Joseph Krist

Publisher

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Ideology moves front and center in many of the issues we explore this week. The Biden stimulus reflects an ideology in favor of government. The Medicaid block grant announcement reflects an opposite ideology. The New York City budget reflects the long term influence of ideology on the part of the Mayor. Proposals to limit the activities of public power entities reflects the ideological battle over green energy. Now that the national election is out of the way, the ideological wars will now move to the state level.

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STIMULUS PROPOSAL – THAT’S MORE LIKE IT

The stimulus proposal from President Biden to provide state, local and territorial governments with $350 billion in emergency aid, along with billions of dollars in assistance for schools and transit was welcome news for budget makers at all levels. In terms of indirect aid, it would provide $1,400 one-time payments to many Americans whose earnings are below a certain amount, while also extending unemployment insurance programs adopted in response to the pandemic and boosting them with a $400 per-week supplemental payment. All of that is positive for municipal credit.

The plan also is calling for $130 billion to help K-12 schools reopen safely and $35 billion for a higher education relief fund directed at public institutions, including community colleges.  It includes$20 billion for public transit agencies.  

From the municipal bond standpoint, there could be more to come. This proposal focuses on operating funding. An infrastructure package is yet to be announced. So the potential for additional resources exists. More important than the actual dollars is the change in philosophy behind the plans. It is hard to see the proposals as anything but positive for municipals.

MEDICAID BLOCK GRANT

The Trump Administration and its legislative allies have spent the last four years trying their best to limit Medicaid through work and reporting requirements. As the courts have consistently ruled against those plans, conservatives have more quietly worked to achieve one long held goal – the conversion of the program to one of block grants to the states.

Now in the death throes of the Administration, one of its medical culture warriors has achieved one of its goals at least temporarily. In a Friday night news drop, the Centers for Medicaid and Medicare services (CMS) approved a waiver for the state of Tennessee to receive its Medicaid funding in the form of a block grant. If Tennessee spends less than the block grant amount, it will be allowed to keep 55%  of the savings to spend on a broad array of services related to “health.” If it spends more, the difference will need to be made up with state funds. 

Tennessee will be allowed to renegotiate prices with drug makers and can decline to cover drugs if it deems the prices too high.  The state also has a troubled history of administering Medicaid under the existing structure which provides less administrative freedom.  States that saw the largest increases in uninsured children — like Tennessee and Texas — were those that created rules to check the eligibility of families more frequently or that reset their lists with new computer systems. 

CMS is run by one of the more ideological members of the Administration who has made the conversion of federal funding programs to block grants a centerpiece of her efforts. The Trump administration has tried to slow the reversal of its Medicaid experiments. Traditionally, such waivers are agreements between H.H.S. and states that can be severed with minimal fuss. But CMS has sent letters to state Medicaid directors, asking them to sign, “as soon as possible,” new contracts that detail more elaborate processes for terminating waivers. Under the contract terms, the federal agency pledges not to end a waiver with less than nine months of notice.

CALIFORNIA BUDGET

California Governor Newsome has released his proposed FY 2022 budget proposal. The budget reflects two basic realities. Revenues have come in much higher than anticipated. The skewing of both the tax structure and the income structure of the state  towards higher income jobs saved the day. In California, this taxpayer cohort was in a much better position to generate income and did so. They tended to be higher paid individuals who could work remotely.

The Budget reflects $34 billion in budget “resiliency” (their term not ours) – budgetary reserves and discretionary surplus – including: $15.6 billion in the Proposition 2 Budget Stabilization Account (Rainy Day Fund) for fiscal emergencies; $3 billion in the Public School System Stabilization Account; an estimated $2.9 billion in the state’s operating reserve; and $450 million in the Safety Net Reserve. The state is operating with a $15 billion surplus.

The budget proposes the use of some of those “resiliency” resources for things like $2.4 billion for the Golden State Stimulus – a $600 state payment to low-income workers who were eligible to receive the Earned Income Tax Credit in 2019, as well as 2020 Individual Taxpayer Identification Number (ITIN) filers; $575 million to more than double this year’s funding for grants to small businesses and small non-profit cultural institutions disproportionately impacted by the pandemic; $70 million to provide immediate and targeted fee relief for small businesses including personal services and restaurants; $2 billion targeted specifically to support and accelerate safe returns to in-person instruction starting in February, with priority for returning the youngest children.

The Budget reflects the state’s highest-ever funding level for K-14 schools – approximately $90 billion total, with $85.8 billion under Proposition 98. Some $2 billion is proposed for immediate action to support and accelerate safe returns to in-person instruction beginning in February. $4.6 billion is proposed for action this spring to expand learning opportunities for students, including summer and after-school programs and $400 million is proposed for school-based mental health. The Budget proposes a General Fund increase of $786 million for the University of California and the California State University systems based on an expectation of flat tuition and fee levels.

FINAL DE BLASIO BUDGET

The process to enact the final budget of the deBlasio Administration has begun with the submission of the Mayor’s FY 22 budget proposal. The proposal reflects the current state of flux in terms of the pandemic, the economy, and national politics. The Mayor’s presentation featured on the fly changes as proposals which would benefit the City were being announced as part of a proposed stimulus. Proposed cuts were literally crossed out and the slides changed as information came in.

This proposal was as much a statement of political philosophy as it was a serious budget document. It depends on a lot of political goodwill from a legislature that looks on the Mayor with skepticism at best. The mayor seems to believe that a new tax on the wealthy will be the answer to the problems of the state and city. The cutbacks included in the Mayor’s plan are a continuation of his use of threatened job cuts to try to generate more state aid.

The mayor continues to tout already existing headcount reductions of 7,000 while threatening an additional 5,000 potential reductions. That still leaves the City’s headcount some 12,000 higher than it was at the start of the deBlasio administration. And it comes as the framework of the upcoming campaign to replace the term limited mayor begins to emerge. That campaign will focus on a lot of spending ideas including the provision of a universal basic income.

The idea of a universal basic income is the centerpiece of the policies behind the newest candidate to enter the mayoral race, Andrew Yang. He would target annual cash payments of about $2,000 to a half million of the poorest New Yorkers, in a city of 8.4 million. Mr. Yang said his proposal would cost the city $1 billion a year. His entrance into the race has led a number of other candidates to embrace the idea.

This is a huge difference from his proposal to fund such a program nationally. That plan called for giving every American citizen over 18 years of age $1,000 a month in guaranteed federal income. It would have been funded by a national value added (sales) tax. In the case of the City, he would only be able to create a universal plan if there was “more funding from public and philanthropic organizations, with the vision of eventually ending poverty in New York City altogether.”

TEXAS REVENUE ESTIMATES

To kick off the budget season, the Texas Comptroller has released his revenue estimates for the State for the upcoming biennium beginning September1. For 2022-23, the state can expect to have $112.5 billion in funds available for general-purpose spending, a 0.4 percent decrease from the corresponding amount of funds available for the 2020-21 biennium. The reports projects $119.6 billion in total collections of general revenue-related (GR-R) funds.

These collections are offset by an expected 2020-21 ending GR-R balance of negative $946 million. In addition, $5.8 billion must be reserved from oil and natural gas taxes for 2022-23 transfers to the Economic Stabilization Fund (ESF) and the State Highway Fund (SHF); another $271 million must be set aside to cover a shortfall in the Texas Guaranteed Tuition Plan, also known as the Texas Tomorrow Fund.

The projected negative ending balance in 2020-21 is a direct result of the COVID-19 pandemic, which caused revenue collections to fall well short of what was expected when the 86th Legislature approved the 2020-21 budget. The projected shortfall does not account for any GR-R expenditure reductions resulting from the state leadership’s instructions for most state agencies to reduce spending by 5 percent of their 2020-21 GR-R appropriations. Nor does it incorporate the effects of substituting federal funds provided as pandemic-related assistance for some GR-R pandemic-related expenditures.

Tax revenues account for approximately  87% of the estimated $119.6 billion in total GR-R revenue for 2022-23. Sixty-two percent of GR-R tax revenue will come from net collections of sales taxes, after $5 billion is allocated to the SHF, as authorized by the Texas Constitution. Other significant sources of general revenue include motor vehicle sales and rental taxes; oil and natural gas production taxes; the franchise tax; insurance taxes; collections from licenses, fees, fines and penalties; interest and investment income; and lottery proceeds.

FLINT WATER

Former Michigan Gov. Rick Snyder has been charged with two counts of willful neglect of duty. The charges are for misdemeanors punishable by imprisonment of up to one year or a maximum fine of $1,000.  It all stems from the implementation of Michigan’s emergency manager statutes in the State’s takeover of the financial affairs of the City of Flint. The Governor was one of nine state officials charged with a total of 41 counts — 34 felonies and seven misdemeanors.

At the core of the issue is the decision by the emergency manager team which switched the city’s water source to the Flint River in 2014 as a cost-saving step while a pipeline was being built to Lake Huron. The problem is that managers and operators did not account for the differences in water from the two different sources.  The water supplied when the switch was made was not treated to reduce corrosion.   State regulators determined that this caused lead to leach from old pipes and spoil the distribution system used by nearly 100,000 residents. That required distribution of bottled water and other non-municipal sources to avoid additional health issues related to elevated levels of lead in the water.

The criminal charges against even Governor will draw renewed attention to the use of the emergency manager statutes in Michigan specifically but also more generally. The environment in which outside overseers might be appointed under statute has changed significantly since these laws were enacted. Anything seen as potentially disenfranchising – which some of these schemes are clearly viewed as already – will operate under an ever more volatile body politic. That makes the outcome of the case even more meaningful and not just in Michigan.

We do not expect that anyone will go to jail in this case. It does however, establish some level of accountability for public officials operating under statutes like those governing Michigan’s emergency managers.

MUSEUMS EXPLORE FINANCIAL ALTERNATIVES

The impact of the pandemic on museums is well documented. We have previously reported on the growing phenomenon of ” deaccessioning” or the sale of art from their existing collections to provide funds to pay off debt or operating expenses.(See the November 2, 2020 issue). Those efforts generated widespread publicity and reactions and it is fair to say that those reactions were not favorable.

Since we covered the topic in the Fall, developments have moved ahead. In Baltimore, the plans to sell at least three major pieces from its collections were withdrawn after local and national blowback. Some institutions continued to investigate the potential for sales of their own. This has led to some cities taking preemptive action to prevent such efforts from moving forward.

The latest example is the move by the City of San Francisco to prevent the San Francisco Art Institute from attempting to sell one its best known works. The Institute has floated the idea of selling a mural painted by Diego Rivera. The works of Rivera and others he influenced produced a raft of murals for public buildings across the country as a part of the economic recovery from the Depression.

Now. after public outcry both locally and nationally, the San Francisco Board of Supervisors voted 11-0 to start the process to designate the mural as a landmark.  Designating the mural as a landmark would severely limit how the 150-year-old institution could leverage it as removing the mural with landmark status would require approval from the city’s Historic Preservation Commission.

The City believes that private donations as well as more creative financing actions could address the concerns of the Institute. It’s not the first time that a sale has been contemplated. In the Fall, a bank sought to sell the mural as collateral for some $19 million of debt.  That plan was halted by the intervention of the University of California Board of Regents stepped in to acquire the Institute’s $19.7 million of debt from that private bank.

A 2016 loan funded the construction of its new Fort Mason campus. Collateral for the loan included the school’s older campus on Chestnut Street and 19 artworks.  The public university system acquired the institute’s deed and became its landlord. Administrators at S.F.A.I. have six years to repurchase the property; if they don’t, the University of California would take possession of the campus. The situation highlights the risks associated with certain kinds of collateral. Many a lender has fooled themselves into thinking that collateral in and of itself provides security. It flows from a fundamental misunderstanding of how fungible an asset that collateral actually can be.

In the end, it is about economic viability. This is yet another example of relying on legal provisions rather than operating sustainability for successful management of a credit. A dose of realism is always a good thing for credits like this.

NEBRASKA PUBLIC POWER DISTRICT

One of the long established public power providers in the nation is at the center of a dispute over transmission lines. As the effort to address climate change moves forward, the need to expand and reinforce the transmission grid nationwide is gaining more attention. Transmission lines are controversial even when they are designed to transmit power from green sources.

Efforts to stop some of these projects takes many forms. In many jurisdictions, litigation has been a primary tool in the effort. Now, the Nebraska Public Power District finds itself the target of proposed legislation in the Nebraska State Legislature. The proposed bill would forbid “a public power district, public irrigation district or public power and irrigation district” from starting or continuing construction on transmission lines at least 200 miles long through Jan. 1, 2023.

The bill targets NPPD’s 225-mile-long R-Project. The project has been slowed by litigation in the federal courts but this bill would block power or irrigation districts from spending “any funds relating to such project during such time period and prior to obtaining any required federal permits.”

The R- project was proposed in 2013. It is believed by opponents to be driven by a desire to facilitate the development of wind generation in the western part of the state.  The proposal highlights the elements that get in the way of the shift to green energy. It is co-sponsored by a legislator from a district that houses a coal generation plant. In a 100% public power state, NPPD is  now at the center of the ideological battle.

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