Joseph Krist

Publisher

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So we have now passed the 40 million mark for new unemployment claims verifying what one can see with their own eyes. At the same time, the Administration has apparently decided that releasing economic projections as a part of the budget process would contain more bad news than they believe the American public can handle. The claims number is 25% of the labor force even as the reported rate is over 13%. The implications for FY 2021 for states and municipalities are bleak.

Municipal bonds will and should be at the center of the debate over next steps on the road to recovery. There seems to be a growing consensus that infrastructure could be a key generator of jobs going forward. A number of comments and proposals have been floated all involving municipal bonds. Whether they be issued for capital finance purposes or  for operating purposes, municipal borrowing is likely to be a key component of any recovery process. It was true of the Great Depression and it is true during the current depression.

The current Depression has raised worries over government solvency. Moody’s made some comments about bankruptcy which should give investors pause. They raise issues which we have raised previously.” Municipalities will not strive to make bondholders whole when doing so would be too painful for residents and other constituents… municipalities will not strive to make bondholders whole when doing so would be too painful for residents and other constituents.”  The second issue reflects cracks in the legal consensus around the treatment of special revenues .

Moody’s notes that decisions in the ongoing Title III proceedings in Puerto Rico have been negative for special revenue backed bondholders. “If this court determines that the revenues securing Fairfield’s bonds constitute special revenue pledges protecting bondholders against impairment, just as another judge ruled in Jefferson County’s bankruptcy case in this district, it would contrast with the recent 1st US Circuit Court of Appeals decision in the Puerto Rico (Ca negative) bankruptcy-like proceedings and likely provoke further litigation, possibly ending at the appellate-court level.”

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HOSPITALS AND FEDERAL AID

We have for some time been advising that investors should be very wary of the small and/or rural hospital sector. They have always been characterized by narrowly balanced finances at best. In recent years, these hospitals have been asked to deal with an increasing share of uninsured patients and cash positions have narrowed in the face of weakened reimbursements. Obviously, these institutions have been among the worst positioned to withstand a significant economic decline. So one might have hoped that the needs of these institutions would have been addressed through any of the pieces of federal legislation designed to mitigate the impact of the corona virus pandemic.

Unsurprisingly, the Trump Administration has taken a different path. The Department of Health and Human Services (HHS) has now begun distributing a portion of the $175 billion allocated for grants to health care providers in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Paycheck Protection Program and Health Care Enhancement Act. Congress stated the money can be used either for costs related to treating COVID patients or to reimburse for lost revenue due to the pandemic. The largest share of the initial tranche of $72.4 billion to be distributed is the $50 billion that the Department of Health and Human Services allocated to providers who participate in Medicare based on their total net patient revenue from all sources.

A recent analysis of the distributions was released by the Kaiser Family Foundation (KFF) and it confirmed the worst fears of the rural hospital sector. These institutions tend to have higher levels of patients either under Medicaid or uninsured. The KFF research showed that the formula used to allocate the $50 billion in funding favored hospitals with the highest share of private insurance revenue as a percent of total net patient revenue. The hospitals in the top 10% based on share of private insurance revenue received $44,321 per hospital bed, more than double the $20,710 per hospital bed for those in the bottom 10% of private insurance revenue.

The disparity reflects the reliance of HSS on input from the larger hospitals and the for profit sector. The formula penalizes smaller and rural hospitals for the fact of the underlying demographics of their patients. KFF found that when compared to the 457 hospitals with the lowest share of private insurance revenue, the 457 hospitals with the highest share of private insurance revenue are less likely to be teaching hospitals (10% vs. 38%) and more likely to be for-profit (33% vs. 23%).  The hospitals with the highest share of private insurance revenue also had higher operating margins (4.2% vs. -9.0%) and provided less uncompensated care as a share of operating expenses (7.0% vs. 9.1%).  Uncompensated care includes bad debt, charity care and unreimbursed Medicaid and children’s health insurance program expenses.

KFF also notes that all things being equal, hospitals with more market power can command higher reimbursement rates from private insurers and therefore received a larger share of the grant funds under the formula HHS used. An alternative methodology for distributing the funds based on patient volume or that increased the size of the grant for providers that are more reliant on public payors such as Medicaid would have distributed the funding more evenly and less skewed by higher revenues from private insurers.

Dignity Health, the Cleveland Clinic, and Stanford Health Care were the only organizations to receive over $100 million in payments from the Relief Fund. Other recipients include Memorial Hermann Health System, $92,422,556, NYU Langone Hospitals, $92,120,455, County Of Los Angeles, $80,867,712, HMH Hospitals Corporation, $76,839,719; Florida Cancer Specialists & Research Institute, $67,343,375; Memorial Hospital For Cancer And Allied Diseases, $64,048,724; Massachusetts General, $58,076,206; Yale New Haven Hospital, $54,994,143; Ohio Health Corporation, $53,810,332, Allina Health System, $53,596,403; Texas Oncology Pa, $52,039,485.

The reimbursement formula is just another brick on the credit load faced by the smaller and rural hospital sector. Only one could be considered a safety net provider. And it is one more reason to avoid the single site and rural hospitals.

VEHICLE MILEAGE TAXES

The pandemic has potentially created opportunities to innovate in the funding of certain services. One of those sectors in the middle of technological change and its impact is transportation. Some states may find that the need to strengthen state finances in the aftermath of the pandemic allows for more creative thought.

We saw this week that the Director of the Wyoming Department of Transportation has suggested a ” a per-mile road usage charge was an option worth considering” as a source of funding for state road projects. Utah and Oregon recently implemented their versions of vehicle mileage taxes (VMT). Other alternatives in Wyoming include a bill to create a master I-80 tolling plan, which would have considered ways to exclude Wyoming drivers. It failed introduction in the Senate, with nearly two-thirds of legislators in opposition. 

Wyoming has assumed for its revenue projections a program with a penny-per-mile rate, which would be half a cent lower than those in Oregon and Utah. It is estimated to bring the state roughly $104 million in annual revenue. That would cover a significant part of the state’s estimated annual road bill.

The discussion is reflective of certain trends regarding the potential for tolls to become a major funding source. In any number of jurisdictions, voters have shown clear opposition to tolls for both new projects as well as maintenance projects. The opposition has been across the country even where there has been a clear need for improvements. That opposition limits the range of funding options available for capital development.

ILLINOIS BUDGET

Illinois was one of the states in similar straits to that of New York with high caseloads and impacts which could potentially result in  difficult budget process. New York moved relatively quickly and enacted its budget essentially on time. Now the Land of Lincoln has moved forward with its budget. The state legislature passed approved a “maintenance level” budget of $40 billion. It depends on federal funds and on companion legislation designed to made another effort to get a casino in Chicago up and running.

The adopted budget keeps spending essentially flat for everything except pandemic related health expenditures. Any budget enacted would be a highly uncertain one given the dispute over state and local aid levels in any future federal legislation. Add the additional uncertainty of the pending November vote on the constitutional amendment restructuring the state’s income tax rates. Asking for more could be a bit unrealistic.

NYC BORROWING REQUEST MEETS OPPOSITION

The state Legislature refused to take up Mayor Bill de Blasio’s request to allow New York City to borrow $7 billion to address a shortfall triggered by the corona virus pandemic pandemic. The Mayor estimates that the pandemic will impact the City’s revenues by some $9 billion. Publicly, the reasons include a desire to wait and see what aid is generated for state and local governments in an expected fifth stimulus bill. There are also issues of oversight cited by both the Legislature and the Governor.

To address those concerns, it has been proposed that should a borrowing be authorized for essentially operating costs, that the borrowing be done under the oversight of the Financial Control Board. The real story is the lack of trust between the Mayor and the State, both the Legislature and the Governor. We have discussed on numerous occasions the concerns that existed about absolute spending levels by the City as well as the number of employees and accountability for spending programs like Thrive NY. While publicly unspoken, these are real drivers of the debate.

The Legislature adjourned for this session leaving a number of topics for later discussion which are normally settled in the session ending in June. In the interim, the City Council President (a 2021 mayoral candidate) has expressed concerns about oversight as well. The City also has to adopt a balanced budget by June 30. The lack of borrowing authority will force a more rigorous approach to expense control as the budget process unfolds.

We expect that that the City will ultimately receive borrowing authority but under much tighter outside oversight and control than the Mayor would like.

EDUCATION, HEALTH, AND THE PANDEMIC

Stanford University is poised to come to market with $750,000,000 of taxable municipal bonds. The issue provides a good opportunity to see how one of the financially strongest private universities talks about how it will operate going forward. This comes as universities large and small, public and private, grapple with the issue of how to approach the fall semester.

The University has announced that a university-wide salary freeze and a moratorium of hiring were in place and that operating budgets were to adopt expense reduction targets of up to 25%. This is driven by, among other things, a projected 15% reduction in revenue available through the university’s endowment. These funds are estimated to account for 26% of the pre-pandemic current budget. That budget projected a $126 million surplus. The most recent estimate issued in May is for a $40 to $45 million operating deficit.

In FY 2019, student income – tuition, room and board, fees – generated 11% ($653 million) of operating revenues. As is the case with the major private research facilities that research is actually a financial keystone for many of them. In the case of Stanford, sponsored support for research comprises 27% ($1.7 billion) of total operating revenue. The medical facilities are integrated into the University’s financial operations. They account for 20% of revenue.

Currently, the University does not estimate a reopening schedule in terms of on-campus teaching and residence. Currently, the entire University operates remotely. It does say that research operations will resume before in-person instruction resumes. In the meantime, Stanford Health Care was one of three organizations to receive over $100 million in payments from the CARES Act Relief Fund.

In Massachusetts, a committee of a dozen Massachusetts college presidents has released an outline of a plan to help universities reintegrate half a million students and some 136,000 employees back into a campus setting. The plan comes with higher education leaders also urging the governor and legislature to change the law so that institutions are held legally harmless if they reopen and people get sick.

That may be a bigger issue than even the extra costs of equipping facilities to provide mitigation. It is a common theme whether it be for businesses (especially those with offices) or for educational institutions. College heads are less certain about being able to test students, faculty, and staff particularly when they come back to campus, according to a survey the advisory group conducted of nearly 90 campus leaders. 

According to the Boston Globe, slightly fewer than 60 percent of state institutions were very or somewhat confident that they could do robust testing of everybody returning to campus. Fewer than three quarters of college leaders felt strongly that they could do the contact tracing to curb the virus’ spread, according to the survey. Boston University recently announced it would open its own testing lab and is buying robots to conduct large-scale testing.

Michigan State will resume in-person classes in the fall along with “enhanced” remote learning opportunities. Students will be able to return for in-person classes on Sept. 2, as previously scheduled. There will be both in-person and online components to instruction in the fall semester. It is planned to end all in-person instruction on Wednesday, Nov. 25, with remaining instruction, study sessions and final examinations moving remotely for the remaining three weeks of the semester. Students will have the option of returning to their permanent residences for the Thanksgiving holiday and not returning to campus, or remaining on campus until the semester ends. 

The question of liability will likely be central to the debate over the next stimulus package. While resistance to state and local aid appears to be softening, there appears to be a linkage between government aid and liability protection.

TOURISM BEGINS TO GEAR UP

With venues large and small being closed for some three months, some bonds backed by tourism related revenues (sales taxes, hotel, car rental) were seen to be at particular risk. Now we see that the relaxation of pandemic related restrictions on public activity is driving the reopening of some of these facilities in some of the most tourist dependant municipalities.

The Orlando area has announced several openings and dates. Disney World is slated begin reopening in July. Magic Kingdom — the most attended park — and Animal Kingdom will reopen for business on July 15. Universal Orlando, is expected to reopen June 5 with Sea World reopening a week later.

Las Vegas will begin to try to create a viable model going forward after the Governor of Nevada announced that casinos will begin reopening next week on June 4.  Nevada had the highest unemployment rate of any state in the country last month, with 28.2% of workers without a job — nearly double the national average of 14.7%.  Guidelines issued this month by the Nevada Gaming Control Board limit capacity to 50% and require new cleaning and social-distancing policies.  This reduces the number of slot machines and regulators have capped capacity at three players a table for blackjack and four for poker.

Both of these areas will provide a good initial test of the dynamic between the desire to reopen, whether there is enough current demand, and whether hospital employees will be willing to return to work under proposed mitigation protocols.

NYC RESTAURANTS AND STREETS

The latest interest group to seek use of the public streets for its businesses is the New York City Hospitality Alliance which represents the City’s restaurant industry. The NYC Council introduced legislation backed by the restaurant industry requiring the mayor to find a way to open streets, sidewalks and public plazas to outdoor dining.  Proponents have couched it as a way to rescue the businesses.

The controversial part comes from comments from the Alliance. ““Our hope is there may be areas where entire streets could be shut down for restaurant service.”  That raises issues which have been heretofore been primarily the provenance of the transportation space namely who owns the streets. Are municipalities expected to turn over use of its streets to certain businesses but not others? How does that reflect in things like property taxes? Do proposed closures raise issues of public safety (access to police and fire) and do they create negative real estate impacts?

The NYC moves come in the wake of the release of guidance for restaurants seeking to reopen in Chicago. That city calls for tables to be placed at least six feet apart, or have a permanent barrier, such as Plexiglas, installed between them, while parties at one table should be capped at six people. Patrons must always wear face coverings — except, of course, when eating — while employees should cover up allowed for the time being.

PG&E UPDATE

The California Public Utilities Commission voted 5 to 0 in favor of PG&E’s plan to exit bankruptcy. The approval was seen as the last significant hurdle for the company to overcome. It preserves the utility’s status as an investor owned entity. Over 200 public officials across the state had supported the idea of creating a public entity to own and operate the PG&E assets. Legislation to allow for such a takeover is working its way through the California Assembly.

The plan includes a statement that its bankruptcy reorganization would not increase customer rates and would lead to about $1 billion in interest savings to customers.  One condition of the approval is guidelines for PG&E and other utilities that cut power to customers during extreme weather events to prevent equipment from causing wildfires. The guidelines require improved communication with local governments and communities while limiting the duration of the power shut-offs.

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