Joseph Krist

Publisher

________________________________________________________________

ASCENSION CAUGHT UP IN TECH DISPUTE

The Department of Health and Human Service’s Office for Civil Rights, the federal agency that enforces HIPAA, would “like to learn more information about this mass collection of individuals’ medical records with respect to the implications for patient privacy under HIPAA,” associated with “Project Nightingale”.

“Project Nightingale” is a project that Google launched last year. It analyses health data from patients who received care at St. Louis-based Ascension, one of the nation’s largest health systems. Ascension is a large issuing presence in the municipal bond space. Data reportedly includes patients’ lab results, medications and diagnoses. Google’s partnership with Ascension also involves a commercial contract to move Ascension’s on-premise data centers to Google’s cloud-computing system.

Here’s the problem, one not unlike many of the tech industry’s disputes with government. Ascension patients were not notified about the partnership with Google so they did not get a chance to opt out. According to Google the intended goal is to use Google’s artificial intelligence tools to recommend changes to a patient’s care, such as different treatment plans, diagnostic tests or additional physicians, as well as to flag unexpected deviations in the patient’s care.

Google has struck similar partnerships with the health systems of Stanford University, the University of Chicago and the University of California at San Francisco. The concern is that a higher level of detail is being analyzed under the arrangement with Ascension. The University of Chicago is being sued by a patient over its sharing thousands of medical records with Google for a research project on predicting patient outcomes, claiming that the health system had not properly de-identified patient information. Google and UChicago Medicine have maintained that they followed regulations, including HIPAA.

It is difficult to deal with the single mindedness of the tech entities in terms of their use of data. It’s the modern equivalent of and ends justifies the means approach whether is the management of public streets and roadways or whether it’s over issues of patient privacy. There just seems to be a lack of common sense manifested in the industry’s inability to see the concerns of the other parties they interact with.

Until the scale of the issues can be determined, it’s not possible to assess the level of risk to the Ascension credit if violations of HIPPA have occurred. Only then can the potential scale of the potential costs of any resulting litigation be determined. There should be some sort of trust penalty associated with Ascension. It seems inconsistent for a religiously based system that deigns to use its beliefs to deny certain medical services should have entered into such an arrangement with Google on what appears to be a secretive basis.

HIGHER EDUCATION REMAINS UNDER PRESURE

For some time we have commented on the potential for credit problems in the higher education sector. There have been several defaults and closures of institutions. So we are interested in comments made this week by Moody’s Investors Service based on its tenth annual tuition survey.

The data is stark. Median net tuition revenue will grow 1.0% and 2.3% for public and private universities, respectively, for fiscal 2020, according to the results. The continued trend of softening net tuition revenue growth for both public and private universities reflects enrollment and pricing challenges. Moody’s also cited factors we have been concerned about including flat numbers of high school graduates, a favorable economy drawing students into the workforce, and some declines in international student enrollment. These factors are not one offs but are rather reflective of trends.

The report highlights issues more specific to the private schools The median growth in net tuition revenue among private universities is likely to soften slightly, partially because of increasing competition reflected in continuously rising discount rates. » The first-year discount rate at private universities rose slightly to 51% for students entering in fall 2019. Overall, nearly one quarter of private university survey respondents reported a first-year tuition discount of 60% or higher, an indicator that private universities will struggle to sustain net tuition revenue growth.

Other more specific points include some focusing on the public universities.  Among public universities, the median annual growth in net tuition revenue in fiscal 2020 is projected at 1%. This represents a decrease from 1.8% in fiscal 2019, due in part to relatively flat enrollment.  Nearly two-thirds of public universities are projected to grow overall net tuition revenue at under 3% for fiscal 2020, our proxy for inflation in the higher education sector. This is almost double the level five years ago.  Continued declines in the number of international students also contribute to more constrained revenue growth. Among our public university survey respondents, the median decline in international students for fall 2019 was 3.7%.

Overall, the public schools offer more safety. They have a larger constituency, the provide much research and support for economic drivers in state economies, they are the low or lower cost alternative for a larger segment of demand. They also have more a more diversified mix of undergraduate, graduate and professional programs. That drives demand as well.

MORE MONEY RAINS ON THE PRAIRIE

We have expressed concerns about the potential impact on state credits in the farm belt resulting from the ongoing trade war, primarily with China. early on the trump Administration disbursed aid to farmers for 50% of their estimated losses resulting from reduced demand for US agricultural products. Now as the trade disputes have dragged on well after previously announced potential settlement dates, the federal Agriculture Department will begin distributing another round of tariff relief payments next week to farmers and ranchers.

The aid payments have been coming across two years. The Administration has already paid farmers at least $6.7 billion for their 2019 production. It paid $8.6 billion for last year’s production and additional trade relief efforts like commodity purchases and marketing assistance. The first set of 2019 payments covered 50% of a farmer’s eligible production; the new funds announced will cover an additional 25%. 

Hog and dairy farmers have been the primary recipients. They are on the front lines of the trade war but coincidentally are in areas key to the president’s reelection hopes so the additional funding is not a surprise. And they do help to mitigate the credit impact on the agricultural states. They are nonetheless a band aid. They also to some extent insult farmers. As one said to the Boston Globe, “I don’t know what socialism is if it’s not receiving a check from the government.” 

TIME TO PAY FOR THE CPS CONTRACT

The news out of Chicago about the city’s ability to fund its recently negotiated labor contracts not good. – especially the one for the CPS teachers – was not good. It puts the already beleaguered tax base supporting both the City and CPS under even more pressure. The situation augers poorly for the ratings of the City and its associated underlying taxing entities. Mayor Lori Lightfoot and Chicago Public Schools leaders have agreed on where the funds to pay for the first year of new union contracts will be found. The problem is that some of those revenues are not recurring leaving a significant hole in future budgets.

The district is relying on the state to keep its pledge to increase school funding, which can change year to year. CPS also is relying on its own ability to significantly raise property taxes. The additional contract costs for the current school year total $137 million: $115 million for the CTU contract and $22 million for the SEIU contract. In addition, the district has to pay $60 million or so in teacher pension contributions formerly paid by the city.

CPS already budgeted $89 million to cover higher personnel costs clearly not enough to cover the full cost increase. By the fifth year of the CTU contract, CPS will need $504 million more a year to cover the added costs. For SEIU, that cost will be at least $54 million. That comes to $558 million in additional costs by the 2024 budget year — about 8% more than the $7 billion that the district spent last year.

PROPOSITION 13 CHALLENGE

When it was passed 40 years ago, there were many doom and gloom predictions about the credit impact of the limitations on property taxes enacted under Proposition 13 in California. As it turns out, Prop. 13 has not become an issue in terms generally of state and local credit in the Golden State. That does not mean that it is universally supported. The law’s reliance of assessed value based on the purchase price of the home has created inequities between the taxes paid by owners on property for which ownership has been extended versus those paid by properties which have recently turned over. Essentially, two very similar properties directly adjacent to each other may have significantly different tax bills. Now, this situation is generating more and more concern.

An effort is underway to address some of the perceived shortcomings of the law. Efforts are underway to place an initiative on the November, 2020 ballot which would allow county assessors to split their tax rolls into two lists. Homeowners and some small businesses would still receive the full Proposition 13 benefits: a 1% tax based on a property’s purchase value and annual tax increases of no more than 2%.

Commercial and industrial property owners would be subject to different rules. While their tax rates wouldn’t change, beginning in 2022 the levy would be based on the current market value of the real estate. Business property values would have to be updated by county assessors at least every three years. Some of California’s most powerful public employee unions — including Service Employees International Union, the California Teachers Assn. and the California Federation of Teachers. They represent those at the forefront of the affordable housing debate in California.

Proponents want to include provisions directing the application of the additional revenue to be derived from the proposed taxing changes. Schools would receive most of the new tax revenue while municipalities also would receive a share of the new property tax revenue. The allocation is not accidental. Initiative supporters see a connection in that public support for the idea of loosening the property tax limits on businesses increases in polls by as much as 10 percentage points if voters are told the money will go to education.

The ballot initiative will be strongly challenged and if on the ballot strongly opposed by the commercial business interests which will be impacted. The California Business Roundtable has promised California Business Roundtable an “aggressive” campaign to kill it. They suggest that the tax will create just another cost to retailers which will be passed onto consumers. The president of the nonpartisan Public Policy Institute of California offers some sage advice for handicapping this one. “Initiative campaigns often focus on the idea of unintended consequences,” he said. “To me, that’s what this is going to be all about. You’re going to hear that from both sides. And the voters will have to decide.”

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.