Joseph Krist

Publisher

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MAJOR SYSTEM SETTLES ANTI TRUST CHALLENGES

Sutter Health, a large Northern California nonprofit health care system with 24 hospitals, 34 surgery centers and 5,500 physicians, has announced a preliminary settlement agreement in an antitrust case brought originally by private interests but joined by California’s Office of the Attorney General. Sutter stood accused of violating California’s antitrust laws by using its market power to illegally drive up prices.

The case shone a light on many of the aspects of the issue of healthcare costs – what drives them and how they can be controlled. As systems grow and consolidation continues, many of the same issues raised in this case appear in the evaluation of other mergers. They involve a number of significant interests – the hospitals, insurers, state and federal government – all of whom are positioned to advance their particular interests.

Some aspects of the Northern California marketplace made Sutter a convenient target. The chain of health care facilities had $13 billion in operating revenue in 2018. A University of California, Berkeley study from 2018 found that health care costs in Northern California, where Sutter is dominant, are 20% to 30% higher than in Southern California, even after adjusting for cost of living.

The settlement is expected to address the issue of negotiations between providers and insurers. Sutter is known as an aggressive bargainer but that is true of other large systems across the country. Merger opponents seize on these negotiations as a source of price inflation. In terms of the immediate impact on the Sutter credit, that likely will not be publicly revealed until 1Q 2020. There were estimates that Sutter could have had monetary exposure of up to $2.7 billion according to press reports.

PROVIDENCE SCHOOLS FACE STATE CONTROL

It was recently announced that the State of Rhode Island would take over the operation of the Providence Public School System. The action comes after the release of an outside report produced by Johns Hopkins University (Aa2 stable that highlighted the system’s  significant academic and administrative deficiencies., The state’s takeover, prompted by poor academic outcomes rather than financial difficulty, takes effect November 1 and will continue for at least five years. The school system is a unit of the city, which is responsible for its debt.

Schools are the largest single source of expenditure for the City. It is important to note that this action was not driven by finances. The state education department has sweeping powers to assume budgetary, governance, programmatic and personnel control of chronically underperforming school districts. The state education commissioner is crafting a turnaround plan for the Providence schools and the state is expected  appoint a turnaround superintendent in the coming weeks. PPSD’s board comprises nine members appointed by the Providence mayor and approved by the City Council.

So this is not a credit event for the schools but it could have some benefit for the City’s overall financial position. In fiscal 2018 (ended 30 June 2018), 58% of PPSD revenue was from the state, 31% from local sources and 11% from federal funding. The state presence likely reduces the need for the city to increase its own funding of the school system, including the growing cost of educating English-language learners, which is considerable given the city’s diverse population. The action comes at a time when the City’s finances are still considered to be vulnerable. Moody’s correctly points out that a weak educational system generally has adverse social effects, making a city a less desirable place to live and less attractive to businesses. If the Providence takeover leads to material improvement in school quality, the city’s socioeconomic profile will improve.

The state has controlled the Central Falls School District (CFSD) since 1993, when CFSD was unable to meet financial obligations absent increased state funding.  

PUBLIC POWER IN CALIFORNIA

The role of private utility generation and transmission assets as sources of wildfire risk has focused enormous attention on California’s investor owned utilities. This week, tens of thousands of Californians could be without power again this week as two major utility companies consider shutting off electricity to large swaths of the state amid heightened concerns that hot weather and strong winds could lead to wildfires. PG&E may shut off power in 17 California counties as dangerous winds return. More than 17,000 Southern California Edison customers in five counties — Los Angeles, San Bernardino, Orange, Santa Barbara and Ventura — are also under consideration for power outages in coming days.

One of the city’s without its own integrated public power system is San Jose. In San Jose, somewhere around 60,000 residents went without power for a couple days in the last series of rolling blackouts.  This is motivating support for investigating alternatives to reliance on PG&E in the City. The mayor has announced that he is directing staff to study the feasibility of creating a municipal utility. That would potentially require the city to purchase power lines off of PG&E and to finance construction of microgrids and energy storage systems.

San Jose already buys energy outside of PG&E through its own provider, San Jose Clean Energy. But PG&E controls energy transmission. The mayor is trying to shift the city into increased reliance on solar even though the city also ranks third in the nation for solar power generation per capita. 

The city of Santa Clara has run its own electrical utility for more than a century, offering lower rates and higher ratios of clean energy than PG&E.  San Jose officials plan to poll residents in the fall to gauge public interest in having the city acquire PG&E’s distribution lines and invest in microgrids. If voters say they don’t want San Jose to buy PG&E infrastructure,  the city will push forward on its efforts to develop microgrids.

SF HOUSING BOND

The median home sales price in San Francisco is $1.35 million. The median rent of a one bedroom apartment is $3,700 per month. The City’s affordable housing woes are well documented. The City has previously sought approval for bonding authority to address the crisis as recently as 2015. Now, the City seeks additional authority on the November 5 ballot.

If Proposition A passes, the city would borrow $600 million dollars to construct 2,800 new affordable housing units. Part of the money would go toward repairing existing public housing developments that have become dilapidated. Other parts would finance the building or buying of low income housing. The bonds would be paid from the proceeds of a tax on homeowners in San Francisco at nearly two cents for every hundred dollars in assessed property value. So if your house is worth that median $1.35 million, you’d pay about $256 in additional property taxes a year.

The proceeds would be spent as follows: $150 million for public housing, $220 million for low-income housing, $60 million for middle-income housing and preservation, $150 million for senior housing, and $20 million for educator housing. Another proposition, Prop. E would allow 100 percent affordable and educator housing to be built on public land.

Teacher unions have offered data which shows that 64 percent of its teachers pay more than 30 percent of their income on housing, making them officially rent-burdened, and almost 15 percent spend more than half.  It is a phenomenon which is being replicated in cities across the country, impacting not only but teachers but the vast majority of municipal employees.

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