Joseph Krist

Publisher

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SCHOOLS AT THE EPICENTER OF THE VIRUS DEBATE

The outlook for a return to school dimmed significantly this week as districts throughout the country have announced delayed, modified, or suspended reopening. These decisions are coming in the face of a massive pressure campaign driven by conservative political considerations to try to force schools to reopen. The latest example is the announcement that the two largest school districts in California – Los Angeles and San Diego – will conduct their fall semesters on line.

The school districts have been put in an untenable position. The modern US economy, for better or worse, assumes that two parents in each household will be able to work. The resulting shift towards and expansion of the role of school districts to serve as a primary source of child care in the modern economy help create the current situation. Obviously, the economy cannot fully recover until all workers are available to work.

So clearly, school districts are at a crossroads. They are due to open in 5 to 8 weeks but they have no idea of the feasibility of a return to class would be financially, legally, and from a public health standpoint. At the same time, they are highly dependent upon sources of funding like state aid which are uncertain at best. There own local tax bases are undergoing extreme stress. Which leads us to ask, how can a school district rating outlook be anything other than uncertain or developing at best?

The certainly can’t be positive or stable in this environment and in many cases deserve a negative outlook. Here’s what Moody’s says about the pandemic.” The situation surrounding Corona virus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis.” On what planet is that a stable environment? Consider the role of state government in funding education and then look at the financial environment for states. We ask again, On what planet is that a stable environment?

We also ask how the pandemic does not raise governance issues for entities like school districts who do not control their own destinies? In many states, the decision to reopen schools will be driven by decisions at the state level. So from a governance standpoint, how is this not a negative factor for school districts? And if this was not a major consideration, why all the focus on the next stimulus bill and its potential funding for states and localities?

The issue of reopening is fraught for the school districts. What is their overall liability? What about the risk to faculty and staff? What are the potential impacts on staffing and costs? These are all basic issues for school districts to address and they currently are not armed with sufficient information so that all stakeholders can have their concerns addressed. For example, The American Academy of Pediatrics has clarified its stance on school reopening. “Returning to school is important for the healthy development and well-being of children, but we must pursue re-opening in a way that is safe for all students, teachers and staff. Science should drive decision-making on safely reopening schools. Public health agencies must make recommendations based on evidence, not politics. We should leave it to health experts to tell us when the time is best to open up school buildings, and listen to educators and administrators to shape how we do it.”

Two headlines we saw this week frame the issue very effectively. “education board in California’s Orange County votes to reopen schools without wearing masks and 7 in 10 parents sat sending kids to school a risk: poll.” These are not the sort of questions which are answered through data and spreadsheets so a more data based quantitative approach to ratings does not answer the real issues facing credits. So I ask once again, on what planet is that a stable environment?

OPPORTUNITY ZONES

When the 2017 tax reform legislation was enacted, one part of the bill placed municipal bonds right at the center of it. Opportunity Zones were included as part of a package designed to drive investment in historically under invested areas. The favorable treatment of capital gains income from investment in OZ projects was the draw for investors. At the time, there was a concern that the structure of the program might not channel investment into the kinds of community based employment and development opportunities most needed.

Initially, the program was seen as not living up to its goals. it was easy to find examples of developments and projects – primarily real estate related – that seemed to have no need for subsidized investment. And in many cases, they were owned by well funded established entities. Now, research from the Urban Institute finds that the critics may be right.

The Institute conducted interviews with a range of stakeholders working on mission-oriented OZ projects across the US. Through that process they found that the incentive’s structure makes it harder to develop projects with community benefit in places with greatest need. There is a mismatch between the type of investment many mission actors desire and the OZ market’s investment parameters, which favor assets providing the highest returns in shorter timelines. That conflicts with the program’s ten year timeline  for maximum tax benefit.

Tellingly, a few developers said the incentives made a difference in allowing a project to go forward, but most admitted their project would have proceeded regardless of whether they raised OZ equity. That highlights the single biggest criticism of the program which was designed to generate a neighborhood based economy more likely to produce longer term neighborhood equity.

The Institute does offer proposed solutions. They include targeting incentives to investments with the greatest impacts. These investments could be more deeply subsidized while more efficiently using total federal tax expenditures. OZ tax incentives could be based, for example, on the number of quality jobs created by the OZ investment. A redesigned OZ incentive could encourage equity investments in Community development financial institutions (Community development financial institutions (CDFIs) Community development financial institutions that, in turn, invest in or lend to OZ projects.  

The weaknesses of the program make an excellent case for more favorable municipal bond provisions. Advance refundings and an expansion of private activity bonds would likely generate more useful benefits in the immediate term.

MILEAGE TAXES GAINING TRACTION

One of the phenomenon we have been observing is the impact of the pandemic on the willingness of legislatures to embrace new ideas. The pandemic, coinciding with the depression in the oil/gas industries, has forced legislators to consider heretofore heretical ideas in their quest to balance their budgets. One of the items that shows this is the growing support for taxes for transportation which are not linked to fuel consumption. We now have data that backs up the view of that support.

In each of the last 11 years, the Minetta Institute for Transportation has surveyed attitudes towards taxes for transportation infrastructure. This year, the survey showed stronger support for a new vehicle taxation model. 49% supported replacing the gas tax with a ‘green’ mileage fee that charges an average rate of a penny per mile, with lower rates for less polluting vehicles and higher rates for more polluting vehicles. Half of respondents supported a “business road-use fee” that would be assessed on the miles that commercial vehicles drive on the job.

The study also found that If Congress were to adopt a federal mileage fee to replace the gas tax, more than three-quarters would prefer to pay monthly or at the time they buy fuel or charge a vehicle, while 23% preferred to pay an annual bill. Respondents thought mileage fee rates should be lower for electric vehicles than for gas and diesel vehicles. A majority valued the idea of using the gas tax revenue on improvements across different transportation modes, including for both road and public-transit-related projects. Only 3% of respondents knew that Congress had not raised the rate of the federal gas tax since 1993.

The data comes as the US Department of Transportation released data on 4th of July travel. Americans took 2.8 billion fewer total trips during the 4th of July week this year than they did in 2019. That overall drop is supported by similar declines in the number of trips per day throughout the week. It is driven by a similar 2.8 billion drop in the number of local trips (under 50 miles) as well as the number of trips taken in each of several local trip-distance groupings. The number of long-distance trips (50 or more miles) edged up by 0.3 million from 2019 to 2020. That slight increase was driven by a 2.2 million rise in the number of trips between 100 and 250 miles, which was tempered by a 1.9 million drop in the number of trips greater than 500 miles. In 2019, on average, 19.7% of Americans stayed home each day during the holiday week; in 2020, that number rose to an average of 24.8% staying home each day.

HEALTH INSURANCE

In spite of the debate over the Affordable Care Act and the efforts of the Trump Administration to have the ACA declared unconstitutional, it has clearly resulted in more people having insurance coverage. This has benefitted not only individuals newly covered but also the institutions which serve them, especially hospitals. as the proportion of uninsured patients has gone down,

Because of job losses between February and May of this year, 5.4 million laid-off workers became uninsured. These recent increases in the number of uninsured adults are 39% higher than any annual increase ever recorded. The highest previous increase took place over the one-year period from 2008 to 2009, when 3.9 million nonelderly adults became uninsured. Nearly half (46%) of the increases in the uninsured resulting from the COVID-19 pandemic and economic crash have occurred in five states: California, Texas, Florida, New York, and North Carolina.

In eight states 20% or more of adults are now uninsured: Texas, where nearly three in ten adults under age 65 are uninsured (29%); Florida (25%); Oklahoma (24%); Georgia (23%); Mississippi (22%); Nevada (21%); North Carolina (20%); and South Carolina (20%). All but Oklahoma are also among the 15 states with the country’s highest spike in new COVID-19 cases during the week ending on July 12. Five states have experienced increases in the number of uninsured adults that exceed 40%: Massachusetts, where the number nearly doubled, rising by 93%; Hawaii (72%); Rhode Island (55%); Michigan (46%); and New Hampshire (43%).

The movement of the pandemic to the Sun Belt is highlighting again the regional nature of the health insurance crisis in the US. This week the nonpartisan consumer advocacy group Families U.S.A., released the results of research which found that the estimated increase in uninsured laid-off workers over the three-month period February to May was nearly 40% higher than the highest previous increase, which occurred during the recession of 2008 and 2009. In that period, 3.9 million adults lost insurance.

That research shows that the highest percentages of uninsured non-elderly individuals are found in the old Confederacy. With the pandemic concentrated in Texas and Florida, it highlights their respective rates of uninsured at 29 and 25%. That will put the hospitals -already under unprecedented stress – to have to deal with the reality that one in four or one in three patients will have to be treated for free.

Contrast that with the environment in early hard hit states where uninsured rates are 10% in NY and 13% in Illinois. Massachusetts has only an 8% uninsured rate. This mitigates the risks associated with high levels of charity care and does provide some comfort that the resumption of elective surgeries will help to support revenues. 

COAL DECLINE LOCAL IMPACT

The National Bureau for economic research released a report documenting the financial impact on counties which have a significant economic dependence upon coal production. The report identified some 27 counties which derive over one third of their revenues from mining activities.

US coal consumption nearly tripled between the early 1960s and 2000s, with growth disproportionately in the Powder River Basin in Wyoming and Montana. Between 2007 and 2017, the tide turned, and total coal production in the United States declined by 32 percent. At coal’s employment peak in the 1920s, 860,000 Americans worked in the industry. As of March 2020, coal mining employed only about 50,000 people. The most concentrated job losses have been in Appalachia. Employment in the coal mining industry declined by over 50 percent in West Virginia, Ohio, and Kentucky between 2011 and 2016. And the decline has been rapid. In Mingo County, West Virginia, coal mining employed over 1,400 people at the end of 2011. By the end of 2016, that number had fallen below 500. Countywide, employment fell from 8,513 to 4,878 over this period.

Which are the most at-risk counties according to the NBER? Boone County, West Virginia, Campbell County, Wyoming, and Mercer County, North Dakota. What does that risk look like in numbers? Campbell County, Wyoming says that of the $5.3 billion in total county assessed property valuation (which includes the value of minerals produced) in the 2016–17 fiscal year, 89 percent was oil and gas production and coal. The Mercer County, North Dakota  general fund received $1.71 million from coal severance taxes, $1.25 million from coal conversion taxes, and $0.76 million from mineral royalty revenue. Overall county general revenues were $7.5 million, making the three sources about half of all county revenues.

About a third of Boone County’s revenues directly depended on coal in the form of property taxes on coal mines and severance taxes. In 2015, 21 % of Boone County’s labor force and 17 percent of its total personal income were tied to coal. Coal property (including both the mineral deposit and industrial equipment) amounted to 57 % of Boone County’s total property valuation. Property taxes on all property generated about half of Boone County’s general fund budget, which means that property taxes just on coal brought in around 30 % of the county’s general fund. Property taxes on coal also funded about $14.2 million of the $60.3 million school budget (24 %).

ILLINOIS MARIJUANA TAXES

As the first state to legislatively legalize recreational marijuana, it has been a source of interest for analysts of the business. So the latest statistics on cannabis tax collections is interesting. Illinois collected almost $52.8 million in tax revenue during the first six months of recreational marijuana sales. This is nearly double the Governor’s budget estimates, which predicted the state would collect $28 million in cannabis tax revenue before June 30.

The state collected about $34.7 million in cannabis specific excise taxes and $18 million in general sales taxes from the industry. The state expects $25.9 million to go into its general fund. As the first Midwestern state to legalize recreational marijuana, Illinois was well positioned to benefit from that status. For once, Illinois is the beneficiary of good timing. The pandemic has also seen a rise in cannabis sales nationwide.

CLIMATE CHANGE AND MUNICIPAL CREDIT

The National Oceanic and Atmospheric Administration (NOAA) has released its 2019 State of U.S. High Tide Flooding with a 2020 Outlook report. The document highlights the increasing impact of climate change and sea levels. The findings have significant implications for the long term creditworthiness of many municipal credits located on the nation’s coastlines.

Evidence of a rapid increase in sea level rise related flooding started to emerge about two decades ago, and it is now very clear. This type of coastal flooding will continue to grow in extent, frequency, and depth as sea levels continue to rise over the coming years and decades. High tide flooding (HTF) is an increasingly frequent phenomenon. The U.S. annual HTF frequency now is more than twice that in the year 2000 due to rising relative sea levels. Nineteen locations also broke or tied their all-time HTF records (median of 13 days) in 2019 along the East and Gulf Coasts including multiple locations along the Texas coastline, as well as at Miami, Savannah, Charleston and Annapolis.

Under current floodplain management practices, by 2030 the national HTF frequency trend is likely to further increase by about 2–3 fold. This highlights the need for municipalities to take remedial steps. HTF is more than twice as likely now as it was in 2000. The rapid growth is in response to relative sea level (RSL) rise, which is occurring along most U.S. coastlines. HTF in 2019 occurred the most along the Western Gulf of Mexico coastline.  HTF occurred more often along the Southeast Atlantic and Gulf Coasts in 2019.

So where was the problem the greatest? HTF occurred most frequently (64 days) at Eagle Point, Tex., which is within Galveston Bay. Other notable locations setting records include Annapolis, Md. where HTF often causes parking and transportation disruption in the downtown area, Charleston, S.C. and Savannah, Ga., Virginia Key in the Miami region, Dauphin Island, Ala. and Galveston, Tex..

The Northeast Atlantic and Western Gulf coastlines are projected to experience the most HTF in 2020. The national median HTF occurrence was 4 days in 2019, and the trend continues to accelerate. By 2030, the national HTF frequency is likely to increase about 2–3 fold (national median of 7–15 days) compared to today without additional flood-management efforts. By 2050, HTF is likely to be 5- to 15-fold higher (national median of 25–75 days), and potentially in some locations reaching nearly 180 days per year, effectively becoming the new high tide.

Keep in mind that this analysis is the product of the current climate ignorant anti-science Administration  in Washington. And it is still bad news for coastal communities. It needs to carry greater weight in the analyses done by investors and certainly the rating agencies.

UPDATES

The Trump Administration has agreed to rescind a directive that would have barred foreign students from the United States if their colleges canceled in-person instruction during the COVID-19 pandemic, following lawsuits by a number of universities and states. Eighteen state Attorneys General and numerous universities across the country challenged the plan in federal court. The reversal eliminates the risk not only for the schools but also for entities like landlords who rely on students who reside off campus.  

We have commented previously on the risks of single project bonds for things like hotels which are extremely vulnerable to the impact of pandemic restrictions on operations. The latest example is the ill-fated Lombard, IL hotel project which has never been a success. The unrated 2005 bonds issued for the project were restructured its bonds through bankruptcy in 2018 . The hotel has not been open since late March and defaulted on its July 1 debt service payment when due. The $142 million bond exchange resulted in recovery rates for the original holders of between 77% and 86% on three most senior series while a subordinated $29 million series took a near total loss. The new debt extended the  final maturity of the debt to 50 years.

The cruise ship industry and those places which depend on it for tourism will continue to be under pressure from the impact of the pandemic. Now that pressure will continue as the Centers for Disease Control and Prevention issued an order that extended the suspension of cruise operations until Sept. 30. The extension reflects the fact that from March 1 until July 10, 80% of the ships in the C.D.C.’s jurisdiction were affected by the corona virus. The agency said there had been nearly 3,000 suspected and confirmed cases and 34 deaths on ships in U.S. waters.  There were 99 outbreaks aboard 123 cruise ships in United States waters alone.

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 advisors prior to making any investment decisions.