Joseph Krist

Publisher

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THE PANDEMIC AND THE ECONOMY

There have been many unfavorable aspects to the need to work remotely but there have been some benefits. One of the obvious ones is the positive impact on the environment from reduced transportation. One aspect of this phenomenon has already been manifest in the crash of oil prices due to severely diminished demand. This decreased demand and spending has had however, the beneficial effect of increasing the disposable income of workers who no longer have a daily commute.

It is hard to determine the exact magnitude of the level of decreased spending but we are beginning to see attempts made to measure it. A researcher working on behalf of a company which links freelancers to businesses has released an analysis on the subject. The analysis estimated that cutting daily commutes out of the equation has saved Americans about $758 million a day in time and expense since the pandemic began. The analysis rests on an assumption that commuting by car costs on average $12.50 an hour.

That generates $411 million a day in savings with an additional amount credited to fewer trips to by gas and that fewer accidents also generate economic savings. Combine these factors and one gets to the daily total of $758 million per day.

Like any analysis which relies on them, the numbers rely on the quality of those assumptions. That leads us to focus not on the accuracy of the numbers but what they reflect about what is going on in the economy.  One of the issues facing the economy going forward is whether the office as we know it will survive. Lower spending, less time in commuting might continue to be attractive to many workers. The longer remote work persists (and many companies are staying remote thorough year end) and if people are given the choice, the alterations in commuting patterns could become permanent.

It is an important concern for all sorts of municipal issuers. We look forward to additional analyses on the subject.

The Federal Reserve also has released its latest Beige Book documenting its findings about economic activity. For the broad economy, activity increased among most Districts, but gains were generally modest and activity remained well below levels prior to the COVID-19 pandemic. Manufacturing rose in most Districts, which coincided with increased activity at ports and among transportation and distribution firms. Consumer spending continued to pick up, sparked by strong vehicle sales and some improvements in tourism and retail sectors. But many Districts noted a slowing pace of growth in these areas, and total spending was still far below pre-pandemic levels. Commercial construction was down widely, and commercial real estate remained in contraction.

Other data and comments reflect the crisis in the tourism and hospitality sectors as well as the airline industry. The recent announcements of permanent cuts to airline employment will likely be reflected in other businesses and industries dependent upon air travel. As we checked through the regional summaries in the Book, we were struck by how often terms like – Outlooks were increasingly uncertain; Uncertainty is extremely high; expectations have been scaled back; conditions in the energy and agriculture sectors remained weak –  came up. It paints a picture of slow recovery both economically and fiscally.

Another sign of the pandemic comes with Amtrak’s plan to furlough 2,000 employees. It is a direct result of diminished ridership and can be seen as a sign of the decline in economic activity in its busiest region. like New York’s MTA, it can cut service to a level which can be supported by available revenue. Amtrak  plans to reduce daily service on its long-distance train network to three times per week without funding help. Cuts of that magnitude would be indicative of difficulties in the underlying economies supporting these agencies. In July compared with July 2019, ridership on the relatively shorter routes through more urban areas was down more than 80%.

PANDEMIC FLEXIBILITY

The pandemic has forced issuers to be more flexible in their approaches to the financing of the revenue shortfalls. In some jurisdictions, structures have existed that provide for borrowing by local issuers to finance these shortfalls. These structures have not always been designed to deal with the unique impacts of something like the pandemic on these issuers. One of the best examples of this sort of borrower is school districts.

New York State has been at the center of the pandemic and the impact of its extended lockdowns and limits on economic activity on local government finances has been significant. To deal with the drop in revenues being received by the State of New York, the State has been withholding 20% of state aid typically distributed to local governments. localities and school districts have taken a number of steps in response to their resulting revenue declines. These include the use of short term borrowing in anticipation of either revenues or the proceeds of a future long term debt issues.

In New York, localities operate under debt limitations enacted by legislation. Among the limitations are a requirement that they be financed or retired within five legislation which extends the period over which notes are outstanding to seven from five years. The ability to roll over the notes an extra two years will allow management to better manage the expected long-term interest costs of borrowing. They can either reducing the note’s principal through annual paydowns of principal by cash funding of capital projects. In either case, long-term principal would decline, lowering future overall debt service requirements.

The legislation also addresses other techniques used by local government to manage the revenue interruptions and shortfalls stemming from the pandemic. The period in which governments must replenish restricted funds that they transfer temporarily to their operating budgets has been extended to five years in equal annual installments from the previous requirement to replenish them within the current fiscal year. The legislation also eases local governments’ access to capital reserve funds to pay for capital costs attributable to the pandemic. Governments will no longer need a referendum to move the funds  access. Capital reserve funds would normally be locked up and not available for corona virus-related expenses.

In New Jersey, newly enacted legislation will allow localities in the Garden State to borrow to replace revenues lost to the pandemic. The legislation permits localities to borrow for up to five years. If local governments can show that debt service costs would present a significant financial hardship that includes a need to increase the tax levy by more than 2%, the repayment period on the bonds could be extended to 10 years. Local governments also received new authorization to increase the tax levy to account for increased mid-year budget appropriations needed to fund emergency COVID-19 expenses. The higher taxes would not be subject to approval from the Local Finance Board which is typically required for municipalities when they exceed the state property tax cap.

We would expect to see similar changes made to local finance laws unfold across the country.

YET NYC STANDS ON ITS OWN

In an effort to pressure the state to provide additional financial aid, the mayor of NYC has chosen to frame the debate over how best to address the revenue to press is that the City must be authorized to borrow up to $5 billion to cover the budget gap which resulted. And that borrowing should have a thirty year term. Without that authorization, the Mayor threatens to lay off 22,000 city employees in as little as 30 days. The layoffs are clearly a bargaining chip to be played with a legislature that is increasingly impatient with the Mayor’s stewardship of the city.

We have stood firmly in the camp of those who believe that the City has been poorly managed especially in the Mayor’s second term. It can be argued that the health aspect of the pandemic was managed as best as could be given the magnitude of the pandemic in New York especially in NYC. Issues in the public eye – primarily the schools and public safety – are easy to cite as examples of ideology clouding management competence. The ongoing debacle over the opening of schools just extends and complicates the economic recovery.  

None of that would be causing a crisis if the economy had kept chugging along creating cover for some of the more troubling issues like soaring headcount which many had questioned. The management of the Thrive NY mental health program raised issues of confidence in Albany and now that the City needs help from the legislature, those concerns create hurdles in the City’s effort to generate additional funds.

Our view is that borrowing authority should be based on a more aggressive amortization schedule. The authority should be linked to cost cutting measures. They would include obvious things like negotiated changes in all forms of compensation, work rule changes, better technology, and better physical plant management. everything should be on the table and all parties will see changes in their level of control. The City’s credibility is on the line and the Mayor needs to step up.

PANDEMIC AND TRANSIT

Two very different scenarios are unfolding in the mass transit space in California. In San Francisco, the San Francisco Municipal Transportation Agency said will not open until at least the end of the year. Since March, the system had only three days of operation before mechanical and staffing issues forced a new shutdown. The mechanical issue will rely on parts not expected to be available until the third week of October. The staff issue reflects the positive test for a person and exposure of two others that forced the qualified workers to quarantine. The closed system does not provide an opportunity to train other personnel.

In Los Angeles, the city will study the potential for eliminating fares on the Metro system. Subsidized or free service is an issue being debated in several jurisdictions across the country. Los Angeles benefits from the fact that fares contribute only about 13% of operating revenues. Contrast this with New York where fares have historically contributed over half of operating funds. The revenue gap which would result in L.A. is far more manageable than the gap which would result in N.Y.

VIRGIN ISLANDS

“The refinancing of our existing bond debt in this unprecedented low-interest-rate environment is too great an opportunity to not explore.”  And so the Virgin Island’s has approved a plan to securitize a portion of its matching fund revenue (derived from the sale of rum) through a taxable debt issue. Like Puerto Rico, the Virgin Islands have had a slow recovery from Hurricane Maria. Now the impact of the pandemic on tourism has accelerated the negative impact of the national economic decline on the V.I. future.

Going into the pandemic, the Virgin Islands credit was characterized by excessive debt and poor fiscal practices. High unfunded pension liabilities and the financial difficulties of the power Authority (sound familiar) have been the recent headliners. Concerns about the timeliness and quality of financial reporting add to the mix. It has all contributed to a well earned Caa rating.

Now existing bond holders who are not refinanced out of their holdings have an arguably weaker credit supporting those investments than they did before. And it does little to address the underlying fundamentals which weaken the credit. It does put off a real cash crunch for the government for now and that would seem to be the major objective of the proposed issue.

MEDICAID, HOSPITALS, AND THE PANDEMIC

It is estimated that some 5 million workers have lost their employer provided health insurance as the result of job losses related to the pandemic. In some cases, these workers might be able to replace that coverage under the Affordable Care Act but many of them will wind up qualifying for Medicaid. We already know that pandemic fears have driven hospital utilization down, impacting revenues after periods of higher unanticipated expenses related to the pandemic. This has created liquidity pressures on hospitals, especially in the most hard hit of markets. The NYC market is a good example.

The Mount Sinai Hospital and Mount Sinai Hospitals Group  provide a good example. In the first quarter, Mount Sinai actually made money in spite of the limitations on operations driven by the pandemic. Recent material increases in liquidity and execute initiatives to improve margins had improved the system’s financial position. Nonetheless, the outlook going forward is uncertain. It has resulted in Moody’s assigning a negative outlook to Mount Sinai’s rating. An already high Medicaid share of revenues will likely increase because of the economic downturn. At the same time, state budget stress could drive Medicaid cuts.

The pandemic comes at a quite inconvenient time for the System. Mount Sinai hopes to replace its money losing facility in lower Manhattan (full disclosure I was born there) with a state of the art facility oriented much more towards outpatient care versus the current traditional structure. If the project is delayed because of a prolonged period of modest margins and high operating leverage would extend the period in which money losing divisions must be supported. Part of the strategy envisions the sale of real estate associated with the existing facility which would have improved liquidity. The benefits of such a sale will either be delayed or will yield a less favorable price.

CHICAGO BUDGET

As one of the largest cities in the U.S. to operate on a calendar year budget, the City of Chicago finds itself at a disadvantage. The primary fiscal impact of the pandemic will occur during this calendar year so that will amplify the impact on the City’s budget. The depth of that impact was reflected in the 2021 Budget Forecast released by the Mayor and city budget officials this week.

The forecast shows a $1.2 billion funding gap which must be addressed by year end. The City’s midyear shortfall for the current fiscal year is $799 million. A $783 million gap is projected for fiscal 2021. The Mayor has hinted at a combination of tax increases and layoffs to deal with the budget realities. This while historical pressures remain. In 2021, the city will pay its four pension funds $1.8 billion, approximately $91 million more than in 2020 from its general operating fund.

The City acknowledges the contribution of existing pressures before the pandemic to the City’s budget gap. Of the city’s projected budget shortfall of $1.2 billion in 2021, $783 million is due to the pandemic while the remainder reflects the City’s structural deficit. It comes as the City projects that full economic recovery is not likely until 2022.

The city will use $350 million in federal relief funds and $100 million saved by refinancing debt last year to help close the 2020 deficit. A hoped for debt refinancing is planned to generate $100 million in current year budget savings.  Over the longer term, the City is putting hopes in a casino which is projected to generate revenues to partially fund uniformed service employee pensions.

It is a bleak outlook which should hold back any improvement in the City’s credit for an extended period.

LAS VEGAS MONORAIL

The Las Vegas Convention and Visitors Authority to buy the struggling Las Vegas Monorail. The monorail opened for service in 2004 The monorail opened for service in 2004 after delays and cost overruns. It has never been a financial success and it was an unmitigated disaster for investors and bond insurers who supported the bonds. The purchase would not be a vote of confidence for the monorail’s financial viability.

It does give the Authority control over the monorail’s exclusivity agreement, which stopped other transportation options in the Strip corridor. It is also interesting that the debate over the vote included comments to the effect that the monorail probably has an 8- to 10-year lifespan. This reflects the expected useful life of the monorail’s physical assets and what is considered to be a prohibitive cost of replacing that rolling stock. It likely spells the end of one of the more interesting sagas of the high yield world over the last two decades and it supports the views of those who knew from the start that the project would not succeed.

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