Joseph Krist

Publisher

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ISSUE OF THE WEEK

$315,065,000*

LANSING BOARD OF WATER AND LIGHT

CITY OF LANSING, MICHIGAN

UTILITY SYSTEM REVENUE BONDS

Moody’s : Aa3  SP: AA-

Our interest in the deal is less with the creditworthiness of the issuer but more with the use of proceeds. in this case, the utility is financing the construction of a 250 MW combined cycle natural gas fueled generation plant. The project is designed to achieve the goals of a plan authored in 2015 to, among other things meet environmental goals. The new gas plant will allow Lansing to shut down five coal fired generating units at two sites, one at the end of 2020 and o at the end of 2025.

The city, which is also the state capital, has a goal of generating 30% of its energy from renewables and 40% by 2030. This is another case where economics supported by popular demand for greener power is driving local utility decisions in the face of the federal government abandonment of its environmental responsibilities. As recently as 2010, the utility owned 14 coal fired facilities.

The plan to construct the gas unit comes as the utility is also in the process of acquiring interests in wind and solar projects so that it can be generating 20% of its power needs from renewables by 2020.

The utility is also approaching cybersecurity issues in its disclosure. The electric system was the victim of a ransomware hack in 2016. This event is acknowledged in the documents and includes a broad discussion of its efforts to combat any future attacks. It may not be as robust as one might like but the acknowledgement of the subject is a positive.

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WE’RE NOT IN KANSAS ANYMORE

When former Governor Sam Brownback took office he launched the state on a great experiment with Arthur Laffer-style government finance theories. This in spite of the fact that the State and a group of plaintiffs we involved in litigation over the state’s local school aid formulas. The uproar surrounding the state’s collapsing financial position often stole some attention from the issue of education funding. Well, the results of the supply side experiment are in. The state took downgrades, Governor Brownback retired to be representative to world religious groups, and Mr.Laffer  just was awarded the Medal of freedom by President Trump.

In the meantime, the dispute and debate over school funding in Kansas continued. Now, the Kansas State Supreme Court issued a unanimous decision signing off on a law enacted in April that boosts the state’s education funding by roughly $90 million a year. It was the high court’s seventh ruling in less than six years in a lawsuit over spending, which was filed by four school districts in 2010.

Kansas now spends more than $4 billion a year on its public schools — some $1 billion more than it did during the 2013-14 school year — as the result of the court’s decisions. Increases are promised through the 2022-23 school year, and the April law was designed to raise spending to account for inflation, something the court ruled last year was necessary.

The state will still be subject to review by the Court to insure that the State continues to comply with the Court’s orders. The result keeps pressure n the State to keep up its funding promises. For individual school districts, the resolution of the funding issue removes a source of negative credit pressure.

MANUFACTURING

It’s been difficult to assess whether the economic policies currently ascendant in Washington  truly have achieved their job retention and repatriation goals. That reflects the fact t the signals currently out there to evaluate e quite mixed. So says a report from the Economic Innovation Group. They reviewed data on manufacturing employment

Pennsylvania’s manufacturing base, for example, now employs only two-thirds the number of people it did in 2000. The state would have to keep adding the same number of manufacturing jobs it did over the past two years—5,570 jobs annually—for another 35 years to get back to where it was 18 years ago.

Only five western states—Nevada, Alaska, North Dakota, South Dakota, and Utah—contained more manufacturing jobs at the end of 2018 than they did in 2000.  Those numbers may confirm or undermine some of your suppositions about these places. So we want to look a little deeper at the data.

Those numbers actually highlight some anomalies. Nevada did indeed have the highest rate of gain in that period. Are all the theories about cost, weather, taxes true? It’s hard to tell because the growth is in one place. A Tesla battery factory in Storrey County is the change. So, Nevada’s number isn’t quite so impressive.

In reality, the picture is mixed. Manufacturing has no doubt recorded positive job growth. As the report indicates, the employment surge was broadly felt but still uneven. A majority of counties (57%) saw their manufacturing growth rates improve, with either growth accelerating or decline slowing, over the first two years of the Trump administration relative to the last four years of the Obama administration.

Manufacturing’s expansion was broad-based across regions, but on average counties in western states saw the highest annual growth rates from December 2016 to December 2018. The South created the largest sheer number of new manufacturing jobs over the past two years: 173,900.

Here comes the old water. The jobs are often in sectors like food and beverages which are now considered manufacturing. It added 84,400 jobs to the economy from December 2016 to December 2018. The apparel and print-related industries combined were responsible for a loss of 28,700 jobs. Income data helps to account for why there is so much attention on wealth disparity. Manufacturing’s share of U.S. GDP has grown steadily since 2008, from 12% to 16%—increasing by a quarter. Manufacturing now contributes more to U.S. economic output than it did 10 years ago. However, manufacturing employment has been far surpassed by that of the professional services sector.

It also makes it harder to estimate revenues since service employment has often been harder to account for and tax than has been the case with income earned by employees  from traditional industrial employers. It also increases risk in that the merging tech based economy will by its very nature be much more mobile. The fact that one’s living will likely be less dependent upon being attached to one place or physical facility introduces a complication  the process of estimating, planning, and collecting revenues.

NYC JUST KEEPS SPENDING

The City of New York announced agreement on its budget for fiscal 2020. That’s the good news. It’s all downhill from here.  The budget, including capital spending, comes in at $92.6 billion. That means that NYC spending has increased some 23% above the level included in the Mayor’s first budget only five years ago. It is something t think about when the city complains when it is asked to pay for things like NYCHA and the MTA.

 It reflects a continuing trend of increases in soft spending – things like social workers in schools, quieter fire truck sirens. They reflect the priorities of the mayor who has never seen a program he does not want to spend on. In his view, “the things that we are investing in either, in some cases, are sheer need, things we must address for a variety of reasons or things that we think are the kinds of investments that make sense for this city and are manageable and affordable.”

The Mayor also contends that the city has accumulated reserves in amounts sufficient to support the spending through any downturn. Some might beg to differ. For example, the nonpartisan  Citizens Budget Commission estimates that a recession would reduce revenues by as much as $20 billion over three years, a number that dwarfs the city’s reserves.

The rate of growth in the level of spending by the City has been an issue of concern to us for some time. The Mayor has been extremely fortunate to have been in office during one of the longest periods of economic expansion in US history. The good economy has allowed increases in spending but has also created a sense of security about the City’s finances which we view as unwarranted.

The City’s personal income tax revenues remain concentrated among higher income residents. While the City has seen the economy reduce its dependence of the health of the financial markets, Given the sources of that income, the City remains vulnerable to financial market downturns . The declines in incomes would naturally hit the City’s real estate and service industries which could force the City to have to cut back spending (usually with a meat ax rather than a scalpel) quickly to avoid rapid draw downs of reserves.

One also has to account for the facts that term limits  have resulted in an inexperienced City Council when it comes to managing in a downturn. From a financial standpoint there will be plenty to cut in a downturn but, politically it will be much harder so much of the increased spending is in the area of social service which can be considered as “nice to haves” but not necessities. That lack of experience in a downturn would make managing such a period extremely difficult.

MEASURING THE IMPACT OF EXPANDED MEDICAID

A recent study in the journal of the American Medical Association (JAMA) asked “Has the expansion of Medicaid eligibility under the Affordable Care Act been associated with any differences in cardiovascular mortality rates?” It found that states that expanded eligibility for Medicaid had a significantly smaller increase in rates of cardiovascular mortality for middle-aged adults after expansion than states that did not expand Medicaid.

So amidst all of the debate which occurred in several legislatures around the country at least some facts were established. the study showed that “Medicaid expansion was associated with lower cardiovascular mortality and may be an important consideration for states debating expansion of Medicaid eligibility.” Other studies show that for  patients with end-stage renal disease, Medicaid expansion was associated with lower all-cause mortality.

This is one piece of non-political data which helps to explain the support for Medicaid expansion and the position of healthcare as one of, if not the leading, issue in recent polling. As a leading source of spending for states after education, trends in this area hold important clues as to the ability of states to keep budgets balanced in the face of rising healthcare demands.

As more data like this is developed and made available, pressure will increase to expand Medicaid access. This may be enough to put most of the remaining holdout states to the point where expansion makes sense.

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