Joseph Krist

Publisher

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PORTS REBOUND

I was taken aback a couple of weeks ago to see that many retailers already were putting out their Christmas related inventory. It made sense in that Christmas did represent retailers best hope of recovering some of their losses. Now we are seeing the impact of the great Christmas inventory build of 2020 on the port sector of the municipal credit spectrum.

The nation’s busiest port, the Port of Los Angeles, set a September record, processing 13.3% more 20-foot-equivalent units (TEU), totaling 883,625 containers compared with 779,902 last year. Officials also said the third quarter was the best in the port’s 113-year history as 2,701,847 TEUs were processed.

The adjacent Port of Long Beach also had a solid September, handled 795,580 cargo TEUs, breaking the record for a month set just two months ago. September’s figure is up 12.5% compared to 2019’s 706,955 TEUs. Long Beach processed 2,274,271 TEUs during the third quarter, a 14.1% increase from the third quarter of 2019. The port enjoyed its busiest quarter on record, topping the previous mark set in the third quarter of 2017 by 160,000 containers.

The Port of Oakland reported a 9.3% year-over-year increase in September, processing 225,809 TEUs compared with 206,539 in 2019, making it the best September in its history. Seattle-Tacoma, the Northwest Seaport Alliance reported September was its best month of 2020, processing 308,682 TEUs. Still, that was down compared with 347,278 in 2019. On the Atlantic, the Port of Virginia had a record September, processing 256,439 TEUs, up 6.2% from 2019’s 241,416. Savannah facility recorded an 11.4% uptick, moving 412,138 TEUs, compared with 369,999 last year. Port Houston reported a 1.1% year-over-year increase, handling 254,405 TEUs compared with 251,524 in the prior-year period. 

The activity numbers support the view that port revenue bond credits are holding up well on both an absolute and relative credit basis.

MUSEUMS

The Board of Trustees of the Association of Art Museum Directors (AAMD) in April passed a series of resolutions addressing how art museums may use the restricted funds held by some institutions. Primarily, AAMD decided to refrain from censuring or sanctioning any museum—or censuring, suspending or expelling any museum director—that decides to use restricted endowment funds, trusts, or donations for general operating expenses. The resolutions place a moratorium on punitive actions through April 10, 2022. 

The measures were a direct response to the pandemic based closures of these institutions. They came at a time when some were criticized for employment reductions without use of endowments. It has taken some time for museums to decide to sell art from their collections but a few are poised to do so.

For investors, you can get used to the word deaccessioning (the sale of art). An institution may consider the following sources for general operations, including necessary expenses such as staff compensation and benefits: Income (not principal) from endowment funds or trusts held by a museum and that are normally restricted to purposes other than general operations such as art acquisition, conservation, or research; Income (or principal) from donations or trusts held by outside entities in support the of museum, and that are also restricted to purposes other than general operations such as art acquisition, conservation or research; and the income (not principal) from funds generated by deaccessioned works of art, regardless of when the works were deaccessioned.

The Brooklyn Museum is putting 12 works up for auction. The Museum of Art in Baltimore is selling three of its prized pieces. These decisions however put other sources of funding at risk. In the wake of the decision to sell, two former museum board chairmen say they’ve rescinded planned gifts totaling $50 million.

TRANSPORTATION TECHNOLOGY

“Moving a complex technology with many variables requires more testing in a deployed situation than in the laboratory.” Therein lies the rub in terms of trying to anticipate the real emergence of a fully connected transportation system. Over recent years, proponents of fully smart transportation systems have tried very hard to make the need for significant connected infrastructure investment by governments a more immediate priority. Our view has been that the technology is not mature enough for use currently and that there are more pressing current road infrastructure demands.

The quote is from a recent analysis of a connected vehicle pilot test in Tampa, Florida, conducted by the U.S. Department of Transportation’s Intelligent Transportations Systems Joint Program Office. It found that the complexities of field testing and technology integration were “significantly underestimated.” The gap between performance in the laboratory and “real world’ performance is significant.

Vendors demonstrating their technologies at their own facilities “had a much higher degree of success” than those demonstrating on the expressway – leading one to infer that the “demonstrations at vendor facilities were more controlled” than those vendors who tried to demonstrate at expressway in an unknown environment. “More effort had to be put into testing applications that were believed to be ready for deployment

[meaning]

certain applications may be falsely marketed as deployment ready, when they in fact still require additional research and development to work effectively.”

That is the problem in a nutshell. Public transportation agencies cannot be expected to produce technology based transit infrastructure without the ability to assess the relative costs and benefits of the projects. For the foreseeable future, there are still many bridges to cross until the connected vehicle infrastructure future is realized.

HEALTHCARE CONCENTRATION CONTINUES

The pandemic may be wreaking havoc with the healthcare system in the upper Midwest but that has done nothing to slow the long term operating trends facing providers. To the end, we note the announced agreement to pursue a merger between two regional powerhouses, Intermountain Healthcare and Sanford. The two have signed a letter of intent for a partnership. The merger is expected to close next year pending state and federal approval.

The combined entity will employ more than 89,000 people and operate 70 hospitals. It will also provide senior care and services in nearly 370 locations and insure more than one million people. Intermountain operates 24 hospitals and 215 clinics in Utah, Nevada and Idaho. Those facilities will retain the Intermountain name. Sanford employs 47,757 at its 46 medical centers and 210 clinics which will retain the Sanford brand. Sanford employs 47,757 at its 46 medical centers and 210 clinics. Each system is the largest private employer in their respective home states of Utah and South Dakota.

COLLEGE ENROLLMENTS

Undergraduate enrollment is running 4.0% below last year’s levels. The usually upward trend in graduate enrollments remains so but at a slower 2.7% increase this fall. Overall postsecondary enrollment is down 3.0%. The declines reflect the fact that first time students are the cohort with the largest decline.  The overall national rate of decline is 16.1% while community college enrollments declined some 22.7%.  

Community colleges continue to suffer the most with a decrease of 9.4% percent. Community colleges’ enrollment decline is now nearly nine times their pre-pandemic loss rate (-1.1% for fall 2019 compared to fall 2018). Even more concerning, the number of freshmen also dropped most drastically at community colleges (-22.7%). Public four-year and private nonprofit four-year colleges show a much smaller drop (-1.4% and   – 2.0%, respectively). Freshmen are down far more steeply (-13.7% and -11.8%, respectively).

As the only exception, for-profit four-year colleges are running 3% higher than last fall. At primarily online institutions, where more than 90% of students enroll exclusively online even before the pandemic, enrollments are growing at both the undergraduate and graduate levels (+6.8% and +7.2%, respectively), regardless of student age. Particularly, adult students age 25 and older, who make up most of the undergraduates at these institutions increased 5.5%, after a 6.3% decline in the year prior to the pandemic.

Students and families, facing skyrocketing unemployment, have been loathe to pay full tuition charges for largely online instruction. The American Council on Education and other higher education organizations estimated that the virus would cost institutions more than $120 billion in increased student aid, lost housing fees, forgone sports revenue, public health measures, learning technology and other adjustments.

Since February, colleges and universities have eliminated over 300,000 mostly non-faculty jobs according to federal data. Now that the pandemic is here for the long haul, the institutions face serious decisions impacting even tenured faculty. The furloughs of tenured faculty are occurring at both state and private institutions. ate enrollments are running undergraduate enrollment is running 4.0 percent below The pandemic and its direct effects  has arrived to entities with several “co morbidities – years of shrinking state support, declining enrollment, and student concerns with skyrocketing tuition and burdensome debt.  Overall demographic trends are not currently favorable for the schools with too many institutions chasing after an insufficient number of enrollees.  A slow winnowing out of weaker institutions is now accelerating.

PUERTO RICO

While the effort to restructure the outstanding debt from the Commonwealth of Puerto Rico continues, the future of the Commonwealth’s government will be on the ballot on November 3. The six candidates running for Governor have a diverse set of views and plans. This is the first time since Hurricane Maria that Puerto Ricans have had a chance to express their views at the ballot box. The choices made will potentially have significant impacts as the Commonwealth deals with the pandemic, the rebuilding of the power system, and a potentially contentious debate over statehood.

For example, the rebuilding of the power system has been fraught with difficulties including hurricanes, earthquakes, and politics. In the wake of Hurricane Maria, the federal government got some questionable entities awarded large contracts to rebuild the electrical grid. After the Whitefish contract was eliminated, a new contracting process happened with a new contract being awarded to a different firm named LUMA Energy.

That contract has been controversial. Gov. Wanda Vázquez’s administration announced the chosen company in June 2020.  Four out of the six candidates competing for governor have vowed that they will cancel that contract if elected. The other two have said they will not cancel it, but modify it instead. One of the controversies surrounding the contract is that while the transaction is being presented as a public/private partnership (P3), LUMA does not anticipate that it will invest money. In fiscal year 2021, it will be the opposite: payments to the company during the transition will trigger a deficit of up to $132 million at PREPA, according to the public corporation’s Fiscal Plan approved by the Fiscal Control Board.

Proponents can cite the long history of poor management at PREPA. Since 2017, it has had six executive directors. Opponents include ratepayers and employee unions who contend that the contract is designed to benefit LUMA. They cite the fact that the Fiscal Control Board submitted a motion for Judge Laura Taylor Swain, who oversees PREPA’s bankruptcy process under the PROMESA law in court, to consider that any payment to LUMA during the transition process be considered an administrative expense that it is obliged to pay. The judge approved that motion on October 19, meaning that if the public corporation’s debt adjustment plan is approved, LUMA would get paid before any creditor.

WAS WISCONSIN FOXCONNED?

Recently, the State of Wisconsin rejected requests from the Taiwanese multinational electronics contract manufacturer Foxconn for tax credits resulting from development of manufacturing facilities in southern Wisconsin. The Wisconsin Economic Development Corporation (WEDC)  is unable to calculate either Job Creation Tax Credits or Capital Investment Tax Credits because the Recipients have not met the requirement that the FullTime Jobs created and Significant Capital Expenditures made within the Zone – or in the case of Full-Time Jobs, outside of the Zone, but within the State of Wisconsin, and for the benefit of the Recipients’ operations within the Zone – be related to the Project.

That is the formal way to document what is becoming a potential disaster for southern Wisconsin. Foxconn isn’t producing the large-sized TV display panels outlined in the original contract, hadn’t invested the pledged amount in the plant and failed to employ even the minimum number of people needed to get subsidies. The proportion of the much smaller projected employee headcount devoted to manufacturing jobs versus R&D jobs is another disappointment.

It was the manufacturing jobs that were the hook to gain state participation as well as the infrastructure investment under taken by the host municipal entities. Now “the Recipients have acknowledged that they have no formal or informal business plans to build a 10.5 Fab within the Zone.” That would be the primary manufacturing facility to be developed. As the State points out, ‘the Agreement and Application provide that, by the end of 2019, 2,080 Full-Time Jobs were anticipated to be created and $3,307,000,000 in capital expenditures would be invested. WEDC’s initial review of the 2019 Annual Project Report reveals that, by contrast, the Recipients employed fewer than the minimum required 520 Full-Time Employees and had invested roughly $300,000,000 in capital expenditures.

We are completely unsurprised by the idea that Foxconn was not prepared to meet their obligations. This deal was thrown together driven by an ideologue Governor and President Trump. They ignored the numerous red flags attached to this project including Foxconn’s past in Pennsylvania where it similarly failed to follow through on commitments made to procure tax benefits.

MTA

The palpable sense of fear about the future of the public transit system in New York continues in the variety of analyses available about the future f the MTA. The data lays out starkly a vision of significant cuts in service and expenses as revenues are slow to recover.

Their major concerns stem from the  impact of cuts in MTA operations on the economy of New York City and the twelve-county region served by the Metropolitan Transportation Authority. Closing the projected gap in the MTA’s operating budget for 2021 could require a reduction of the agency’s workforce by 8,000 positions, directly and indirectly resulting in a loss of 13,380 jobs, with more than $1.4 billion in earnings, in the MTA region in 2021 according to the study.

A reduction in capital spending by $4.8 billion below the level previously planned for 2021 would directly and indirectly result in a loss of 23,264 jobs, with nearly $2.0 billion in earnings, in the region in 2021. Reductions in capital spend beyond the $4.8 billion planned for 2021 would directly and indirectly result in even greater job losses.

It’s one side of the transportation debate already underway in New York before the pandemic. The reality is that the mass transit system in greater New York has been one of the best examples of infrastructure subsidizing business. The concerns of business interests regarding the MTA’s future are real even if those concerns are motivated by enlightened self interest. These sorts of studies supply good ammunition in the argument over an additional federal stimulus. It’s becoming obvious that public transit.

GDP – BEHIND THE HEADLINES

Unsurprisingly, the Administration is touting the third quarter GDP numbers as signs that everything is on track for a recovery from a pandemic based world. There is no denying that the revival in GDP is positive but like so many other times, the President focuses on the headline number with no appreciation for the details.

Disposable personal income decreased $636.7 billion, or 13.2%, in the third quarter, in contrast to an increase of $1.60 trillion, or 44.3%, in the second quarter. Real disposable personal income decreased 16.3%, in contrast to an increase of 46.6%. Personal saving was $2.78 trillion in the third quarter, compared with $4.71 trillion in the second quarter. The personal saving rate—personal saving as a percentage of disposable personal income— was 15.8% in the third quarter, compared with 25.7% in the second quarter.

The impact on personal disposable income bodes poorly for those sectors of the economy which have served as foundational blocks for many revived cities. Declining disposable income hurts the entertainment/culture/arts, hospitality, and travel. Increasingly the path to recovery lengthens. This has implications for many revenue backed credits. The current wave of new corona virus cases will put the economy under pressure again. This comes as GDP has not fully recovered from the second quarter impact.

Already, the data was showing a decline from second quarter growth rates. This trend is likely to continue as the revival of the virus is already leading to reimposition of limits on activities. This will further pressure those sectors which had anticipated benefitting from a reviving economy. The potential negative impact on the Christmas shopping season of the pandemic has significant implications for state and local revenue streams.

One must also keep in mind that the fourth quarter will be the first to fully reflect the end of supplemental unemployment payments, the end of regular unemployment payments, and the lack of any additional stimulus. The combination of reduced disposable income and limited or closed retail venues will really be felt for the holiday shopping season. Without these sorts of seasonal boosts, many small businesses which have held out but depend on the holidays for a significant share of their profits may not be able to continue in the new year.

These issues are reflected in the findings of an analysis done by the National Association of Counties. Among economic priorities, individual and small business relief were by far the primary concern of county financial officials. These were followed quickly by unemployment which was cited by 51% of the counties. Many counties are seeing increases in Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Program (SNAP) applications.

All of this points to a difficult budget making process in 2021.

NEW YORK AND THE PANDEMIC

Sales tax revenue for local governments in New York state dropped 9.5% in the third quarter compared to the same period last year, according to State Comptroller Thomas P. DiNapoli. Sales tax collections from July to September totaled $4.3 billion, or $452 million less than last year. New York City’s steep year-over-year decline of nearly 22% in sales tax revenue for the third quarter was the main driver behind the overall drop in local government collections. Nearly every other region of the state saw at least some increase over the third quarter of 2019, although these increases were not as strong as in the pre-COVID first quarter.

For September, New York City saw a 43.9% decline in collections compared to the same month in 2019, while the rest of the state rose 19%. Statewide, local sales tax collections declined by 11.8%, or $225 million, for the single month of September 2020 compared to the same month in 2019. So far in 2020, year-to-date (January through September), collections declined 11% or $1.5 billion compared to the same period last year.

CHICAGO RATING BLUES

Moody’s Investors Service has affirmed the Ba1 rating on the City of Chicago, IL’s outstanding general obligation (GO) unlimited tax bonds, the Ba1 rating on outstanding motor fuel tax revenue bonds, the Baa2 rating on outstanding water revenue bonds, the Baa2 rating on outstanding senior lien sewer revenue bonds and the Baa3 rating on outstanding junior lien sewer revenue bonds. That is some $6.2 billion of debt. The outlook however, was lowered to negative.

The change in the outlook to negative from stable reflects the expectation that the sudden and substantial decline in certain economically sensitive revenue will intensify the city’s challenge to reduce the persistent structural gap between revenue and expenses. Any negative variances arising from the uncertain operating environment could intensify and prolong the challenge. The city’s high and growing leverage from debt and pensions will also continue to weigh on its credit profile.

The move comes in the middle of the City’s budget making process for the fiscal year beginning July 1. None of the structural issues cited are new but the pandemic has put the City in an even more difficult situation than was the case prior to the pandemic.

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