Joseph Krist

Publisher

________________________________________________________________

ISSUE OF THE WEEK

$253,000,000

City of Minneapolis

Fairview Health System

Health Care System Revenue Bonds

A2/A+

The issue comes to market with its A2 rating intact but with an outlook lowered from stable to negative. The negative outlook reflects the increased financial challenges that the system will need to absorb given the higher level of funding to the University and the losses at HealthEast. The higher funding requirement is part of a Letter of Intent (LOI) between Fairview and the University of Minnesota for a new affiliation agreement.

The LOI, if executed, would further solidify Fairview’s essential and long-standing role as the academic health system for the University of Minnesota and create greater incentives for physicians to increase productivity. Tthe proposed agreement would require increased funding to the University from Fairview, which might thwart margin improvement. Hence the shift to a negative outlook.

At the same time, Fairview’s integration of HealthEast will pressure the new entity’s margins as it seeks to improve its modest financial performance and moderate liquidity. In addition, despite its broad offerings, Fairview will remain highly reliant on its more profitable specialty pharmacy services. Further, the entry of for-profit health plans will raise market uncertainty.

All bonds are secured by an unrestricted receivables pledge from the System’s Obligated Group which includes HealthEast. This deal will allow the system to refinance insured debt with restrictive covenants. The system has obtained credit facilities not subject to the restrictive covenants. Total combined operating revenue in fiscal 2017 was $5.2 billion with over 90,000 admissions. The System owns and operates eleven hospitals, including the University of Minnesota Medical Center, and also operates over 100 primary and specialty care clinics, seven ambulatory care centers, over 40 retail and specialty pharmacies, as well as senior care housing and long term care facilities, hospice and home care, medical transportation and a health plan.

___________________________________________________________________________

CHARTER SCHOOLS

The California legislature has enacted legislation which would ban for-profit charter schools within the state. 25,000 students are now enrolled in 34 for-profit charter schools in the state, according to the California Charter Schools Association and an analysis by the California State Assembly. Now a real source of competition for the nonprofit charter school base has been eliminated. This occurs at a time when overall school enrollment trends are negative.

Some 10% of California students are enrolled in charter schools so the overall market for charter schools should remain strong. Enrollment and the number of charter schools continue to increase. During 2000-10, the number of charter schools jumped to 809 from 299, according to the California Charter Schools Association. In recent years, growth trends have slowed as traditional public schools have responded to competition with the introduction of specialized programs and both charter and district schools confront ongoing erosion of their student population, with the state projecting additional declines totaling around 3% over the next decade.

65 new charter schools opened in the fall of 2017, but this followed 46 closures from the prior spring, for a net gain of only 19 schools statewide. The demand has become centered in urban centers and areas with stronger population growth. By precluding new market entrants with lower cost structures, the legislation helps ensure the competitiveness of schools with outstanding debt as well as market demand for existing school facilities in the event of a charter school closure.

MISSISSIPPI FUNDS INFRASTRUCTURE

Mississippi has gained notoriety for the poor condition of many of its bridges and has been serving as an unwilling poster child for the issues underlying the national infrastructure debate. 12% of the state’s bridges deemed structurally deficient. The state has taken a step forward toward funding and addressing its most glaring infrastructure needs through several pieces of recent legislation.

The laws include directing a portion of the state use tax for local roads and bridges, create a state lottery and codify the distribution of remaining BP settlement funds, will provide an estimated $220-$270 million in annual funds for sorely needed transportation and infrastructure projects and distribute $750 million of funds related to BP’s Deepwater Horizon oil spill settlement.

The first law, the Mississippi Infrastructure Modernization Act of 2018 (MIMA), diverts a number of revenue streams – most prominently 35% of the state use tax – to local roads and bridges, yielding approximately $120 million annually in infrastructure funds. It also approves the issuance of up to $300 million in revenue bonds for the Emergency Road and Bridge Fund ($250 million) and the Transportation and Infrastructure Fund ($50 million). The bill appropriates funding for several Infrastructure Fund projects in 2018, with notable project grants (greater than $2 million.

The statewide lottery – a long-contentious proposition – is projected by the state to generate $80 million in new revenue annually ($40 million in the first year). Until 2028, the first $80 million in revenue will be dedicated to the State Highway Fund. The BP Settlement law distributes the remaining $600 million of $750 million in settlement funds that the state expects to receive through 2033 ($40 million annually). The remaining 25% of the annual disbursement will be deposited into the state’s BP Settlement Fund for use on projects throughout the state. Of the nearly $100 million in funds currently held by the state (approximately $50 million has been already spent), $52.9 million will  be allocated to the Transportation and Infrastructure Fund.

As significant as these resources are and although they are received over time, they will effectively function as one shot revenues. The reality is that Mississippi will need to find some $400 million of recurring revenues to meet the state’s ongoing infrastructure maintenance and repair costs on an annual basis.

TEACHER PAY MOVES TO THE DISTRICTS AS AN ISSUE

Throughout the Spring, attention was focused on statewide teacher job actions in several states. They generally resulted in more funding for education at the state level. Now the attention focuses to local negotiations as districts grapple with the demands from teachers for their share of the newly enlarged resource pool. The latest battleground is in Washington state where teachers in four districts including Tacoma, with an enrollment of more than 29,000 students, or 2.6 percent of the state’s total. Across the state, some 53,000 students are out of school as negotiations take place.

The funding mechanisms have made it clear that the increased funding from the State mandated by the decade long school-finance case known as McCleary may not be the windfall expected. The extra money also automatically opened teacher contracts for renegotiation in virtually all of the state’s 295 school districts. The Centralia School District received an extra $50 million this year, while cutting $46 million from a levy that the district relied on to fund its budget last year, resulting in a near-wash.

LITIGATION HURTS JEA RATING

S&P Global Ratings has placed its ratings on debt from the Jacksonville Electric Authority CreditWatch with negative implications: Its ‘AA-‘ rating on JEA, Fla.’s senior-lien, fixed-rate electric system, bulk power supply system and Saint Johns River Power Park debt; Its ‘A+’ rating on the utility’s subordinate-lien, fixed-rate, electric system debt; Its ‘AA-/A-1+’, ‘AA-/A-1’, and ‘A+/A-1’ ratings on several series of JEA senior and subordinate-lien variable rate debt; andIts ‘A-1+’ rating on the utility’s senior-lien, variable-rate demand bonds that are in the commercial paper mode.

The outlook revision is based on JEA’s Sept. 11 court filing asking a Florida state court to release it from a power purchase agreement (PPA) with the Municipal Electric Authority of Georgia (MEAG). The contract commits JEA to pay the first 20 years’ debt service on 41.175% of the debt MEAG has issued and will issue to fund its 22.7% interest in the two 1,100 megawatt Plant Vogtle nuclear units under construction in Georgia.  JEA’s Sept. 11 court filing asking a Florida state court to release it from a power purchase agreement (PPA) with the Municipal Electric Authority of Georgia (MEAG). The contract commits JEA to pay the first 20 years’ debt service on 41.175% of the debt MEAG has issued and will issue to fund its 22.7% interest in the two 1,100 megawatt Plant Vogtle nuclear units under construction in Georgia.  In the next month, the owners of Plant Vogtle will meet to decide on whether to continue construction. If ownership interests representing at least 10% of the project choose not to proceed, unless the courts provide JEA with a judicially sanctioned method of exit, abandonment could leave the utility responsible for debt service without an associated revenue-producing asset.

We understand S&P’s point of view but we believe that the litigation is a negotiating tactic on the part of JEA. MEAG has been steadfast in its view that the Plant Vogtle expansion should continue. This is unlike the situation in South Carolina where the state’s largest public power agency (Santee Cooper) is a partner in a nuclear expansion which has been suspended.  Both of these situations highlight the exceptional level of financial risk inherent in the construction of a nuclear power plant. The Georgia situation would seem to have a greater level of uncertainty attached to it versus the suspended South Carolina project. While both offer the potential for a rate impact the Georgia project presents a level of risk which cannot be fully measured at this time. In South Carolina, the costs are more certain.

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.