Joseph Krist

Publisher

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We come upon the midpoint of this most unique year. As we enter the second half, we see one of our top five cities by size begin its decent into the abyss from which New York City is just beginning to rise. Houston is now the flashpoint but also is likely to serve as a cautionary tale for communities large and small as they face the full force of the virus. Now, Texas is poised to be the first major example of a failed reopening. As events unfold, it is likely that a paused restart will generate many lessons for the nation at large.

The economy now teeters between an uncertain recovery and a possible second stumble. Cutting through the data, there are some 21 million people collecting unemployment benefits as of last week. The initial claims figures are leveling at 1-1.5 million, a heretofore unacceptable number. This, before many state and local government employees find themselves furloughed our laid off with the new fiscal year for most states beginning July 1.

That unemployment wave is coming with 13% of the US workforce employed by government. The revenue hit has been just too great to maintain headcount. many in the public sector hope that the potential impact of widespread government employment is the argument which moves the needle on pending additional federal aid to states and localities. It would shift the spotlight to general economic impact versus pension costs and other spending issues.

With GDP down 5% in 1Q 2020 and an even steeper decline expected for 2Q 2020, more optimistic scenarios spun by various interests become less likely. The economy will not be rocking by the 4th of July. The hope is that is does not look like the exhausted couples at the dance marathon contests of the Great Depression.  Estimates are that the decline for the entire year 2020 will be 8%.

The Muni Credit News will take a week off the celebrate America’s 244th birthday. It will return for the week of July 12. In the meantime, you can take the Muni Credit News to the beach by checking out our recent Bond Buyer podcast.

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STATES

Recent data from the National Association of State Budget Officers, shows that government was already a diminished source of spending as the pandemic hit. Based on pre-COVID estimates, general fund spending was on track to total $919.1 billion in fiscal 2020, a 5.8% increase, with this growth partially driven by one-time investments and rainy day fund deposits made with surplus funds. After steep declines during the Great Recession, state general fund spending just barely returned to inflation adjusted pre-recession fiscal 2008 levels in fiscal 2019.

Before COVID-19 hit, revenues were on track to increase 3.0% in fiscal 2020 over fiscal 2019, slower than the level of growth observed over the past couple of years. General fund collections from sales taxes were on track to grow 5.0% in fiscal 2020, personal income taxes were set to increase by an estimated 2.7%, and corporate income taxes, a more volatile revenue source, were estimated to increase by 1.0% in fiscal 2020. In fiscal 2021, general fund collections from sales taxes were forecasted to grow 3.3%, personal income taxes by 3.7 %, corporate income taxes by 2.7%, gaming and lottery revenues by 2.5%, and all other revenues by 0.9 %.

On the spending side, the changes are just as profound. Before COVID-19, Medicaid spending from all fund sources was estimated to grow by a median of 5.8 % in fiscal 2020 compared to fiscal 2019 levels. In fiscal 2020, spending from state fund sources was estimated to grow by a median of 6.4 %, with general fund spending growing 5.0 % and spending from other state funds growing 9.9 %. Federal fund spending on Medicaid was on track to grow 7.6 % for fiscal 2020.

Medicaid spending growth was forecasted to slow somewhat in fiscal 2021, based on governors’ proposed budgets. The median growth rate for total Medicaid spending was projected at 3.4% for fiscal 2021. Governors in two states that have yet to expand, North Carolina and Oklahoma, included funding in fiscal 2021 for Medicaid expansion in their recommended budgets.

When governors proposed their fiscal 2021 budgets, fiscal conditions were stable in the vast majority of states, and recommended revenue actions were for the most part limited and modest in size. According to executive budgets, 14 states proposed net increases in taxes and fees while 15 states proposed net decreases, resulting in a projected net positive revenue impact in fiscal 2021 of $2.4 billion. That is all off the table now given the realities of 4Q FY 2020 and the depressed outlook well into FY 2021.

PANDEMIC CASUALTIES – CAPITAL INVESTMENT

One of the ways in which the pandemic has impacted public capital investment is reducing the revenue available from states for distribution to municipalities for local road repair and construction. As a result, many communities are being forced to delay or cancel some projects for lack of funding.

One example may be found in Maryland. The Maryland Department of Transportation recently revised its estimates for highway-user revenue disbursements for the current and upcoming fiscal years in May. The state grants are based on revenues from vehicle-registration fees and taxes for gas, corporate income, rental cars and vehicle titling. The highway-user revenue grant amounts to local governments factor in a jurisdiction’s vehicle miles traveled and vehicle registrations. Early estimates showing transportation revenues to come in $550 million short this fiscal year and $490 million to $560 million short for the new fiscal year, according to the Maryland DOT.

The Massachusetts Port Authority board voted to reduce its five-year, $3 billion construction plan by a third in the face of a worldwide slowdown in air travel brought about by the pandemic. The ambitious multibillion-dollar renovation and expansion of Logan Airport would have included a monorail-like people mover and two parking garages. The board also approved trimming three of seven gates from the expansion of Terminal E.

Passenger counts at Logan are roughly 90% below the levels of a year ago. Massport estimates as few as 13 million passengers will use Logan in the fiscal year beginning July 1, under its worst-case scenario. There were about 42.5 million passengers in 2019. Other Massport operated facilities are experiencing significant utilization declines.

Worcester Regional Airport saw two of the three airlines end service in June. Shipping volume has dropped at the Conley freight terminal in South Boston. The nearby cruise ship terminal has handled as many as 150 ship visits annually yet may not see a single ocean liner this calendar year. There is a clear budgetary impact. The Massport board adopted a new budget for the fiscal year that begins in July that anticipates $600 million in revenue, down from about $900 million two years earlier. The reduction in the scale of the Terminal E expansion is projected to reduce its cost from $700 million to $565 million. Other project reductions include postponement of plans to connect the terminal to Airport Station on the MBTA’s Blue Line.

The biggest casualty to date is the pending $51.5 billion capital improvement plan for NY’s Metropolitan Transportation Authority. The agency faces a $10.6 billion deficit over the next two years with the virus hammering ridership numbers. The subways are carrying some 1 million passengers daily but this is only 20% of the normal pre-pandemic ridership.  At the same time, extraordinary maintenance costs will have to continue in order to drive higher utilization. The question is how permanent is any resulting decline and how bad is it? That drives this decision.

BUSINESS AND GOVERNMENT ON THE SAME PAGE?

The pandemic is turning many notions upside down as they pertain to commuting, working remotely, and urban life writ large. The unique dynamics of the pandemic are leading to some of the most unexpected marriages in terms of near term government finance and fiscal policies. The latest example is an emerging linkage of interests on the part of government and business.

The U.S. Chamber of Commerce has come out in support of increased stimulus for state and local governments. It is not as if business has had its “come to Jesus” moment in terms of its historic stances against taxes and government spending. It is a reflection of business being able to read the emerging tea leaves and realize that the public has noticed that many more resources have been provided to the corporate sector through Congressional action than has been the case for governments.

With in excess of 40 million Americans claiming unemployment over the last twelve weeks, it is apparent that raising individual taxes is an idea that is dead on arrival. So business has figured out that after receiving four times as much aid as governments that there is an appetite for raising taxes on companies. The move to support additional stimulus to government  reflects a real fear of higher taxes on businesses. As the Chamber’s head of policy put it “Part of our conversation with Republicans on Capitol Hill is that ironically, if your concern is big state government, then the last thing you want to do is force states to replace one-time lost revenue with permanent tax increases.” 

The newly adopted stance reflects the realization that the impact of the pandemic will be long lasting as the economy has essentially taken a ten year step back. The downturn has strengthened the position of those who are against tax breaks to entice facilities and jobs, especially if many jobs previously done in offices are done remotely on a long term basis. (No need to bribe Facebook or Amazon if no one is using the offices.)

MIXED SIGNALS ON HIGHER EDUCATION

Depending on where you look, the outlook for state universities is either benefitting from the pandemic or is being hurt by the pandemic. We were intrigued by two stories we saw recently on the subject about enrollment trends in two neighboring states – West Virginia and Pennsylvania.

The first story centered on the Universities of West Virginia and Kansas and highlighted what is reported as increased demand due to students wanting to stay closer to home as the result of the pandemic. The schools reported anecdotal evidence of increased demand but offered no tangible data to back it up. While much of the focus was on cultural issues driving the demand it was also clear that as much as anything the economy was driving demand for lower cost higher education options. It isn’t clear which is the primary driver.

The second story however, highlights many of the concerns facing the higher education sector overall. The Pennsylvania state higher education system is facing a different set of circumstances. Recent data released by the Commonwealth showed that projected first-year enrollment is down at Pennsylvania’s 14 state universities. The decline is not precipitous – 2% vs. last year’s pace of acceptances. Completed applications were down 6% this year.  The impact was not consistent across the board but some cited institutions saw nearly 20% declines in demand. Officials cited the corona virus pandemic as one reason for the lower numbers, but they also said there was a continuing decline in high school graduates.  

PURPLE HAZE OVER MARYLAND P3

The unfolding drama underway at the Maryland P3 developing and constructing a suburban light rail system moves to its next phase. In a move which had been anticipated, Purple Line Transit Partners (PLTP) filed a notice of termination. In 60 days, PLTP could withdraw from the project, effectively crippling it when it had finally able to begin construction. PLTP, as we have previously chronicled, had threatened the move.  It comes as negotiations continue over the size of project cost overruns and how those additional costs would be distributed to the various entities comprising the P3.

The actual notice clearly indicates that this is essentially a catalyst for ongoing discussions. A resolution is thought to depend on the employment of a new contractor. The current contractor and the state are in disputes over performance and payment. The contractor claims that litigation and regulatory related delays account for much of the overruns. The state has granted the contractor a five-month extension for delays related to the lawsuit but no additional money, saying the other delays are the contractor’s responsibility.

PANDEMIC CASUALTIES – GOVERNMENT HEADCOUNT

The profligate hiring practices of the DeBlasio administration are quickly coming back to haunt it as additional aid from either the State or the federal government is not forthcoming. While the City waits to see if additional aid materializes, it has had to prepare for the reality that current headcount levels – 325,00 – for the City are untenable. Now the Mayor is considering furloughing or laying off some 22,000 city employees.

It is likely that some headcount reduction is necessary. We believe that for now the announcement of potential layoffs is a bargaining tactic as the City looks to the State and federal governments for more aid. It is important to remember that the Mayor has greatly expanded headcount during his tenure by some 10%. The proposed reductions would still leave the City with some 8,000 more positions filled than at the start of his administration. Many, including ourselves have regularly cited rapidly expanding headcount  as a credit risk as the growth in headcount could not be sustained in other than an optimal economic environment.

The headcount issue arises in a number of situations. In Chicago, the Mayor recently garnered some unwanted attention when she discussed the role of police headcount as an economic development tool. The Mayor expressed the view that “defunding the police” means “you are eliminating one of the few tools that the city has to create middle-class incomes for black and brown folks. ” Not real productive jobs, not better teachers, not better services. Policing as a tool of economic development. It is the kind of thinking that makes one wonder how serious the City is about matching its service priorities to the real needs of the City.

What is unfortunate is that this kind of thinking has been tried and failed before. Thirty years ago, NYC’s then Mayor David Dinkins undertook a program of hiring for traffic control officers and parking enforcement officers as a way of providing entry level employment. Over time, the jobs began to be occupied less and less by formerly unemployed residents. It became instead a mode of entry employment to immigrants. It became a less effective economic empowerment tool for the very people it was intended to help.

Localities would be hard pressed under the best of circumstances

HOUSE PROPOSES BOND FRIENDLY INFRASTRUCTURE BILL

The Moving Forward Act (H.R. 2) includes bond financing provisions such as advance refunding bonds, an increase of annual state volume cap, creation of new Qualified Infrastructure Bonds, and the restoration of certain tax credit bonds. It also makes the NMTC permanent, gives LIHTC a major boost, delays the phase down of the ITC, and increases the Historic Tax Credit, among many other provisions.

H.R.2 includes provisions to establish a permanent minimum 4 percent rate for the LIHTC, increase the annual LIHTC allocation amount, temporarily reduce the test for bond-financed housing to 25 percent and permanently extend the NMTC at $5 billion, increase the historic tax credit (HTC) applicable percentage from to 30 percent for five years and delay the phase down of the renewable energy investment tax credit (ITC) until 2026.

The new Qualified Infrastructure Bonds (QSIBs), which are modeled after Build America Bonds, would have their direct-pay subsidies phase lower to 38% in 2025, 34% in 2027, and 30% permanently thereafter. The legislation also would restore tax-exempt advance refunding 30 days following enactment into law and authorize the issuance of $30 billion in qualified school infrastructure bonds (QSIBs) over three years.

NUCLEAR STUMBLE

The latest piece of negative news to come out of the Plant Vogtle expansion project is an announcement of changes to the timing of certain planned activities at its Plant Vogtle Units 3 & 4 new nuclear construction project. The changes reflect the impacts of workforce reductions earlier this year as the project needed to enforce social distancing while it continued construction.

Georgia Power and Southern Nuclear Company, an affiliated entity that manages project construction, are employing an aggressive site work plan that targets regulator-approved in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4, dates that have not changed following the latest schedule adjustments. That schedule is viewed as aggressive. It is also likely to further extend in service dates and increase costs.

Georgia Power announced in April that it would reduce its workforce at the construction site by about 20% to mitigate the effects of the corona virus pandemic, including on labor productivity. Georgia Power expressed its view that the reduction would enhance operational efficiencies by increasing productivity of the remaining workforce and reducing fatigue and absenteeism. The company also hoped that  the reduced workforce would facilitate increased social distancing and compliance with the latest recommendations from the US Centers for Disease Control and Prevention.

It seems likely at this point that the project will experience further delays. It remains a drag on the credit of all of its participants and customers. It increases the likelihood that the messy litigation between MEAG and JEA will continue.

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