rates. Often, smaller host communities become dependent on one large taxpayer and face significant disruption caused by lower revenues.

CLIMATE CHANGE AND MUNI CREDIT

Having commented many times on climate change in this and other spaces related to municipal bond credits, we are more than interested to see the market’s current interest in the issue. We are heartened to see attention drawn to it, but we are disappointed in some of the simplistic advice offered. Like sell Florida and California to defend against ocean level increases and reinvest inland. But that stance can lead investors down equally wet roads.

Some examples – the greatest sustained flooding issues in 2019 were in the Spring in the Midwest. Yes there was storm related flood damage where one would expect in the hurricane zones on the coasts later in the year. In the Midwest, there was not only the physical damage to infrastructure but the damage from not being able to raise a crop due to wet conditions and flooding. So maybe those climate related risks (heavy winter moisture and exceptionally low temperatures backed up moisture for months) will continue and you might want to lighten up on exposed Midwest credits.

Or you might look a bit northeast of the Mississippi flood zones. But then you have to ask, where in terms of miles is the greatest coastline or shoreline exposure? The 2,165 miles of coast for the 14 states on the Atlantic Ocean seems significant. There are 1,293 miles of coast for California, Oregon and Washington on the West Coast. But combined they are less than the real coastal exposure to rising levels of water. That would be the 4,530 miles of U.S. coastline for the five Great Lakes. 

The Gulf of Mexico has 1,631 miles of coastline (apparently Florida gets it two ways.). Hawaii has 750 miles but the leader is Alaska at 5,580 miles of coastline on the Pacific Ocean. Around the Great lakes, the problems are immediate. According to the Chicago Tribune, in 2013 Lake Huron bottomed out, hitting its lowest mark in more than a century, as did Lake Michigan, which shares the same water levels, according to data from the U.S. Army Corps of Engineers and the National Oceanic and Atmospheric Administration. Since then the rate of lake levels increasing has been astonishing. The swing in the water level of Lake Huron from January 2013 to July 2019 was nearly 6 feet, from historically low to historically high.

Island properties near Michigan’s Upper Peninsula are under water, the lakeshore in Chicago is being overtaken and eroded damaging water access and recreational infrastructure, and intermittent flooding along Lake Ontario in New York State has become more frequent and voluminous. So if we really do take the threat of rising sea levels and altered climatic events seriously than these numbers would make the case that the job of avoiding their impact on municipal bond investments will be that much harder. There are fewer places to hide.

CALIFORNIA BUDGET

California Gov. Gavin Newsom presented his $222.2 billion budget proposal  with plans to spend part of a projected $5.6 billion surplus on green technology and homeless aid. The presentation of the Governor’s proposal is the official kickoff to the FY 2021 state budget process. Highlights include funding 677 new CalFire positions over five years and allocating $90 million for new technology and a forecast center to better predict, track and battle blazes. The plan also assumes the continuation of a $200-million annual investment approved by lawmakers to reduce the kinds of vegetation that fuel wildfires, and more than $100 million to fund the Legislature’s pilot program to harden homes in fire-prone areas. There would be $50 million in one-time funding to help critical services prepare for power outages associated with fire prevention plans.

Governor Newsom also has a proposal to set aside $250 million per year for four years to create the Climate Catalyst Revolving Loan Fund, which would help small businesses and organizations invest in projects, such as recycling and climate-smart agriculture, to help the state meet its environmental goals.

The total spend sets a record if it is adopted. Education funding remains a preeminent issue as does funding for healthcare.  The budget would deliver more money to Medi-Cal, the state’s health care program for low-income people. Part of that expansion would boost assistance for homeless people and mental health care funded in part by $750 million from the anticipated surplus to be directed to organizations that help homeless Californians. That money could be used to pay rent, build housing and improve shelters.

The budget anticipates an accumulated surplus for the State of $21 billion. Newsom and lawmakers have until June 15 to pass a budget in time for the start of the upcoming fiscal year July 1. The Governor submits a revised proposal in May. If the economy continues on its current course, a budget similar to this plan should be credit neutral.

LOUSIANA P3

The Louisiana Department of Transportation and Development announced the execution of a Comprehensive Agreement with Plenary Infrastructure Belle Chasse, LLC an indirect, wholly-owned subsidiary of Plenary Group Concessions USA Ltd. to build the Belle Chasse Bridge and Tunnel Replacement Project in Plaquemines Parish. The new bridge will be located between the existing vertical lift bridge and tunnel and will include four lanes with a separated, protected sidewalk in the southbound direction. 

This the first transportation infrastructure Public-Private Partnership (P3) project in the state. Funding for this project will be combined with funds from the $45 million Infrastructure for Rebuilding America (INFRA) grant that DOTD received in June 2018, $26.2 million in federal/state funds allocated to DOTD, $12 million in federal funds allocated by the Regional Planning Commission, and up to ten percent of the project cost in GARVEE Bond proceeds, as this is a toll project. 

The tunnel opened in 1956, and the current bridge was built in 1968. The average daily traffic is approximately 35,000 and this route serves as the primary access point to the residents, businesses, and industries of Plaquemines Parish. Construction is anticipated to begin summer 2021, with an estimated completion of spring 2024, weather dependent. The legislature’s acceptance of the plan had Construction is anticipated to begin summer 2021, with an estimated completion of spring 2024, weather dependent. That approval overcame opposition to tolls for the project. Construction is anticipated to begin summer 2021, with an estimated completion of spring 2024, weather dependent.

The deal is a positive for private/partnerships generally and for Louisiana in particular. With the state facing so many infrastructure challenges especially through its exposure to climate issues, the acceptance of the P3 concept is an important step forward for the state.

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 advisers prior to making any investment decisions.