Joseph Krist

Publisher

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This is our last issue for calendar 2020. We wish you a hopeful Christmas and a brave New Year. The Muni Credit News will  return for the first week in January.

As the year has worn on, it has become increasingly difficult to keep politics from influencing our judgment. We are not concerned about the ultimate ability of the U.S. economy to recover and eventually thrive. That reflects our view of the enormous resources we have as a country and faith that its workforce will continue to be the most innovative and productive in the world.

Having said that, the politics of the country especially on the national level should give one pause. This is far from the first time that the country has been divided. It’s not the first time that a generational clash of values has happened. But it does come at a time, unlike others,  when truth has become subjective. Having dealt with politicians from both parties over the years I can honestly say that I cannot remember a time when the differences were over the interpretation of facts, not the existence or veracity of facts.

We also see troubling trends. When I was in my early years as a sell side analyst, I would get asked regularly about Puerto Rico bonds and the potential for an insurrection that would result in efforts to repudiate debt. I could write that off to ignorance or racism and move on. Now, one has to wonder when we see photos of armed protesters in the halls of legislatures whether an investor could ask the same question about Idaho, Michigan, or Virginia.

As we go to press on Sunday night, it appears that Congress will enact a relief bill providing stimulus checks up to $600 per adult and child, meaning a family of four would receive $2,400 up to a certain income. The size of that benefit would be reduced for people who earned more than $75,000 in 2019, similar to the last round of stimulus checks.  The bill would also extend federal unemployment benefits of up to $300 per week, which could start as early as Dec. 27.

What the package does not include is aid for states and localities. The budget year begins for many on January 1 and many smaller credits will have to budget on what they have. This has potentially significant impacts on employment and economic activity just as many jurisdictions are entering lockdown periods.  It makes for a more uncertain credit outlook if additional funding is not provided especially during the distribution phases of an immunization program. 

That said, the market did very well in meeting the challenges of the pandemic. It was able to finance all of its issuers’ needs in an orderly and economically effective way.

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I’ve been asked a lot what I think will be the important driving factors credit in 2021. The biggest change will be the fact that a Biden administration believes in government while the current administration did not. As we write this, the biggest remaining variable is a huge one – control of the U.S. Senate. It’s clear that the Senate elections in Georgia are even more meaningful than they already were. If the Senate is not under Democratic control, the policy gridlock and ideological drive to stymie any additional aid to states and cities will limit available resources.

It was one thing when Ronald Reagan made his joke about “I’m from the government and I’m here to help.” He then turned around and accepted a tax increase to fund Social Security and ran deficits which were for their time huge. But they did not set out to consciously undermine state and local finances. Now, we see overt efforts to undermine state finances combined with a significant offload of national responsibilities to states.

It makes no logical sense from either side of the partisan divide. Clearly it’s ideology. If you don’t want to give states and cities cash (which would probably be the most useful form of aid to these entities), at least restore the SALT deduction and advance refunding. The Fed chair made it pretty clear that low interest rates will be around for a while.  Yes, advance refunding and the SALT deductions are expenditures but they don’t require Federal cash expenditures. It would be a shame if ideology got in the way of commonsense fiscal management.

The slowing labor market recovery, significantly reduced pandemic-related state and federal government transfers, and a resurging wave of corona virus infections and hospitalizations will slow the pace and challenge the durability of the economic recovery of many U.S. states. Timing matters. New York and California both begin their budget processes in earnest before Inauguration Day.

The budget makers at all levels will be forced to make assumptions as to economies and revenues during the most uncertain period in memory. The level of stimulus provided by Congress will be the biggest source of uncertainty. This is especially true given that moratoriums on evictions, utility payments, and rents are not assured into the new year. Those potential negative pressures on local budgets will come just as FY 2022 budget decisions must be made.

Having set the backdrop, we examine some individual sectors.

Mass transit has arguably been the most visible loser in terms of the impact of the pandemic on credit. The situation in New York is telling. Subway ridership and fare revenue bottomed out in April and recovery has been slow. The share of MetroCard swipes in Manhattan remains depressed, reflecting declines in commuting to work and the collapse of tourism. Similar phenomena are observable in all of the major urban areas. The transit sector is right up there among the most vulnerable if office utilization remains below pre-pandemic levels.

For mass transit, the lifting of ideological opposition to funding can only be good. With three of the largest and oldest subway systems in the country in dire need of repair and expansion, the lack of federal funding has been a major hurdle. At the same time, mass transit is facing another crossroads which will have clear implications for the sector. What is the real expected level of utilization with other factors in the equation like changes in demand for centrally located office and housing space post pandemic? With the inclusion of some $4 billion in the current relief package, the MTA has received time to figure this all out?

It won’t just be about money. The drive by the Trump administration to privatize transportation will not continue. That philosophical basis for the development of policy relied on a model which simply has not worked that well. We think that New York is a good example of P3 projects working out favorably and that other state models are examples where it does not. The difference which leaps out is that models which involve concessions to operate as well as develop seem to have more problems than design build P3 models.

In New York, design build has generated three prominent bridge replacement/expansions and two airport renovations. They have generally received favorable reviews and support for the design/build P3 concept has grown in a strong union state. Where road projects have been leased to developer/operators, public support has been substantially less. Concessionaires have sold out both under duress or for other reasons.

All of this contributes to our view that P3s will continue to have their place but there will be no headlong rush to fully utilize the concept.

Energy Outside of pandemic related issues, the sector underwent significant change in 2020. The year saw unsuccessful efforts to convert investor owned electric generation and distribution assets to public ownership. The Jacksonville Electric Authority abandoned efforts to privatize the JEA which led to criminal investigations. In South Carolina, the legislature punted a decision on the future ownership and structure of the South Carolina Public Service Authority in the wake of the cancellation of the Sumner nuclear plant expansion.

 Many saw the troubles and bankruptcy of Pacific Gas and Electric in the wake of significant forest fires in California in recent years as an opportunity for public entities to take over PG&E’s troubled operations. It became clear that the process would be more difficult and time consuming than many thought and supporters of a public utility could not get a proposal together before PG&E was able to emerge from bankruptcy.

Boulder, CO considered converting the City’s electric distribution system to public ownership in an effort to support environmental goals. A proposal was put on the ballot this past November but residents instead voted to extend the city’s current arrangements for another 20 years with Xcel Energy.

The JEA saga continued as it announced that its new permanent CEO will be someone with utility experience. The announcement follows the firing of the previous CEO who did not have experience running a utility but did have experience privatizing public assets. The new CEO has a long history of operating local public utilities as well as experience with the TVA.

The market realities leading to closure after closure of coal fired generating facilities will continue. The pace of closures may slow as many remaining coal plants are newer and comparatively more economic. Nonetheless, the drive to decarbonize will continue. And plants will have to perform efficiently (environmentally and economically) to continue to operate.  

The change in philosophy alone at the White House will be a significant change catalyst and municipal utilities will be right in the center of them..

Congestion Pricing was held hostage to the ideological leanings of the Trump administration which refused to move forward on required federal approval processes for New York City’s application to levy congestion charges. It is likely that a Biden administration will look more favorably on congestion pricing proposals. This will be offset  by the economic realities of the pandemic and the desire to facilitate as much commerce as possible as the economy recovers.

Infrastructure  Infrastructure Day, Week, Month, Year. We’ll take whatever form it comes in as long as the process moves forward. A lack of federal policy beyond privatization has stymied all sorts of development whether it’s the repair of public housing stock or regional projects like the Gateway Tunnel. That does not even begin to include the significant number of smaller local projects which often are based in federal policies. It is nonetheless impressive that municipal issuers have managed to finance as many projects as they have during the last four years. Imagine what could happen with real support from the federal government.

Housing This was another sector where investment was held back by policy. The effort to shift projects into private hands as a price to be paid for needed renovations did nothing for some of the neediest projects. The best example is the New York City Housing Authority. The well known massive maintenance needs of these projects remained largely unaddressed while the Trump Administration promoted various schemes to convert public assets to private hands.

The looming eviction deadlines take on more relevance at year end given the pending expiration of a pair of temporary aid programs to individuals. The pending relief legislation will provide only short term fix. The Federal Reserve Bank of San Francisco studied what happened when unemployment insurance ended for workers who lost their jobs during the recessions of 2001 or 2007-9. Household income declined $522 a month on average, they found. There are real concerns that renters will be forced out of their homes without additional assistance.

On the other end of the spectrum, the ability of many to work from home has tended to benefit those in professional fields and other office workers. This has driven up prices for single family housing especially in major metropolitan area suburbs. If the prognostications about the likely level of return to the office on the part of workers are correct, than this state of affairs will likely continue.

This will all contribute to a willingness on the part of municipalities to reexamine their zoning laws. While not a direct fiscal issue, rezoning as a method to address affordable housing shortages will be an increasingly utilized tool. It serves to improve housing stock, preserve ownership, and support existing communities. These are often better connected to transportation and employment opportunities. Changes in zoning will have various impacts on assessed values and tax revenues which we believe would be positive.

Senior Living is far from a one size fits all sector. The American Health Care Association and National Center for Assisted Living, which represents more than 14,000 nursing homes and assisted living facilities across the U.S., found 90% of the 953 nursing homes that responded said their profit margins are 3% or less, and 65% said they are currently operating at a loss. The biggest increase in cost was staffing.

Digging deeper we find that the realities for skilled nursing credits are far different than for continuing care senior living credits. The IL and AL segments of integrated senior living projects have been able to generate revenues to support skilled nursing beds as those beds generate increased costs and real concerns about people’s willingness to move to nursing homes. It all combines to improve the outlook for senior living.

Transportation Technology Toyota plans to unveil a prototype electric car with a solid state battery in 2021, a long-sought technological breakthrough that would dramatically increase range and longevity while cutting charging time. Mercedes-Benz announces six new electric vehicles, including two SUVs that will be built at an Alabama plant. The police department in Redding, CA is seeking city approval for a specially equipped Tesla and other electric or vehicles for its fleet. The request follows a successful pilot program in Fremont, CA.

Three simple stories which neatly cover three important legs to the acceptance of electric vehicles story. The Toyota announcement addresses commonly cited concerns with EVs over range and charging time. The Mercedes announcement is about jobs related to EV production at an existing plant. That’s one fewer group of workers “losing” in the process of transition. The police car announcement shows that entities with fairly unique and stringent operating requirements are able to satisfy them with electric power.

We have noticed that as localities go through their budget processes for 2021, the issue of electric vehicles has moved forward in the debate. Even where cities are not moving towards widespread adoption at present we have noted that those debates seem to center around the issues of when and how much. Governmental users are in a unique position to advance technological change in transportation simply through the investment and purchasing decisions they make. Now that the idea of employing electric vehicles is seen as viable for vehicles associated with public safety, the next step to full adoption for municipal vehicle fleets is not far behind.

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.