Joseph Krist

Publisher

HOSPITALS AND THE CLIMATE

The end of October will mark the passage of ten years since Hurricane Sandy devastated the northeastern U.S. While there are many images which can be recalled, one was especially telling. The idea that three major hospital facilities experienced severe damage and that operations at those facilities could be curtailed for an extended period focused much attention on their location and vulnerability to floods. Hurricane Ian focused attention on Florida’s hospitals given the ever-increasing levels of population along the state’s coasts.

Climate researchers at Harvard recently released a study of the risks posed to hospitals from flooding associated with storms. The study examined 682 acute care hospitals in 78 metropolitan areas along the East Coast and Gulf Coast, all situated within 10 miles of the shore. It found that 25 of 78 metropolitan statistical areas (MSAs) on the U.S. Atlantic and Gulf Coasts have half or more of their hospitals at risk of flooding from relatively weak hurricanes. 0.82 m of sea level rise expected within this century from climate change increases the odds of hospital flooding 22%.  In 18 MSAs, at least half of the roads within 1.6 km of hospitals were at risk of flooding from a category 2 cyclone.

The areas of greatest risk are not a surprise. The Miami-Ft. Lauderdale-Palm Beach strip up the east coast of Florida contains the greatest risk from road flooding in addition to the obvious location risk of the institutions.  New York, New Orleans, and Tampa were other areas with substantial vulnerability.  Rising sea levels, put more hospitals at risk from hurricane induced storm surge. Sea level rise of 2.69 feet increases the odds of hospital flooding from any strength.

That level of sea level rise puts hospitals and beds in 6 MSAs (Easton, MD; Hammond, LA; Pensacola-Ferry Pass-Brent, FL; Savannah, GA; Washington, NC; and Washington-Arlington-Alexandria, DC-VA-MD-WV) at risk that would otherwise be unaffected by a category 2 storm without sea level rise and increases beds at risk by over 50% in 7 MSAs (Baton Rouge, LA; Beaumont-Port Arthur, TX; Boston-Cambridge-Newton, MA-NH; Corpus Christi, TX; Deltona-Daytona Beach-Ormond Beach, FL; Philadelphia-Camden-Wilmington, PA-NJ-DE-MD; and Virginia Beach-Norfolk-Newport News, VA-NC) from a category 2 storm.  

WATER UTILITIES

Water utilities have historically been a reliable sector in terms of creditworthiness. The revenues collected are usually protected in a bankruptcy of a general government as water revenues are treated as special revenues. This makes it harder to use revenues from a financially healthy utility to fund non-utility expenses. In combination with the absolute necessity of the supply of water, the sector has been a steady credit performer over an extended period of time.

In recent years, that image has been weakened somewhat by management and operations issues at several utilities. The Birmingham, AL bankruptcy largely was rooted in issues with its water and sewer utilities. Newark, NJ faced issues with lead pipes delivering tainted water. This summer, the Jackson, MS water system was unable to deliver water to its customers. That was reflection of mismanagement, neglect, and a distinct lack of support from the State of Mississippi for its state capitol.

Now another water system serving a state capital is under scrutiny and a candidate for takeover. The City of Trenton, NJ has long experienced operational and management difficulties. The state Department of Environmental Protection has cited the utility on multiple occasions in recent years for failing to ensure the safety of the 29 million gallons of water the utility delivers daily to 200,000 residents of Trenton and four adjacent townships. The state sued the city and utility in 2020, in a lawsuit joined by the impacted municipalities, for failing to pay for mandated upgrades.

In Mississippi, the situation reflects a real lack of support from the state. That reflects the realities of local and state politics. As suburban growth around Jackson continued, the remaining customer base became more concentrated among the city’s poorer (and let’s face it Blacker) population. The failure by management to address long standing infrastructure needs of the system make it vulnerable to operating and supply issues. The state’s neglect of the City and its water system was not at all benign.

The unwillingness of local utility officials to raise rates and address capital needs in Trenton has renewed calls for a new entity to operate and fund the City of Trenton water system. Now, state legislation is being offered that would establish an oversight commission to take control of the Trenton Water Works and monitor reforms. It would a create Mercer Regional Water Services Commission (Trenton is the county seat of Mercer County) would be created to oversee Trenton Water Works’ rate-setting, service quality, and infrastructure operations, as well as remediation measures to bring the utility into environmental compliance. State officials and leaders of the five municipalities served — Ewing, Hamilton, Hopewell, Lawrence, and Trenton — would comprise the bulk of the 17-member commission.

Water quality concerns drive the effort. There are issues with lead pipes as is the case with so many old utilities. Water quality was top of mind this summer when a study found 50% of homes serviced by Trenton Water Works in Hamilton tested positive for legionella bacteria, which can cause Legionnaires’ disease. The state sued the city and utility in 2020, in a lawsuit joined by the impacted municipalities, for failing to pay for mandated upgrades.

The City’s ability to help financially is limited. In August, Moody’s downgraded the City of Trenton, NJ’s outstanding general obligation bonds to Baa2 from Baa1. The outlook has been changed to negative from stable. The downgrade affects approximately $252 million in outstanding debt. Politics have overwhelmed the practical needs of the City.

The city council and the mayor have not only been unable to pass a budget for 2022, they were unable to agree to authorize debt service. The mayor publicly appealed to the state for assistance, which came in the form of a directive from the Division of Local Government Services (DLGS), ordering debt service to be made on time and in full. That is simply poor governance.

This brings us to an issue which some have raised in connection with utilities, especially water utilities. Many of the most publicized issues with municipal water systems have occurred in systems surrounded by weak economies. This has in turn led to those systems serving an increasingly poor and BIPOC population. This has led some to try to link ratings downgrades to race and imply that the rating agencies hold minority communities to different standards.

Over a five-decade career, I have had a hard time defending the rating agencies over many issues. This is one where the criticism is badly misplaced. Trenton, Birmingham, Newark, Flint, Detroit are all cities with significant water utility problems and yes, they all serve primarily BIPOC communities. But the other common threads are weak local resources and management (pass a budget on time) and an unwillingness to avail themselves of state assistance.

The lower ratings assigned to these credits usually have not been based solely on economics and demographics but on an inability to arrive at solutions by overcoming local politics. Rating agencies do not make rates, appoint management, or elect officials. These are weak credits as far as ratings are concerned.

PUERTO RICO HIGHWAY AUTHORITY DEBT RESTRUCTURING

Judge Laura Taylor Swain confirmed Wednesday the Puerto Rico Highway and Transportation Authority’s Plan of Adjustment (POA-HTA), a restructuring that -beyond cuts to the public debt- will require the public utility to reorganize its operations; will allow 30 years of consecutive toll increases adjusted to inflation; and will prepare the way to transfer all of Puerto Rico’s highways to private operators.

The plan cuts the agency’s debt by more than 80% and saves Puerto Rico more than $3 billion in debt service payments. HTA must establish a toll management office that is exclusively responsible for toll roads, separate responsibility for construction and maintenance between toll roads and non-toll roads, and transfer the Urban Train (Tren Urbano) to the Puerto Rico Integrated Transit Authority. The HTA Plan also requires HTA, during all times in which new HTA bonds (or refinancings thereof) remain outstanding, to maintain and comply with a debt management policy that imposes certain limitations on further borrowing after the plan becomes effective.

TAMPA TRANSIT STOPPED BY COURTS AGAIN

For the second time, efforts to get a transportation funding initiative off the Hillsborough County, FL ballot have been successful. (MCN 9.19.22). As was the case the first time, local anti-tax advocates seized on detailed ballot requirements to have the proposed removed from the ballot. Opponents have used the fact that the proposed ballot item would, if approved, violate requirements that the ultimate responsibility for identifying projects and allocating money lies with elected commissioners, not a pre-determined formula contained in the citizen-initiated referendum.

The ballot initiative was described as confusing so as to make voters think that approving the initiative meant approval for specific projects. Decide for yourself if the following was too “confusing”: “Should transportation improvements be funded throughout Hillsborough County, including Tampa, Plant City, Temple Terrace, Brandon, Riverview, Carrollwood, and Town ‘n’ Country, including projects that: Build and widen roads; Fix roads and bridges; Expand public transit options; fix potholes; Enhance bus services; Improve intersections;  Make walking and biking safer By levying a 1% sales surtax for 30 years and funds deposited in an audited trust fund with citizen oversight.”

Conservative activists use these challenges to defeat as many tax initiatives as they can. The arguments are never usually about the need for better roads and more public transit. They focus on procedural issues. The frustration in Tampa is that initiative backers relied on prior court actions when designing the second initiative. It is another example of ideology getting in the way of progress.

WHAT’S LEFT IN IAN’S WAKE

It is becoming clear that a lack of flood insurance is going to weigh on the recovery from Hurricane Ian in Florida. CNN did an analysis of data from the Federal Emergency Management Agency that shows how serious a situation it is. That analysis showed that some 25% of single-family homes in Lee County, by the coast, are covered by federal flood insurance. On Sanibel Island, about half of homes are covered. It is the inland counties where the lack of protection is highest – 4% of single-family homes in Seminole County, 3% of homes in Orange County and 2% of homes in Polk County are covered by flood insurance.

People without flood insurance will still be eligible for assistance payments from FEMA and any additional aid which might be approved by Congress. Those payments are not designed to replace flood insurance. In Seminole County more than 5,200 residential buildings have been damaged by the storm. Polk County has 3,000 buildings damaged in the storm, Orange County has 1,200, and Volusia County on the state’s eastern coast has at least 4,000 damaged.

The majority of the damage appears to be flooding related. Federal flood insurance limits payments for single-family home damage at $250,000 and contents of the home at $100,000. There will also be significant automobile losses adding to the cost burden for recovering residents. One bit of positive news. Moody’s says that Citizens Property Insurance Corporation can withstand damage claims. Citizens, an entity created by the Florida legislature that provides coverage for coastal properties, has the resources to withstand damage claims from Hurricane Ian. Florida Hurricane Catastrophe Fund’s reimbursement capped at $17 billion. Primary insurers will share a significant portion of the loss with The Florida State Board of Administration Finance Corporation (Florida Hurricane Catastrophe Fund, FHCF). The fund is well positioned to cover claims from Hurricane Ian because it has financial resources on hand that approximate its statutory reimbursement cap.

COAL TAKES ANOTHER HIT

The efforts of some to hold on with the last of their fingernails to the use of coal to generate electricity failed again. This time, the State of Montana failed to persuade a federal court that two newly-passed Montana laws intended to stop majority owners of Colstrip from closing the power plant were constitutional. The Court ruled that the laws violate the Commerce Clause and Contract Clause of the U.S. Constitution, as well as the Federal Arbitration Act.

The legislation authorized the state executive branch to issue $100,000-a-day fines or dictating maintenance and repairs the government finds necessary.  The federal court ruled that the laws served no legitimate purpose and instead attempted to thwart the business decisions of the power plant’s majority owners.

That interferes with efforts to negotiate financial issues stemming from the closure which is driven by the four out-of-state utilities which own 70% of capacity. The court concluded that SB 265 substantially impaired the rights of the Pacific Northwest owners under the Contract Clause of the U.S. Constitution, which prevents states from making law impairing the obligations of contracts.

MUNI UTILITIES MOVING FORWARD

Four Florida energy companies have signed agreements to join as members of the Southeast Energy Exchange Market (SEEM), effective Jan. 1, 2023. Two of the four are municipal utilities – the Jacksonville Electric Authority and Seminole Electric Cooperative – recently expressed their intent to join the expanded platform and expect active energy trading in mid-2023.

The platform is intended to facilitate sub-hourly, bilateral trading. This is designed to allow participants to buy and sell power close to the time the energy is consumed, utilizing available unreserved transmission. The two utilities join several municipal utilities which are founding members of the SEEM.  They include Associated Electric Cooperative, Dalton Utilities, MEAG, N.C. Municipal Power Agency No. 1, NCEMC, Oglethorpe Power Corp. and Santee Cooper.

NYC AND RESILIENCE

It will be ten years since Hurricane Sandy flooded Manhattan. The storm did some $19 billion worth of damage. The recovery was aided by some $15 billion of aid from the federal government. Now, the NYC Comptroller has released a report which documents how the City has used those resources. They can be viewed either positively or negatively. To us, they reflect the complex process of designing, approving, funding and financing capital projects in NYC. The fact that the money has been available has been no guaranty that the needed projects have been undertaken.

Of the $15 billion of federal grants appropriated for Sandy recovery and resilience, the City has spent $11 billion, or 73%, as of June 2022. The City has spent 66.2% of the nearly $10 billion in FEMA Sandy grants, and 92.4% of the $4.2 billion HUD CDBG-DR grants. The anticipated completion dates for some of the uncompleted Coastal Resiliency Projects are as far out as 2030. A major component ‘is the East Side Coastal Resiliency project (ESCR) which is expected to create a network of seawalls on existing parkland to protect Manhattan.

Four agencies received over a billion dollars each in FEMA grants: the New York City Housing Authority (83.5% spent), Health and Hospitals Corporation (45.3% spent), Department of Environmental Protection (58.8% spent), and Department of Parks and Recreation (61.8% spent). The report highlights one issue of import – the location of so much of the New York City Housing Authority’s housing stock which is vulnerable to flooding. Today, 17% of NYCHA’s buildings are in the 100-year floodplain; this number will grow to 26% by the mid-century.

On the private real estate side, In the past decade as new waterfront developments have steadily increased, market rate values of real estate in the 100-year floodplain have increased to over $176 billion – a 44% increase since Superstorm Sandy.

Rising tides and more frequent storms will put upwards of $242 billion (in current market value) at risk of coastal flooding by the 2050s – a 38% increase in value from today with Brooklyn experiencing the most dramatic increases in property values at risk in the coming decades. The tax lots in the current 100-year floodplain are estimated to generate $2.0 billion in annual property taxes. As the floodplain grows, more tax lots will be put at risk, threatening $3.1 billion in annual projected property tax revenues by the 2050s (using current property values).

HOSPITALS IN THE POST-COVID WORLD

This week’s poster child for the uncertain operating environment for hospitals is University Hospitals in Cleveland, OH. The A2 rated credit by Moody’s like many hospitals, confronts three primary sources of pressure – the aftermath of the pandemic, general inflation, and labor costs and availability. These three factors as well as the supply chain issues everyone is facing are pressuring hospital finances across the country.

University Hospitals operates an integrated network of 21 hospitals (including five joint ventures), more than 50 health centers and outpatient facilities, and over 200 physician offices in 16 counties throughout northern Ohio. The system reports a net operating loss of $184.6 million in the first eight months of 2022. To deal with the revenue shortfalls, the system has announced that it will lay off 100 administrative workers. It will also leave unfilled some 300 additional administrative jobs.

Utilization in the post-pandemic environment has been below what was expected at many institutions. This pressuring profits and more particularly impacting balance sheets. This is reflected in less favorable debt rations and declines in days cash on hand. It should not be a surprise that many hospitals were at least partially shielded from the full financial impacts of the pandemic. Only after massive injections of operating cash to hospitals slowed and ended did many of the impacts of the pandemic become clear.

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