Joseph Krist

Publisher

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GETTING ON OUR SOAPBOX

I saw an opinion piece this week that suggested that any additional stimulus aid to states and localities be contingent on accepting requirements as to how the state and local governments spend the money. That is fine as states and localities have handled grant, aid, and leveraging programs in the past. These include matching fund and other financial requirements. Those are normal policy decisions are made ostensibly for economy and efficiency. Tying healthcare funding under the ACA to funding by states for healthcare make sense, for example.

In particular, the article suggested that Congress require states to build and maintain rainy days funds of certain sizes and proportions. It is further suggested that the reason that states have needed aid to fight the worst and most mismanaged pandemic in history is not because of that but because of their unfunded pension obligations. We find that view ridiculous.

All of the argument seems to revolve around only two parts of the actual public fiscal management equation. Pension funding is a function of good management, responsible legislation, and a supportive electorate. The arguments seem to revolve around whether one should blame the legislatures or the workers. The fact that the pension funding difficulties currently in the spotlight developed over decades under the administrations of both parties and under a variety of economic and fiscal theories does not seem to matter.

What we are seeing today is a reflection of the starve the beast, cut revenue philosophy which has broadly characterized Republican fiscal policy for four decades. Its anti-revenue stance contributes as much as the allegedly greedy public workers backed by the Democratic side. The body politic has been convinced that the only good spending by government is no spending. In this case, it is reasonably easy to identify pandemic related spending and direct any monies generated by Congress to remedy the extraordinary expenses of the pandemic.

Conflating a long history of bad pension management with the problems caused by the extraordinary conditions of the pandemic is ridiculous. The pension expenses plaguing government at present would be the same with or without the pandemic. What is a variable in the equation is the role of the federal government in managing (or more correctly mismanaging) the pandemic response. States could only take steps within their own states to manage restrictions on activity. I’m sure that people in New York State would have loved to have been able to cancel the annual rally in Sturgis, SD which many believe was a catalyst for the ongoing disaster underway in the Plains.

Taken to its logical conclusion, there is as much a case to be made to deny the states currently under a pandemic siege due to the refusals of their governors to impose preventive restrictions any aid as there is to deny states with underfunded pensions assistance. Connecticut. Illinois. New Jersey – blue states. South Carolina, Kentucky, Kansas – red states. They all have badly managed and underfunded pension systems. Chronically so. Going further down a logical path, are pensions more of a problem than irresponsible development subsidized by federal flood insurance? Would FEMA have to pay less if development was restricted in flood zones and wildfire areas? Would states and cities be penalized for issuing ineffective but expensive tax breaks to subsidize business?

In the end, the conflation of current expense demands generated by extraordinary circumstances with the pension funding problem is ludicrous. It’s the sort of ideologically based argument that we have long cautioned against from either party. It’s not constructive and most importantly doesn’t contribute to solving the problem. The states and local governments are asking for help with the pandemic, not for a pension bailout. Let state and local government get through the pandemic and get the red herrings out of the way.

ACA OUTLOOK IMPROVES

We are always wary of trying to read the tealeaves when it comes to issues before the Supreme Court. Nonetheless, it would be a mistake not to note the overwhelming consensus reaction to the arguments heard this week at the Court in the California v Texas case challenging the ACA. By all accounts, the notion of severability – the idea that one portion of a law may be invalidated without invalidating the whole law – seems to be one that will save the Act.

At least two justices clearly expressed the view that the mandate provisions of the law were severable from other provisions of the act. Now that the political firestorm over the appointment of the most recent justice is receding, it is easier to more objectively prognosticate about the expected final result of the case. If we have to make a prediction, we believe that the mandate may be invalidated but that the basics of the ACA including the expansion of Medicaid will be upheld.

Such a result would be credit positive for the major governmental players. The likelihood that the basic terms of the ACA are upheld is increased lessens a significant source of uncertainty for not just providers but also for providers as well as state and local government funders.

ELECTION TAKEAWAYS

So much of the focus has been rightfully on the implications of the Presidential election in the days after its completion. It is true that certain expected federal policy changes will have implications for state and local government. We take the view that local decisions as expressed through the ballot box will have more of a current impact than changes in federal law or policy will.

In Arizona, Proposition 208, an income tax increase to fund teacher salaries increases income taxes through a surcharge on taxable income for single earners who make more than $250,000 and dual earners who make more than $500,000. The Arizona Joint Legislative Budget Committee estimates the surcharge will raise $827 million in revenue, with approximately $702.95 million to be distributed to schools, another $99.2 million available in grants for schools with career technical education programs and $24.8 million that will go towards teacher education throughout the state. The direct funding to districts represents a funding increase of 12.6% in the state’s $5.6 billion general fund expenditure on K-12 education in 2021.

In Los Angeles, Measure RR authorized the Los Angeles Unified School District to issue up to $7 billion in general obligation (GO) bonds. Voters in the SF USD approved Proposition J, which introduces a $288 per parcel tax starting in fiscal year 2022. The tax will generate around $48.1 million annually (equivalent to around 5% of fiscal 2021 budgeted general fund revenue) and allow the district to maintain 7% salary increases negotiated in 2018. The increased revenue is needed as the district drew $40.0 million and $20.0 million, respectively, from its share of the city’s rainy day reserve to fund the pay raises.

In Maryland, voters in Montgomery County approved a charter amendment on property tax limitations that enables the county to raise property tax rates without revenue constraints. The ballot item replaces the existing limit and enables a unanimous vote by County Council to adopt a tax rate on real property that can exceed the rate from the previous year. The county’s previous charter limit, a self-imposed tax cap that was enacted in 1990, limited property tax revenue growth to the rate of inflation (CPI index) and an amount based on new construction. Reinforcing the support for County operations, second charter amendment on the ballot (Question B) was rejected: it aimed to remove the county’s ability to increase revenue above inflation.

THE REAL IMPACT OF PROPOSITION 22

Much will be written and said about the success of the transportation network companies (TNC) in defeating a ballot initiative aimed at reclassifying gig workers as employees. While so much focus on that aspect of the initiative is driving debate, one troublesome aspect of the initiative should draw much more concern. Other initiatives have attempted to make it hard for a legislature to override a voted change by requiring supermajorities for repeal.

I have trouble with supermajority requirements philosophically but to date the required percentages have not exceeded two thirds. That’s manageable. In the case of Proposition 22, the initiative included language which requires a 7/8 majority in the legislature in order for the initiative to be overridden. That effectively prevents any change in the law going forward. It would be dangerous to see a significant body of voter initiatives include such excessive supermajority requirements.

In this case, an exceedingly well funded campaign supported overwhelmingly by the TNCs was more successful than a more thought out and debated legislative process. From our standpoint it’s yet another example of the TNCs adversary approach towards government which hinders its long term goal of replacing public transportation. It also reinforces the view that their long term profitability relies on fully autonomous vehicles. And when that comes, Proposition 22 will be why the unemployed drivers can’t claim unemployment insurance. 

NEW JERSEY

S&P Global Ratings has lowered its rating on the State of New Jersey’s general obligation (GO) bonds to ‘BBB+’ from ‘A-‘, as well as lowered its long-term and underlying ratings to ‘BBB’ from ‘BBB+’ on various other bonds secured by annual appropriations from the state. “The downgrade reflects our view that New Jersey will continue to have a significant structural deficit that will be difficult to close in the coming years because of decreased revenues as a result of the COVID-19 pandemic, combined with high and increasing debt, pension, and other postemployment benefit liabilities.”

The path back from the credit declines experienced under the Christie administration became longer and more twisted as a result of the pandemic. S&P looks at the history of pension underfunding by the State, the decline in available revenues, and the continued need to increase pension funding and concludes that the state will have a large fiscal 2021 structural deficit of 15.9% of budgeted appropriations. 

MBTA

As the most significant example of the difficulties in which large city public transit agencies, we have rightly devoted significant space to the ongoing troubles at the New York MTA. Nevertheless, other northeastern agencies are beginning to reveal their plans for coping with pandemic related declines in ridership and revenues.

Boston’s public transit agency – the Massachusetts Bay Transit Authority – is the latest to announce plans to cope. The plan would take $130 million from spending on service. The reductions in service would be 15% on buses, 30% on subways and 35% on commuter rail.  The proposal includes the elimination of all weekend commuter rail service, 25 bus routes, ferry service, or any rapid transit after midnight.  The T already exhausted about $827 million from the CARES Act to close gaps in fiscal years 2020 and 2021.

The proposal represents the impacts of eight months of state of emergency restrictions on ridership. Current levels of ridership reflect huge declines compared to pre-pandemic crowds — an average of about 40% on buses, 25% on subways, and 13% on the commuter rail. Those declines significantly reduced fare revenue, which typically makes up about a third of the agency’s budget. Officials now expect they will face a $579 million gap in fiscal year 2022, if you believe the most pessimistic end of earlier estimates.

P3 CHANGES HANDS

In 2012, two major players in the public/private partnership arena, Skanska and Macquarie, partnered with Virginia in 2012 to rebuild and expand the Downtown and Midtown tunnels between Norfolk and Portsmouth. The entities were paid to expand the capacity of the tunnels and an extension of  Martin Luther King Boulevard to Interstate 264. These private partners contributed $1.6 billion of project costs with $550 million paid by the Commonwealth of Virginia. A concession was awarded allowing the operator to collect tolls to an entity owned by the partners known as Elizabeth River Crossings.

Toll collections commenced in 2014 and the private operator immediately ran into criticism over its collection of tolls and financial penalties assessed to non-payers. Within three years, the agreement between the concessionaire and the Commonwealth was renegotiated. Macquarie and Skanska offered to settle for lower amounts and to pay $500,000 annually for 10 years toward a toll-relief program for eligible residents of Norfolk and Portsmouth, among other changes.

Tolling and their collections remain a political sticking point.  Gov. Ralph Northam tasked the Virginia Department of Transportation to “evaluate opportunities to mitigate the financial burden on the commuting public.” Work on the study began in May 2019 and was nearing completion this summer. So the private partners clearly reevaluated their investment.

Now the partners have announced that that the legal entity which operates the facilities, Elizabeth River Crossings, has been sold to a Spanish toll road operator and the John Hancock Life Insurance Co. for more than $2 billion. The sale will generate an annual  5.4% return on asset over the eight year period of ownership to the Macquarie/Skanska partnership. That just doesn’t cut it for these investors relative to their perceived risk.

The new buyer is Abertis, a Spanish toll road company, and Manulife Investment Management, which did so on behalf of John Hancock Life Insurance Company, a division of Manulife Financial Corp. If approved, the project would be Abertis’ first toll road operation in the United States. Under the existing terms governing operation of the facilities, the operator would have the concession for another 50 years. It would be limited to annual increases of 3.5% for tolls.

MORE ON TOLL ROADS

More traditionally financed and operated toll roads are facing issues related to their toll collection practices, especially the use of accumulating additional penalties in the event of non-timely payment of delinquent fees. The Transportation Corridor Agencies, operator of the San Joaquin toll roads, has made a motion in the California courts to settle litigation regarding Transportation Corridor Agencies and its tolling practices.  The Transportation Corridor Agencies and 3M have approved a deal worth nearly $176 million to end a lawsuit filed by a class of millions of motorists who traveled the toll roads. The settlement includes nearly $41 million in cash awards and $135 million in penalty forgiveness.

The lawsuit alleges that Southern California toll companies for tolls on state Routes 73, 133, 241, 261, and the 91 Express Lanes improperly shared personally identifiable information of motorists to third parties. The agencies will provide $135 million worth of penalty forgiveness to members with outstanding penalties. Those eligible will receive the lesser of the total of their outstanding penalties or $57.50. Any remaining funds will go toward those with the oldest outstanding penalties to the newest.

Who gets the money? Class members include anyone whose personally identifiable information was provided by the Transportation Corridor Agencies to any other individual or entity between April 13, 2015, and 30 days after the court issues a preliminary approval order.

In the Bay Area, The Golden Gate Bridge, Highway and Transportation District oversees the bridge, buses and ferries in the Bay Area. It has been relying on federal stimulus assistance to keep paying its employees even in face of significantly reduced traffic. Now those funds are essentially gone and no subsequent stimulus appears on the horizon.

This has led the District to pose a choice to its stakeholders in the absence of any additional stimulus. The District faces a $48 million revenue shortfall. To deal with that gap, the District has proposed either reducing headcount by half or raising tolls. The transit district has experienced about a $2 million a week drop in tolls and fares throughout the pandemic

Golden Gate Bridge traffic is still down 30%, bus ridership dropped 75% and ferry ridership plummeted 96%.  cutting staff would save an ongoing $26.7 million a year until the positions are refilled. One option, which would avert layoffs, is to temporarily raise the toll by $2, from the current range of $7.70 to $8.70 for a car depending on whether a driver pays with FasTrak or by mail. Another option is a hybrid model that would raise the toll by $1.25 and furlough staff one day a week. 

CLIMATE

The powerful derecho that swept through the Midwest in August, focusing its destruction on central Iowa, is officially the most costly thunderstorm event in recorded U.S. history. According to NOAA, an estimated 90% of structures in Cedar Rapids were damaged by the storm, and more than 1,000 homes were destroyed. the U.S. Department of Agriculture estimates that 850,000 crop acres were lost — 50% more than originally estimated.

As of November 2, 2020, more than 200,000 claims have been reported.  Of those claims, nearly 160,000 claims totaling more than $1.6 billion have been paid already.  Insurance companies are holding more than a billion in reserves to be used for the remaining claims. Iowa Gov. Kim Reynolds requested nearly $4 billion in federal aid to help the state’s agricultural industry.

This all comes as the state has come later to the pandemic’s wrath but is now facing its full pressure. The daily case tally has just reached nearly 5,500 and 27 deaths. The total is 162,000 sick and some 1900 dead. It all adds up to additional pressure on the State.

On the positive climate front, green jobs can even spring from the auto industry. One of the fears of local economies is that existing manufacturing locations may not survive the ultimate conversion to electric vehicles. Ford just announced it will add 150 workers at its Kansas City Assembly Plant in Claycomo, Missouri, to build the new E-Transit full-size van that will go on sale late next year. Another 200 workers will be hired at Ford’s Rouge Electric Vehicle Center in Dearborn, Michigan, which will build an all-electric F-150 pickup starting in mid-2022.

Ford will spend about $150 million at a transmission plant in Sterling Heights, Michigan, to make electric motors and transaxles for new electric vehicles. No new jobs will be added but the investment will help keep 225 positions. Automakers sold just over 236,000 fully electric vehicles in 2019, up 36% from 2018. That is a mere 1.4% of all new vehicles sold in the country.

This news comes as the Federal Reserve made its clearest statement to date regarding the potential impact of climate change on the global financial system. “Acute hazards, such as storms, floods, or wildfires, may cause investors to update their perceptions of the value of real or financial assets suddenly…slow increases in mean temperatures or sea levels, or a gradual change in investor sentiment about those risks, introduce the possibility of abrupt tipping points or significant swings in sentiment.” Lost in much of the politics driven debate over climate change is the fact that two of the more objective entities in the federal government – the military and the Federal Reserve – have made clear policy statements in support of a view that climate change is real and is happening. That moves the debate forward.

PUERTO RICO

This week’s news that nearly 200 boxes of uncounted votes have surfaced in Puerto Rico is just the sort of thing that makes statehood a pipedream. Officials acknowledged that the votes could change the results of particularly narrow races that had already been preliminarily certified. Two city mayoral elections are currently decided by margins of under ten votes.

In spite of the hopes of activists and others, the election was already marred by the fact that the winning gubernatorial candidate won with only one-third of the vote.  The president of Puerto Rico’s State Electoral Council, Francisco Rosado Colomer, acknowledged that it could be between 3,000 and 4,000 votes which have been “found”.

The exact circumstances behind the “loss” and “discovery” of the votes are not clear. What is clear is that the perception of the government and politics of Puerto Rico as being incompetent is only enhanced by events like these. It weakens the value of the vote on issues like status. Add this to the narrowing of the partisan breakdown of the U.S. Congress and the outlook for statehood significantly weakens.

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