Joseph Krist

Publisher

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THE LAST SNAPSHOT BEFORE THE ELECTION

The last Federal Reserve Beige Book was released at mid week. Economic activity continued to increase across all Districts but, changes in activity varied greatly by sector. Manufacturing activity generally increased at a moderate pace. Residential housing markets continued to experience steady demand for new and existing homes, with activity constrained by low inventories. Increased demand for mortgages was the key driver of overall loan demand.

While businesses figure out how they will conduct their office operations amid the pandemic, commercial real estate conditions continued to deteriorate in many Districts. The role of office utilization is reflected in the fact that warehouse and industrial space construction and leasing activity remained steady. For commercial businesses the news was mixed as consumer spending growth remained positive, but there was some reported leveling off of retail sales and a slight uptick in tourism activity. Demand for autos remained steady, but low inventories have constrained sales to varying degrees.

Reports on agriculture conditions were mixed. Some Districts are experiencing drought conditions while in places like Iowa, crop damage from weather was excessive. Districts reported generally optimistic or positive outlooks for the sector, but with a considerable degree of uncertainty. Restaurateurs expressed concern that cooler weather would slow sales, as they have relied on outdoor dining.

The report essentially confirms what one can see on a daily basis. Much of the economy is in a state of suspended animation. Some obvious sectors like travel and entertainment (broadly defined) find many teetering on the precipice as they try to hang on until an additional stimulus comes. In much the same way, state and local government find themselves having to consider headcount reductions which would only exacerbate local economic conditions.

CHICAGO BUDGET

The fiscal position of the City of Chicago has been under assault as Illinois was one of the states hardest hit by the pandemic in the Spring. With much of its commercial life hindered, offices empty, and its world famous convention and hospitality industries were crushed. With a new fiscal year for the City beginning January 1, the budget process now begins in earnest.

Mayor Lori Lightfoot issued her proposal for a fiscal 2021 budget. The $12.8 billion budget proposal includes closing a $1.2 billion Corporate Fund budget deficit in FY2021 – 65% of which is directly tied to the economic impacts of COVID-19. There would be a $94 million property tax increase. That would work out to $56 more a year for Chicago’s median home value of $250,000. The plan would also index property tax increases to the Consumer Price Index. A three cent hike in the local gas tax is envisioned.

About 350 city employees would be laid off. More than 1,900 vacant positions would be eliminated and nonunion workers would be required to take five unpaid furlough days.  Debt refunding and restructuring would be used to generate current budget savings.

SEATTLE TRANSIT GETS A REPRIEVE

The Washington State Supreme Court has ruled on a challenge to the formula used to calculate the value of automobiles for the purpose of calculating the tax due to Sound Transit, the public transit agency in and around Seattle. Taxpayers who are plaintiffs in the lawsuit contend that the transit agency uses a formula that inflates the value of vehicles when it levies a motor vehicle excise tax. That value is used to establish the amount of what is known as the car tab.

Vehicle owners in urban parts of Pierce, King and Snohomish counties pay the tax through their annual vehicle registration or car tab. The suit relied on an interpretation of procedural aspects of how a law is enacted. One provision says no law shall be revised or amended by mere reference to its title. The revised or amended law must be laid out “at full length.” The plaintiffs contend that the transit agency uses a formula that inflates the value of vehicles when it levies a motor vehicle excise tax.

Puget Sound area voters approved the car-tab tax rate increase in 2016. The car tab dates back to 1990, when the Legislature approved a new valuation schedule for the statewide car-tab tax that had been levied for decades. It overvalued the worth of a vehicle to raise more revenue for transportation projects. Six years later, the Legislature enacted a law which authorized Sound Transit to collect a car-tab tax. Voters that year approved a 0.3 % car-tab tax to help pay for light-rail projects. Sound Transit used the state’s valuation schedule adopted in 1990.

This is the second time that a determined group of activists has litigated their anti-tax viewpoint to the Washington Supreme Court.  in 2002, voters statewide approved Initiative 776, which repealed the state law authorizing locally imposed car-tab taxes, Sound Transit’s car-tab tax and the valuation schedule it used. That initiative was overturned in the Washington Supreme Court in 2006. The Legislature then approved a bill authorizing local governments to create regional transportation districts to build roads, in part through car-tab taxes. 

In 2015, a bill passed giving Sound Transit authority for a voter-approved car-tab tax not to exceed 0.8 % — on top of the 0.3 % approved in 1996 — for a total of 1.1 % of the vehicle’s value. That bill did not use the schedule with the lower values for vehicles that lawmakers approved in 2006. That formula would have meant less revenue for Sound Transit. The bill said the higher valuation schedule that Sound Transit had used since it began to collect car-tab taxes in 1997 temporarily would be in effect until its 30-year bond debt incurred in 1999 for light-rail projects is retired. The transit agency has said that will happen in 2028, when its 0.3 per cent car-tab tax is set to end.

The decision is a win for public transit financing in the Puget sound region.

MEDICAID EXPANSION – THE SONG REMAINS THE SAME

They keep swinging and missing but one more state is going to try Medicaid expansion with work rules. These provisions have regularly failed to be successfully upheld once they face the scrutiny of the federal courts. Nonetheless, Georgia is the latest state to receive federal approval to expand their program with work rules.

Governor Brian Kemp introduced his “Pathways to Coverage” plan that expands Medicaid but to a limited cohort. This would cover adults who meet the work requirements and who earn no more than 100 percent of the federal poverty level — $12,760 a year for an individual. It is estimated that 65,000 currently uninsured could qualify for coverage. That compares to estimates of the number of people who could be insured under a full expansion of some 600,000.

Because it does not qualify for federal funding, this partial expansion will have to be 100% funded by the State whereas a full expansion under the ACA would be 80% federally funded. The proposed work rules would require  Medicaid beneficiaries to complete at least 80 hours of work, community service or other qualifying activities per month. Most individuals who earn between 50 percent and 100 percent of the poverty level will also be required to pay monthly premiums. had.

The program will likely have the same experience that the programs in states like Arkansas and Kentucky have had. So the legitimate question is: what are these states trying to accomplish? It’s not about healthcare access and it’s not about sound long term fiscal policy.

SOUTH CAROLINA PUBLIC SERVICE (SANTEE COOPER)

The resolution of a class action lawsuit related to the 2017 abandonment of construction at the V.C. Summer nuclear power plants Units 2 and 3 (Summer), which places an upper limit on the financial obligations associated with the lawsuit between the Authority and Central Electric Power Cooperative Inc. (“Central”), Santee Cooper’s largest customer has led Moody’s to upgrade its outlook on the credit of the South Carolina Public Service Authority to stable from negative. The litigation was just one of the issues serving as a drag on the Authority’s ratings to result from its participation in the ill-fated power plant expansion.

To refresh, terms of the settlement involve a $200 million payment from Santee Cooper payable over the next three years beginning in 2020. Santee Cooper is also required to hold base rates for the substantial majority of its customers to levels reflected in the Reform Plan it submitted to the General Assembly in January of this year through the end of 2024. Clearly, this will impact the utility negatively in terms of revenues and cash flows. The Authority believes that it can offset at least some of the foregone revenue through lower operating costs related to lower fuel costs will help mitigate the rate freeze impact over the next several years. The favorable environment for issuers should provide multiple opportunities to refund debt.

One thing in favor of the long term outlook for Santee Cooper is a significant service area and a strong monopoly position relative to other power distributors. That monopoly received recent legal support when a state court ruling ended a dispute between Santee Cooper and the City of Goose Creek over which utility was legally entitled to serve an industrial customer. The ruling that Santee Cooper’s right to serve the facility in the current location was established by the state’s General Assembly many decades ago is seen as reducing concerns about the ability of competitors to snatch away customers as the Authority recovers from the Sumner debacle.

There is uncertainty still remains as to whether Santee Cooper will be reformed or sold. The pandemic complicated many legislative issues in the 2020 session of the State Legislature. It is expected that the issue of Santee Cooper’s future will be a central issue during the 2021 session. 

I’VE BEEN WORKING ON THE RAILROAD

The last week brought mixed news for the Brightline high speed rail developer. The good news came in the form of the announcement that the US Supreme Court had declined to review an appellate court finding against the lawsuit by Indian County, FL challenging the issuance of municipal bonds to finance construction. Investors had already made the judgment that the County’s legal challenge would be unsuccessful. This was probably the greatest potential legal challenge to the credit.

The bad news came in the form of the postponement of the sale of $3.2 billion of bonds, the proceeds of which would be used to finance construction of Brightline’s high-speed rail service between southern California and Las Vegas. The sale has faced a variety of headwinds related to the proposed route (Victorville is 85 miles from L.A. which is over 25% of the distance between L.A. and Las Vegas), concerns about the impact of the pandemic, the potential for litigation, and uncertainty regarding the success of Brightline’s  Florida train. The deal has been restructured to reflect a higher equity contribution which will lower debt to 68% of total financing.

As was the case in Florida, the effort to finance the Las Vegas project faces a deadline to issue its debt. Brightline has until Dec. 1 to sell the bonds under a deadline from California officials, who approved the company’s request to sell tax-exempt debt. In September, Brightline sold $1 billion in short-term securities to preserve its federal allocation of so-called private activity bonds that it will refinance next year. It’s not clear whether the postponement reflects an insufficient number of buyers or if it is an issue of price. The analysis is also complicated by the ongoing shutdown of the Florida operation due to the pandemic.

Meanwhile in Texas, the governor has landed himself in the center of a storm over the Texas Central Railroad, the company handling the construction. Recently, the Governor sent a letter to Japan’s prime minister offering strong support for the project which will use Japanese bullet train technology. It created a bit of a storm as landowners resistant to selling their land for the proposed right of way.

Those landowners have been fighting eminent domain proceedings seeking to obtain their land for right of way. The state has a long history of resistance to the concept of eminent domain and the property owners have now generated enough pushback to cause the governor to waver. His staff has made it known that “the Governor’s team has learned that the information it was provided was incomplete. As a result, the Governor’s Office will re-evaluate this matter after gathering additional information from all affected parties.”

Texas Central has yet to file an application for the project with the Surface Transportation Board, the federal agency with jurisdiction over the project. It does claim that the proposed rail line recently received the necessary permits to begin construction. Opponents note that the regulatory process is far from complete.

The company hopes to begin construction in the first half of 2021. It has acknowledged that expected partners who operate rail lines overseas have seen their financial positions damaged by the pandemic. Opponents of the line have tried to portray the issue as being one of taking Texan’s land for the benefit of a foreign entity.

MASS DOT PROJECTS THE FUTURE

The Massachusetts Department of Transportation recently presented three scenarios in support of efforts by Mass DOT and the MBTA to plan for the recovery of transit in the wake of the pandemic. While designed for the greater Boston metropolitan area, the exercise highlights the issues which will face most, if not all mass transit systems in the nation’s urban areas.

Each of them covers the 2021-2023 time period. The first scenario portrays an almost full recovery. Under this scenario, travel patterns diverge from economic recovery as consumers and employees adapt to a new normal – especially in light of new and emerging remote meeting and e-commerce technologies. Travel and business restrictions are lifted and consumer spending slowly increases but consumers have increasingly shifted previously in-person activities like shopping to digital and e-commerce.

Telehealth appointments are common and higher education is increasingly online.  In those industries that have historically supported teleworking (pre-COVID), half of employees choose to work exclusively from home an average of three days per week as employers are more comfortable with enterprise-wide tools for remote meeting space and cloud-based file access; flexible work arrangements become more common.

The second reflects an environment where travel patterns diverge from economic recovery as consumers and employees adapt to a new normal – especially in light of new and emerging remote meeting and e-commerce technologies. Travel and business restrictions are lifted and consumer spending slowly increases but consumers have increasingly shifted previously in-person activities like shopping to digital and e-commerce.

Telehealth appointments are common and higher education is increasingly online. In those industries that have historically supported teleworking (pre-COVID), half of employees choose to work exclusively from home an average of three days per week as employers are more comfortable with enterprise-wide tools for remote meeting space and cloud-based file access; flexible work arrangements become more common.

The third is based in a world where the economic impacts of COVID continue to depress travel and mobility for a longer period of time, especially on the MBTA. Telecommuting becomes the standard practice for the foreseeable future. The period in which at least some travel and business restrictions remain in place is longer in this scenario. In addition, discretionary spending including spending on travel remains lower.  Half the workforce in tele-workable industries continues to work remotely but does so much more often than they did pre-COVID (on average, three days per week) because teleworking habits have had more time to form and employers see productivity benefits and savings in downtown real estate costs.

Which scenario proves out will have significant implications. For the MBTA, the first scenario would return ridership to just under 90% of pre-COVID levels. The second would produce ridership at about 75% of pre-COVID levels. The third would leave ridership at 60% of those levels. It is important to note that these percentages reflect the period ending in June of 2022 when the full recovery impact on ridership will be seen.

MBTA ridership and revenue is at a fraction of its earlier levels. Bus ridership is at about 40% of pre-pandemic levels, while the subways have seen about 25% of former crowds and commuter rail remains the lowest around 12%. According to favorable estimates, the MBTA FY21 loss could be $18 million and losses in FY 2022 could be $114 million. The pessimistic view puts the losses at $46 million and $271 million respectively. With many other transit agencies face bleak current and short term environments, it is easy to make the case for additional support in an stimulus being considered.  

COLLEGE MODELS MOVE IN OPPOSITE DIRECTIONS

Two universities received opposing views of their outlooks as revealed by ratings actions by S&P. S&P Global Ratings revised its outlook to positive from stable and affirmed its ‘A’ rating on New Hampshire Health & Educational Facilities Authority’s revenue bonds issued for Southern New Hampshire University (SNHU). The ubiquitous TV advertiser found itself well positioned to take advantage of pandemic related demand for online learning.

One of the earliest providers of online learning, SNHU has seen its enrollment increase significantly in the last two years after some 20 years of steady growth. This has enabled the university to maintain its financial position to a greater degree than would otherwise be the case. It all led to the upgrade of S&P’s outlook for the credit to positive.

S&P Global Ratings lowered its long-term rating to ‘BB’ from ‘BBB-‘ on La Salle University, Pa.’s bonds, issued through the Philadelphia Authority for Industrial Development and the Pennsylvania Higher Educational Facilities Authority. The outlook is negative. In fall 2019, full-time-equivalent enrollment dropped by 5.4%, compounded by another 7.2% decline for fall 2020. Based on audited fiscal 2020 results, the university predicts a $1.3 million adjusted operating deficit (- 1%) and has budgeted for a larger deficit for fiscal 2021. 

This reflects operating pressures prior to the pandemic. The university has already been operating for three years in a cost cutting mode in an effort to reflect the lower demand. The university has increased its reliance on endowment draws to maintain balance. The institution is not positioned nearly as well to accommodate a move away from traditional college learning structures.

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