Joseph Krist

Publisher

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NEW YORK CITY HOUSING AUTHORITY

The New York City Housing Authority (NYCHA) has been a troubled entity for some time. It has identified capital needs in excess of $40 billion. These include basics like fixing roof leaks and heating systems which did not operate this winter. They have little to do with “amenities” on either a unit by unit or project by project basis. Now, NYCHA’s already strained finances are absorbing yet another blow as the result of the pandemic. The NYC Independent Budget Office (IBO) recently delivered its analysis of the financial hit being taken by the nation’s largest public housing agency.

In the Mayor’s Executive Budget and the state budget enacted in April, the city and state did not provide any additional funds for NYCHA for corona virus response. The city’s funding for NYCHA grew by $34 million from 2020 through 2024 to reflect new collective bargaining agreements with NYCHA workers, but otherwise was unchanged from January’s Preliminary Budget. The state did not appropriate any additional new funding for NYCHA as part of the current budget. The rent NYCHA charges its tenants is pegged to their household income. As incomes fall due to the economic downturn, NYCHA’s rental revenue from tenants will decrease. IBO estimates that with the present economic downturn, NYCHA’s tenant rental revenue will be $85 million (8 percent) less in 2020 and $140 million (14 percent) less in 2021 than estimates produced by NYCHA this past December.

Tenant rental revenue makes up over one-third of NYCHA’s total operating revenue. Tenant rents are pegged at 30 percent of household income, so when tenants become unemployed or lose income, the rents they owe NYCHA decrease proportionally. Tenants are required to recertify their household income with NYCHA annually, but are also able to recertify their income to adjust their rent any time their income or household composition changes under a Rent Hardship Policy. With high unemployment expected to continue through the year, IBO projects that NYCHA will receive only $840 million in 2021—$140 million less than expected.

Through the CARES Act, NYCHA received $150 million from the Public Housing Operating Fund. These funds are based on operating expenses and are, as of yet, unavailable to offset any loss of rental income. CARES public housing operating funds can be used for eligible operating and capital expenses as well as corona virus-related activities.

The difficulties of NYCHA were already clouding the future fiscal outlook in New York. The Authority is effectively competing with both the state and city governments to finance its capital needs. NYCHA will continue to be a source of pressure and drag on the City’s finances. The pandemic is slowing capital expenditure through deferrals of all but essential maintenance during the pandemic but that just leads to an increasingly expensive backlog. And NYCHA remains under a federal consent order. A federal monitor was imposed last year by the Trump Administration to ensure NYCHA would perform work related to lead paint, mold, and pest infestations that will bring the housing authority into compliance with the law.

DATA BEGINS TO TELL THE STORY

The focus was all on the headline number when the latest retail sales data was released by the U.S. Department of Commerce. Yes, the April to May change of 17% was a great number. The reality is that the May 2020 number was 6.1% below the May 2019 number.

State by state data is beginning to come in and the picture is not pretty. Texas collected about $2.6 billion in state sales tax revenue in May, leading to the steepest year-over-year decline in over a decade. Motor fuel taxes, for example, were down 30% from May 2019, marking the steepest drop since 1989. And the hotel occupancy tax was down 86% from May 2019, marking the steepest drop on record in data since 1982. On average, Texas cities got 11.1% less in this year’s June tax distribution than they got last year; the May distributions were down an average of 5.1%. 44 Texas cities — including Houston, San Antonio, Dallas, Austin and Fort Worth — each saw double-digit percentage decreases in sales taxes.

Sales tax diversions to cities across the state of Mississippi are down from 2019. Cities across the state will receive $34.8 million for sales tax collected in April compared to $37.6 million in 2019. That is a decline of 7.45%. In New Jersey, the sales tax was one of the worst-performing revenue sources in May, falling nearly 30% off the pace set during May 2019. The Tennessee Department of Finance and Administration Commissioner announced that revenues for May were $981.9 million, which is $197.3 million less than the budgeted monthly revenue estimate. State tax revenues were $184.7 million less than May 2019, and the overall revenue for the month represented a negative growth rate of 15.83%.

May sales tax collections in Illinois fell by $181 million compared to the same month one year earlier, a decline of more than 24%. That follows a 21% year-over-year decline in April of $146 million. Wisconsin estimates year-to-date tax collections are down $380 million compared to this time last fiscal year. The agency estimates $1.3 billion in tax revenues for the month of May, $66 million below May 2019 revenues. Tax collections in April 2020 were $870 million less than collections in April 2019. New York State’s tax receipts in May were down $766.9 million or 19.7% from the amount of money that had been collected in May 2019. Total receipts for May 2020 were $2.694 billion.

SANCTUARY CITIES

The Supreme Court let stand California’s sanctuary law that forbids local law enforcement in most cases from cooperating with aggressive federal action to identify and deport undocumented immigrants. The law had been challenged by the Trump Administration.  The Administration had tried to withhold grant monies for popular law enforcement programs from jurisdictions which had declared themselves to be sanctuary cities.

The Edward Byrne Memorial Justice Assistance Grant (JAG) Program is the primary provider of federal criminal justice funding to states and units of local government. It was that money that the Administration sought to withhold from localities.

Grants fund among other things: law enforcement;  prosecution and courts; prevention and education; corrections and community corrections;  drug treatment;  planning, evaluation, and technology improvement; crime victim and witness assistance (other than compensation); and  mental health and related law enforcement and corrections programs, including behavioral programs and crisis intervention teams. Since FY2012, appropriations that are available to be allocated through the JAG program have generally been around $340 million each fiscal year.

PANDEMIC CASUALTIES – PORTS

Data is starting to come in on May port operations around the country as the damage being done by the pandemic continues. The Port of Los Angeles, the nation’s busiest, reported a 29.8% year-over-year decline in twenty-foot-equivalent (TEU) containers, moving 581,664 shipping receptacles compared with 828,662 in the same period of 2019. Year-to-date, the Port of Los Angeles is running 18.4% behind 2019ls through May. The Port of Long Beach processed 628,205 containers in May. That is a 9.5% increase compared to 2019’s 573,624 TEUs. It is also a statistical fluke as 28.8% of the TEUs moved— some 181,060 — were empty containers that had been stored at Long Beach and were shipped back to ports and other locations in Asia.

The Port of Oakland reported a 17% decrease in May, processing 184,995 TEUs compared with 223,095 in 2019. The Port of Virginia on June 15 reported the facility had a 22.7% decline in May, processing 112,913 containers compared with 146,018 last May. Georgia’s Port of Savannah reported a 9.65% decrease in container volume in May, which moved 337,360 TEUs compared with 373,394 in the same month ago. Port Houston saw a 15.1% drop in TEUs to 222,250 compared with 263,061 in the same period a year ago.

PANDEMIC CASUALTIES – AIRPORTS

Fitch Ratings weighed in this week with its views of the situation facing airports. As we all know, the airline industry has been among the hardest hit as the result of the lack of demand for flying during the pandemic.  Fitch has applied a stress test to airport credits based on the following assumptions: enplanement declines of approximately 50% in calendar year 2020 (relative to 2019), with a recovery of 85% in 2021, 95% in 2022, and 100% in 2023 (relative to 2019). 

Fitch outlined several airport characteristics and offered examples of potentially impacted credits. “Large airports that serve as fortress hubs for a single carrier may have greater vulnerabilities with regards to recovering its connecting segment of passengers when compared to O&D traffic.” Examples include large airports with elevated risk like Charlotte, Chicago-Midway, LaGuardia (NY)  and Dallas-Love Field. “Airline revenues for regional airports tend to be better protected against volume declines as they are closely tied to cost recovery mechanisms under lease agreements.” 

Some regional airports, particularly those with a more limited underlying traffic base, would be susceptible to downgrades under Fitch’s more severe stress scenario. This includes airports in Buffalo, Burlington, Dayton, Fresno and Harrisburg. They are all on negative watch. As for the major international airports, they are better positioned. Where there are single terminal based credits, such as those at JFK in New York, single terminal projects tend to have relatively low liquidity cushions relative to entire airport facilities. Two single terminal credits at JFK have been downgraded.

SAFETY NET HOSPITALS

At the onset of the pandemic, we expressed concerns about the potential impact of  the pandemic on the financial position of “safety net” hospitals. These institutions tend to serve sicker populations with less access to health insurance and a limited ability to pay for services. These populations have been inordinately impact by the pandemic through larger rates of infection and hospitalization than for the population as a whole.

One of the institutions we cited as having these vulnerabilities was Boston Medical Center, a safety net facility in one of the most affected states. So we were interested to see that this week Moody’s affirmed the Baa2 rating on BMC’s debt. “Although the system will report depressed margins in fiscal 2020 relative to budget and prior year performance due to corona virus, BMC should meet all bond covenants and generate positive operating cash flow, owing to funding from the CARES Act and the Commonwealth, and management’s swift actions to raise liquidity and minimize operating losses.”

BMC has sizeable exposure to Medicaid as one of its affiliates operates primarily Medicaid managed care plans. High exposure to Medicaid and the reliance on supplemental funding at BMC, as well as government-determined funding rates for the insurance products offered by that affiliate, will continue as credit challenges. The rating also assumes that BMC does not face a “second wave” of corona virus cases.

SUTTER HEALTH BACK IN COURT

Under the category of “it ain’t over ’til it’s over”, Sutter Health is asking the courts to revisit the terms of a settlement it entered into with the State of California to settle antitrust violations by Sutter. The settlement, which is pending final approval was supposed to take place in February. Since then, the pandemic has occurred and now Sutter is complaining that the terms of the settlement are too onerous.

Sutter’s lawyers filed a motion requesting the California state Superior Court in San Francisco to delay approving the settlement for an additional 90 days, due to “catastrophic” losses stemming from the COVID-19 pandemic. That would delay approval from the original February date to sometime in September. In the interim, Sutter has not made any payments or instituted changes required by the settlement in its operations.

Sutter reported an operating loss of $404 million through April, citing declining patient revenue and expenses resulting from the pandemic. System officials said that loss took into account the more than $200 million the system received in COVID-19 relief funds from the federal government via the CARES Act. Sutter agreed to limit what it charges patients for out-of-network services and increase transparency by allowing insurers and employers to give patients pricing information.

Some of the specific settlement terms Sutter now considers problematic include a provision that calls for Sutter to end its all-or-nothing contracting deals with payers, which demanded that an insurer that wanted to include any one of the Sutter hospitals or clinics in its network must include all of them. Limits on rate increases included in the terms of the settlement.

A recent analysis by a healthcare economist at the University of Southern California found that Sutter has earned an average 43% annual profit margin over the past decade from medical treatments paid for by commercial insurers. A 2018 study from the Nicholas C. Petris Center at the University of California at Berkeley found that healthcare costs in Northern California, where Sutter is dominant, are 20% to 30% higher than in Southern California, even after adjusting for cost of living.

According to Sutter, “There are certain provisions that, if they went into effect today, would interfere with Sutter’s ability to provide coordinated and integrated care to patients in California.” Sutter generated $13 billion in revenues in 2019 so it’s becoming more obvious that Sutter hopes that delaying the final approval will allow it to rack up more losses in an effort to reduce the amount it will be forced to pay.

GOVERNMENT AS EMPLOYER

This week the Chairman of the Federal Reserve testified before Congress as to the impact of the pandemic on the economy. That testimony shed light on the role of government throughout the country at all levels as a significant source of employment. 13% of the American workforce are employed by state and local governments.

Much of the questioning revolved around what could happen without the provision of additional stimulus aid from the federal government. State and local governments already have laid off 1.5 million workers. And that is before the budget process for FY 2021 has been completed. The Chairman agreed that the slow pace of economic growth following the Great Recession was partly attributable to spending cuts that had been made by state and local governments. The Fed estimated that state and local government austerity measures were a drag on economic growth for 23 out of 26 quarters between 2008 and mid-2014. That austerity resulted in 3.5% less in economic growth by the end of 2015.

We have not seen any discussion about the role of government as a source of demand for goods and services. Obviously, as headcount is reduced and projects are  delayed and/or eliminated the demand for various supplies is also reduced. For many smaller issuers at the local level, these steps have already been taken as they are below the thresholds based on population to receive aid from the enacted federal stimulus packages. Those communities have begun the process of furloughs and project delays to the detriment of their small local economies.

ANOTHER STUMBLE FOR JACKSONVILLE ELECTRIC

It is at the center of a scandal, it has effectively temporary management, and it faces significant legal and potential financial risk. The Jacksonville Electric Authority (JEA) is facing more of that after a federal District Court judge ruled the power purchase agreement between Georgia’s joint action agency, MEAG Power, and JEA, is “valid and enforceable”. The 20-year, take-or-pay contract obligates JEA to pay unconditionally, regardless of whether electricity is delivered or units are completed its share of the Plant Votgle expansion project in Georgia. 

JEA argued that the contract was not valid as the City Council had not approved it.  That claim was rejected. It was not a total loss for JEA as the judge did agree to lift a stay he had imposed on JEA from pursuing a claim of negligent performance by the Municipal Electric Authority of Georgia. Cohen also allowed MEAG to continue its breach of contract claim against JEA. This will force JEA to litigate its issues within the framework of the power purchase agreement.

The negligent performance issue stems from a 2017 agreement entered into by MEAG on behalf of its project partners of which JEA was one. The agreement was designed to reflect the impact of the bankruptcy of Westinghouse, the manufacturer of the plant’s reactor. Under the new deal, JEA’s obligation increased to $2.9 billion (up from $1.4 billion) and the completion date was delayed from April 2016 to November 2021. JEA contends that it should have been able to review and approve the plan and that it did not occur. Under the new deal, JEA’s obligation climbed to $2.9 billion and the completion date was delayed from April 2016 to November 2021.

Litigation uncertainty has weighed negatively on JEA for some time. It has led some to question the City’s (not just JEA’s) willingness to meet its debt obligations. JEA has taken an aggressive stance in its litigation approach questioning not only the validity of the contract but also the security for MEAG debt. This despite the concerns raised by the ill-fated attempt to privatize the utility last year. Put all of this together and the outlook for the credit remains quite negative.

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