Joseph Krist

Publisher

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This week we start the New Year with commentary on some of our favorite subjects. The latest on Florida’s high speed railroad, healthcare mergers, pensions, New York City, pensions, public education and charter schools, and the latest moves in the perpetual Santa Rosa Bay Bridge default.  We look at California’s changes to its system of oversight of fiscally distressed school districts. Happy New Year!

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BRIGHTLINE

The Office of Program Policy Analysis and Government Accountability is the research arm of the Florida Legislature. In October it issued a report on rail safety. The report got a bit more exposure as the operators of the Brightline sought an extension on the existing December 31 deadline to close on an issue of private activity bonds.  They were successful in obtaining a six month extension of that deadline. The USDOT however,  advised Brightline that “any amount of unused bond allocation following an initial bond issuance will automatically return to U.S. DOT’s remaining aggregate amount of private activity bonds, and thus be available for other eligible applicants.” The bond extension gives Brightline more time to complete a separate application for a Railroad Rehabilitation and Improvement Financing loan to further cover the cost of the Miami-to-Orlando service.

HEALTH MERGER

A proposed merger between San Francisco-based Dignity Health and Catholic Health Initiatives, based in Englewood, Colorado, has been delayed. The two hospital heavyweights have moved the expected closing date for their new combined organization to Jan. 31, 2019 from Dec. 31, 2018, according to a statement from Dignity. Dignity’s statement said the two companies “continue to finalize the last steps to bring our operations together and to combine our ministries, including the completion of licenses, certifications and other administrative items. We are looking forward to completing our alignment.”

The merger, proposed in December 2017, aims to create a new company called CommonSpirit Health that will have operations spanning 16 states and including 136 hospitals, including 30 hospitals in California. Dignity runs five hospitals in Arizona, three in Nevada and 31 in California. In the North State, it has Mercy Medical in Redding, St. Elizabeth Community Hospital in Red Bluff and Mercy Medical Mt. Shasta in Mount Shasta.

SANTA ROSA BRIDGE DEFAULT

It may the Freddy Kruger of bond defaults but the bondholders are taking another whack at the Santa Rosa Bay Bridge credit which has had a troubled financial history over its 20 year life. The trustee bank representing bondholders filed a lawsuit seeking to force the state Department of Transportation to raise tolls on Northwest Florida’s Garcon Point Bridge to pay off construction bonds that are in default. The Trustee is asking a judge to order the Department of Transportation to “upwardly adjust” the tolls. The $3.75 one-way toll has not changed since 2011.

The lawsuit, filed in Leon County circuit court, alleges the failure to increase tolls is a violation of the original bond agreement that stated the Santa Rosa Bay Bridge Authority, which has since disbanded, or the Department of Transportation would maintain tolls that “would always generate sufficient revenue” to pay off the bonds.

Since the bridge authority has no members, the lawsuit said the responsibility to raise the tolls falls on the Florida Department of Transportation, and the agency’s “intentional failure to timely respond to the revenue shortages” has resulted in the loss of toll revenue that should have been collected and paid to the bondholders. The bondholders are caught between the rock of no toll increases and the hard place of insufficient demand for the bridge.

The credit has found itself in a classic death spiral as higher tolls weaken already dampened demand which then drives the need for high tolls. As this story has unfolded, many other factors have changed. The real estate development which was supposed to result from the bridge has been buffeted by a number of events. The latest is the relatively decreased attractiveness of barrier island real estate in an era of climate change. Have the fates conspired against the project? Yes. Does that make it imperative that a speculative investment be bailed out? No.

DIFFERENT PATHS FOR PUBLIC EDUCATION

The City of New Orleans is poised to become the first city in the US to turn over its entire public school system to charter operators. What is interesting about the situation is that one of the pillars of support for the charter school model versus the traditional public school model is the need for choice. Here is the first significant example of a system where there is no choice but that the monopoly which creates this phenomenon is private rather than public. That introduces a totally new twist on the issue whichever side of the charter school issue you find yourself on.

Our interest in the issue is predominantly academic. Over time, the results delivered by the charter school space in a non-competitive environment will go a long way towards shaping the debate over how best to provide K-12 education. Those results will be seized upon by either side in the debate.

As New Orleans goes the charter route, the Los Angeles USD is gearing up for a potential strike by the District’s teachers. The nation’s second largest school district takes up this negotiation in the environment left after numerous teacher job actions across the country highlighted the lack of salary growth for teachers. California has been a less favorable environment for charter schools relative to the rest of the country. The negotiations are expected to be contentious.

PENNSYLVANIA PENSIONS

In 2017, the Commonwealth of Pennsylvania enacted legislation establishing the Public Pension Management and Asset Investment Review Commission (PPMAIRC). The Commission was charged with a comprehensive review of the investment management of the Public School Employees’ Retirement System (PSERS) and State Employees’ Retirement System (SERS). The hope was that the review could generate some $3 billion in savings for the underfunded systems.

Recently, the Commission released the results of its effort. It recommends more indexed investing, better discount rate assumptions, much more reporting transparency.  It’s major recommendation – maintaining full payment of the actuarially required contribution. Obviously, there are many variables contributing to the size of that requirement. But in the end, pensions require funding.

So much effort is expended on the retiree side of the equation – they are lazy, greedy, somehow undeserving, they hoodwinked their negotiating counterparts – that to some degree the issue of chronic underfunding (or political cowardice) has become less of a point of criticism. Where changes in conformance with the law are available should they be exploited? Certainly. But at the core the problem in its current state is underfunding.

One other issue which should be easier to address is the issue of costs of managing the funds. The report concludes that the Commonwealth’s pension funds underperform and incur higher than average expenses. According to the Commission, changes in how much work is “farmed out” to external managers or advisors, negotiation of better fee structures, and more efficient internal procedures could generate between $8.2 billion and $9.9 billion of expense savings over a 30 year period.

NEW YORK CITY BUDGET OUTLOOK

The City’s Independent Budget Office (IBO) has released its outlook for the City’s fiscal position in 2019. IBO’s latest projections of revenues and spending under the contours of the Mayor’s November 2018 Financial Plan show the city ending the current fiscal year with a surplus of nearly $400 million. Assuming this year’s surplus is used to prepay some of next year’s expenses, we project a shortfall of $2.1 billion for fiscal year 2020, just 3.0 percent of city-funded expenditures. With a reserve of nearly $1.3 billion already built into next year’s budget, this gap is very manageable, as has been the case in recent years.

IBO’s latest forecast for the local economy and tax collections does not foresee a steep slide through at least 2022. Nonetheless, there are concerning issues given the huge run up in head count by the current administration. Employment growth has slowed in 2018, and is expected to total 64,000 (fourth quarter to fourth quarter), nearly one-third lower than in 2017. It is expected that  positive employment growth to continue in 2019 through 2022 but to be well below the average of 97,000 in the preceding eight years. Assuming Amazon’s HQ2 project proceeds as scheduled, it will moderate, but not reverse, the trend.

IBO forecasts tax revenue of $60.8 billion in 2019 growing to $67.9 billion in 2022, with much of the increase attributable to the property tax, which is expected to grow at an average rate of 5.5 percent annually over that period. After an extraordinary 2018, growth in personal income tax revenue will fall off to a more typical pace. IBO’s tax forecast exceeds the de Blasio Administration’s by $558 million in 2019, $1.0 billion in both 2020 and 2021, and $1.6 billion in 2022, with much of the difference attributable to the outlook for property and the income taxes. IBO projects that total city spending will grow from $90.6 billion this year to nearly $100.5 billion in 2022, an average annual rate of 3.5 % and just below the 3.7 % rate of growth it projects for tax revenues.

There are areas of spending growth which are worrisome. The cost of health care for city employees will rise from $6.7 billion in 2019 to $8.1 billion in 2022, an increase of nearly 7 %. IBO’s forecast for tax revenue in the current fiscal year is $60.8 billion, a gain of 3.2 % ($1.9 billion) from 2018. This growth would be slower than all but one other year in the current expansion and far slower than in 2018, when tax revenue increased 8.4 %. Total tax revenue growth will be faster in 2020 and subsequent years but will still be modest compared with growth earlier in post 2009 expansion. For 2020, IBO forecasts $63.2 billion in total tax revenue, 3.8 % ($2.3 billion) greater than the 2019 forecast. We project that tax revenue will rise at an average rate of 3.7 % annually over the final two years of the financial plan period and total $67.9 billion in 2022.

MEDICAID WARS

The only state which has been permitted by the federal government to implement work rules for Medicaid eligibility under the ACA has generated data on what the impact on recipients would be. That data would seem to support the efforts of those turning to the courts for relief from those requirements.

Arkansas has seen only 1,428 low-income adults required to report their hours in November logged at least 80 hours. Roughly 8,400 failed to report 80 hours, with 98 percent of them not reporting any work activities. The state has removed more than 16,000 low-income adults for failing to log at least 80 hours of work, job training, volunteering or similar activity — including 4,655 in November.

Arkansas’ conservative governor cites the motivation for the program – it provides the help residents need to become independent as justification for the program. Unfortunately, many of the affected citizens are in areas which because of geography or economics do not have internet access. That makes it difficult to comply with reporting requirements as does the fact that the internet site is only open for a limited period each day.

All of that makes it much easier to declare noncompliance and remove recipients from the rolls. So it does not necessarily generate jobs for people or improve or maintain access to healthcare.  That makes it easier for work rule opponents to voice the view that the goal is not independence but budget savings for the state government.  All of this will be hashed out in the federal courts. Individuals who don’t adhere to the new rules for three months get removed from Medicaid for the rest of the year. Nine Arkansas Medicaid enrollees who sued the Trump administration in August to block the rules. 

CALIFORNIA DISTRESSED SCHOOL DISTRICT OVERSIGHT

The Golden State’s Office of the Legislative Analyst recently offered its views of recently enacted changes to the State’s system for supporting distressed local school systems. First, some history. In 1991, the State enacted a Formal Process for Supporting School Districts in Fiscal Distress. This system was designed a variety of levels of support and intervention to districts based on their fiscal health. All districts, regardless of their fiscal position  are subject to ongoing fiscal oversight from their county office of education (COE). Districts determined to be exhibiting signs of fiscal distress receive special COE assistance. For those districts facing the prospect of being able to meet obligations including operating expenses can request an emergency state loan in exchange for temporarily ceding control to an outside administrator. Prior to 2018, these administrators were appointed and overseen by the state Superintendent of Public Instruction.

The fiscal 2019 budget process led to the enactment of changes to the way that extremely distressed districts would be dealt with. Legislation adopted as part of the 2018-19 budget package made three notable changes to the process for supporting districts in exceptional fiscal distress. First, it authorized special grants to supplement the loans already provided to the Inglewood and Oakland Unified school districts. Second, it shifted takeover responsibilities from the state to county level. Third, it established a new process for appointing outside administrators.

The LAO expresses concerns that the special grants to the two troubled school districts will encourage more districts to seek grants in lieu of making more permanent changes. The LAO view is that the state likely has weakened incentives for all districts to make the tough decisions necessary to balance their budgets. In addition, shifting takeover responsibilities from the state to county level could weaken oversight, as the state is better positioned to provide the independent, external perspective necessary for fiscally distressed districts to recover.

The LAO went farther and made recommendations for how to address the problems they see. They recommend supporting the Inglewood and Oakland Unified school districts within the traditional loan process. If additional support for these districts is deemed necessary, they recommend providing loan payment deferrals in exchange for greater state oversight. Concurrently, the LAO recommend shifting takeover responsibilities back to the state from the county level.

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