Joseph Krist

Publisher

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It is becoming clear that in spite of the best efforts of the Trump Administration, there will remain serious issues of concern for municipal bond investors. The most central to emerge is the issue of reopening schools. The pandemic has laid bare the role of the public education system as de facto day care. As the economy is currently constructed, two working parent households are the norm if not the necessity. That has put the schools in an untenable position of being pressured to open to enable workers to work outside of the home.  

The biggest unanswered question of the reopening effort is how working families will find child care for the days when their children cannot be physically present in school. Another is the issue of staffing in the schools. The idea behind opening schools is that younger children are less at risk of the virus than are adults. That begs the question of what to do to mitigate the risk in adults. This will create significant financial costs. And that does not include the cost of hiring staff to replace teachers who will either seek medical exemptions or, perhaps worse, retire. In NYC, the city estimates that about one in five current teachers will receive medical exemptions to work remotely.

The second issue is that the reopening experience overall to date has been perilous. The reimposition of some limits on economic activity is the clearest indication that reopening policies have been a failure. The immediate effect is on governmental revenues derived from taxes most directly related to economic activity like sales taxes especially those generated from the hospitality industry. There is a conger term component to this concern. The problem is that most reopening scenarios make the assumption that there will be work to return to.

Take the airline industry. United has threatened to furlough 36,000 workers if it is unable to resume a “normal” schedule. This week saw reopenings by airlines which were quickly pulled back as the pandemic marched through the Sun belt. A large drop in projected demand drove those decisions. In the hospitality sector, employment could take a significant hit without additional federal stimulus. Now will be the time when the small independent operator will have to face the music and decide whether or not their business is viable. The signs of drags on employment are everywhere with a variety of retail entities announcing unit closings and/or financial restructurings. Banks are even contemplating or announcing branch closures. These will undoubtedly serve to dampen the decline in unemployment.

We believe that there will be a significant impact to local revenues that will become clear when tax collection data for FY Q1are available in the fall.

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WHILE WE WERE AWAY

Lots happened in the short time we took away from things. The pandemic has turned the budget processes of a number of issuers on their heads as they attempt to deal with the fiscal impacts of the pandemic.

Oklahoma voters approved a ballot initiative which would expand Medicaid in the state under the provisions of the Affordable Care Act. The ballot measure requires the state to expand Medicaid by July 1, 2021. At least 200,000 Oklahoman adults will be newly eligible for Medicaid. It comes after the State had positioned itself to be the first to receive a federal waiver to implement a more limited form of the Medicaid expansion. It would convert a portion of federal Medicaid payments from an open-ended entitlement into a defined lump sum, known as a block grant. 

The ballot measure inserts Medicaid expansion into the state’s constitution, which could bar state leaders from making conservative changes to the program, like adding work requirements or premiums. The Governor was an early and vocal holdout against the imposition of containment and mitigation procedures in Oklahoma. Since then, the ground has shifted as evidenced by the failed campaign rally in Tulsa.

New York City adopted a budget for FY 2021 that reflects the fiscal realities of the City’s $9 billion budget gap which resulted from the impact of the pandemic on the City’s economy. It also comes as the City attempts to grapple with demands for reducing funding for the police. It is not surprising that the budget process was a highly political one. What is disappointing is the threatened actions of one of the City’s major elected political leaders.

Jumaane Williams, the city’s public advocate has threatened to attempt to use City Charter language which he interprets as giving him the right to stop the City from collecting property taxes. The advocate’s position reflects his long role as a political activist in the City’s political life. What is also reflects is an irresponsible attitude towards its debt holders. The problem with the advocate’s position is that property taxes are by law initially required to be deposited into sinking funds held for the purpose of repaying the City’s general obligation debt. Only after sums required for debt service have been deposited do those monies flow into the City’s general fund.

It does raise the question of whether a control board should be reinstated to oversee the City’s finances. We only have to look to the City’s eastern border at Nassau County. There the County is seeking to have NIFA, the entity overseeing its operations, extend the potential period of its control. The vehicle for that would be the issuance on behalf of the County of debt through NIFA. A control period would extend through the life of any NIFA debt issued. It comes from the same County Executive who ran against NIFA oversight so, many things have changed.

In Maryland, the Board of Public Works cut $413 million out of the state’s budget — one of the biggest single-day revisions in state history.  Funding was reduced for universities, community colleges, crime initiatives and dozens of other state programs. The Board also approved selling off state-owned aircraft and eliminating 92 vacant state jobs. The largest cut — $186.8 million — affected universities and community colleges. The governor has warned that if the board cannot come up with an alternative to those cuts by next month, the state may be forced to lay off 3,157 employees.

PUERTO RICO

The judge overseeing the Puerto Rico Title III proceedings ruled against bondholders in three motions before her. $6.7 billion of Puerto Rico Highways and Transportation Authority, Infrastructure and Finance Authority, and Convention Center District Authority were affected by the decision. Bond insurers Assured Guaranty (AGO), Ambac, National Public Finance Guarantee, and Financial Guarantee Insurance Corp. had asked the court to lift the bankruptcies’ automatic stay provisions on those entities. This would allow the insurers to sue the issuers for the right to retain revenues subject to what is known as the “clawback” provisions for those bonds.

Those provisions were always a threat to creditor to bond payments. It always seemed clear from offering documents that there could be potential conflicts between the strength of statutory versus constitutional claims on revenues. The   insurers had plenty of motivation to challenge the “clawback” which allows some tax revenues dedicated to the revenue bonds to be held back by the Commonwealth in order to conform to the constitutional pledge securing general obligation debt of the Commonwealth. HTA debt to the tune of $2.95 billion gross par . All three issuers have sold insured debt backed by the insurers. With $4.1 billion outstanding, the HTA bonds are the biggest segment of the insurers claim.

And then there is the water system. Starting July 2, nearly 140,000 customers, including some in the capital of San Juan, became without water for 24 hours every other day as part of strict rationing measures. More than 26% of the island is experiencing a severe drought and another 60% is under a moderate drought, according to the US Drought Monitor. Water rationing measures affecting more than 16,000 clients were imposed earlier this month in some communities in the island’s northeast region. 21 of 78 municipalities are affected by the severe drought while another 29 are affected by the moderate drought. An additional 12 municipalities face abnormally dry conditions. The worst of the drought is concentrated in Puerto Rico’s southern region.

Underlying this all is the annual dance around the adoption of a budget for the Commonwealth. For the fourth straight year, the Puerto Rico government budget that went into effect at the start of fiscal year on July 1 was the version presented by the federally created Puerto Rico Financial Oversight & Management Board (FOMB). Section 202 of Promesa mandates the Puerto Rico Legislative Assembly to approve a “compliant budget” and submit it to FOMB before the start of fiscal year. Otherwise, the oversight board’s proposal will be “deemed approved” by the governor and the oversight board will issue it a fiscal plan compliance certification, entering into “full force and effect” at the start of the fiscal year on July 1.

Funding for full payment of the Christmas bonus to public employees is not included in the approved budget. The House budget plan contained an allocation of $48 million to pay the Christmas bonus to public employees, and the Senate insisted on $64 million in bonus funding. It’s a symptom of the state of denial in which the Commonwealth government exists  and serves as a drag on recovery.

MORE BAD NEWS FOR THE MTA

The New York City Independent Budget Office (IBO)has released an analysis of the impact of declining dedicated tax revenue on MTA finances. Revenue from dedicated taxes comprised 37 %  of the Metropolitan Transportation Authority’s operating budget in 2019. Dedicated taxes made up a similar share of NYC Transit’s budget, or nearly $3.7 billion. On the basis of the recent experience, the IBO has delivered several projections of the revenue impact on MTA revenues due to the pandemic.

Over the years 2020-2022, IBO estimates that dedicated tax revenues for the transportation authority will fall a combined $2.7 billion short of projections by the agency prior to the pandemic. IBO estimates the shortfall will be $484 million in 2020, $1.4 billion in 2021, and $816 million in 2022. Looking just at dedicated taxes from the city, known as the urban tax and the mansion tax, IBO projects a substantial decline from the amount forecast by the Metropolitan Transportation Authority in February. IBO projects urban tax collections will fall $355 million short of the nearly $1.9 billion previously expected by the transportation authority over the years 2020-2022. IBO estimates the mansion tax will generate about $450 million less than the transportation authority estimated over the same period.

IBO anticipates other dedicated taxes also will generate revenue well below previous expectations. For example, the transportation authority had projected that the payroll mobility tax would garner about $5.0 billion in revenue for the years 2020-2022. IBO estimates collections will fall about $500 million short over the three-year period. NYC Transit’s fare revenue totaled $4.6 billion in 2019. NYC Transit’s fare revenue, which totaled $4.6 billion in 2019.

Before the Covid-19 crisis, the MTA expected to receive between $1.0 billion and $1.1 billion per year from the regional sales tax. IBO’s projections for this tax are $138 million (13 %) lower in 2020, $187 million (17 %) lower in 2021, and $142 million (13 %) lower in 2022. The for-hire transportation surcharge (FHV Surcharge) is a fee on trips taken by traditional taxis, car services, or app-based service such as Uber or Lyft, that begin, end, or pass through Manhattan south of 96th Street. The surcharge is $2.75 for app-based services, $2.25 for traditional taxis and car services, and $.75 per passenger in “pooled” vehicles. The MTA in its February 2020 Financial Plan projected FHV Surcharge revenue of $417 million in 2020 and $385 million in 2021 and 2022. Preliminary actual revenue for 2020 was $384 million, and IBO projects revenue of $332 million in 2021 and $365 million in 2022.

One tax source has held up. The internet marketplace tax took effect in New York in calendar year 2019. The legislation authorizing the tax requires third party retail sites such as Amazon and eBay to collect and remit sales tax on purchases made by New York State residents. Most of the revenue from the tax is earmarked for the MTA’s capital program. Given the strength of online sales in the wake of the Covid-19 pandemic, IBO has not adjusted the projected revenue from this tax in 2021 and 2022. The preliminary total of actual dedicated tax revenue received by the MTA in 2020 is $6.4 billion, $484 million (7 %) below what the MTA projected in its February 2020 Financial Plan. IBO projects dedicated tax revenue for the MTA of $5.7 billion in 2021 and $6.5 billion in 2022. Compared with the MTA’s February forecasts, these projections are $1.4 billion (25 %) and $816 million (11 %) lower, respectively.

SCHOOL IS OUT FOR COLLEGE TOWNS

The higher education sector has been under increasing pressure as unfavorable demographics and a demand base which is warier about taking out significant debt to finance attendance have exerted downward pressure on demand. This has led to universities seeking to cut costs and lean on their endowments for greater amounts of annual support. While these factors have pressured university finances, the economic impact of those factors has been somewhat muted for those businesses which cater to college populations. Now, the pandemic may be able to do what these other factors have not – significantly damage local economies.

One way to identify potentially localities vulnerable to the impacts of containment and mitigation strategies is to see whether or not colleges have a significant impact on their local economies. Many of these institutions are state universities located in areas where they have become the dominant employer. With the potential for predominantly online learning due to student fears over returning to a traditional residential campus setting, many of these local economies face the loss of significant economic activity if normal university/college related activities do not resume this semester.

The most recent hit to international student demand has come from the announcement that the Trump Administration has determined that international students must take their courses in person, in order to remain in the US on their student visas. In our February 24 edition we highlighted the importance of international students to many institutions and their local economies. The regulations proposed from the Department of Homeland Security say that students on study visas whose schools will operate entirely online this fall will not be allowed to remain in the US.

The decision will impact all types of universities. The California State system, Harvard and the University of Massachusetts Boston are among those institutions offering only online classes this fall. Harvard and MIT asked a federal court in Boston for a temporary restraining order and permanent injunction against the administration’s new policy. The lawsuit alleges several violations of a federal law known as the Administrative Procedure Act (APA), which concerns how much decision making power resides with federal agencies. 

The effort by DHS to promulgate these regulations at this date under these circumstances seems designed to be as disruptive as possible for the students and the institutions. There have been several affirmations of stable ratings outlooks of state university credits. Under current circumstances, the move against international students is not a source of stability.

Another segment of university operations to succumb to the pandemic is athletics. The pandemic has provided an opportunity for institutions to eliminate varsity support for a number of “unprofitable” sports. The biggest example is the announcement that Stanford University will discontinue 11 of its varsity sports programs at the conclusion of the 2020-21 academic year: men’s and women’s fencing, field hockey, lightweight rowing, men’s rowing, co-ed and women’s sailing, squash, synchronized swimming, men’s volleyball and wrestling.  The 11 programs include 240 student-athletes and 22 coaches. 

It is a trend seen across the country. The University of Akron cut men’s cross country, men’s golf and women’s tennis, while Furman eliminated baseball and lacrosse. Brown is planning to demote eight teams to club status.  If football and basketball result in restricted and/or partial seasons, than the mother’s milk of college sports will have been impacted creating further pressure on college finances.

COAL – NOT IF BUT WHEN?

Coal continues its struggle against the realities of economics and climate change. Last week, the Trump Administration made a last ditch effort to subsidize coal with a $120 million program to seek other uses for coal. This was offset by the trend of utilities in the western US retiring coal-fired plants before they reach the end of their expected useful lives. Even stalwart facilities like the Navajo Generating Station are shuttering. Now, more western utilities are making similar moves even as they are located within reasonable shipping distance of low sulphur coal.

Colorado Springs Utilities voted Friday to close the two municipally owned coal plants, one in 2023 and another by 2030. Colorado Springs Utilities will close its Martin Drake plant in 2023 and its Ray Nixon plant by 2030. The municipal utility’s “Energy Vision” calls for reducing carbon emissions 80% by 2030. The announcement means only three of the state’s remaining coal generators are slated to continue running after 2030. Colorado had 17 coal boilers spread across eight power plants in 2008.

Tucson Electric Power released a proposal to ramp down the usage of its two boilers at the Springerville Generating Station before closing them altogether in 2027 and 2032. The plan is subject to approval from Arizona regulators. Tucson Electric Power said it plans to operate two of Springerville’s four coal boilers on a seasonal basis beginning in 2023, using the units only in the summer months. The utility said it plans to install 2,457 megawatts of new wind and solar by 2035 — a 70% increase in its renewable capacity.

CONVENTION BLUES

The nation’s large convention centers have been under the gun as they deal with cancellations and the decline in tourism which is impacting revenues pledged to support the debt issued to finance their construction. The latest victim is the debt issued by the Las Vegas Convention and Visitors Authority (LVCVA), Nev. S&P announced that it was lowering its rating on the Authority’s outstanding debt from A+ to A.

S&P acknowledges that “the authority is a primarily tax-funded public operating entity”. Nevertheless, “with the onset of the COVID-19 pandemic and social distancing measures implemented in response to the outbreak, economically sensitive pledged revenues are expected to fall sharply in 2020, weakening the authority’s coverage metrics and introducing significant revenue volatility risk in the short-to-medium term, which is reflected in the downgrade.”

Ninety-three events (conventions, events, and meetings) were held at LVCC facilities in fiscal 2019. The pandemic and the restrictions on travel and large gatherings has created real uncertainty regarding medium-term large-scale travel, general tourism, and traditional heavy scheduling of fall conferences in the wake of resurging cases has the potential to slow traffic to the city and significantly reduce expenditures for an extended period of time. Demand for hotels and large-scale events has fallen, leading to weakening pledged revenue collection and debt service coverage. 

NO REST FOR THE HACKERS

Cybersecurity in the public sector was back in the news. NetWalker, a ransomware gang is holding Fort Worth’s Trinity Metro. The group is threatening to release all their data from Trinity Metro’s private files. The group is bold as they are the ones publicizing the hack.

Trinity Metro has the option to either pay up — which most experts discourage — or they can rely on backups of the data and risk the information being posted publicly. The NetWalker ransomware group has attacked the University of California — San Francisco. The university recently paid the hackers $1.14 million to prevent the release of student records and other information. Michigan State University and Columbia College of Chicago were also hacked by NetWalker in June. It’s not clear whether they paid as well. It only takes a few to give in to encourage this activity. As the old saying goes, a million here and a million there and pretty soon it adds up to real money.

CONGRESS AND INFRASTRUCTURE

A bipartisan bill has been introduced in the Senate to support the financing of infrastructure by state and local governments. The  legislation – The American Infrastructure Bonds Act of 2020  – would allow state and local governments to issue taxable bonds for any public expenditure that would be eligible to be financed by tax-exempt bonds. These bonds could be used to support a wide range of infrastructure projects, including roads, bridges, water systems, and broadband internet.

The bonds would be modeled as a “direct-pay” taxable bond, with the U.S. Treasury paying a percentage of the bond’s interest to the issuing entity to reduce costs for state and local governments. The Treasury Department would make direct payments to the issuer of the bonds at 35% after the date of enactment and down to an estimated revenue neutral rate of 28% starting in 2026. These payments would encourage economic recovery from the corona virus pandemic by subsidizing AIBs issued through 2025 at a higher percentage of the bond’s interest.

The payments would revert to a revenue neutral percentage for projects after 2025, reducing long-term costs for the federal government and providing a permanent financing option for localities. the payments from the U.S. Treasury to issuers would be exempt from sequestration. This became an issue as Congress steadily chipped away at the support for Build America Bonds which were authorized in 2010.

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