Joseph Krist

Publisher

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OPIOID SETTLEMENT

The effort to recover some of the costs of the opioid epidemic has been settled.  The nation’s three largest drug distributors and a major pharmaceutical manufacturer announced a settlement in the litigation against the companies by states and localities across the country. The total cost to the companies: $26 billion.

The settlement will require Janssen, Johnson & Johnson’s pharmaceutical division to pay $5 billion. That payment will be broken into annual payments over nine years. McKesson, Cardinal Health and AmerisourceBergen, the distributors, will pay a combined $21 billion over 18 years. The settlement requires that at least 85 percent of the payments will be dedicated to addiction treatment and prevention services.

While the settlement is the second largest multi-state settlement to be reached, it did not turn into the next tobacco deal. The settlement announcement does indicate that it was approved by at least 90 percent of those governments eligible to participate, and 46 of 49 eligible states for the distributors and 45 for Johnson & Johnson. This settlement comes as additional litigation is either settled or moves closer to settlement.

An agreement arrived at earlier this year produced a tentative settlement with Native American tribes. It will not produce a substantial windfall for any of the tribes. The 574 federally recognized tribes could receive $665 million in payouts over nine years.  There could be more money available from the ongoing Purdue Pharma bankruptcy proceedings. That litigation, focused on the Sackler family, continues. The Sacklers recently increased their dollar offer in negotiations but may plaintiffs remain unsatisfied.

Washington, Oklahoma and Alabama are not participating. Oklahoma’s Supreme Court overturned a lower court’s $465 million verdict that concluded that Johnson & Johnson’s opioid marketing created a public nuisance in the state. Other court efforts have generated a mixed bag of rulings which may lead ultimately to U.S. Supreme Court review. These three states obviously believe that they can do better even though the experience to date might indicate otherwise.

That strategy may be vindicated by the announcement that a reworked settlement between the Sackler family which owned Purdue Pharma and the states had been agreed. That settlement came in the wake of the rejection of Purdue Pharma’s bankruptcy plan in December. The District of Columbia and nine states — California, Connecticut, Delaware, Maryland, New Hampshire, Oregon, Rhode Island, Vermont and Washington had rejected that earlier plan. Mediation talks between that group of plaintiffs and the Sacklers led the family to increase its proposed share of the settlement by $1 billion.

By holding out and conducting their own negotiations, the hold out states did generate increased payout to the states. At the same time, the Sacklers will pay out the new $1 billion over 18 years versus the nine-year timeframe established in the prior rejected settlement. It is well below what many thought would be the required payout and there is a fixed timeframe for payments. The hope that opioids would become the new tobacco in terms of supporting debt issuance will not be realized.

TRANSIT FUNDING

The federal Urban Mass Transportation Act of 1964 was enacted to develop and revitalize the country’s public transportation systems.  This Act, in part, allows state and local transportation authorities to obtain federal grants.  Urban mass transportation authorities created pursuant to this section receive federal grants administered by the Federal Transit Administration.  Receipt of these federal grants requires certification from the United States Department of Labor. 

Now to ensure that public transit agencies in West Virginia are able to continue to receive federal grants, House Bill 4331 has been introduced. The bill tweaks existing state law to make clear that labor unions are recognized by these agencies. To preserve this source of federal funds for urban mass transportation authorities, only for urban mass transportation authority employees whose public authority employer is a recipient of federal funds, the term “deductions,” as used under Chapter 21, Article 5, shall include amounts for union, labor organization, or club dues or fees.

NEW JERSEY UPGRADE

New Jersey continues its journey out of the credit wilderness as it reaps the benefits of federal funding and a recovering economy. This week Moody’s said it has upgraded New Jersey’s general obligation and Garden State Preservation Trust, NJ bonds to A2 from A3, and the state’s related subject-to-appropriation bond ratings also by one notch, to A3 from Baa1 for bonds financing essential-purpose projects and to Baa1 from Baa2 for bonds financing less-essential projects. What is essential? The essential-purpose appropriation financings include bonds issued by the New Jersey Transportation Trust Fund Authority and school construction bonds issued by the state’s Economic Development Authority. Less essential debt is issued by the New Jersey Sports & Exposition Authority. 

Much agency issued debt also benefitted from the State’s upgrade. The program ratings for the state’s aid intercept enhancement programs – the New Jersey Qualified School Bond Program and the New Jersey Municipal Qualified Bond Program -were upgraded to A3 from Baa1. The Liberty State Park Project Bonds issued by the New Jersey Economic Development Authority were affirmed at Baa1. Federal Highway Reimbursement Revenue bonds (GARVEEs) issued by the New Jersey Transportation Trust Fund Authority were raised to A3 from Baa1. The ratings on the bonds issued by the South Jersey Port Corporation were affirmed at Baa1.

The vast majority of the State’s debt is paid from monies that are subject to annual appropriation. That reliance on that mechanism, rather than the use of general obligation debt, has always been seen as a strong source of support for the view that failure to appropriate would be an act of fiscal suicide on the part of the Stater. It would undue all of the benefits of better pension funding which will still be a long term drag on the State’s ratings. The reversal of the trend of inaction during the Christie administration regarding pension funding and its role in the steady declines in the State’s ratings has clearly boosted the outlook for the State.

NYC BUDGET

The NYC Independent Budget Office has released its analysis of the proposed budget for FY 2023 recently offered by Mayor Eric Adams. It is the analysis of the economy that we find most informative. It highlights the benefits as well as the costs of the City’s dependence upon Wall Street and the many associated businesses that benefit from the economic activity the FIRE sector generates for NYC.

The first example concerns wages and personal Income. The city’s recovery in terms of aggregate wages and salaries has been much more robust than its recovery in total employment. The sectors experiencing the slowest recovery, and for which IBO projects employment will not have recovered by the end of 2026, have some of the city’s lowest average wages, while the sectors that are projected to recover the most rapidly have some of the highest average wages.

The leisure and hospitality sector and retail trade sector, for example—which lost the most jobs and are projected to have the slowest expected recovery—have average annual salaries of $54,700 and $57,300 respectively. Conversely, the information and professional services sectors, which have recovered much more quickly, have some of the city’s highest average annual wages, $144,500 and $181,300, respectively.

A second example is that of real estate. After a sharp decline in 2020 in the wake of the onset of the pandemic, real estate sales in New York City rebounded strongly in 2021. The total value of taxable sales rose 81.5% to $111.3 billion compared with 2020, with residential sales up 88.7 %, and commercial sales increasing 71.2 %. Residential sales were $68.1 billion, far exceeding the previous record of $55.4 billion set in 2017. That does not mitigate longer term concerns. the future of the commercial real estate market remains uncertain.

While many observers expect an increase in the number of workers returning to the office as 2022 progresses, the total demand for office space, particularly in “non-trophy” buildings, is likely to remain soft, and the continuing shift to online shopping will weaken the market for retail space. Retail spaces may face the most uncertainty. Storefront vacancies are the most visible sign of the impact of the pandemic. The role of the individually owned small retail business in the employment of non-college graduates in large cities cannot be overstated. The recovery of these sorts of businesses will be a key to resolving issues of unemployment especially at the lower range of the pay scale.

We recently documented the Mayor’s plan to eliminate projected budget gaps through headcount management. That would represent a real reversal from the DeBlasio years. IBO estimates that nearly half of the $5.4 billion in total savings proposed in the Mayor’s Plan to Eliminate the Gap (PEG) for the current fiscal year through fiscal year 2026 are achieved through headcount reductions ($2.5 billion). Headcount reductions of between 3,500 and 6,000 are projected annually. The primary method? Most of the positions proposed for elimination are vacant.

And there are the usual tricks. The reductions occur only with vacant positions, ones that agencies have budgeted for—but do not actually have staffed. In fiscal year 2023, nearly 1,800 of the city-funded positions eliminated in the PEG at DOE are restored with federal funds, with approximately 900 vacancies eliminated in the PEG in fiscal year 2024 restored with federal funds. The expiration of federal Covid-19 relief funds occurs in 2025.

The Preliminary Budget includes a budgeted full-time headcount for fiscal year 2022 of 306,291, a level similar to what it was prior to the onset of the pandemic. In fiscal year 2026, the final year of the Adams Administration’s current financial plan, full-time budgeted headcount drops below 298,000. This would be the lowest budgeted headcount since calendar year 2017.

REGULATION

In North Dakota, the Board of University and School Lands, better known as the Land Board, has been appealing to the North Dakota Supreme Court in a case with issues surrounding royalties from the development of state-owned minerals.  Those issues include deductions oil and gas companies removed from royalties to account for transportation and processing costs. The Land Board has for several years sought to collect those deductions following a favorable Supreme Court ruling in 2019 in a case involving oil producer.

House Bill 1080 was enacted last year. The law limited the length of time for which the state in the future could seek to collect unpaid royalties at seven years. That created a cutoff date of August 2013 that would apply to the money the state is seeking to recover from dozens of companies. Now, the Board has decided not to pursue collections from prior to that date. The Department of Trust Lands has estimated the state is owed $69 million in royalties from production before that date. 

NO TOLLS ON THE OHIO

Kentucky and Ohio plan to seek $2 billion in federal funds to help pay for the overhaul of the Brent Spence Bridge corridor near Cincinnati without using tolls. The money would come from the federal infrastructure bill that Congress passed last year which includes $17.5 billion in national grants for large projects like this project. It would retrofit the Brent Spence Bridge, which carries Interstates 71 and 75 between Covington, Kentucky, and Cincinnati, a nearby companion bridge, and work on approach roads on both sides of the Ohio River.

Unlike another major bridge project – the Ohio River Bridges Project, the Kentucky-Indiana bridges built in Louisville – this one will not use tolls. That would clash with the stated intent of the USDOT to encourage the role of user fees, aka tolls. The Kentucky General Assembly banned tolls on interstate crossings between Kentucky and Ohio in 2016. This will clash with the stated goals of encouraging public/private partnerships in the finance and execution of large transit infrastructure projects.

DETROIT

Michigan law requires that the City of Detroit to hold independent revenue conferences in September and February each fiscal year to set the total amount available to be budgeted for the next four years.  The latest forecast predicts a faster recovery for Detroit than the State overall. Resident employment will recover to pre-pandemic levels by the end of 2022. Meanwhile, jobs at establishments within the city boundaries will recover by early 2023. The City’s economy continues to grow through 2026 with blue-collar jobs leading the way. 

Recurring City revenues are forecasted to exceed pre-pandemic levels in the current fiscal year ending June 30, primarily due to stronger income tax collections and the implementation of internet gaming and sports betting last year. The City presented FY2022 General Fund recurring revenues projected at $1.087 billion for the current fiscal year ending June 30, up $23.8 million (2.2%) from the previous estimate in September 2021. General Fund recurring revenues for FY2023, which begins July 1, are now forecasted at $1.147 billion, an increase of $60 million (5.5%) over the revised FY2022 estimates. General Fund revenue forecasts for FY2024 through FY2026 show continued, but modest, revenue growth of around 2% per year on average.  

AIRPORTS

The data is on regarding airport volumes in 2021.  The volume of flights operated in 2021 (6.2 million), although more than 2020, was 78.1% of the volume of flights operated in pre-pandemic 2019 (7.9 million). In 2021, the 10 marketing carriers reported 6.3 million scheduled flights, 78.0% of the 8.1 million scheduled in 2019.  In December 2021, the 10 marketing network carriers reported 580,238 scheduled domestic flights, 13,773 (2.4 %) of which were canceled. In pre-pandemic December 2019, the same airlines reported 679,941 scheduled domestic flights.

At the same time, the industry is applying heavy pressure in light of the new guidance issued by the Centers for Disease Control and Prevention that relaxes many COVID-era policies – including indoor mask wearing. The U.S. Travel Association, the American Hotel and Lodging Association, Airlines for America and the U.S. Chamber of Commerce are appealing to the White House Coronavirus Response Coordinator to replace pandemic-era travel advisories, requirements and restrictions with endemic-focused policies.  

BEIGE BOOK

The Federal Reserve issued its latest view of the economy as the nation moves towards treating COVID 19 as an endemic rather than a pandemic. Several themes were consistent across all regions. Transportation costs (fuel), labor shortages, higher costs, and higher wages were noted across the board. Steady increases in prices are supported by demand. As retail activity increases and inflation remains high, the resulting rise in prices will contribute to higher sales tax revenues.

For NYC, the Fed reported that New York City’s residential rental market has picked up steam in recent weeks, as vacancy rates have continued to edge down and rents have accelerated. Rents have fully rebounded across much of the city. Commercial real estate markets were mixed but, on balance, slightly stronger. Office markets were mostly steady, with both office availability rates and market rents essentially flat throughout most of the District.

ELECTRIFICATION REALITIES

The effort to promote electrification of homes has run into some of the realities of the costs of electrification. Residents who lost homes in the Marshall Fire already faced issues in terms of costs and insurance to replace their lost homes. Many were confronted with the reality that replacing their homes and complying with new electrification requirements left many of the 1,000 impacted homeowners facing costs well in excess of the replacement values included in their homeowner’s policies.

One of the two communities most affected by the fire was Louisville in Boulder County. The Louisville City Council voted this week to direct city staff members to draw up potential changes in its building codes in the wake of the Marshall Fire for future vote. The changes would roll back building codes to the 2018 codes in place well before the fire for those whose homes were lost in the blaze, possible with a three-year time limit. In that process, the city gathered estimates of the costs of meeting the updated codes over what was in place prior to October with the 2018 codes. It found the extra cost for the construction of an average 2,800 square foot home was about $20,000.

The situation focuses attention on the cost of “green” building. As is the case with so many environmental issues, proponents often underestimate the cost to individuals of environmental regulation. It is one thing to require corporations to incur the extra costs, it is proving to be another to get support for imposing costs on individuals.

BERKELEY HOUSING DISPUTE AND COLLEGE ADMISSIONS

After the impacts of the pandemic on the demand for public universities unsurprisingly increased demand, it raised demand for housing as well. To address such increased demand at the University of California, UC proposed construction of additional residential facilities adjacent to its campus in Berkeley. This would have facilitated a student population of 45,000.

Now a local group with a long history of opposing university expansion of its physical plant has stymied the plans in court. The California Environmental Quality Act requires state and local agencies to study the environmental impact of construction projects before approving them. The group has obtained rulings in a suit under the CEQA which say that the existing environmental study is inadequate. UC recently asked for a stay of the initial lower court rulings on the matter while it is under appeal. The request was denied.

The real problem? UC Berkeley plans to begin mailing admissions offers on March 23. The university has said that it would limit those offers to 15,900 applicants if a stay was denied, down from its original allotment of 21,000 admissions offers for the next academic year. It occurs just as California has dedicated funding to expand enrollment by 5,000 full-time students at University of California schools and 10,000 full-time students at the California State University System.  

Pending legislation would exempt certain campus housing developments from the California Environmental Quality Act.  The shortage of housing in California especially “affordable” housing can be blamed on many factors. It is disappointing for advocates of smarter less impactful housing development to be stymied by opposition from the areas which would benefit the most. The university will try to reduce the number of new students it turns away, through encouragement of online enrollment and for some incoming students to delay enrollment until January 2023. California residents and transfer students from within the California Community College system will be prioritized for fall in-person undergraduate enrollment.

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.