Joseph Krist

Publisher

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This week we focus on unemployment as it drives most everything we comment on. There is the direct funding need generated by record initial claims, the uncertainty about the duration of social distancing practices, the potential offloading of laid off employee medical costs to Medicaid, and the costs of highly diminished transportation and its immediate impact on revenues. The lack of coherent federal strategy in response to the pressures generated by the pandemic coupled with continued wishful thinking by the White House has simply added to the difficulty in assessing the pandemics true impacts and potential long term credit effects. Anyone who tries to tell you otherwise is only fooling themselves.

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PANDEMICS, UNEMPLOYMENT, AND BUDGETS

Three weeks ago, initial unemployment claims were at about 200,000. In the week ending March 21, the advance figure for seasonally adjusted initial claims was 3,283,000, an increase of 3,001,000 from the previous week’s revised level. This marks the highest level of seasonally adjusted initial claims in the history of the seasonally adjusted series. The previous high was 695,000 in October of 1982. The previous week’s level was revised up by 1,000 from 281,000 to 282,000. The 4-week moving average was 998,250, an increase of 765,750 from the previous week’s revised average. The previous week’s average was revised up by 250 from 232,250 to 232,500.

The State of New York is not only the epicenter for the virus but is also the first state to have to budget  under the terms of the new economic reality in the US. It is grappling with the fact that we are undoubtedly in a nationwide recession as well as the State’s role as the center of the financial industry. It is feared that the economic consequences of the pandemic will create a $15 billion plus hole in the State’s revenue base. With the declines in the stock market, the capital gains states of NY, NJ, CT. MA, IL, CA will see disproportionate impacts.

We already see requests from the State of California and the City of New York to identify significant potential expense reductions in the face of both an anticipated revenue decline as well as delays in revenue receipt as the result of the delay in the federal tax payment date. NJ State Treasurer Elizabeth Maher announced that she is placing $920 million of appropriations into reserves. We would not be surprised to see a higher volume of cash flow borrowings.

The reality is that state and local budget makers are flying blind as there is no real visibility as to a potential time frame for the renewal of “normal” economic activity. We would anticipate lower general obligation bond ratings to decline essentially across the board. Some states are taking significant steps to marshal resources. NJ State Treasurer Elizabeth Maher announced that she is placing $920 million of appropriations into reserves. 

The Senate stimulus bill would offset some of the impacts on credits especially in the transportation sector. The bill would provide $25 billion to transit agencies, the figure they had been seeking. The money could be used to pay to put personnel on administrative leave as agencies cut service, as well as to buy protective equipment and cover other costs. New York’s Metropolitan Transportation Authority is expected to get almost $4 billion. 

Airports would see a further $10 billion in grants on the condition that they keep 90 percent of their staff employees until the end of the year. It is not clear on whether these monies would benefit contractor employees who make up a significant segment of labor at airport terminal commercial outlets.

We do not see any provisions for toll road revenue losses. This is a concern as roads are virtually empty. Credits backed by high occupancy and demand management lanes will continue to be impacted. One high profile high yield bond is being directly affected. Virgin Trains USA, the parent company of the Brightline express train, suspended all train service in South Florida and laid off 250 employees amid the corona virus concerns. 

The Senate stimulus also provides $117 billion for hospitals and veterans’ health care; $11 billion for vaccines, therapeutics, diagnostics, and other preparedness needs; $4.3 billion for the Centers for Disease Control; $16 billion for the Strategic National Stockpile; and $45 billion for FEMA disaster relief fund, among other things.  More than 80 percent of the total funding provided in the corona virus emergency supplemental appropriations division of the package will go directly to state and local governments. Health care systems would receive $130 billion, including $127 billion for a Public Health and Social Services Emergency Fund.  

NO CENSUS, NO FEELING

One of the things that we would normally be anticipating is the US census for 2020. As our industry and market have become so much more data driven, the importance of the availability of good data whether it be for trading, for analysis, or government has continued to grow. The development of good data regarding the economic, demographic, educational , and other aspects of American’s lives are central to much of the work we all do.

Among all of the issues arising from the corona virus pandemic, interruptions to the process of collecting data from residents for the 2020 Census pale beside things like ventilators and shelter orders. Nonetheless, the hurdle that various actions taken to control the pandemic across multiple states  can create for the timely and complete execution of the Census is substantial. While many can complete

their forms on line, a significant portion of the population does not have or use internet access. Some will fill out and mail a form but up to a quarter of the population may need to be contacted in person.

The US has never failed to execute a timely Census but the possibility of a delay must be considered. If it is delayed, that would raise all sorts of issues with the data. A delay in the data could also impact the state redistricting process. This has practical and political considerations for states and localities especially as they involve issues of federal funding for many projects covering many sectors.

PUERTO RICO

The financial Oversight Board is looking to the courts to postpone proceedings on existing proposals to restructure its defaulted debt. “In light of Puerto Rico’s current reality, the oversight board believes that the government and the oversight board’s sole focus should be on getting Puerto Rico through this unfortunate crisis. The board will present a motion in court to adjourn consideration of the proposed plan of adjustment’s disclosure hearing until further notice.”

There are practical considerations which support such a move. The economic impact of the corona virus pandemic will hit the Commonwealth as hard as anywhere given its weakened economic and fiscal conditions to begin with. As will be the case with the states, Puerto Rico will see significant revenue losses. These will likely be enough to force a reevaluation of many of the economic and revenue assumptions supporting the restructuring plan.

Meanwhile, the US District Court for the First Circuit ruled against holders of debt issued to fund pensions in their request to have the assets of the pension fund taken from the general government and given to bondholders. The Puerto Rico government as part of its restructuring largely abolished the pension system. It then, ordered that the assets be transferred over to the general government funds with the general fund assuming its obligation to pay pensions.

The bondholders’ primary argument on appeal was that the federal court didn’t apply standard commercial bankruptcy principles. The justices said the federal judge could consider that this was a governmental bankruptcy and different interests were involved.  The Court reasoned that “The bankruptcy of a public entity … is very different from that of a private person or concern”. A commercial bankruptcy is designed to “balance the rights of creditors and debtors,” whereas governmental bankruptcies are intended to allow governments “the opportunity to continue operations while adjusting or refinancing their creditor obligations.”

We see it as positive that the Court ruled that the nature of municipal versus corporate bankruptcies is different. The role of investors who traffic in distressed situations in the municipal market has been evolving leading to a debate over the role of distressed institutional investors. I believe that they have a role and often provide a needed source of liquidity for holders without the ability to ride out bankruptcies. At the same time their efforts to jam the round peg of a governmental entity into the square hole of corporate bankruptcy practices often bring unnecessary delay to the process of restructuring a municipal entity.

The bondholders still have a separate case pending in the U.S. Court of Federal Claims in which they are arguing that the asset transfer amounted to a “taking” in violation of the Fifth Amendment. The First Circuit suggested that the plaintiffs “avoid a proliferation of actions seeking essentially the same remedy. Each such proceeding potentially drains assets which could be put to other uses.” We agree.

RATING AGENCIES AGREE WITH US

Fitch placed the ratings of five large U.S. public transit agencies on rating watch negative. They are the Metropolitan Transportation Authority in New York, the San Francisco Bay Area Rapid Transit District, the Washington Metropolitan Area Transit Authority, the Metropolitan Atlanta Rapid Transit Authority, and Colorado’s Regional Transportation District. S&P has lowered its outlook on the Metropolitan Atlanta Rapid Transit Authority’s (MARTA) sales tax revenue bonds to negative from stable. It also lowered its long-term rating and underlying rating to ‘A-‘ from ‘A’ on the Metropolitan Transportation Authority (MTA, or the MTA), N.Y.’s transportation revenue bonds (TRBs) outstanding.

Moody’s revised its outlook  to negative on the Aa3 and A2 ratings of the New York Convention Center Development Center’s (NYCCDC) Senior Lien and Subordinate Lien Revenue Bonds including the Aa3 rating on SONYMA bonds that are subordinated to the Senior Lien Revenue Bonds and the A2 rating on SONYMA bonds that are included in the Subordinated Lien Revenue Bonds. The bonds is secured by a $1.50 per-night unit fee on occupied hotel rooms in New York City; a revenue account minimum balance requirement of 80% of MADS; a debt service reserve funded at maximum annual debt service ($43.4 million for the senior lien and $24.5 million for the subordinate lien); and (iv) a credit support agreement with SONYMA that establishes a dedicated account that may be used to pay up to one-third of debt service each year, after tapping the corporation’s other reserves.

S&P Global Ratings placed Queens Ballpark Co. LLC (Citi Field) and Yankee Stadium LLC — the respective homes of the Mets and Yankees — and Louisville Arena Authority LLC on credit watch with negative implications. S&P rates both New York ballpark bonds BBB. “Stadiums and arenas are already facing canceled events and suspended sports seasons due to the corona virus outbreak,” S&P said. “As a result, cash flows in the related project financings are under pressure.” S&P also revised its outlook on toll roads as well as the airport and parking facilities sectors to negative. Moody’s Investors Service revised its sector outlook for toll roads to negative from stable.

Fitch has downgraded Suffolk County, NY to ‘BBB+’ from ‘A-‘. “Current economic conditions, triggered by the corona virus pandemic, are expected to place significant additional pressure on the county’s revenues and cash position in the near term.” Fitch noted that the county’s financial resilience is limited with no general fund reserves to address fiscal pressures that will arise from the current economic slowdown. The majority of the county’s budgeted operating revenues for 2020, including the general fund and police district fund, come from sales and use tax collections (approximately 47%) and property taxes (approximately 22%).

Fitch highlighted the fact that it does not expect the county to come close to budgeted sales tax assumptions due to the recent declines in oil and gas prices, the temporary closure of the major shopping malls, restaurants and the casino, and other economic pressures associated with the corona virus pandemic. Budget balancing is likely to require drastic spending cuts or increased borrowing.

Port credits began to feel the pressure. Moody’s revised its outlook to negative on port credits in Port Canaveral and Miami-Dade due to unprecedented Corona virus (COVID-19) restrictions globally that led to the halt of cruise operations at PortMiami and other cruise ports in the US for a 30-day period since March 13, 2020.

CA LIFORNIA WILDFIRE AGREEMENT

Pacific Gas & Electric reached an agreement with Gov. Gavin Newsom. It pledged billions of dollars to help wildfire victims, improve safety and make other changes. Half of the company’s $13.5 billion payment to wildfire victims will be in the form of PG&E stock under a previously reached agreement. 

Now, PG&E has agreed to a plea bargain in state court to settle pending criminal charges against the company. The plea agreement requires PG&E to accepted a maximum penalty of $3.5 million. In exchange, “no other or additional sentence will be imposed on the utility in the criminal action in connection with the 2018 Camp Fire.” The company will also pay the district attorney’s office $500,000 to cover the cost of its investigation. The plea  must be approved by a state court, which is scheduled to consider it on April 24, and the bankruptcy court.

The agreement should allow the utility to exit bankruptcy by June 30, a state-mandated deadline for it to take part in the fund designed to help utilities pay claims from future wildfires. PG&E must receive approval of its plan by state regulators and the bankruptcy judge by June 30 and have its financing in place by Sept. 30. Failure to do so will set off the sale of the company.

The agreements will keep PG&E as an investor owned entity after it was threatened with an effective takeover by a state created entity. It will not necessarily be able to maintain itself as a sound entity even after this second bankruptcy is concluded. It will be a heavily leveraged entity as it finances capital needs and will likely face a constricted ratemaking environment.

HOSPITALS AND INSURANCE

California, Colorado, Connecticut, Maryland, Massachusetts, Minnesota, Nevada, New York, Rhode Island, Vermont and Washington run their own health insurance exchanges under the Affordable Care Act. These states have opened up enrollment under the Affordable Care Act to allow laid-off workers to get subsidized health insurance. Under the Affordable Care Act, people who lose insurance coverage when they lose their job are already allowed to buy their own insurance.  The newly announced changes will anyone without comprehensive insurance could simply sign up for a health plan, without having to prove such special conditions. 

The potential for large surges in demand through emergency departments especially by those without health insurance created huge risks for hospitals who could see their uninsured charity caseloads skyrocket without knowing how those costs would be covered. The Kaiser Family Foundation estimates that 17 million people already uninsured are eligible for marketplace coverage. More than a quarter of those people were eligible for a bronze plan that would cost them nothing in premiums after federal subsidies were applied (they would still have a high deductible). 

The question remains what the 32 states which operate through the federal marketplace will be able to do. They cannot expand their programs without federal approval. Whether that approval will come while the Administration is fighting to have the ACA declared unconstitutional is unclear. 36 states expanded their Medicaid programs under the Affordable Care Act, and in those states anyone now earning less than 138% of the federal poverty level — about $17,000 for a single person and $35,500 for a family of four, annually — can qualify for coverage right away. 

There has been some effort to support the states from the federal government. The Centers for Medicare & Medicaid Services (CMS) approved an additional 11 state Medicaid waiver requests under Section 1135 of the Social Security Act (Act), bringing the total number of approved Section 1135 waivers for states to 13. The waivers are designed to facilitate relief from administrative requirements, such as prior authorization and provider enrollment requirements, suspending certain nursing home pre-admission reviews, and facilitating reimbursement to providers for care delivered in alternative settings due to facility evacuations.  This will facilitate funding for the states during this crucial period.

The expansion of coverage would be positive for hospitals in that it would reduce charity care burdens and provide more certainty about how they would be reimbursed. The need for increased coverage is highlighted by the plight of rural hospitals. While many of the financially distressed hospitals in this cohort have been smaller, the pressure on the rural hospital sector is impacting larger rural facilities.

Two 200+ bed facilities saw their ratings downgraded . Southeast Hospital, d/b/a SoutheastHEALTH is a not-for-profit 501(c)(3) health system located in Missouri. The system operates a flagship hospital of 245 licensed beds in Cape Girardeau, a rural community hospital in Dexter, and numerous outpatient clinics. It saw its Moody’s rating lowered to Ba1 from Baa3, affecting approximately $127 million of rated debt. The outlook is revised to negative from stable. Moody’s also downgraded Hutchinson Regional Medical Center, Inc. (HRMC) in Kansas to Ba1 from Baa3, affecting approximately $35 million of rated debt. Both hospitals had underlying credit problems but now are facing increased pressure as the result of the pandemic.

For hospitals whose financial position was marginal going into the pandemic, there will be further ratings pressures. These are just two of the latest examples.

BORDER RESTRICTIONS AND LOCAL CREDITS

On the US Mexican border, several credits will be impacted by the closure of the US-Mexico border to nonessential travel to slow the spread of the corona virus until 20 April closure of the US-Mexico border to nonessential travel to slow the spread of the corona virus until  April.20. The reduced toll revenue is also negative for US-Mexico border cities which rely on transfers from their international bridge funds to support general funds. Lower bridge revenue flowing to border cities’ general funds increases the credit-negative effects of reduced sales tax revenue.

Take Laredo, TX where up to 50% of bridge toll revenue is transferred to the general fund. The Laredo International Toll Bridge System consists of four bridges at the intersection of major rail lines and highways. Bridge transfers provided 17% ($34 million) of general fund revenue in fiscal 2018, which ended 30 September 2018, while sales taxes accounted for 16%.  The impact on retail sales in border cities will be replicated at the many other communities which serve as ports of entry. The free flow of goods and people across the border has supported the emergence of commerce based economies with facilities such as warehouses becoming significant sources of property value growth, taxes, and jobs.

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.

Joseph Krist

Publisher

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Publisher’s Note: The overarching impact of the corona virus pandemic is that we are about to see something unprecedented in our nation’s history – the near total shutdown of industry in the country. This week’s announcement that Ford and GM will halt production at their manufacturing facilities through the end of March at a minimum is unlike anything seen in this country since World War II. The companies and the United Auto Workers will work together on plans to restart production in compliance with social distancing protocols among workers, including at shift change times, and to maximize cleaning times between shifts changes. As demand slackens, we would not be surprised to see additional industrial and manufacturing disruptions.

This is a unique experience in US history certainly after World War II. One would have to go back to the Spanish Flu Pandemic of 1918 and 1919 to find a similar experience. The difference is how intertwined the world is now versus then which raises a whole host of issues creating this unique experience. Unique means that in many ways we are making it up as we go along. With that in mind, view this week’s comments.

CORONA VIRUS

The declaration of a national emergency and the actions increasingly being taken by localities to limit gatherings has made it clearer where the potential sector weak spots are in the municipal credit spectrum. So now the process of picking winning and losing sectors depending upon the individual credit characteristics can begin.

It is estimated that some 14% of total consumption spending – recreation services recreation services; food services and accommodation; transportation services- is effectively shut down for an indefinite period of time. The immediate impact will be on credits backed by taxes related to economic activity. “Wages that aren’t earned aren’t spent.” Sales tax bonds will come under pressure as non-essential spending is curtailed as the result of mandated closings of things like restaurants and bars.

Sales taxes provide current cash flow. They are usually collected and remitted to the taxing jurisdiction monthly. Credits secured by things like admissions taxes (from arena and entertainment facilities), hotel taxes, convention center revenues, toll roads, will all see revenue impacts. Flight cutbacks will reduce throughput at airports which rely on the economic activity from the increasingly important retail sales activity at terminals. That will impact general airport revenue bonds. Stand alone enterprise credits like airport rental car and garage facilities will be under stress.

One sector facing long term implications in addition to the short term pressures is the senior living industry. The vulnerability of their residents to the impact of pandemics is clear. There is no way to determine how the experience of the corona virus will impact long term demand for all of these facilities. For those in the early stages of development and fill up, the potential impact is significant as these projects often rely of fairly delicate timelines for the receipt of those revenues to meet covenant requirements as well as repayment schedules. The potential impact on housing demand and sales will make it more difficult to meet financial targets and schedules.

Project financings for things like shopping malls and casinos will be vulnerable. The Carousel Center in Syracuse, NY was already experiencing operating difficulties when it was downgraded by Moody’s in Late 2019. Carousel Center Company L.P. signed a three year loan extension and modification agreement with the special servicer of its subordinate CMBS loan on May 31, 2019. Now, the extended time period of inactivity faced by a project such as this means that its ability to meet the new Debt Yield covenants in 2020 and 2021 to secure the second and third year of the loan extension remains uncertain. While it is likely that the developer will make every effort to make payments in lieu of taxes which secure the bonds, the secondary financing difficulties make the project vulnerable to a bankruptcy by the developer to deal with the secondary financing needs.

The newly opened American Dream mall and entertainment complex in New Jersey was under significant pressure from its start. $800 million of limited obligation revenue bonds backed by a payment-in-lieu-of-taxes agreement between developer Triple Five Group and East Rutherford, along with $287 million of grant revenue bonds supported by anticipated sales tax revenue were issued to finance the project. Now the facility has closed in response to the virus which will further pressure the reliance on developer support for the bonds while tax cash flows are interrupted.

The impact of the stock market will be felt in multiple ways. States like CA, NY, NJ, IL, and MA all are vulnerable to negative impacts on capital gains revenues. So the immediate impact will be on operations. Longer term, pension funds are at the center of stock market risk so it is likely that funding ratio data and expense requirements to maintain funding will generate negative news.

Overhanging all of this is the need for states to take swift action without the benefit of a coordinated federal response. Maryland Gov. Larry Hogan (R) and New York Gov. Andrew Cuomo (D) ordered state health officials to reopen closed hospitals and to convert other facilities in order to accommodate patients. Retired medical staff is being recruited. These are expenses which must be covered but who and how much is effectively yet to be determined. Cuomo’s order will add an additional 9,000 beds to the 53,000 beds already available around the state. Maryland has about 8,000 hospital beds, and Hogan’s order will boost capacity by an additional 6,000.

Early in the week, The President advised states to seek out their own equipment, a potential sign that the federal government was not prepared or equipped to aid states that are going to need serious help. That will require funding. States will also be at the front lines of providing and funding unemployment insurance.

For smaller communities, orders to effectively shelter in place will reduce short term travel and reduce the opportunity to collect fines. In some rural communities, reduced travel will impact their ability to collect fines which are often an important component of local budgets. Less traffic makes it harder to issue speeding tickets which for many small towns are a significant revenue source. In larger communities, reduced travel will result in lower revenues from parking charges as well as parking related fines. In some localities, ticketing and fines have been suspended which will impact revenues.

On the public transit side, ridership on the NY subway was down 27% in one week and that was before schools and public facilities were closed. Seattle’s Sound Transit has experienced a 25 percent drop in ridership in February compared to the month before. Ferry ridership in Seattle was down 15 percent on Monday, March 9th, compared to the previous Monday. In San Francisco, BART fares account for 60 percent of the agency’s service budget and officials estimate the current drop in ridership will cost BART up to more than $600,000 each weekday. Ridership has fallen some 30%.  

WHO WORKS WHERE

The Airports Council International-North America (ACI-NA) represents local, regional and state governing bodies that own and operate commercial airports in the United States and Canada. They have their own agenda but they have produced data to reflect the potential impact of the economic downturn we are in. The council estimates  that about 1.2 million people work at 485 commercial airports in the United States. O’Hare in Chicago employs 41,000 alone.

Casinos in most places are shut down. Obviously the front line for economic impact would be Las Vegas. Nevada employs 403,000 in the gaming industry segment alone. The top five include New Jersey, Pennsylvania, Mississippi, and Louisiana each with between 30,000 and 40,000 employed.

And then there are the overall leisure/hospitality statistics. Some 16.8 million are employed as of February 2020. Less than three percent of them are unionized so they are not likely to have employment terms favorable to their being laid off. They make an average of $435 per week. So their unemployment will generate pressure on the health and shelter providers.

PRACTICAL FISCAL RESPONSES TO CORONA VIRUS

When one tries to assess the potential fiscal impact of the ongoing pandemic, the implications for ongoing funding things like education must be considered. School aid is often based on formulae which include factors like attendance and the provision of a minimum number of school days. The legislation by which things like ongoing school aid as well as state enhancement programs securing local school bonds does not always include provisions to cover situations such as is occurring right now.

One state’s recent action highlights one such example. In New York, aid is based on attendance as well as minimum day requirements. Should a district choose or be forced to close their facilities for any extended period, it was not clear whether the laws under which school aid is distributed would permit all of the anticipated aid. Districts and their creditors were concerned that cash flow issues related to delayed or lessened anticipated school aid could cause payment interruptions by districts. So it was positive to see that The Governor issued an Executive Order to eliminate the aid penalty for schools directed to close by state or local officials or those closed under a state or local declaration of emergency that do not meet 180-day requirements if they are unable to make up school days. 

For the states generally, the demand for unemployment support and the need to fund it is already apparent. Initial unemployment claims are in the tens of thousands in many states. Twenty three states have unemployment trust fund balances below their recommended funding levels according to the US department of Labor. That is before any Medicaid hit just from that cohort and not inclusive of corona related costs.

After several years of significant headcount increases, the City of New York finds itself with less room to maneuver through the corona virus pandemic. The City does have budgetary reserves but they will be quickly evaporated as it faces a significant revenue hit. This week, City Comptroller Scott Stringer estimated that the City would experience a $3.2 billion loss to the city’s tax revenues over the next six months. The comptroller called for spending at most agencies to be reduced 4% from what the mayor had proposed. For the Department of Homeless Services, the Administration for Children’s Services and the Human Resources Administration, reductions should be 2%. The Health Department and the department overseeing the city’s public hospitals should be exempt, according to the Comptroller. He estimates that over the next six months, restaurant sales will go down 80%, real estate sales, 20% and tourism-related retail, 20%. 

Seattle’s budget director last week estimated the city could collect $110 million less than expected in general-fund tax revenue this year due to an economic breakdown caused by the virus and by efforts to slow its spread. Hawaii’s chief state economist estimates that tax revenue coming into Hawaii state coffers is now expected to be $48 million to $80 million less than previous estimates for the rest of 2020 due to the impact of the corona virus. The drop will be primarily driven by declines in visitors coming to Hawaii and their spending. The latest data indicate that international arrivals are already down by more than 30% compared to the same period last year.

The virus is taking its toll operationally. In Pennsylvania , the Department of Transportation (Penn DOT) is suspending all operations, including construction, except critical and emergency work. Driver licenses, photo ID cards and learner’s permits scheduled to expire from March 16, 2020 through March 31, 2020, the expiration date is now extended until April 30, 2020. Vehicle registrations, safety inspections and emissions inspections scheduled to expire from March 16 through March 31, 2020, the expiration date is now extended until April 30, 2020. Persons with Disabilities Parking Placards scheduled to expire from March 16 through March 31, 2020, the expiration date is now extended until April 30, 2020. Moves like this should be expected across the country. That will impact the timing of fee revenues which along with possible tax payment deferrals could impact cash flows.

SOUTH CAROLINA PUBLIC SERVICE LITIGATION SETTLEMENT

In 2017, concerns were rising about the viability of the project to expand nuclear generating capacity at the Sumner Nuclear plant. A group of consumers filed a class action lawsuit against the plant’s sponsors The suit was brought in an effort to claw back charges customers paid for the unfinished twin nuclear reactor project. It names several electric cooperatives, former and current Santee Cooper directors, South Carolina Electric & Gas and SCANA Corp., and Dominion Energy, which bought SCANA in January 2019.

Now Santee Cooper has announced that it has reached a proposed settlement with the plaintiffs. The utility’s board of directors agreed to pay $200 million in cash over three years and to freeze rates for four years to end the suit. Dominion will pay $320 million in stock that will be sold and converted to cash as part of the settlement. Santee Cooper and Dominion also agreed not to attempt to recover settlement proceeds in base rates or other customer charges.

The settlement, if approved by the court, will remove a major source of uncertainty for Santee Cooper and may enhance its prospects for remaining a public utility. It allows the utility to more accurately estimate its stranded costs and determine a more certain course for its ongoing viability. It reduces the total liability with which creditors and investors would be effectively competing.  

The proposed settlement also helps to solidify some of the math being used to support assumptions being made by potential private suitors involved in efforts to acquire Santee Cooper’s assets. It is likely that the settlement will enhance the position of those who support reforming Santee Cooper’s oversight and management while maintaining its ability to compete. The ability to continue to finance its capital needs in the tax exempt market will continue to provide Santee Cooper with a cost advantage.

Proponents of a sale to private interests still have support in the state legislature and the outcome of deliberations currently underway in the state legislature is unclear. The approval of the proposed settlement is still uncertain. Preliminary approval of the settlement by the judge will begin a process during which all members of the class will be identified, and then they will be given the opportunity to opt into or opt out of the settlement.

Conclusion of the settlement process will be a credit positive event for the Authority and its bondholders.

GREAT LAKES WATER AUTHORITY

During the bankruptcy of the City of Detroit, investors holding debt issued for the Greater Detroit Water and Sewer Systems may have been one of the best positioned creditors. Between existing precedents for special revenue debt like that of the water and sewer systems and its regional revenue base, those credits were the most likely to be successfully restructured. So it was easy to counsel patience to those investors especially retail investors who were significant holders of the debt. Eventually, the Greater Detroit debt was restructured into a new entity, the Great Lakes Water Authority.

Now patient investors who worked through the bankruptcy, restructuring, and exchange process are seeing that patience rewarded. Moody’s Investors Service has upgraded to A1 from A2 and to A2 from A3 the senior and second lien water revenue ratings and the senior and subordinate sewer revenue ratings, respectively, of the Great Lakes Water Authority (GLWA), MI Water Enterprise. It cited ” continuation of strong operating performance that has resulted in healthy annual debt service coverage and liquidity. Additionally factored are the system’s large scale of operations, independent rate setting authority, and sound legal provisions of outstanding revenue debt. At the upgraded rating, these strengths continue to balance the system’s elevated debt burden, as well as their reliance on revenue derived from retail operations within the City of Detroit (Ba3 positive). The upgrade of the second lien revenue bonds to A2 incorporates the same factors while the lower rating reflects a subordinate claim on pledged net revenue.”

The restructuring improved regional oversight of the systems while maintaining their geographically diverse revenue streams. The regional character of the revenue base has only become clearer over time providing a solid foundation on which to rebuild its credit strength. It was always a regional credit and while Detroit had its problems the utilities managed to maintain the city’s suburban communities as customers of the systems.

RATINGS ACTIONS

We cited NY’s Metropolitan Transportation Authority as a vulnerable credit do to its reliance on farebox revenues. The corona virus will impact many credits and sectors but the MTA’s Transportation Revenue Bonds were especially vulnerable in the short term. So we view with interest the announcement this week that the Moody’s outlook for the A1 Transportation Revenue Bond (TRB) rating is negative.

According to Moody’s, MTA’s ridership levels and financial performance will be vulnerable if a widespread coronavirus outbreak occurs in NYC, or if local precautions to control an outbreak are extended. The credit impact will depend on the depth and duration of the economic and service disruption. We note that the MTA has ridden out prior interruptions in ridership – strikes, natural disasters, terror attacks without any real impact on bondholders. Unlike those events, the pandemic is forcing the MTA to fund increased employee education, customer communications and station and fleet sanitization, which will increase expenditures. 

The situation highlights the security structure for the MTA farebox bonds. Unlike most other rated transit systems, there is no debt service reserve fund. Pledged revenues flow to a trustee held account and are set-aside monthly for debt service before being released for operations. Longer term , the basic challenges the MTA faces – flat ridership trends, rapidly escalating leverage that includes growing market access risk, large debt and capital needs and growing public pressure to improve service and limit fare increases – will remain in a damaged economic environment. In the longer term, MTA will also be challenged by growing and relatively inflexible labor costs, and environmental risks (particularly from natural disasters).

PANDEMIC POSTPONES BOND VOTES

After the California primary, transit advocates were concerned that results from those elections might indicate that there was diminishing support for tax funding for transportation projects. Now, with 7 Bay Area counties under shelter in place regulations, there has been concern that a proposed sales tax backed transit funding program in a nine county around the Bay Area might not succeed at the polls this November. The proposal would ask voters in those counties to approve a 1 cent increase in sales taxes with proceeds dedicated to supporting debt issued to fund various transportation projects in the region.

The ballot measure was being proposed to the state Legislature under Senate Bill 278. In order to be placed on the November ballot, the bill would have had to be passed under an urgency clause that would have required at least two-thirds majority support from both the Senate and Assembly. Gov. Gavin Newsom would then have had to sign the law by June 24. Now in light of current events, proponents have announced that they are shifting their emphasis to the post-2020 time frame.

We would not be surprised to see other bond proposals wither in the face of the unprecedented funding demands due to the pandemic. It will be very difficult to garner support for any increases in taxes in the near term as individuals and businesses struggle in the face of extraordinary limits on economic activity. There are practical considerations as well. Many ballot actions in support of proposed bond issuances benefit from efforts to generate support in the community. Efforts in that regard are thwarted by the restrictions (required or voluntary) resulting from the pandemic.

Many scheduled elections in which bond ballot measures would be offered will be difficult to hold. To that end, Texas Governor Greg Abbott announced that local governments could suspend May 2 elections until the general election Nov. 3. The Metropolitan St. Louis Sewer District will go to court in an effort to postpone a $500 million bond referendum scheduled for April 7 because of the COVID-19 outbreak.

NONTRADITIONAL CREDITS UNDER PRESSURE FROM VIRUS LIMITS

Here in New York, there are certain credits which will be under unique pressures due to the limits on public gatherings. While no one is currently predicting defaults, four  prominent cultural or sports functions are exposed to financial pressure as seasons and performances are put on hold.

Bonds issued to finance Yankee Stadium and Citi Field are secured to varying degrees by revenues tied to attendance. The Yankee Stadium bond revenues pledged to debt service are dependent upon attendance or as George Steinbrenner used to put it “fannies in the seats”. A protracted stoppage would be akin to the risk of an extended labor stoppage which has always been cited as a major risk to the bonds. The Citi Field debt is secured by a pledge of certain seat revenues as well as revenues from advertisers at the stadium.  When all is said and done, a downgrade would not be surprising.

The Metropolitan Opera also issued municipal bond debt. It was downgraded in 2018 as the impact of  softening ticket revenue. It also faces labor pressures, pension costs, and disappointing fundraising trends. Weakened operating performance including inability to cover debt service with a 5% endowment spending rate, reduction in unrestricted liquidity, meaningful reduction in total cash and investments, and softened prospects for donor support or inability to meet fundraising targets were all cited as potential drivers of another downgrade. Now, the opera estimates that it will lose $60 million of revenue – a 20% hit after it announced that it would cancel the rest of its season because of the coronavirus pandemic and begin an emergency fund-raising effort aimed at covering the anticipated loss of revenue.

Other NY institutions with debt outstanding include the Museum of Modern Art. It just had its rating of Aa2 affirmed in January by Moody’s which cited excellent visitor demand and programs and strong membership which support revenue prospects. It also noted that the museum remains vulnerable to changes in New York City tourism patterns or art programming preferences. Additionally the museum has some exposure to contractual expenses through pension plans and collective bargaining agreements. Now it has announced that it will stay closed at least until July and expected a nearly $100 million shortfall.

There will be other examples across the country as cultural and educational facilities around the country are closed potentially for extended periods.

IT’S FLOOD SEASON AGAIN

While signs of Spring abound after the 2nd hottest February on record, not all of them are good. This is the time of year when the National Oceanic and Atmospheric Administration released its annual Spring Outlook and its estimates of potential flooding during the winter runoff. Last year saw exceptional levels of flooding across the middle of the country.

This year, NOAA says that major to moderate flooding is likely in 23 states from the Northern Plains south to the Gulf Coast, with the most significant flood potential in parts of North Dakota, South Dakota and Minnesota. It is forecasting above-average temperatures across the country this spring, as well as above-average precipitation in the central and eastern United States. Significant rainfall events could trigger flood conditions on top of already saturated soils. 

The flooding will renew the debate over physical mitigation (flood walls and levees) versus strategies such as managed retreat. The greatest risk for major and moderate flood conditions includes the upper and middle Mississippi River basins, the Missouri River basin and the Red River of the North. Moderate flooding is anticipated in the Ohio, Cumberland, Tennessee, and Missouri River basins, as well as the lower Mississippi River basin and its tributaries. The West seems best positioned going into flood season. Drought conditions are expected to persist and expand throughout California in the months ahead, and drought is likely to persist in the central and southern Rocky Mountains, the southern Plains, southern Texas, and portions of the Pacific Northwest.

Once again, states and localities will be central to any response further straining finances after the impact of the corona virus pandemic. The Army Corps of Engineers and the Federal Emergency Management Agency, are linchpins of the nation’s flood response. They could be stretched thin as the nnation fights the virus.

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.

Joseph Krist

Publisher

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This week, the emergence of a full blown pandemic and an anemic federal response to it have clearly shifted the operational and funding burden to the issuers in the municipal bond market. The nature and timing of this event, relative to many current trends and the nation’s political realities, create an unprecedented set of challenges.

The nature of the pandemic such that anyone who pretends to tell you that they know what will happen is, to be charitable, irresponsible. Our comments about the pandemic and its potential impact on credit reflect that view. We hope that these thoughts however, inform your own assessment of the event and its potential impact on the credit security of your portfolios.

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CORONA VIRUS IMPACT EXPANDS

The language is both stark and boilerplate. It soberly outlines the current risks to credit related to the corona virus for any credit reliant on travel or large gatherings. In the case of the following it applies to one credit but it could also be applied to a variety of credits dependent upon people gathering together and generating economic activity. Just substitute the appropriate words for McCormick Place or the Metropolitan Pier and Exhibition Authority for the credit of your choice. It happens that McCormick Place and the Authority are in the front lines of this situation.

“If the COVID-19 persists as a public health emergency or if other health epidemic conditions arise and persist, additional events at McCormick Place or other venues owned or operated by the Authority may be cancelled and related commercial activity and taxable transactions reduced. Such additional cancellations could also occur as a result of event and travel restrictions imposed by federal or local governmental authorities, voluntary decisions to withdraw by event sponsors and planners, and voluntary decisions to forego travel by expected event attendees.

While as of the date hereof, the remainder of events scheduled for the balance of 2020 at McCormick Place or other venues owned and operated by the Metropolitan Pier and Exhibition Authority have not been cancelled due to concerns about COVID-19, the Authority gives no assurance that there will not be future cancellations, nor is it possible for the Authority to predict whether or to what extent COVID-19 or any other pandemic, epidemic or other health-related conditions will affect the Authority’s operations, commercial activity, taxable transactions or the Revenues.”

This is one event which has actually resulted in disclosure. While the factors referenced may be obvious, the reality is that seeing them addressed in a timely manner by a major issuer is a positive development.

We consider certain states to be good indicators of the potential near term impact of the virus. They would be states with a reliance on sales as opposed to income taxes. There the impact in terms of declining travel and economic activity will give a fairly good real time measure of the impact. Florida is our primary target. The travel and economic activity related to MLB spring training, Disney World and other tourist attractions, and spring break are significant drivers. The monthly sales tax data from Florida will give us some basis for comparison and analysis. Texas, another sales tax state, has already seen the cancellation of South by Southwest and California’s Coachella festival has been postponed until the Fall. The center of attention – Washington State – is another state which relies on sales taxes. Nevada is a sales tax state as well as transportation/tourism dependent.

Some 100 major colleges and universities have cancelled classes. Some local school districts are closing schools for at least a week. Now that mass gatherings have been effectively banned, the fallout will quickly spread. The ban on gatherings will, if it lasts include the Easter season, traditionally a strong period for tourism. With events like the NCAA basketball tournament, Broadway, and the major professional sports leagues shut down, the economic impact will quickly emerge.

That brings us to the potential policy impact. As we go to press, the Administration proposals for steps to address the employment issues resulting from these event shutdowns are insufficient. That is not a political opinion – it’s just how it is. So many of those who works in those impacted industries – tourism, sports, cultural events, hospitality, transportation – are not covered by benefits or unemployment insurance. They will experience an immediate cash hit. And the big question is how long will this last? Unfortunately, there is no way to know until widespread testing is available and implemented.

What we do believe is that major governmental issuers – states, counties, and large municipalities will bear the brunt of any fiscal impact. It is a good sign that some major employers – Walmart and Darden Restaurants – are offering two weeks paid sick leave.  Implementation of such policies across the board would substantially relieve pressure on tax revenues.

One of the issues which will arise from an extended duration of social distancing is the potential long term impact on where and how people work. The immediate impacts will be on traffic as it is reflected in different commuting realities and on mass transit.

The photo is of one of New York’s busiest rush hour subway stops, the express platform at 59th Street and Lexington Avenue. This is 9 a.m. on a Thursday. Normally, the 4 and 5 lines are the busiest lines in Manhattan. If the pandemic is not dealt with, this could be the reality for many transit systems. That would result in a significant impact on revenues. One comfort is that many of the bonds sold to finance rapid transit construction and expansion are backed by dedicated sales taxes (Los Angeles and Atlanta are two). In New York however, the primary security for MTA bonds for the buses and subways is a pledge of the gross revenues of the system (the farebox). There doesn’t seem to be a lot of revenue potential in the picture.

HOSPITALS AND CORONA VIRUS

It is impossible to predict the impact on this sector on either a micro or macro level. Each institution will have its own set of circumstances and levels of outside government support as the effects of the pandemic spread. Having said that, here are the things which concern us.

Utilization will increase but it will not be profitable utilization. There are between 28 and 30 million uninsured individuals and many of them will either be treated or tested through hospital facilities. We are still not getting good data about the actual scope of the pandemic and there is not enough data on which conclusions may be reached regarding the potential need for acute care admissions The messaging from the Administration is muddled at best. Supposedly testing will be paid for (how and by whom is not clear) but there are no provisions for covering inpatient care or drugs for this cohort.

The potential for major hospitals to incur substantial unexpected expenses for supplies and personnel is significant. Because of the trends of declining inpatient utilization and the reduction of available beds, there is much less slack in the system than many think is the case. Estimates are that there are approximately 200,000 “excess” beds in hospitals nationwide. These are not likely to be sufficient in the event of a rapid need for care. An Economist article cited a recent study of covid-19 in China which found that 5% of patients needed to be admitted to an intensive care unit, with many needing intensive ventilation or use of a more sophisticated machine that oxygenates blood externally. America has 95,000 ICU beds and 62,000 mechanical ventilators, while only 290 hospitals out of 6,000 offer the most intensive treatment. 

This leads us to the issue of how charity care is funded and/or reimbursed. Charity care has traditionally been funded by states although the levels of funding and resources available to fund such care varies widely across the country. In the interim, utilization and revenues will be negatively impacted as hospitals are being asked to delay and/or curtail elective surgery. This will reduce revenues from sources which tend to have insurance.

Should corona related demand spike, hospitals will face daunting personnel challenges which will likely result in increased costs for more staff and/or overtime costs. Most troublesome is the fact that there is no good guidance as to how long the pandemic will last or how serious its effects could be. Hospital managements will have to rely on the strength of their balance sheets and available cash resources to fund operations as the pandemic unfolds.

That puts systems and large facilities at an advantage once again relative to stand alone institutions and smaller institutions. Rural hospitals will again be at relatively greater risk since they tend to have weaker balance sheets and operating profiles. On sector where size may not be an advantage will be the safety net hospitals. They will be exposed to the greatest potential for demand from uninsured patients who also are more likely to be in those groups considered most vulnerable.

OIL PRICES

The two places likely to see the greatest impact from lower oil prices are Texas and North Dakota as they are in the lead in terms of traditional drilling and fracking, respectively. There has already been employment impacts in oil dependent states but the current situation seems more dire. It’s not just the number of rigs which operate but the jobs in the oil services sector, the heavy equipment sector, as well as jobs in general services including restaurants and residential facilities.

Before this weekend, the impact of oil prices did lead to rig closures but it was the decline in new drilling where it was truly felt. Albeit in Canada, the pre-crisis price of oil made a multi-billion project in the Canadian oil sands uneconomical and was cancelled. Now the impact of the price war between Saudi Arabia and Russia is even more severe so there be even more reduced investment in smaller projects throughout the oil patch.

Generally, the uncertainty around the length and depth of an economic slowdown could not come at a worse time for governmental budgets. With so many of them facing June deadlines, it may be hard to predict with any certainty what the impact on both sides of the government income statement will be. We suspect that Credit volatility – at least in perceptions if not immediately ratings – will happen through the end of 2020 at least. Any significant deviations from projections on the downside will raise real concerns as they appear monthly and quarterly.

Other credits under pressure include those ports which derive significant revenues from oil exports. An example is the Port of Corpus Christi, TX. It handled 40% of total U.S. oil exports in January, or about 1.38 million barrels a day. The short term impact is blunted by the fact that many of the port’s agreements are based on take-or-pay contracts — meaning the port gets paid whether barrels are shipped or not.  The price decline, if it maintains over an extended period, will reduce production and shipments and will impact long term demand for the port.

PUERTO RICO

The Puerto Rico debt restructuring proceedings will extend through Election Day according to a schedule approved by the judge overseeing Puerto Rico’s Title III proceedings. The Puerto Rico Oversight Board and some groups of holders of general obligation bonds supported a schedule advanced by the Chief Mediator leading negotiations and other parties such as the Puerto Rico Fiscal Agency and Financial Advisory Authority, the Unsecured Creditors Committee, bond insurer Assured Guaranty (AGO), bond insurer Ambac Assurance, Invesco (IVZ), and others opposed the proposed timeframe.

The judge said she would set aside weekdays Oct. 21 to 31 and Nov. 1 to 6, excepting days for the omnibus hearing and for Election Day, to be used for the confirmation hearing. The deadline for the filing of objections to the release of a disclosure statement covering the proposed settlement to April 24. A hearing will also be held on the diversion of money from local government instrumentalities and their revenue bonds to the central government-guaranteed bonds, better known as “clawbacks”.

The uncertainty continues.

CALIFORNIA SCHOOL BOND DEFEAT

Supporters of a school bond authorization initiative were surprised when the 2020 Proposition 13 did not pass on March 3. After all, California voters have passed every construction bond for education since 1994, when voters narrowly defeated two small bonds, one for higher education and one for K-12 schools.  Organizations representing teachers, parents, school leaders, higher education groups, unions and business groups like the California Business Roundtable all endorsed Prop. 13.

The ballot summary of the bond made clear  that the principal and the $11 billion in interest on the bond would be repaid through the state’s general fund. Apparently, that was not enough to convince people that this initiative had nothing to do with the tax limiting Prop. 13 initiative which passed in 1978. Every decade, starting the year ending in “8,” the numbering cycle starts again for California ballot initiatives.  There were a dozen initiatives on state ballots in 2018; the state construction bond was the only measure appearing for the March primary, so it became Prop. 13.

Apparently, a large number of people believed that the two propositions were related and that the initiative would require higher property taxes. What did not help was the inclusion of provisions regarding requirements for the use of union construction workers on school projects and  increasing the local school district bonding limit. This allowed opponents to frame the issue as one of likely tax increases and higher costs for capital facilities.

One other provision would have reduced fees that districts can charge multi-unit housing developers and eliminated fees for large residential complexes near transit lines. This concerned some larger district managements who feared a loss of those revenues without some offset. Development around transit facilities is a hot button issue for affordable housing advocates who see the impact of gentrification as outweighing the benefits of new development.  

We do not read anything into these results which could have national implications. The factors contributing to this unexpected defeat we see as California issues.

NYS BUDGET SHIFTS COSTS TO NYC

As a result of the 1996 federal welfare legislation and the 1997 implementing legislation adopted by New York State, the state and city have three distinct cash assistance programs. Those on Family Assistance qualify for federal Temporary Assistance for Needy Families (TANF) grants. Needy single adults or couples without children are not eligible for Family Assistance but can receive benefits from the state’s Safety Net Assistance program. Safety Net Assistance was originally funded jointly by the city and state, each paying 50 percent of the cost, with no federal contribution. Families that reach their 60 months of federal TANF eligibility who are still eligible for benefits can shift to the 60 Month Converted to Safety Net program. Emergency Assistance for Families provides up to four months of grants for families in danger of homelessness.

The state’s funding comes through block grants from the Federal government so the experience is instructive as other programs come under consideration for block grants (block grants for Medicaid are a Republican dream) from the Federal government. In state fiscal year 2011-2012, the state allocated more of its TANF block grant to Family Assistance, increasing the federal share for the program from 50 to 100 %. Changes to the Safety Net and 60 Month Converted programs, which had previously been funded with 50 % state and 50 % city shares, but now were funded with 71 % city and 29 % state shares.

Governor Cuomo’s 2020-2021 Executive Budget proposes to increase the city share of both Family Assistance and Emergency Assistance for Families from 10 to 15 %. Since the city’s 2021 cash assistance budget includes a combined $455.4 million in federal funds for these two programs, a 5 percentage point increase in the city share would cost New York City an additional $25.3 million annually.

TRANSPORTATION AND MOBILITY

The lack of a comprehensive approach to emerging transportation technologies is forcing individual jurisdictions – large, medium, and small – to take their own regulatory approaches. The latest example comes from Spokane, WA where the city is considering a slate of proposed changes to the city’s contract with Lime and city laws that govern the use of scooters and bicycles. The proposals reflect issues around persistent complaints about scooters illegally cruising down sidewalks and being abandoned in places that obstruct pedestrian walkways.

The city official in charge of micro mobility planning summed up where we are. “We’ve done the carrot – we’ve done education, we’ve done Lime Patrol, and we’ve done all these things to encourage people to act right. Now we’re providing the stick, which is a fine through their user account when they park improperly.” Scooters and bicycles are not allowed on downtown sidewalks. Riders must be at least 18 years old, and scooters and bicycles must be parked in a way that leaves sidewalks clear.

The local press reports that an in-person survey of traffic by city staff at one busy intersection last year found more scooters illegally riding on the sidewalk than on the road, where they are meant to be used. City officials propose adding a new regulation that would require the company to tag each scooter with an identification number. City code enforcement officers would document parking violations via a time-stamped photograph and charge Lime $15 for each infraction. The company would pass on the fine to the user. The city will require Lime to suspend the account of any user who violates the rules three times in a year.

NEW MEXICO TAKES ON PENSION FUNDING AND THE BUDGET

The State of New Mexico has enacted legislation which primarily reduces Public Employees Retirement Association (PERA) fund cost-of-living adjustments (COLAs) and mandates increased contributions by employees and participating governments. The legislation primarily reduces Public Employees Retirement Association (PERA) fund cost-of-living adjustments (COLAs) and mandates increased contributions by employees and participating governments. PERA is severely underfunded, with a 71% funded ratio based on a reported 7.25% discount rate. Halve the discount rate and the funding ratio drops below 50%.

Moody’s has developed what it calls its “tread water” indicator to determine pension underfunding exposure. Using that metric, the governments’ collective tread-water indicator was $570 million in fiscal 2019, roughly 25% of payroll. Unfortunately, the state and participating governments contributed roughly $371 million in aggregate to PERA in fiscal 2019 (ended June 30, 2019), which equated to roughly 15% of active employee payroll.  The legislation calls for the state and its participating employees to increase their contributions to PERA by 0.5% of payroll per year for four years, producing a 2% cumulative increase relative to payroll for both the state and the employees, beginning July 1. Local governments that participate in PERA and many of their employees will similarly increase contributions relative to payroll, but not until  July, 2022.

The legislature also approved a fiscal 2021 budget of $7.6 billion. The final budget reflected the realities of the current health problem. When the Governor signed the bill, it was after she had cut $110 million in projects from an accompanying public works package due to concerns over plummeting oil prices and the impact of corona virus.

The action will hopefully not be the start of a trend where operating problems are solved by cutting back on infrastructure. The projects spanned many sectors including proposed school improvements, tribal building repairs, road renovations, and street signs. This as the budget left intact 4% pay raises for New Mexico teachers and state employees that will take effect in July. 

It is telling that the budget was adopted with the cuts despite the fact that as of last month, the state was estimated to have $1.7 billion in reserves when the budget year ends in June. It was not all bad news for infrastructure. The signed budget bill does include $180 million for statewide highway construction and repairs.

FLOOD CONTROL – MANAGED RETREAT VS. EVICTIONS

We have frequently commented on the impacts of climate change and various possible mitigation approaches. Two weeks ago, we discussed the concept of managed retreat as a way to deal with rising water levels and their impact on infrastructure. That is one approach as is the use of eminent domain as a way to relocate vulnerable structures and people. Now the use of eminent domain is back in the news with real implications for local credits.

The Army Corps of Engineers’ mission includes protecting Americans from flooding and coastal storms. It is the primary source of infrastructure development for flood mitigation from the federal government. Building sea walls, levees and other protections, and elevating homes are all elements in the Corps’ set of responsibilities and its projects are generally two thirds funded by the federal government.

Now as flooding becomes more frequent and severe, the Corps is taking a different approach paying local governments to buy and demolish homes at risk of flooding.  It is not a partisan approach as the Corps said that voluntary programs were “not acceptable” and that all future buyout programs “must include the option to use eminent domain, where warranted” in 2015 under the Obama administration.

The Corps estimates how much damage a house is likely to suffer in the next 50 years, then compares that to what it would cost to buy and tear down the house, plus moving expenses for the owner. If the buyout costs less, the homeowner is asked to sell for the assessed value of the home. It is not a universally accepted strategy. Some of the most vulnerable places – New Jersey and Miami-Dade – have refused to use eminent domain.

Now these and other jurisdictions face the loss of the Corps’ share of funding for mitigation. Some initially agreed to the terms of the Corps’ funding plan but have since reversed themselves as political backlash grows. So far the scope of these programs seems fairly limited but the reaction has not been positive from homeowners. 

What is particular to this administration is an unwillingness to advance infrastructure funding at the federal level. The view that too much overdevelopment in vulnerable areas contributes to huge natural disaster losses is not new. But this plan comes at a time when so many things – flood mitigation, public transit, and roads – which have relied on a state/local/federal partnership are facing severe federal funding cutbacks.

Now lower levels of government must choose between draconian actions like eminent domain or significant funding challenges to address the issues themselves. The result of this process is not likely to be positive for local credits under the current regime. It also continues a trend of federal influence on local affairs generally being on the negative side as has been the case for some time in regard to capital financing generally.

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.

Joseph Krist

Publisher

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PUBLIC BANKS

California legalized public banks last October. Now the first steps in establishing local public banks have been taken. The Santa Cruz County Board of Supervisors voted to begin discussions with  jurisdictions proposing a viability study, the first step in the creation of a public bank. A letter was sent to Monterey, Santa Clara, San Luis Obispo, San Benito and Santa Barbara counties and to the cities of Seaside, Monterey, San Luis Obispo, Watsonville, Scotts Valley, Santa Cruz and Capitola.

The move has achieved significant support not only from progressive legislators but a broader slice of the political establishment. The effort to coordinate with a significant number of jurisdictions reflects Santa Cruz County’s view that “the scale of operations for public banks is far too large to be undertaken by anything smaller than the largest cities or counties in California or multi-jurisdictional efforts.”  The idea of a public bank has even received support from the business community. The Monterey Peninsula Chamber of Commerce and the Salinas Taxpayers Association have said “this is a progressive vision that would have some crossover appeal for business.”

RURAL INTERESTS TAKE ANOTHER HIT

The U.S. Department of Education recently dealt another blow to some of the nation’s poorest rural school districts when it informed them of a bookkeeping change which will likely result in a significant reduction in federal aid to local school districts. 800 schools stand to lose thousands of dollars from the Rural and Low-Income School Program because the department has abruptly changed how districts are to report how many of their students live in poverty. 

The department has allowed schools to use the percentage of students who qualify for federally subsidized free and reduced-price meals, a common proxy for school poverty rates, because census data can miss residents in rural areas. This has been the case since the program began in 2002. Now the Department insists that the Districts use data from the Census Bureau’s Small Area Income and Poverty Estimates to determine whether 20% of their area’s school-age children live below the poverty line.

Congress created the Rural Education Achievement Program when it determined that rural schools lacked the resources to compete with their urban and suburban counterparts for competitive grants. The program is the only dedicated federal funding stream for rural school districts. There is some geographic concentration among the impacted school districts. Over half of them are in Oklahoma.

Some 100 of the 149 schools in Maine that qualified last year would lose funding this year under the census criteria. The funding supports increased literacy and is also often applied to fund technology investments in areas which are already plagued by limited or no broadband access. Rural school districts serve nearly one in seven public-school students and the Rural School and Community Trust found that many districts “face nothing less than an emergency.” Nearly one in six students living in rural areas lives below the poverty line, one in seven qualifies for special education services, and one in nine has changed residence in the previous 12 months.

SUMNER NUCLEAR DEBACLE CONTINUES

The South Carolina legislature is in the middle of a debate over the future of the South Carolina Public Service Authority (Santee Cooper). The debate is over whether to maintain the status quo or to sell the utility which finds itself mired in the center of the cancelled  V.C. Sumner nuclear plant quagmire. The V.C. Summer project cost more than $9 billion before it was called off in 2017 by its sponsor, South Carolina Electric and Gas.  Now that the state looks to move forward in its process of deciding what to do, the story has taken yet another turn.

The Securities and Exchange Commission and the U.S. Attorney’s Office for South Carolina have announced that they are suing executives of SCE&G for fraud in their disclosures (or lack thereof) in connection with the failed project. The SEC’s lawsuit was filed against SCANA (the holding company for SCE&G) and Dominion’s (the buyer of SCE&G) electricity business in South Carolina, as well as two of SCANA’s top executives during the project: former CEO Kevin Marsh and former Executive Vice President Steve Byrne.

Bechtel Corp., one of the world’s largest construction and engineering firms was paid $1 million to study the project by SCANA and Santee Cooper, which owned 45% of the reactors. Bechtel informed SCANA’s executives in 2017 that the project likely wouldn’t be completed in time to claim billions of dollars in federal tax credits that were set to expire in 2021. Gov. Henry McMaster forced Santee Cooper to release the study.

While nuclear power is often mentioned as a potential source of source of climate friendly generation, the fact is that the economics of nuclear generation construction remain prohibitive. The financial risks associated with nuclear power have yet to be successfully addressed and the industry finds itself in much the same place as it was in the 70’s and 80’s when it came close to bankrupting numerous investor owned utilities. Many of the joint action agencies around the country were established essentially as bailouts for the investor owned sponsors of nuclear power. The South Carolina Public Service Authority is just another in a long line of such entities.

This is what happens when factors other than economics are allowed to drive decisions. The fact that this project as well as the Votgle projects in Georgia have failed is not a surprise. The decision to participate was driven by politics as much as anything else. When project sponsors as well as potential investors ignore economics and reality, it is at their peril.

JEA RATINGS

Moody’s has decided to weigh in on the City of Jacksonville’s efforts to extricate itself from the aforementioned financial disaster that is the Plant Votgle expansion. The city and its utility were the subject of downgrades this week as Moody’s views the action as ” calling into question its willingness to support an absolute and unconditional obligation of its largest municipal enterprise, which weakens the city’s creditworthiness on all of its debt. The city and JEA sued to invalidate a contract the city-owned utility signed in 2008 with a Georgia utility authority that binds JEA to help pay open-ended construction costs at the Votgle expansion.

Moody’s made it clear that the rating would be restored if the City dropped the suit. A recent estimate for the project’s completed costs was around $27 billion. JEA could pay $2.5 billion or more of the project’s cost. The plant was once priced around $14 billion.

Given the unique nature of nuclear plant construction and its financing, it is hard to make the case that Jacksonville is somehow unwilling to meet its overall debt obligations. The governance issues which the action has raised in conjunction with the botched effort to privatize the Jacksonville Electric Authority are legitimate but there has never been an implication that Jacksonville is seeking to walk away from its debts. We are more troubled by the attempt to privatize the utility because of the governance and oversight issues it raised.

From our standpoint, Moody’s is doing the right thing for the wrong reasons. The privatization effort revealed weak oversight. The legal challenge to the power purchase agreement with MEAG to purchase Votgle capacity is a legitimate process to address the issues arising from the Plant Votgle debacle. We do not agree that this is a sign of an overall policy change impacting the City’s willingness and ability to pay its debts.

HARDER TIMES FOR COAL COUNTRY

The US Federal Trade Commission released a February decision to block a joint venture in the Powder River Basin (PRB) coal-producing region of Wyoming. Peabody and Arch in June 2019 had announced a definitive agreement to combine seven operating coal mines and reserves in the PRB and Colorado into a joint venture. The expected synergies were being undertaken to improve profitability in the face of a coal market under continuing pressure from the decline in demand from utility operators. The US Energy Information Administration forecasts that production in the US Western Region, including the PRB, will fall to 310 million tons in 2020, down from 378 million tons in 2019 and 418 million tons in 2018 – a decline of over 25% in two years.

Much has been made of the potential economic impact of responses to climate change and their dampening impact on coal prices. The decline of demand from utilities especially impacts the PBR as its surface mined low sulfur coal is especially attractive to utilities. Moody’s projects that US coal production will fall by 15%-20% in 2020, based on significant ongoing reductions in the electric utility sector’s coal consumption, down from 24% in 2019 and about 50% in 2008. Like so many other industries where climate and economic realities have led to long term declines in production, the handwriting has been on the wall for some time in communities whose economies have been built around coal. The impact of climate change on demand is yet one more brick on the load of the coal industry.

The region in northeastern Wyoming which comprises the Powder River Basin covers all or part of 8 counties in the state. Coal operations are largely conducted within two – Campbell and Converse counties. There is not a lot of tax backed debt outstanding and the bulk of it is for school districts. The major city in the region – Gillette – is a Aa3 rated issuer but its dependence upon the coal based economy has a dampening impact on the city’s rating potential.

The fact that credits are subject to single industry dependence for economic, demographic, and tax growth is not new even though some seem to believe that climate change related pressures are somehow different in terms of their potential credit impact. The changes coming to credits like those in the powder River Basin are nothing that market participants haven’t seen before.

CHINA SYNDROME HITS U.S.PORTS

First it was tariffs. Then it was the Lunar New Year. The corona virus followed up. It’s a triple threat impacting port operations throughout the country. Now we have data to support those concerns.

On the West Coast, The Port of Los Angeles saw the number of 20-foot equivalent units fall 5.4% in January when compared with 2019. The port processed 806,144 TEUs compared with 852,449 a year ago. Port of Long Beach saw a 4.6% year-over-year drop in January. The port processed 626,829 TEUs compared with 657,286 in 2019. The Port of Oakland experienced a 0.6% in January, processing 211,160 TEUs compared with 212,433 in 2019. The Northwest Seaport Alliance, which operates facilities in Seattle and Tacoma, Wash., saw a 19.1% year-over-year drop in TEUs as it processed 263,816 containers compared with a record 326,228 last January. 

While the largest numbers of ill patients is found along the West Coast, the impact is being felt at East Coast ports as well. The Port of Savannah saw a 12.7% decline in January volume as the port processed 377,672 TEUs compared with 433,079 in 2019. The Port of Virginia saw a 5.3% decline in January, to 227,234 TEUs from 240,111 in 2019. The Port of New York and New Jersey, saw its monthly container volume slip in January by 0.9%, to 617,024 TEUs compared with 622,531 during the year-ago period.

CORONA VIRUS

The concerns which might arise as the result of the corona virus breakout are not hard to guess at. Credits dependant on travel (airports, transit) are obvious candidates. Many convention centers and conference centers will see cancellations. Hotel credits are obviously at risk. These could obviously experience short term credit deterioration. In our view, the issue is not necessarily short term risk of default but the longer term impacts of events like the pandemic.

After 9/11 travel limitations caused many businesses to rethink their conference and meeting practices. Conference lengths were shortened. Many were moved to in house sites. Declines in occupancies and demand were experienced. The underlying assumptions driving feasibility studies no longer were no longer valid. SARS had a similar impact on hotels, travel, and tourism in 2003. The financial crisis of 2008 also had similar impacts. This caused a rethink of the importance of many of the meetings and conferences and increased the utilization of online meetings and presentations.

Now that mass meetings of all sorts are being discouraged and cancelled, the potential for disruption both short and long term grows. It is important for investors in this space to understand the project specific credit drivers supporting the projects you own. Know whether the credits in this space you own are stand alone project financings or whether they rely on supplemental government support. Make sure you understand the nature of the local obligation which you are relying on. The level of government commitment varies widely and often is contingent on future legislative actions.

RAINY DAY FUNDS WHEN IT ISN’T RAINING

A recurring theme in the municipal bond press has been that states are well positioned to deal with any potential recession because they have been able to accumulate reserves to fund initial revenue shortfalls. That is all well and good when times are fairly normal. Unfortunately, that might not remain the case. Huge reserves do position states well but only if they are used for the purposes for which they are intended. We are beginning to see signs that the relative health of state general fund balances or “rainy day funds” may be pressured as legislators look to fund needed infrastructure and now public health needs.

There is no way to assess right now the impact on state budgets which might result from the corona virus. There is such inconsistent information and resources coming from the federal government that states will have to share the initial burden. The potential for serious financial consequences remains. The crisis comes at a time when skepticism is arising about various proposals to increase funding at the state level for  shifted attentions to issues infrastructure. Connecticut legislators have expressed a desire to apply some of the state’s budget reserves to funding transportation in lieu of higher gas taxes or tolls.

In Michigan, Republicans are proposing replacing the six percent sales tax on gas with a per-gallon tax. The goal is try to gain the money without raising net taxes on Michiganders. The plan is estimated to generate $800 million which would then be directed toward local and county-maintained roads. Some 92% of the roads in the state are owned and maintained by cities, villages and county road commissions. This plan is a response to the Governor’s proposal to issue $3.5 billion in debt for transportation. That proposal followed a rejection of a proposed increase in gas taxes.

EARTHQUAKE RISKS

It has been a while since the San Francisco and Northridge earthquakes brought attention to the risks of those sorts of events. Since then, climate change and its attendant impacts on life in the State have shifted attention to events like wildfires and issues with water. The fear has skewed more towards the potential impacts of those events and the potential impact from seismic events have received less attention.

So our radar was awakened by the release of a study by the Earthquake Engineering Research Institute San Diego Chapter. A study, partially funded by FEMA, found that San Diego County is subject to seismic hazards coming from several regionally active faults, including the local Rose Canyon Fault which runs through the heart of downtown San Diego. An earthquake originated on this fault may produce substantial damage and losses for the San Diego community. San Diegans need to be aware of this hazard.

According to the study, The Rose Canyon Fault Zone strikes through the heart of the San Diego metropolitan area, presenting a major seismic hazard to the San Diego region, one of the fastest growing population centers in California and home to over 3.3 million residents. The region’s large population coupled with the poor seismic resistance of its older buildings and infrastructure systems, make San Diego vulnerable to earthquakes. Best models show San Diego County facing an 18 % probability of a magnitude 6.7 or larger earthquake occurring in the next 30-year period on a fault either within the County or just offshore. Primary geologic hazards include surface fault rupture and severe ground shaking from La Jolla, along the I-5 corridor, through Old Town, the Airport, downtown San Diego, and splintering into the San Diego Bay, Coronado, and the Silver Strand.

The scenario earthquake the study observed  is expected to cause widespread damage to buildings, including moderate to severe damage to approximately 120,000 of the nearly 700,000 structures countywide. Economic losses associated with building and infrastructure damage are estimated at more than $38 billion. In part, that reflects the fact that much of the existing infrastructure of the San Diego region was built before recognition of the seismic hazards posed by the Rose Canyon Fault Reason to disinvest? No. But San Diego is usually not associated with earthquake risk to the same extent L.A., S.F. and many inland communities are. It’s just another factor in the credit equation to evaluate. 

NYU LANGONE UNDER FEDERAL INVESTIGATION

NYU Langone Medical Center is a major provider in Manhattan and regionally in the New York metropolitan area. It has revealed that it received a subpoena in January from HHS’ Office of the Inspector General that asked for information related to its Medicare cost reports submitted from 2010 to 2019. The Office of the Inspector General is asking for data and documents used to calculate how much money the health system should receive for indirect medical education expenses. The indirect portion is a welcome source of revenue for teaching hospitals that train physicians and tend to have higher costs.

NYU Langone closed on a $466 million bond issue on January, 2020. There is reference to how much the hospital gets from indirect medical education expenses but the offering document does not reference the subpoena. The time period in question was very difficult for NYU Langone. Over that time, it opened a new facility and suffered significant damage from Superstorm Sandy. The investigation does not appear as a pre-sale rating concern.

It’s not clear as to what amount of money may be at risk or the timing of a finding, if any. It is also fair to note that this process often leads to negotiated resolutions. It is unlikely that the federal government would be seeking to significantly damage the hospital’s financial position. It is however, something to watch.

HARVEY, IL BOND RESTRUCTURING

The Chicagoland suburb of Harvey has been in litigation with a variety of parties as it seeks to regain its financial footing after years of declining property values and revenues. The weak finances have landed the city in hot water with its uniformed services pensioners, the City of Chicago, and its bond insurers. Holders of a 2007 issue of general obligation  bonds have been in litigation since the city defaulted on that debt ($32 million).

After a status hearing last week in a lawsuit filed by holders of Harvey’s $32 million 2007 general obligation bond issue, Harvey’s legal representative hinted that a bond exchange might be the city’s best alternative. Under the terms of a decision rendered by the court in December, 2019, Cook County was ordered to segregate Harvey’s tax revenues needed to cover debt service payments in an escrow before sending tax dollars to the city. Harvey’s interim agreement with the 2007 holders that frees up $301,000 of property tax revenue currently held in escrow was approved in Cook County court.

Chicago sued Harvey after it fell in behind on payments for Chicago-treated water from Lake Michigan. The two cities agreed to a consent decree in 2015, but Harvey violated it and the court stripped Harvey of control over its water operations in 2017. A new administration in Harvey has argued the receivership has failed to accomplish the goal of bringing the city current  on water payments while extracting fees for its services and withholding revenues. The bondholders argue they are entitled to a portion of water rents and rates because about $5 million of the 2007 bonds financed water system improvements. 

Ultimately, a negotiated restructuring is likely the city’s best plan for resolving its debt dilemma. Any such resolution would likely extend the maturity of the debt and reduce debt servicing obligations significantly in the next few fiscal years.   

CALIFORNIA ELECTIONS HAVE NATIONAL IMPLICATIONS

Californians voted on some 289 local ballot measures. While they are local, some reflect policies which are being considered nationwide. Proposition D targets San Francisco’s rampant storefront vacancy problem with a tax on landlords who keep stores empty for more than six months. It would impose a $250 per foot tax on sidewalk frontage the first year, then $500 and $1,000 in subsequent years. As we go to press, it received the required 66% approval pending mail-in ballots. New York’s City Council is considering legislation along the same general lines.

There were mixed results for issues funding public transit and schools. In many places the issue was not whether there was a majority in favor of proposals but whether the required supermajorities (they range from 55 to 66.7%). Housing and development issues were front and center. Prop. E is San Francisco would tie commercial development to residential development. It is a reaction to the current real estate/housing environment and looks like it will pass with the required supermajority.

These are all issues which resonate nationally. Look and learn to see where politics and policies are going. A growing constituency across the country is more willing to embrace government intervention in local housing markets and developments. California is just the leading indicator.

WILDFIRE RATINGS FALLOUT

Recent actions taken to lower ratings in the aftermath of the most recent wildfires in California are impacting some of the state’s largest and best known electric utility issuers. while PG&E has been at the center of most of the attention paid to the role of utilities in the spread of wildfires, municipal utilities are not immune to the impact. recently, S&P downgraded the long-term and underlying ratings on the Los Angeles Department of Water & Power (LADWP) power system revenue bonds to ‘AA-‘ with a negative outlook from ‘AA’.

S&P specifically cited its updated assessment of the department’s overall wildfire risk profile as informed by our review of its revised wildfire mitigation plan taken in conjunction with the department’s specific wildfire exposure and ongoing potential liability claims as measured against power system reserves and insurance coverage. is a The risk posed by the operation of large scale transmission and distribution infrastructure is yet another headwind facing the utility as it navigates an increasingly complex array of issues facing LADWP as it operates in the California legislative and regulatory environment.

The downgrade of one of the major electric utility credits in the state has had knock on effects on the ratings of joint action projects in which LADWP is a significant participant. The latest example is the S&P Global Ratings revision of the outlook to negative from stable and affirmed its ‘AA-‘ long-term rating on the Southern California Public Power Authority’s (SCPPA) series 2012A and 2012B Mead-Adelanto Project revenue bonds and Mead-Phoenix Project revenue bonds.

The action reflected the significant share of project entitlement and debt service represented by participants rated AA-/Negative. LADWP and Glendale together represent a significant share of transmission entitlement and debt service. It comes as LADWP deals with the conversion of the Intermountain generating asset away from coal and the aggressive climate change mitigation targets legislated by the State.

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.

Joseph Krist

Publisher

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UNLIKELY ALLY IN THE MOVEMENT AGAINST TAX INCENTIVES

The World Trade Organization concluded last year that Boeing benefited from unfair subsidies in the form of tax incentives from the State of Washington worth roughly $100 million a year. The decision was made over a complaint from the Trump Administration against Airbus, Boeing’s European rival.

In its case, the U.S. cited the fact that Airbus received billions in so-called launch aid from European countries as it developed new aircraft. In its defense, Airbus cited the receipt by Boeing of tax incentives for its Washington State and South Carolina manufacturing facilities. After the WTO decided in favor of Boeing, the company remained concerned that the tax breaks could be used to justify the imposition of tariffs by the EU in retaliation for those imposed by the U.S. after the WTO decision.

In reflection of those fears, Boeing is now seeking to end those tax incentives at least in Washington State. Legislation has been introduced on behalf of Boeing to do so. A sponsor of the bill, said the proposal had come from Boeing itself. It is under current consideration by the Washington legislature. Doing away with the state tax breaks eliminates a target for European Union trade representatives.

This response from the State and Boeing is reflective of the changing landscape over which these entities approach economic development. Tax incentive schemes in the U.S. reflect 20th century rules and thinking. The globalization of not only production but also supply chains means that incentives are no longer an intramural fight between U.S. entities. They have global trade implications which could seriously impact local economies.

There are many sound arguments against the use of these incentives. The potential impact on trade  and the economies reliant on it have just created more of those arguments.

THE FUTURE OF TRANSPORTATION REVENUES

New research for The Pew Charitable Trusts shows that even moderate use of  autonomous vehicles (AV) could affect the fiscal outlook of states that collect substantial taxes and fees from cars and trucks through a range of revenue streams that would diminish.  The research, conducted by a professor at the University of Tennessee at Knoxville, and published by Pew, examines the effect of the adoption of AVs on tax revenue in California, New Hampshire, New York, Ohio, Tennessee and Texas. The research focused only on transportation-related taxes and fees, assumed that AVs will be largely electric-powered, and modeled the direct fiscal changes using each state’s current tax structure.

First, the data.  States currently collect about 8 % of their total revenues from vehicle-related taxes and fees on sales, licensing, registration, and fuel.  That percentage involves a range of outcomes. Transportation-related revenues in Texas would drop by nearly a third over a 15-year period, from 18.4 % of total state revenue in 2025 to 12.7 % in 2040. New York’s vehicle-related revenues are already less than 5% of total state revenue. Although vehicle-related revenues would drop by more than half in the Empire State, the projected decrease in overall revenues is still only from 4.6% in 2025 to 2.1% in 2040.

Now the caveats. The study only covered six states. Importantly,  it assumes that current tax regimes remain as they are. While the difficulties to date in establishing vehicle mileage taxes to replace gas taxes are clear,  a consensus is forming around the issue and it currently has bipartisan committee leadership support in the U.S. House. The other is the analysis assumes that AVs eventually replace person-driven vehicles entirely.

What does this tell us? The concentration by advocates on transportation without taking into effect the overall economic impacts of full AV adoption is a major flaw in approach. Eight percent, while significant,  is a manageable revenue drop.  The real costs come when one looks at the implications for employment especially among lower skilled workers. The revenue drop would occur in the context of massive employment disruptions which would have a greater impact on state revenue bases. At the same time, at least initially, a significant social service funding impact would have to be absorbed by the states.

PRIVATE COLLEGES CONTINUED HEADWINDS

Yet more small private liberal arts institutions finds the current headwinds facing the sector too much for their ratings to bear. There are two latest casualties which have seen their Moody’s ratings downgraded. Saint Michael’s College (SMC)  is  a small private coeducational Catholic institution located in Colchester, Vermont offering experiential learning near Burlington, Vermont. Like so many of its size it is dependent upon ongoing demand to generate sufficient operating revenues through tuition. Under current economic conditions and demographic trends, this leaves an institution’s finances under constant pressure.

In the case of SMC, net tuition revenue decreased 15% over the fiscal 2015-19 period as enrollment declined 20%. In fiscal 2019 the college recorded operating revenues of $73 million and for fall 2019 enrolled 1,721 full-time equivalent (FTE) students. Outstanding rated bonds are an unsecured general obligation of the college. There are no debt service reserve funds. So the College’s ability to cover debt service is not in peril in the short run but, the long term outlook is quite negative in the face of current enrollment trends.

All of this added  up to a downgrade of the SMC debt by Moody’s to Baa2 from Baa1. Some $50 million of bonds are subject to the downgrade. The rating outlook remains negative. The school needs to diversify its revenue streams (especially in terms of donation support) or it will continue its tuition reliance, vulnerability to several negative trends, and need to draw down quasi-endowment funds to cover operations.

On the West Coast, Linfield College is a small undergraduate college with two locations in Oregon. The main, primarily traditional liberal arts campus is in McMinnville, Oregon. The college also has the Linfield Good Samaritan School of Nursing in Portland and the Online and Continuing Education division with online students nationwide. Linfield generated $62 million of revenue in fiscal 2019, and in fall 2019, the college had 1,763 full-time equivalent students. Their rating action reports could have been essentially exchanged for each other.

Linfield was downgraded to Baa2. Its rating outlook is negative. Pardon us if the rest sounds familiar. The credit is highlighted by prior multiple years of significant enrollment declines. absent continued net tuition revenue growth, the college will struggle to restore fiscal balance. Enrollment losses led to two consecutive years of deepening operating deficits, with debt service coverage below 1x in fiscal years 2018 and 2019. A comparatively small and shrinking scale, with $62 million of revenue, down nearly 8% over the past five years, will make material expense reductions difficult as the college invests in programs and facilities to sustain competitiveness.

The sector remains a minefield for investors.

RED LIGHT ON TOLLS IN CONNECTICUT

It appears that the ongoing inability of the State of Connecticut to agree on a program to fund transportation hit another red light. For some time, the Governor has been trying to persuade legislators and voters that a plan to levy tolls on trucks using the interstate highways in the state was away to enhance transportation funding without increasing the burden on state residents. a significant portion of annual truck volume originates  and ends out of state so the view was that tolls on trucks were a painless way for the state to develop a new funding source.

It appears now however, that the plan has been overwhelmed by politics. Gov. Ned Lamont announced that he was withdrawing his plan to collect tolls. It had always been the subject of Republican opposition but it became clear that even with a substantial Democratic majority in the Senate, that the votes were not there to enact it. That reflects the excessive politization of the issue on both sides of the debate.

This means that regardless of one’s view of the toll plan, the defeat puts the state’s credit back to square one in some ways. The immediate response would be to issue general obligation debt for transportation crowding out a myriad of projects from capital funding. That would put more pressure on general revenues during a period of high anti-tax sentiment. This effectively closes off an increase in any of the state’s major taxes for transportation funding.

It is a credit negative outcome for the State of Connecticut.

AND CAUTION LIGHTS FOR OTHER TOLLS

When the State of Alabama decided not to move forward with a toll funded project to improve resilience through the Interstate 10 Mobile River Bridge and Bayway project, opposition to tolls was a main driver supporting the opposition.  The project would have marked the first tolled interstate through a public-private partnership. Now that project decision has emboldened other opponents of tolls to finance needed highway infrastructure.

Alabama law now states that prior to building any new toll roads, bridges, or tunnels, the state Department of Transportation must conduct a public hearing in each affected county. A pending bill, SB151,  would add a requirement for the Alabama DOT to complete an economic impact study prior to any toll project being undertaken. A second bill, SB 152, would give voters the final say on any toll project. Specifically, voters would decide whether to put into the state’s Constitution a requirement for a public vote in any county where a toll project is planned.

A 1978 Maryland law requires the state to get consent from local government leaders in the nine counties on the Eastern Shore before moving forward with any toll plans in the area. Now legislation would be introduced which would impose that requirement statewide. It is in direct response to plans tolls to cover costs to widen Interstate 270 between I-495 and I-70, and portions of I-495 in Montgomery and Prince George’s counties. The project would create toll lanes to relieve congestion along existing roads which would remain toll free.

The Wyoming legislature early in its current session rejected proposals to place tolls on Interstate 80 where it runs through the state. Recently, the Florida DOT announced that it was suspending the use of dedicated lanes subject to tolling along the Palmetto Expressway. The State will reduce the number of northbound express lanes from two to one, add a regular southbound lane and create new access to the express lane. It will also reduce the minimum 50-cent toll to zero, meaning tolls will be suspended indefinitely.

The change in Florida reflects the perception that congestion was not meaningfully reduced as the toll lanes did not see the demand which was expected. Two Miami-area legislators who say the tolls lanes have had a disastrous effect on traffic gridlock sponsored a bill to get rid of the tolls and convert the express lanes to regular lanes which was pending at the time of the suspension announcement. During the suspension, construction will take place on the highway, along with short-term work like restriping lanes and moving lane dividers. 

ILLINOIS BUDGET

Gov. J.B. Pritzker released a $42 billion state budget that ties education support, pension funding and other programs to the fate of a constitutional amendment authorizing a graduated income tax to pay for more spending.  “To address the uncertainty in our revenues, this budget responsibly holds roughly $1.4 billion in reserve until we know the outcome in November. Because this reserve is so large, it inevitably cuts into some of the things that we all hold most dear: increased funding for K-12 education, universities and community colleges, public safety and other key investments—but as important as these investments are, we cannot responsibly spend for these priorities until we know with certainty what the state’s revenue picture will be.”

This puts the vote in November, 2020 at the forefront of the effort to solidify and improve the state’s credit. Fiscal 2021 is projected to be the first year that the State will fully fund its required pension contribution after years and years of delay and underfunding. It reflects the Governor’s view that a constitutional amendment necessary to cut benefits would not be approved by the electorate. On the spending side, Pritzker said his administration has already identified $225 million in budget savings for the upcoming fiscal year, and as much as $750 million through the end of his first term. The biggest share of the savings, according to Pritzker’s office, came from are costs for state employees reduced health care costs for state employees, accounting for $175 million in the upcoming year, and an estimated $650 million over the next three years. These cuts were negotiated with the relevant unions.

Under the Evidence Based Funding formula that lawmakers approved in 2017, state funding for public schools is supposed to increase by at least $350 million. Meanwhile the state’s mandated pension costs, including the cost of paying down pension obligation bonds  that were issued in 2003, are scheduled to increase nearly $460 million, to a total of $10.4 billion.

ILLINOIS CANNABIS

The sale of legal recreational cannabis products began on January 1 in Illinois. We now have at least one month of data to see what the take from cannabis taxes is and how that relates to expectations. So far, the buzz seems to be pretty good from the revenue standpoint.

According to the Illinois Department of Revenue, January sales generated more than $7.3 million in cannabis tax revenue and more than $3.1 million in sales tax revenue. This represents some over 37% of the amount projected to be collected by the end of June. Customers spent more than $39.2 million on recreational marijuana during the first month of legal product.

The majority of sales were to residents. As has been the case where adjacent states have no or only some level of legality, out-of-state residents spent more than $8.6 million some 22% of the total sales. The strong numbers were produced despite shortages. Shortages have become a staple of the startup phase of any legal sales regime.

Illinois is just the latest example of the disjointed way in which government has undertaken the process. By now there ought to be a better way to assess demand and permit supply accordingly. It has been characteristic to see regulatory impacts on one problem can needlessly impede the industry from operating standpoint. The numbers also reveal the potential. Marijuana-infused products are taxed at 20%. All other marijuana with 35% THC or less is taxed at 10%, and marijuana with THC content higher than 35% is taxed at 25%. Municipalities can levy an additional 3% tax however those revenues were not included in the state data.

So will New York be next?

UTILITY CYBER ATTACK

The Cybersecurity and Infrastructure Security Agency (CISA) of the Department of Homeland Security responded to a cyberattack affecting control and communication assets on the operational technology (OT) network of a natural gas compression facility. A cyber threat actor used a Spearphishing Link to obtain initial access to the organization’s information technology (IT) network before pivoting to its OT network. The threat actor then deployed commodity ransomware to Encrypt Data for Impact on both networks. Specific assets experiencing a Loss of Availability on the OT network included human machine interfaces (HMIs), data historians, and polling servers. Impacted assets were no longer able to read and aggregate real-time operational data reported from low-level OT devices, resulting in a partial Loss of View for human operators.

The attack did not impact any programmable logic controllers (PLCs) and at no point did the victim lose control of operations. Although the victim’s emergency response plan did not specifically consider cyberattacks, the decision was made to implement a deliberate and controlled shutdown to operations. This lasted approximately two days, resulting in a Loss of Productivity and Revenue, after which normal operations resumed. 

The attack highlights the need for utilities to have robust defense and recovery plans against cyber attacks. In this case, the victim’s existing emergency response plan focused on threats to physical safety and not cyber incidents. The victim cited gaps in cybersecurity knowledge and the wide range of possible scenarios as reasons for failing to adequately incorporate cybersecurity into emergency response planning.

Absent disclosure from municipal issuers, this situation sounds a lot like what one would expect to find at a smaller municipal utility. Two days of lost service, production, and or revenues is no small thing and this happened to a sophisticated private operator. Even if your local utility operations are prepared, those entities are at the mercy of other providers. The US natural gas pipeline industry, now the primary fuel supplier to the US power generation fleet, has no federally mandated cybersecurity standards.

Moody’s rightly points out that “Natural gas distribution utilities rely on pipeline infrastructure for gas distribution to customers for heating and other purposes, exposing them to the safety, operational and financial risks from pipeline cyberattacks. Because of the increased interdependence between electric utilities and natural gas pipelines amid the growing use of low-cost natural gas as a transition fuel to renewables and away from coal, the electric grid infrastructure is exposed to cyberattacks on natural gas pipelines.”

In addition to actions taken by utilities, investors can add to their protection by demanding robust disclosure as to cyber security actions being taken over and above procuring insurance. Insurance to provide funding for remediation is fine but some disclosure about the ability of an insurer to effect real change in terms of preparedness should be available. It is important to  have some sense of the potential damage to revenue streams which support for debt service since after all that is what pays debt service.

FLORIDA HIGH SPEED RAIL BACK IN COURT

Earlier this year, Indian River County announced that it decided to throw in the towel on its efforts in the federal courts to challenge the use of tax exempt debt to fund the development of the high speed rail line serving the Miami to Palm Beach corridor. It had been to date a costly and unsuccessful process. The county has spent $3.5 million on litigation with Virgin Trains, including other cases over other safety issues. Now, the Indian River County Commission has rethought that position and decided to move forward with an appeal to the U.S. Supreme Court. $200,000 of private money and a legal team including a retired judge once short-listed for the Supreme Court convinced the County that an appeal is viable.

Our view on this issue is colored by our view that it becomes tiresome to see private entities insist on being viewed as private risk takers while fully exploiting the use of tax exempt financing. No matter how you slice it, the use of tax exempt financing is the use of a public subsidy. We would like to see these private entities stand on their own to prove their point that private is better than public.

MANAGED RETREAT IN THE SPOTLIGHT

We have discussed the various approaches available to and taken by municipalities to deal with the specific issue of rising sea levels resulting from climate change. for some time. There haven’t been many examples where a municipality has been able to develop public support for the issue. Lately, one such municipality has been in the spotlight for its efforts to deal with the issue of rising sea levels which do not focus on hard infrastructure answers.

Marina is located along the central coast of California, 8 miles west of Salinas, and 8 miles north of Monterey. It has a population of some 22,000. Sea walls are forbidden, and sand replenishment projects do not have local support. It does require real estate disclosures for sea level rise. It works to move infrastructure away from the water. It is working with a private resort in town to relocate its oceanfront . 

Much of the shoreline remains undeveloped. Marina’s coast has one of the highest rates of erosion in California and the city was also the site of an industrial facility which effectively removed tons and tons of sand annually. There are some other facilities including office buildings, a sewer pump and an aging water treatment facility. They are all subject to the impact of continuing erosion.

At some point, many of these facilities as well as public facilities including public beach infrastructure such as a parking lot and public restrooms will have to be moved. those types of facilities will be needed to maintain access to the ocean. Some of that can be accomplished through regulation but buy in from the public and from private property owners is essential. Municipal credits are in a position to be at the center of that debate.

We find the Marina example instructive. There is much focus on large events like natural disasters which inflict large scale damage and inspire large scale reactions. In reality, the impact of rising water levels is smaller scale. It’s situations like Marina, its steadily crumbling walkways and access points around the Great Lakes and other places seeing smaller scale but increasing incidents of erosion and undermining. Cities will increasingly face a choice between ongoing and incident based remediation – essentially an ongoing patching process or a longer term policy based approach.  

AV SPEED BUMP

Columbus, Oh has been at the forefront of efforts to test out the realistic potential of autonomous vehicle technology to provide practical mass transit alternatives. The city has been testing a small scale shuttle service with two 12-passenger shuttles which began running Feb. 5. An operator is always on board to monitor the shuttle. Now, a recent incident has taken the shuttles out of service. One unexpectedly stopped in the middle of a route and a woman fell from her seat onto the floor.

Now, the city has decided to take the vehicles out of service until the vendor can investigate the causes of the unplanned stoppage. It is portrayed as erring on the side of caution and we do not dispute that. It does highlight the fact that like many other implementations of new technologies, the use of AV technology will be a gradual process with both forward and backward steps being a part of the process.

In the wake of the Columbus incident, the vendor who provided the vehicles is coming under closer inspection by regulators. The National Highway Traffic Safety Administration (NHTSA) said operation of the battery-powered buses in 10 U.S. states would be suspended pending an examination of “safety issues related to both vehicle technology and operations.” The vehicles are all provided by Easy Mile now all Easy Mile vehicle use is subject to the suspension.

The deployment in Columbus that started earlier this month was the first public self-driving shuttle in a residential area. It is not the first incident with Easy Mile vehicles however. In July, one passenger in Utah was injured and required medical assistance when the EasyMile shuttle he was in came to an abrupt stop.

It is not a reason not to move forward but it is a reason for governments to be involved in the process at the earliest possible point. Successful development of AV technology into a major component of the mass transit service plan will rely on reliability and transparency throughout every phase of the development and implementation process. That will be the case for emerging micromobility technologies in their efforts to become mainstream.

HARTFORD UPGRADE

Some two and a half years after the city seriously contemplated bankruptcy, Hartford, CT has begun to move forward on the path to fiscal recovery. Those efforts were rewarded this week with an upgrade in its rating at least from Moody’s.  Moody’s Investors Service has upgraded the city of Hartford, CT’s long term issuer rating to Ba3 from B1. The outlook has been revised to stable from positive.  While it does not have any debt outstanding based solely on its underlying rating, the move does signal that the City may have turned a corner in its efforts to recover its financial standing.

Moody’s cited “stable financial operations and improved liquidity that has been achieved through adherence to the city’s financial recovery plan including the benefits of the state’s contract assistance agreement and cost saving measures taken by the city through labor contract agreements and tight expenditure controls. The rating also incorporates strong and continued state oversight through the Municipal Accountability Review Board (MARB) and contract assistance agreement.”

That discipline and oversight will remain important as Hartford has limited revenue flexibility resulting in part from the high percentage of exempt properties within the tax base, persistent challenges of high poverty, above average unemployment and low median family income. Those factors will continue to be the City’s prime credit characteristics and will make it difficult for the City to regain investment grade status on its own for a long time.

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.

Joseph Krist

Publisher

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IS CONGESTION PRICING HITTING A ROADBLOCK?

It has been the expectation that the era of congestion pricing in the US would officially begin on January 1, 2021. When the NYS Legislature authorized the City of New York to impose a scheme of congestion pricing to fund part of the Metropolitan Transportation Authority’s (MTA) massive capital funding needs, the goal was for the charges to begin on that date. This would provide time for the Legislature to work out the details of such a plan and the expectation was that the State’s budget process would lead to  the development of a full mechanism for the collection of the charges and the distribution of any resulting funds.

Now it looks as though achieving a January 1 start will be difficult if not impossible. That is because the pricing scheme must be approved by the US government – the Department of Transportation – as the result of federal funding for the MTA. That approval process also includes an environmental impact component. Therein lies the rub. The State and the City would be responsible for producing an analysis of the environmental impact of the plan. It would help if they knew to what level of analysis the feds would require any assessment to meet. Alas, the federal government has sat on the decision for the last ten months  and now the planning process is held up.

The issue is – does New York State and New York City have to undertake a more limited environmental assessment or a complete “environmental impact statement? It is a big deal because of the serious time implications of such a decision. A report by the National Association of Environmental Professionals on reviews concluded in 2018 cited academic data that showed that for agencies like the MTA that have conducted environmental impact statements with the Federal Highway Administration, it took an average of 2,691 days to complete the process. The shortest time any agency completed such a review with any agency in the federal government was 637 days.

With the State and the Trump Administration at virtual war right now over immigration policy, it would not be realistic to expect any help from the Administration. So it becomes increasingly unlikely that we see any monies paid until the approvals are secured. There also has to be time reserved for the inevitable flow of  litigation which the final regulations should generate. Those are ironically not anticipated to be made public until mid- November.

The situation begs the question of whether or not a full environmental review process just should have been part of the process to begin with. It is easy to become suspicious of just what everyone is afraid of as the result of a full review? Would proponents case for environmental benefit be undercut? Would the impact on the economy cause opposition? Would it support expanded use of the concept both in New York City and in other jurisdictions nationally? Why can’t supporters of significant policy changes based on issues like the environment just do the research, make the case, and then get on with making it successful?

It is a sign of how politically rather than policy driven so much of the current debate over climate, environment, and issues like “car culture”, “micromobility”, and the like find themselves. Government finds itself in the middle of the implementation conundrum. It is easy to criticize government – especially smaller less sophisticated levels of government – for their response to cultural and technological change. The situation in which New York’s congestion pricing scheme finds itself illustrates the difficulty government and therefore municipal credits face when  dealing with these sorts of issues.

FLORIDA UTILITIES

HB 653 is a bill pending in the Florida legislature which would forbid cities from using utility revenue for anything other than the maintenance and upgrade of the utility system’s infrastructure. Attention is being paid to the bill which does not have a companion bill in the Senate as local officials are rallying against it. The debate highlights a phenomenon which has been around for a long time.

Utilities have long been used to keep property tax rates lower primarily for residential properties. The political logic is pretty clear. The idea was that the electric rates paid by large commercial/industrial customers would not be such a significant marginal cost to those entities that they would care. Over the years, cities came to be reliant on often significant annual transfers of revenues out of municipal utilities.

How reliant? Recent press accounts cite examples like the State Capital in Tallahassee where $31 million was transferred to the City’s general operating funds, Jacksonville transferred $118 million to the city’s general revenue fund this fiscal year, and Gainesville’s utility provided $38 million (30%) for general revenue. So it is a significant issue in the Sunshine State. That easily explains the effort to derail the bill early in the legislative process. For utility investors, such a ban would reduce the level and timing of future rate increases. These would expect to be offset by a payment in lieu of taxes mechanism of some other which would require the utility to generate revenues for direct city use.

Nonetheless, the cities should be concerned. Obviously, that level of concern should reflect the proportion of operating funding derived from transfers. It’s generally a subject which comes up in times of fiscal stress on the part of entities on either side of the equation. When those pressures lead one side of the equation to seek changes in the rate of transfer, real credit implications can result.

More recently, it reflects the increasing attention being paid to the issue of infrastructure and the electric grid in particular. The understanding on the part of electric consumers and their desire for more flexibility in their own utility sourcing decisions increases daily. This places more attention on operating and economic efficiency with direct pressure on costs. This will only increase with the development of battery technologies, microgrids, and less centralized generation. Those pressures will be driven from the bottom up as climate change, sustainability, and other environmental issues alter the utility landscape.

PUERTO RICO

“The elected government of Puerto Rico does not support a plan based on the [February] Plan Support Agreement because the government has concluded that the current terms — standing alone — are not in the best interests of the people of Puerto Rico. And, without government support for the PSA and Amended Plan [of Adjustment], the Amended Plan cannon become a reality.” So now we see where the political establishment stands in what should be seen as a reinforcement of the belief that until populism ceases to be the primary driving force in the debt resolution process, that process will not result in resolution of the Commonwealth of Puerto Rico’s debt problems.

Puerto Rico’s Fiscal Agency and Financial Advisory Authority filed an objection to a central government debt-restructuring plan. Cutting through the technicalities, the motion indicates that further concessions to bondholders can only be seen as being detrimental to pensioners. Other legal moves saw the Ad Hoc Group of General Obligation Bondholders, Ad Hoc Group of Constitutional Debtholders, Assured Guaranty Corp, Assured Guaranty Municipal Corp., and Invesco Funds filed a motion to dismiss the board’s and the Unsecured Creditors Committee’s challenges to late vintage GO and Public Building Authority bonds.

It seems that there is little appetite for negotiation outside of legal proceedings. That is not positive at all.

PRIVATE HIGHER ED CREDIT SIEGE CONTINUES

We have hammered the point home for some time in a variety of forums about the enormous pressure small private college/university credits are under. Demographics are trending against maintaining demand over the short run. Those institutions depending on ongoing demand to generate tuition revenues will continue to display rating distress. We saw yet another example with the recent action by Fitch Ratings to downgrade the ratings on Immaculata University  to ‘BB-‘ from ‘BB’.

Immaculata was the first Catholic women’s college established in the Philadelphia area and it celebrates its centennial in 2020. recent times have not been kind as full time equivalent (FTE) enrollment declined by about 18% between fiscal years 2016 and 2019. That trend did end with a 3% increase in enrollments but it was achieved through an acceptance rate of over 80%. That is because on 20% of those accepted enroll.

The fundamental credit weakness in  the current environment is the fact that student-generated revenues constitute approximately 90% of university operations. Fitch notes that ” Immaculata’s student base exhibits an elevated level of price sensitivity, as even modest increases in net tuition and fee revenues are likely to result in further demand pressure.”  

Currently FTE enrollment is approximately 1,700 students in 53 undergraduate majors, seven master’s degree programs, three doctoral degree programs, and over 40 additional professional endorsement, certificate and certification programs. This puts the University right in the middle of a large pool of comparably sized and oriented private institutions competing for a currently limited demographic cohort.

We continue to believe that this sector is one to currently avoid. This is more evidence in support of that view.

INTERNATIONAL STUDENT ACCESS UNDER PRESSURE

Each year, the International Educational Exchange releases its Open Doors report on enrollment trends for international students. International students make up 5.5% of the total U.S. higher education population. According to data from the U.S. Department of Commerce, international students contributed $44.7 billion to the U.S. economy in 2018, an increase of 5.5 percent from the previous year. Because of that economic impact and the importance of these usually “full fare” students, they have become increasingly important to universities in particular.

There have been ongoing concerns that the immigration policies of the Trump administration might put a damper on demand from that sector. There have been a variety of reports on the difficulties students from a wide variety of countries have experienced with obtaining visas and visa renewals.  Overall, data shows that international student enrollments in the US increased 0.05% in 2019. One would have expected more robust demand absent conflicts with China and nation specific limits and bans.

One institution which is not happy with the current regime is the University of Illinois at Urbana-Champaign. It has the fifth-largest population of international students in the country. , according to the 2019 Open Doors. More than 15,000 are enrolled in the university system, including the Chicago campus. UI is at the forefront of a group of presidents and chancellors from nearly 30 colleges and universities in Illinois are pushing for lawmakers to do more to help international students and scholars who face new obstacles tied to immigration policy.

The group has sent a letter to the Illinois congressional delegation expressing “concern about changes in immigration policy and procedures that undermine the ability of our institutions — and the state of Illinois — to continue benefiting from the important skills and contributions of international students and scholars.”  That concern reflects academic concerns but also the fact that more than 53,000 international students went to colleges and universities in Illinois, according to the Open Doors report – contributing $1.9 billion to the state’s economy. 

It matters and is a situation worth continued monitoring.

DISCLOSURE

Recently, the various facets of the disclosure issues facing the municipal bond market were indirectly debated in an industry publication. And as expected, it featured the usual litany of reasons why investor demands for timely information are so difficult to fulfill. After some five decades in the municipal credit analysis sector, I have to admit to a high level weariness with the laments of issuers of various sizes and structures and their difficulties in meeting those demands.

My views are built on a foundational view that one knows the rules associated with access to the public securities markets. It is not that we don’t understand that there is a very wide range of municipal issuers and municipal credits. A single regulatory mandate does not fairly address everyone and every credit. That is not what the investing community is asking for and it is simply disingenuous to imply otherwise. And it becomes tiresome to hear arguments about the massive costs that good disclosure would create for ” taxpayers and rate payers who end up paying more for necessary infrastructure projects.” Please do not tell me that if it wasn’t for those pesky municipal bond analysts we could magically have more infrastructure.

There are reasons why private entities remain so when they are staring out or as they remain successful but at a smaller scale. These  entities often survived and thrived without the use of or access to private capital. They also have to provide less ongoing financial disclosure. Many of the sources of finance which supported those ventures have admittedly changed and become more concentrated. At the same time, the overall level and global availability of capital has created a whole new universe of funding outlets.

That creates opportunities for those who are prepared to compete in the current digital world. Instead of creating never ending hurdles to disclosure, the issuer  community would be better served putting its efforts into trying to generate and provide the kind of information which would serve to expand rather than limit our market. With every day the financial markets become more globalized. It may be that some levels of municipal bond issuer may not be able to access those markets (especially the international space). That means that there needs to be a better match between issuer and investor. That may mean that less fulsome and timely disclosure may still satisfy some investor classes while restricting access to others. Sorting that out is what markets do.

The challenge to issuers is to find and if necessary develop demand for their debt at a level of disclosure which is mutually satisfactory.  That could be bond banks, direct loan relationships with private lenders both bank and non-bank, or with state or municipally owned banks. The answer for those who trade and invest through the public markets should never be one which encourages less transparency.

NYS BUDGET

With some 40 days to go before the New York State budget must be enacted, the State Comptroller Tom DiNapoli has weighed in with his analysis of the Governor’s proposed fiscal 2021 budget. School Aid would increase by $826 million, or 3%, to $28.5 billion in the coming school year. This increase is less than the 4% growth allowable under a statutory limit related to personal income in the state. Funding for most local governments aid programs would be held flat, continuing a trend in recent years of decreases or level funding in such areas. These include Aid and Incentives for Municipalities, also known as AIM, the largest unrestricted aid program for local governments, as well as major funding for streets, highways and bridges.

Total capital spending over the current and next four years is projected at $66.7 billion, little changed from the estimate based on the SFY 2019-20 Enacted Budget. Projected transportation spending is increased $3.3 billion, partly offset by certain unspecified reductions from the previous plan. The budget would appropriate $3 billion for the Metropolitan Transportation Authority’s 2020-2024 capital program, although funding sources are not identified. 

The State’s own spending on Medicaid rose by nearly $10 billion through the decade ending in State Fiscal Year (SFY) 2018-19. While most of that growth was expected, unplanned cost increases more recently led to deferral of $1.7 billion in Medicaid payments from the end of SFY 2018-19 into the current year. The Division of the Budget anticipates a second consecutive deferral of $1.7 billion, into the coming fiscal year. The SFY 2020-21 Executive Budget Financial Plan relies on unspecified actions to generate $2.5 billion in Medicaid savings during SFY 2020-21, with the savings amount projected to rise to $3.5 billion within three years.

The budget recommends presenting a $3 billion Restore Mother Nature General Obligation (GO) Bond Act to the voters that, if approved, would provide funding to restore habitats, reduce flood risks, improve water quality, protect open space, expand the use of renewable energy and support other environmental projects. The budget would authorize an additional $10.3 billion in new state-supported debt, all to be issued by public authorities except the proposed $3 billion Restore Mother Nature GO Bond Act. Outstanding state-supported debt is projected to rise 20.3%, and annual debt service 48.4%, by SFY 2024-25. The Executive anticipates elimination of 2,500 state prison beds in the coming fiscal year, and a $181.5 million reduction in spending for the Department of Corrections and Community Supervision, partly reflecting budget language that would authorize additional prison closures. The Financial Plan assumes a deposit of $428 million to the Rainy Day Reserve Fund at the end of the current fiscal year.

The State has long been a utilizer of creative accounting maneuvers and the coming year is no exception. The Comptroller gives particular attention to recent actions In recent years which he feels serve to obscure actual spending increase amounts. The Executive has set a non-statutory goal of limiting annual growth in State Operating Funds spending to no more than 2%. The Financial Plan includes a number of budget actions – including timing-related adjustments, program restructurings, shifts and new categorizations of spending and other steps – that cloud the picture of spending growth. The readily identifiable actions described in this report are expected to reduce SFY 2020-21 State Operating Funds expenditures by a net of approximately $1.1 billion. Adjusting for such differences, State Operating Funds spending in the coming year would increase by 3.1 percent, compared to the 1.9 percent presented in the Executive Budget Financial Plan.

SANTEE COOPER SALE UNDER CONSIDERATION

The South Carolina Legislature has received information on three bids which have been submitted for the purchase of the South Carolina Public service Authority from the State. Dominion Energy, and NextEra energy of Florida were both chosen as possible companies that could take over. Santee Cooper itself also submitted a bid that is still on the table as it hopes to stay its own entity.

The bid from NextEra seems to be getting the most attention. NextEra is ready to pay off the Santee Cooper’s debt, provide refunds and rebates to customers, and settle an important class-action ratepayer lawsuit over a failed nuclear plant expansion. At the same time, NextEra wants the Legislature to “pre-approve” 800 megawatts of new solar generation; an expansion of Santee Cooper’s Rainey gas-fired power station in Anderson County; and the construction of a new, 1,250-megawatt gas-fired plant in Fairfield County. Here’s the catch. NextEra also wants assurances that it can bill customers for those plants if the projects are scrubbed because of state or federal regulatory changes, like a nationwide tax on carbon emissions.

The plan also anticipates that it would cut more than 40% of Santee Cooper’s workforce — some 700 employees. Dominion Energy also entered an offer to take over Santee Cooper’s management but leave the utility under state ownership. The House and Senate’s budget committees each must pick their preferred bid within the next month. Santee Cooper has already charged its direct customers and the members of South Carolina’s 20 electric cooperatives roughly $670 million for the abandoned Sumner nuclear project. Santee Cooper’s nuclear-related debt now stands at $3.6 billion.

State officials reached out to 55 companies and received interest or bids from 10 businesses. The Governor has thrown his support behind the NextEra bid. As for bondholders, the choice would be between the Santee Cooper bid and the investor owned utility bids. A private owner would have to defease the existing Santee Cooper debt. If Santee Cooper remains the owner, the debt would remain outstanding and the bondholders would continue to face the risk of potential litigation. NextEra’s proposal offers slightly higher rates in the long term but, it provides money to settle a major lawsuit brought by ratepayers over the failed V.C. Summer project. The Santee Cooper offer features lower rates over the next 20 years but no certainty as the utility heads to court in April. 

CANNABIS GROWS

The Colorado Department of Revenue’s Marijuana Enforcement Division reported that 2019 generated $1.75 billion in sales of legal cannabis. This represents a new high in sales and is a 13% increase in sales from 2018. Since legalization and the commencement of sales in 2014, sales have totaled $7.78 billion.

Taxes, license, and fee revenues for 2019 accruing to the State were $302,458,426. This raised the State’s total revenue take from these sources at $1,207,966,842. For FY 2015-16, the first $40M of the Retail Marijuana Excise Tax revenue was distributed to the PSCCAF. Excise tax collections in excess of $40M, $2.5M for FY 2015-16, were transferred to the Public School Fund. For FY 2016-17, the first $40M of the Retail Marijuana Excise Tax revenue was distributed to the administered by the PSCCAF. Excise tax collections in excess of $40M, $31.6M for FY 2016-17, were transferred to the Public School Fund.

For Fiscal Year (FY) 2017-18*, the first $40M of the Retail Marijuana Excise Tax revenue was distributed to the Public School Capital Construction Assistance Fund (PSCCAF) administered by the Colorado Department of Education’s Building Excellent Schools Today (BEST) program. Excise tax collections in excess of $40M, $27.8M for FY 2017-18, were transferred to the Public School Fund. Starting FY2018-2019, pursuant to HB18-1070, the greater of $40M or 90 percent of excise tax revenue will be credited to the PSCCAF. Any excess will be transferred to the Public School Fund.

On the regulatory front, the U.S. Department of Transportation (DOT) issued a notice clarifying that workers in safety-sensitive positions under its regulations will not be tested for CBD. The federal legalization of hemp means that cannabidiol derived from the crop is no longer a controlled substance. The notice made three specific points.

DOT “requires testing for marijuana and not CBD.”  Workers should remain wary of using CBD products because they are not currently regulated by the Food and Drug Administration and “labeling of many CBD products may be misleading because the products could contain higher levels of THC than what the product label states. The department said “CBD use is not a legitimate medical explanation for a laboratory-confirmed marijuana positive result.” So, if an employee using CBD that contains excess THC tests positive, it cannot be defended as a medical use.

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.

Joseph Krist

Publisher

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NASSAU COUNTY

The Nassau Interim Finance Authority (NIFA) took control of the finances of the public benefit corporation running Nassau University Medical Center, saying the hospital’s condition “poses a material threat” to the county. NuHealth, the public benefit corporation that is the medical center’s parent, had a cumulative loss of $193.9 million between 2015 and 2018. The resolution adopted by the Authority allows NIFA to “take whatever actions they deem necessary or appropriate” to enforce the resolution placing NuHealth under NIFA’s control. This is effectively the kind of oversight which the Authority exercises over the County. They will not run the hospital but will have significant sway over those who do.

NIFA controls could lead to imposition of an employee wage freeze and requirements that NUMC submit contracts, budgets and union agreements to the control board for approval. NUMC showed cumulative losses of $193.9 million between 2015 and 2018, according to the NIFA resolution. It estimates operating losses were $46.6 million in 2018, compared with $25.7 million in 2017.

NIFA’s basis for intervening is the guarantee of some $188 million of debt by Nassau County. NIFA has determined that current trends will exacerbate the hospital’s problems and is an unacceptable risk for the County. There  is a long record of county owned and operated hospitals experiencing operating losses which were funded by the counties. Ultimately, those situations would have significantly hampered general county finances so spinoffs of those institutions generally resulted.

The decision to impose oversight comes at a time of great uncertainty for safety net providers in the State. Sharp increases in Medicaid costs are at the center of the State’s current budget debate as the Legislature grapples with an estimated $6 billion budget gap for the fiscal year beginning April 1. It is therefore unlikely that the County will be able to rely on additional outside funding for its operations. This makes the oversight role of NIFA even more important.

PUERTO RICO

An agreement with bondholders announced by the Commonwealth’s federally created financial oversight board Is estimated to effectively eliminate some $24 billion of debt. The deal would reduce $35 billion of bond debt and other claims to about $11 billion.  Bondholders would face average haircuts of 29% for GO bonds and 23% for PBA bonds. This is less than proposed  haircuts of 36% to 65% that were included in the September plan of adjustment. According to the PROMESA board, “lowers total debt payments relative to the agreement we reached last year, pays off commonwealth debt sooner, and has significantly more support from bondholders, further facilitating Puerto Rico’s exit from the bankruptcy that has stretched over three years.”

Pensions remain at the center of the negotiations. The board has been seeking a maximum 8.5% cut for retirees who receive more than $1,200 in monthly benefits. Pensioners and the Governor of Puerto Rico insist that if the bondholders position improved that their position should also improve.

Of importance to investors is that the deal if ultimately adopted calls for the Commonwealth to stop its efforts to have some $6 billion of Commonwealth debt declared invalid. Those bonds, issued between 2012 and 2014 were the subject of litigation which contended they were issued in violation of Puerto Rico’s constitutional debt limit. Under the terms of the revised proposal, creditors would receive $10.7 billion in new debt, divided between GO bonds and sales tax-backed junior lien bonds, along with $3.8 billion in cash. Positively, the plan also reduces the timeframe to retire the Commonwealth’s legacy debt to 20 years from 30 years.

Regardless of how negotiations over the restructuring of the Puerto Rico Electric Power Authority (PREPA) end up, it appears that a giant opportunity is being squandered to create a more sustainable and viable electric utility. This week, the executive director of the Fiscal Control Board, said that PREPA is “arms crossed” on the negotiations of renewable energy projects for Puerto Rico. “As of today, PREPA has not finished any discussion and, much less, some negotiation with renewable energy producers so that the people of Puerto Rico benefit from cheaper, cleaner and more reliable energy. To the extent that PREPA remains arms crossed, the people continue to be penalized while unsustainable rates are paid month by month.”

We have consistently argued since the immediate aftermath of Hurricane Maria that an opportunity had been created to reimagine the island’s utility grid. We advocated for the greater use of renewables to take advantage of Puerto Rico’s abundant wind and solar exposure. We also advocated for the creation of microgrids centered around diverse local sources of generation. Since that time, the recent experience of earthquakes highlighted the attractiveness and viability  of local generation and distribution. In the limited  number of jurisdictions with access to these modalities, the disruption from the earthquakes was mitigated. So the case is being made. Just like so many other things in Puerto Rico, populism and politics keep getting in the way.

The perception of a government less than focused on efficiency was supported by the news that the finance director of the government-sponsored Puerto Rico Industrial Development Company said in the police report that the island’s government had unwittingly handed over $2.6 million to thieves after being fooled by a bogus email message. An email message contained instructions to transfer money intended for the public pension system to a different bank account than had been used before. The finance director  said his office sent the money to a foreign account on Jan. 17. They are not alone. Another government entity, the Puerto Rico Tourism Company, had been fooled into transferring $1.5 million. 

It has been noted that training for the Commonwealth’s work force was less than sufficient. One observer noted “Training is forgotten because it costs. Hospitals have to have them because they have to comply with regulations. Government agencies have no regulations.”

TRANSPORTATION

Legal proceedings challenging Washington State Initiative 976 are underway. The Initiative passed in November. It limits most taxes paid through annual vehicle registration at $30 and largely revokes state and local authority to add new taxes and fees. A coalition of cities, King County and Garfield County’s transit agency sued to overturn the Initiative which the state Office of Financial Management estimates would cost the state and local governments more than $4 billion in revenue over the next six years.

While the legal process plays out, local transportation agencies have been raising the specter of unpalatable cuts. Seattle said it would have to cut 110,000 bus hours. Garfield County said it would have to halve the transportation services it provides to help seniors and disabled people.

The hearing follows a ruling from the same court in November that the initiative’s ballot title was misleading because it said the measure would “limit annual motor-vehicle-license fees to $30, except voter-approved charges.” The judge has already indicated that the litigation against the initiative would succeed.  He believes that the language in the initiative referring to “voter-approved charges” led some voters to believe that existing local funding sources would not be affected.

The effort to defend the Initiative is part of a long battle waged by an anti-tax activist who is now running for Governor. Previously, he had sued to stop the car tab taxes unsuccessfully. He believes that the initiative would allow for the end of voter approved taxes in the Puget Sound region used to expand Sound Transit.

Meanwhile, Seattle’s southern neighbor Portland, OR has decided to ask voters to approve a 10-cents-per gallon gas tax in May. The tax would continue the gas tax program for another four years. Portland voters approved the gas tax in 2016 with 56% of the vote.

WHO’S STREETS? OUR STREETS!

We will employ this headline for our ongoing observations of the transportation sector especially as it involves “micromobility”. We were struck by two recent themes we saw expressed in current literature on the subject. One put forth the view that cities have “lost” the technology battle. The other unwittingly showed where the problem lies.

In a sector that is evolving as quickly as the “micromobility” space, it is not realistic to expect that municipalities could be prepared for the essentially lawless approach that so-called transportation disrupters would take. It’s clear that the approach reflects a conscious decision that it is somehow better or easier to deploy a given modality without consideration for any regulatory process. Whether it is ride sharing, rental bikes, or motorized devices, the proven practice has been to deploy often without any attempt to engage with local jurisdictions. That is of course until the problems associated with them generate enough public support for action.

The question is what are local jurisdictions supposed to do when a particular player insists on deployment under its terms or not at all. A current example is the ongoing dispute between Uber and the City of Los Angeles over the City’s regulation of electric scooters. The City Council last year adopted a pilot program that regulates the number of electric bicycles and scooters each company can have in its fleet. After demonstrating compliance with program requirements and meeting certain performance criteria, LADOT can allow companies to increase their fleet size.

The approval of e scooters by the City accompanied the rollout of the City’s Mobility Data Specification (MDS) technology. It is designed to receive real time trip data each scooter is equipped to provide. It has been the subject of robust debate within the industry as providers struggle to placate the City while addressing the perceived privacy concerns of its users. MDS can be used to inform policy decisions, like where to put a protected bike lane or how to ensure low-income residents have access to dockless vehicles. It also allows the agency to use MDS to send instructions back to the mobility companies. That enhances the City’s ability to address issues like illegal parking of scooters especially in places like sidewalks.

Of the major scooter providers (Uber owns JUMP), only Uber refuses to provide the data. Consequently, the City has banned JUMP scooters and bikes from its streets. In keeping with its annoying history, Uber has chosen to fight the regulation in court. So how is this a failing on the part of the City? They made a rule, implemented and enforced a regulatory structure and one potential provider did not like it. Unsurprisingly, Uber suffered another defeat legally when a city hearing officer upheld the Los Angeles Department of Transportation’s temporary ban on Uber’s JUMP e-bicycles.

At some point, the industry will realize that they do not own the streets and that government has a duty to regulate the use of those streets. Especially, when private entities seek to exploit those streets for private gain at the expense of public facilities and services. For an example of how these things can work, look to the recent approval of a pilot program for electric bikes and scooters approved in Jacksonville, FL. The State of Florida legalized e-scooters and similar devices throughout the state in June through   House Bill 453 which provides for Florida cities to regulate micro mobility devices. For a company to install a corral and operate scooters in Jacksonville there will be permit, renewal and annual fees. The companies also will have to purchase performance bonds for each device up to $10,000. The program sets travel boundaries for the electric scooters and bikes.

TRUMP INFRASTRUCTURE PROPOSAL

The proposed FY 2021 budget from the Trump Administration includes an $89 billion budget request for USDOT FY 2021 funding – a nearly 2 percent increase above FY 2020 appropriations, of which $64 billion would come via the Highway Trust Fund (HTF). The request is step one in a proposed 10 year plan to invest $86 billion in infrastructure annually through 2030. The administration noted, however, that its request for $21.6 billion in discretionary transportation budget authority for FY 2021 is a $3.2 billion or 13 percent decrease from what was enacted for FY 2020.

The proposed $810 billion, 10-year surface transportation package would increase spending by 12% over the amount the Congressional Budget Office of current surface transportation funding projection based on existing law. That would produce an average annual investment of $60.2 billion for highways over the decade, with $15.5 billion yearly for transit, $2 billion for National Highway Traffic Safety Administration and Federal Motor Carriers Safety Administration, $1.7 billion for rail, and $100 million for pipeline and hazmat safety. A serious proposal would have included ideas for fully funding the program. Efforts to impose higher fuel taxes and/or vehicle mileage taxes should be at the center of any of those discussions and there is support for both.

Ironically, the budget does include non-fuel based fees for infrastructure financed through the Inland Waterways Trust Fund. Here the budget offers ideas such as a per vessel tax on commercial boats. Contrast this with the road proposals where the Highway Trust Fund is facing a cash shortfall in FY 2021 and FY 2022. This proposed budget for FY 2021 seeks to eliminate general fund supplements to transportation outlays made by Congressional appropriators in recent years and seeks to build those additional dollars into affected program baselines, supported by the HTF rather than the general fund.

AIRPORTS

The Des Moines, IA Airport board voted in 2016 to build a new terminal at the airport grounds and rebuild the runways. The total cost of the overhaul was estimated at about $500 million. Some $300 million in funding has been identified for the project relying on a combination of sources including cash on hand, passenger and airline fees, authority-issued bonds and grant money.  The last 40% of the funding gap has been hard to fill.

One source which will not be tapped is private facilities to be constructed at the airport. In the case of Des Moines, there was a proposal to build a casino and hotel on the airport’s grounds. The project proponents claimed that the project could generate some $194 million for the airport capital plan. Like so many projects like this, the motives of a proposed developer have gotten in the way much as they did in St. Louis.

Here’s the catch. There is one casino operating in Des Moines and Polk County. It originated as a race track and as that industry declined, casino gambling provided greater potential. So 16 years ago, Des Moines, Polk County and Prairie Meadows Casino and Hotel entered into an agreement that requires elected officials to reject any proposed new casino in the city or county in exchange for a share of gaming revenue from the casino. The city receives about $6 million in gaming revenue annually from the county-owned Prairie Meadows.

So this drives the airport board to look at traditional financing away from a P3. Federal and state grants and passenger facility charge revenues are the likely sources. This is where the current state of federal infrastructure policy (or more correctly the lack thereof) comes in and highlights the role of municipal bonds. The level of passenger facility charge caps is a constant source of conflict between air carriers and airports. Many airports would love to raise the charges above their currently capped $4.50 level. That would require federal legislation to lift the cap.

In the absence of some policy consensus at the federal level, raising the PFCs looks like the easy thing to do. Of course, this debate will occur during both an election year and a likely much less profitable year for the airlines as they grapple with the corona virus issue. So an increase in PFCs is hardly a foregone conclusion. If it does happen, we would expect to see a flurry of municipal bond financings for airport improvements.

RATINGS AND GOVERNANCE

We were struck by the juxtaposition of two headlines regarding recent developments in the credit supporting debt issued by the Town of Oyster Bay, NY. The first covered the engagement of a consultant to improve the City’s disclosure under the terms of a settlement agreement with the Securities and Exchange Commission (SEC). In November 2017, the SEC charged Oyster Bay and a former Oyster Bay supervisor with defrauding investors in Oyster Bay’s municipal securities offerings by hiding the existence and potential financial impact of side deals with a businessman who owned and operated restaurants and concession stands at several town facilities.  Oyster Bay agreed to settle the case by agreeing to permanent injunctions against violating the antifraud provisions of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and to the retention of an independent consultant to advise the town on its policies, procedures, and internal controls regarding its disclosures for securities offerings.

At the same time the formal engagement of the consultant was announced, Moody’s announced that it has upgraded the town’s issuer and general obligation limited tax (GOLT) ratings to Baa2 from Baa3. The outlook remains positive. According to Moody’s, “the upgrade to Baa2 reflects recent improvements to the town’s financial position resulting from cost cutting and substantial tax increases as well as improved liquidity eliminating the need for annual cash flow borrowing and successful resolution of the bulk of the town’s legal problems, including the SEC suit, without material ill effects. The issuer and GOLT ratings also reflect the town’s large tax base, strong resident wealth and income, exposure to litigation, and weak, albeit much improved, financial position.”

From our standpoint, the move essentially imposes no cost to the Town in terms of its ratings even though it engaged in practices intended to deceive. It might have been more appropriate to maintain the rating even with a positive outlook. This would recognize that the Town has indeed made fiscal progress without rewarding the governance failures which led to the SEC investigation and settlement. Let the Town put out clean financials and honest sale disclosure before effectively rewarding it.

Our view is that individual investors continue to put too much faith in the rating agencies to protect them from bad actors. Whether that is the appropriate role for rating agencies is up for debate but given the fact that they are trying to stake out positions and roles associated with the growth of the ESG sector on the buy side, they need to decide quickly what constitutes good governance. Oyster Bay was an opportunity to establish some benchmarks but instead the opportunity was passed up.

AUTONOMOUS VEHICLES

A House hearing on autonomous vehicle deployment served to highlight many of the issues holding back implementation and regulation of these vehicles. The testimony served to highlight the potential of AV technology to address issues such as safety and improved access for the elderly and disabled. At the same time, it also drew attention to the many areas of concern the public has with many aspects of AV deployment.

The hearing did not address measures that should be taken if a human needs to override; for example, if a human needs to take over and operate a vehicle, a steering wheel and pedals might be useful in this endeavor. Issues around cybersecurity were raised.  One Congressperson raised the potential for “bad actors to hack and commandeer vehicles.”

One other issue holding things back is the issue of liability. Current safety standards and insurance practices and regulations assume that humans are operating vehicles. As one witness put it, “the difference between an automated vehicle and a human-driven vehicle is a promise. It is a promise from the manufacturer of that automated driving system that they will operate the vehicle safely on our roads.”  

The resolution of insurance and regulatory issues will be a key to full implementation of AV technology on the nation’s roads. This places government at all levels at the center of the process of resolving these issues. It is another example of a question we asked earlier – Whose streets?

HEALTHCARE

The federal government continues its efforts to limit access to healthcare through the Medicaid program. In addition to its efforts to limit expansion of the program and overturn Affordable Care Act provisions supporting it, it is now using the regulatory apparatus to add layers of bureaucracy to the process. The latest example is this week’s announcement that the Centers for Medicare & Medicaid Services (CMS) has issued a proposed Medicaid Fiscal Accountability Rule (MFAR).

The rule would among other things establish requirements regarding state plan amendments (SPAs) proposing new supplemental payments, and addresses the financing of supplemental and base Medicaid payments through the non-federal share, including states’ uses of healthcare-related taxes and provider-related donations, as well as the requirements on the non-federal share of any Medicaid payment. 

States have reacted negatively. The proposed changes would make it harder for states to manage the use and allocation of its (as opposed to federal resources) own resources. The proposed amendment would clearly limit permissible state or local funds that may be considered as the state share to state general fund dollars appropriated by the state legislature directly to the state or local Medicaid agency; intergovernmental transfers (IGTs) from units of government (including Indian tribes), derived from state or local taxes (or funds appropriated to state university teaching hospitals), and transferred to the state Medicaid Agency and under its administrative control; or certified public expenditures (CPEs), which are certified by the contributing unit of government as representing expenditures eligible for federal financial participation (FFP).   

It is hard to see how the reporting and data production asks being made under the proposed rule reflect much more than a desire to cut the federal share of healthcare funding. That would likely result in a higher cost burden for states as they would be looked to for the funding of charity care in an era of lower overall reimbursements. That would be credit negative for both government and the provider sector.

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.

Joseph Krist

Publisher

________________________________________________________________

NEW YORK CITY PROPERTY TAXES

New York City’s property tax scheme has always created wide disparities in how individual properties are valued and taxed. This has created tax burdens unrelated to ability to pay and has wound up creating valuations in high value neighborhoods which result in lower tax burdens for those with the ability to pay versus those who face constrained incomes. One example – Co-ops and condos are not taxed at their true market value under the current system, but rather on the income generated by similar rental buildings.

The Commission recommends moving coops, condominiums and rental buildings with up to 10 units into a new residential class along with 1-3 family homes. The property tax system would continue to consist of four classes of property: residential, large rentals, utilities, and commercial. It calls for a sales-based methodology to value all properties in the residential class and for assessing every property in the residential class at its full market value. It wants annual market value changes in the new residential class be phased in over five years at a rate of 20% per year, and that Assessed Value Growth Caps should be eliminated. A partial homestead exemption for primary resident owners with income below a certain threshold is another recommendation. The exemption would be available to all eligible primary resident owners in the residential class and would replace the current Coop-Condo Tax Abatement.

The changes could affect 90 percent of all homeowners in New York City, according to the commission chairman. The City Council and the State Legislature would both have to approve any changes which create significant hurdles to implementation. For that to happen, lots of opposition on the ground will have to be overcome as there is no constituency for paying more especially with the Legislature up for reelection in November.

NYC IBO BUDGET ANALYSIS

The Independent Budget Office for the City of New York has released its preliminary review of Mayor Bill de Blasio’s proposed budget. IBO projects a fiscal year 2020 surplus of $2.66 billion—$65 million less than the  de Blasio Administration. It estimates a surplus of $240 million in 2021 and a shortfall of $1.7 billion in 2022. IBO’s forecast of tax revenue exceeds the de Blasio Administration’s by $210 million this year, rising to $644 million in 2021 and $906 million in 2022. IBO forecasts tax revenue growth of 5.0 percent this year, slowing to increases of 2.6 percent and 3.4 percent over the next two years. It projects that tax revenues will increase more rapidly than city-funded expenditures from 2019 through 2024.

On the expenditure side, IBO projects that the city’s cost of providing shelter for the homeless will be $216 million more in 2021 than budgeted by the de Blasio Administration. That finding combines with a less optimistic view of the city’s budget cushion than that of the Mayor. IBO projects the fiscal year 2020 surplus will total $2.66 billion, $65 million less than expected by OMB. This as IBO forecasts a sharp decline in employment growth over the next two years. That reflects projected slower employment growth across all private-sector industries. education and health services are expected to be the primary employment drivers but the health sector could be negatively impacted by proposed state budget cuts.

CYBER SECURITY RISKS NOW CLEAR

The credit risk associated with a ransomware attack has now been made clear to municipal bondholders. Pleasant Valley Hospital in West Virginia was the victim of such an attack. It now is reporting that the cost of recovering from the attack and the ransom demand it ultimately resulted in have materially impacted its credit. Because of the attack, the hospital was forced to spend about $1 million on new computer equipment and infrastructure improvements. It has occurred at a time when the hospital was already experiencing a decline in patient volumes which negatively impacted revenues.

The result is that financial performance has been inadequate and the bond trustee for the hospital has notified bond holders that the hospital’s debt service coverage for the fiscal year that ended on Sept. 30 to fall to 0.78 times. That is substantially below the 1.20 times debt service coverage the loan agreement requires, according to the material notice to bondholders.

This event shines a light on the problems our industry has had with dealing with the issue of cybersecurity risk. While the hospital has disclosed about the level of unplanned remedial spending it was forced to do, it did not answer one key question which investors should be interested in – was the ransom paid. The hospital declined to deal with that leaving its cybersecurity insurer to answer which it declined to do.

If cyber attack victims begin to be seen as willing payers of ransoms, we believe that the level and volume of these incidents will continue. Recent incidents have led to payments (mostly healthcare providers) in response to demands. Governments have seemed less willing to do so. This will increase the risk associated with healthcare credits even more if they make themselves into a target rich sector.

CALIFORNIA DAMS BACK IN THE NEWS

The California State Auditor recently issued the results of an audit of conditions and inspection practices at the over 1200 dams in the state. Unsurprisingly, it found that the State’s flood control structures, like the highway system, are aging and deteriorating. California experienced exceptional levels of precipitation in the winter of 2016–17 caused by a series of atmospheric rivers that caused flooding throughout the State and exposed vulnerabilities in the flood control infrastructure. In early 2017, after multiple storms, a large hole broke open in the main spillway of the Oroville Dam. Dam operators decreased the outflow to minimize the damage, but with the heavy rain and quickly rising water levels on Lake Oroville, the reservoir filled and water crested over the emergency spillway for the first time in the dam’s history. The runoff caused the upper portion of the hillside below the emergency spillway to erode rapidly, and county officials ordered the evacuation of approximately 180,000 downstream residents until the risk of flooding could be reduced.

Oroville Dam is just the most prominent example. According to the Auditor, most of the major dams in the State are vulnerable, with a median construction date of 1955. Data from the dams safety division show that, as of August 2017, 98 of the 1,249 dams throughout California are in less‑than‑satisfactory condition due to seismic, structural, and other deficiencies. Many of the dams in less‑than‑satisfactory condition are near urban areas in the Bay Area, Southern California, and the Central Valley and, as a result, pose an extremely high downstream hazard potential. Data from the dams safety division show that it has placed restrictions on 39 percent of the dams in the State that are in less‑than‑satisfactory condition.

It must be noted that a significant number of these structures are privately owned and operated. Although the State is responsible for regulating and supervising the construction and repair of major dams, improvements to dams are ultimately the responsibility of their owners, who are generally not state or federal agencies. The state requires that by 2021 all dams—except those with low hazard potential—must submit emergency action plans and make those plans publicly available. That will provide a better measure of the potential level of demand for capital investment needed to address the problem.

It is likely that municipal bond financing will be involved.

PENNSYLVANIA TURNPIKE COURT VICTORY

On 27 January, the US Supreme Court denied the Owner Operator Independent Drivers Association’s (OOIDA) petition for a writ of certiorari to review the Third Circuit’s decision to affirm the lower court’s dismissal of OOIDA and other plaintiffs’ lawsuit against the Pennsylvania Turnpike Commission  and the Commonwealth of Pennsylvania. The denial of OOIDA’s petition is credit positive for the PTC and the state because it provides near final clarification on the legality of the funding laws that use PTC tolls for non-system needs, including other transportation and transit needs in the state.       

After a long period of infrequent toll increases, the Commonwealth decided earlier in the last decade to raise tolls and generate excess revenues to be used to address local capital needs supporting the state’s road system. This funded an annual transfer from the Turnpike Commission of $450 million. That raised the ire of the trucking industry which felt it was being singled out as a source of funding as they believed that the bulk of the increased toll burden fell on them. Hence, the litigation against the PTC and the commonwealth. The plaintiffs alleged the PTC, the state and others violated the dormant commerce clause and the constitutional right to travel by charging higher tolls on the turnpike system to fund other state transportation needs, like capital needs of the state’s transit enterprises.

Existing state statute requires the annual PTC transfer to the state to decline to $50 million from $450 million starting in fiscal 2023. To address the issue of funding for local roads, Act 89 identified the Motor Vehicle Sales and Use Tax as the replacement source of revenue to fill the funding gap that will materialize when the transfers decline.  The funding plan to use turnpike revenue had real negative credit impacts for the PTC. The PTC currently has $6.7 billion of subordinate debt outstanding that was issued to fund these transfers to date and it will rise through fiscal 2022. The pressure to support that debt and maintain the Turnpike led to rating declines. The favorable court decision is credit positive for the PTC.

Nonetheless, the impact of the litigation outcome is uncertain. In the aftermath of the decision, there are concerns that the unsuccessful legal challenge could still encourage the Legislature to abandon plans to use different revenues to fund the state’s local road needs. While this is a legitimate concern, the current atmosphere in the State legislature supports speeding up the shift from turnpike revenues to the fuel revenues. This uncertainty will slow actual rating improvement but the current environment makes for a better trading environment for Turnpike debt.

PUERTO RICO

Holders of municipal bond debt issued on the behalf of the Puerto Rico Employees Retirement System have had a bad run in the federal courts. The latest blow to their case occurred when a U.S. Appeals Court ruled that bondholders’ claim on the assets of Puerto Rico’s public employee pension system ended when the system filed for bankruptcy in May 2017. The First Circuit Court of Appeals affirmed Federal Judge Laura Taylor Swain’s June, 2019 decision that bondholders’ claim on employer contributions to the U.S. commonwealth’s Employees Retirement System (ERS) did not extend into bankruptcy.

ERS’s assets include certain properties and investments that it had before requesting bankruptcy-like protection under Title Three of PROMESA, in May 2017. The First Circuit ruling clearly denies the access of SRE creditors to Public pension contributions. Those contributions include payments from employees so employees were effectively pitted against bondholders. Increasingly in recent bankruptcies, that has been a losing proposition for bondholders.

The financial oversight board took the view after the ruling that ” the commonwealth has no obligation to pay bondholders other than the value of encumbered assets in ERS when it commenced its case under Title III of PROMESA.” As things currently stand, the plan of adjustment the board filed in court in September for Puerto Rico’s core government debt and pension liabilities included an 87% haircut or value reduction for ERS bonds. 

The bondholders continue to face legal adversity. They are appealing the decision of Judge Swain who is overseeing the Title III proceedings from Jan. 7 denying their motion for the appointment of a trustee to pursue ERS claims arising from the oversight board’s role in the system’s bankruptcy.

The PREPA restructuring has hit another roadblock as the Governor and the Legislature’s leadership have come out against any rate increase for retail customers that might be part of a debt restructuring. Disagreements over rate increases have delayed hearings on a proposed restructuring have been delayed on five occasions as the parties attempt to marshal political support necessary to any restructuring agreement implementation. The existing proposal for an agreement with PREPA bondholders begins in the first year with a Settlement Charge of 1 cent per kilowatt hour. Then it increases to 3.46 c / kWh from the 2nd to the 4th year and to 3.7 c / kWh in the 5th year. This includes the basic Transition Charge plus the Subsidy Charge, which reaches up to 25% of the Transition Charge.

OHIO OPEB COST SHIFT

The Trustees of the Ohio Public Employees Retirement System approved changes in the funding of retiree health costs. Beginning January 1, 2022, for retirees who are Medicare-eligible — ages 65 and older — the monthly allowance provided by OPERS to offset health care costs will be reduced. The allowance currently ranges from $225 to $405, depending on age, years of service and retirement date. The lower allowances will range from $178 to $315.

Retirees under the age of 65 will no longer be covered by a group plan, where OPERS picks up between 51 percent to 90 percent of the cost. On average, retirees are paying $354 a month. Those employees will be expected to apply a monthly stipend towards the purchase of insurance on the open market and through the Affordable Care Act.

Clearly the state is shifting its cost base from itself to Medicare. Without the changes, OPERS projected that its $11.3 billion health care fund would run out of money by 2030. OPERS has $94 billion in assets for pension benefits and serves 1.14 million people. OPERS covers most of the city, county and state workers, has provided health care coverage to retirees since 1974.

In addition to the reduced healthcare benefit, OPERS hopes to have legislation enacted which would  eliminate the cost of living allowance given to retirees in 2022 and 2023 and delay the COLA for two years for all new retirees. 

Like many approaches to the “reform” of pension and OPEB funding, this one puts the onus of the recipients. It acknowledges that the political reality is that trustees want to explore the idea of asking lawmakers to increase the employer contribution rate to generate funds for health care coverage. Lawmakers and taxpayers are considered unlikely to embrace such a change.

Moody’s has declared the changes to be credit positive. We agree that reduced funding requirements are good for the state’s finances but the changes do create a couple of areas of risk. One is that the Trump Administration is focusing on supporting litigation to invalidate the Affordable Care Act. Should it succeed, one of the pillars of Ohio’s plan will be destroyed. Along with efforts to eliminate protections for patients with preexisting conditions, the availability of insurance for many individuals would be in question. If that occurs with no replacement, the state’s Medicaid burden could be significantly impacted.

We think that it will take an extended period to see if the overall health insurance structure which emerges over the next few years actually is positive for Ohio. If it is not, the economic impact on the state will be quite negative. Case in point follows below.

PROPOSED FEDERAL MEDICAID CHANGES

Medicaid has been in the news as it is at the center of the Fiscal 2020 budget process in New York State. While the State seeks to adjust and shift cost responsibilities for the program to county and local governments (a large chunk would come from New York City), a major wrench has been thrown into the works with the release of proposed changes from the Centers for Medicare and Medicaid (CMS).

This week, CMS released a proposal to states which would significantly alter federal funding for the program. CMS proposes to effectively cap annual federal spending for Medicaid by converting the funding mechanism to a block grant formula. According to CMS, the changes are intended “to provide states with a menu of maximum up-front flexibilities with which to design their program. It is clear from the letter containing the proposal that the goal is to limit spending, restrict access, and encourage the use of non-hospital facilities to provide services. The language belies the magnitude of the proposed changes.

Here are some examples:  The ability to impose additional conditions of eligibility, such as community engagement requirements for non-elderly, non-pregnant adult Medicaid beneficiaries who are eligible for Medicaid on a basis other than disability. That is bureaucratic speak for work rules. This despite consistent court rulings against the imposition of such requirements. In addition, states are finding that work requirement enforcement has not been successful due to difficulties with verification. Another is the ability to make certain changes in benefits, premiums, and co-payments during the course of the demonstration without the need for state plan or demonstration amendments and further approval by CMS. Providers are going to love that one whether they be individual practitioners or hospitals. Nothing helps financial planning or credit stability like the uncertainty such a system would provide.

Another would provide the ability to change eligibility and enrollment processes, such as eliminating retroactive eligibility. The changes would also provide the ability to make certain administrative changes during the course of a demonstration under the proposed changes, such as certain changes in provider payment rates and application of claims review prior to making payment, without amendments or further approval by CMS. providers would be unable to determine how much they might receive over the course of a year which would likely make it less likely that providers would like to participate.

Bottom line is that while some states see these proposals positively, the expansion of Medicaid has been an unqualified political success. Just about every time voters have had an opportunity to support Medicaid expansion under the ACA, they do. The do it in red states especially (Utah and Idaho, e.g.). Once Kansans got rid of their ideologue governor, Medicaid expansion was supported there as well. So the idea that the federal efforts to restrict healthcare access is not only a political winner but also a financial winner for states and counties just does not stand up to the facts.

The proposed cuts would hurt hospitals by reducing their revenues, reducing incentives to get care outside of a hospital setting (emergency rooms), and forcing them to rely on state funding to cover the increased charity care burden which will result. All of that is credit negative for hospital credits.

RURAL WOES CONTINUE

Now that the Muni Credit News has moved its headquarters to upstate New York, our existing focus on the unique credit and infrastructure needs of rural areas becomes more intense. In the midst of trade wars and commodity price uncertainties, we now have additional evidence of the difficulties facing rural economies. The latest evidence comes from Farm Bureau, an independent, non-governmental, voluntary organization which advocates for farmers. 

According to the Farm Bureau, while well below historical highs, Chapter 12 family farm bankruptcies in 2019 increased by nearly 20% from the previous year, according to recently released data from the U.S. Courts. Compared with figures from over the last decade, the 20% increase trails only 2010, the year following the Great Recession, when Chapter 12 bankruptcies rose 33%.

During the 2019 calendar year there were 595 Chapter 12 family farm bankruptcies, up nearly 100 filings from 2018 and the highest level since 2011’s 637 Chapter 12 filings. Given that there are slightly more than 2 million farms in the U.S., the 2019 bankruptcy data reveals a bankruptcy rate of approximately 2.95 bankruptcies per 10,000 farms, slightly below the rate of 2.99 filings per 10,000 farms in 2011.

During the fourth quarter of 2019, there were 147 Chapter 12 bankruptcy filings, which was up 14% from the prior year but down 8% from the third quarter of 2019. On a year-over-year basis, Chapter 12 filings have increased for five consecutive quarters. The continued increase in Chapter 12 filings was not unanticipated given the multi-year downturn in the farm economy, record farm debt, headwinds on the trade front and recent changes to the bankruptcy rules in 2019’s Family Farmer Relief Act, which raised the debt ceiling to $10 million.

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.

Joseph Krist

Publisher

________________________________________________________________

HEALTHCARE

The healthcare sector remains one of the municipal industry’s most interesting. As it evolves, it presents a variety of models and approaches which provide a variety of investment opportunities. Large systems versus stand alone facilities; urban versus rural; public versus private. They all reflect different approaches and funding models as they cope with the lack of consensus; the ability of patients to pay, and the particular characteristics and demands of individual local markets. It places some systems squarely in the middle of the conflict between the various market forces currently challenging hospital managements.

The latest example is New York’s Montefiore Medical Center, long considered the leading hospital in the Bronx. Montefiore Health System (MHS) is the parent of Montefiore Medical Center (MMC), which is comprised of three inpatient campuses with 1,558 licensed beds located in the Bronx, NY, as well as several other affiliated “member” organizations in Westchester, Rockland and Orange Counties. Member hospitals include 292 bed White Plains Hospital, 121 bed Montefiore Mount Vernon Hospital, 223 bed Montefiore New Rochelle Hospital, 375 bed Nyack Hospital, 242 bed St. Luke’s Cornwall Hospital, and 150 bed Burke Rehabilitation Hospital. MMC’s medical staff (2,800 physicians), is comprised of employed providers including faculty practice physicians as well as non-employed independent physicians. Montefiore Medicine Academic Health System (MMAH) is the parent above MHS that also controls Albert Einstein College of Medicine (AECOM).

Historically, Montefiore has primarily concentrated on its local market but that market has declining demographics in terms of the financial wherewithal of its primary service area. Nonetheless, it has maintained its quality standards and its role as a significant academic medical center. This however, has not been enough to maintain the system’s finances leading to changes  in its approach to the evolving healthcare marketplace.

In recent years, Montefiore has tried to maintain its role in serving underserved populations but has also attempted to expand its presence as a regional health system. This reflects the declining demographics of the Bronx as well as the hospital’s unique role as a “safety net” hospital while maintaining its position as the primary teaching hospital for the Albert Einstein College of Medicine (AECOM). This places Montefiore in a very difficult position. It faces funding pressures to maintain the academic quality of AECOM while it is also exposed to potential revenue constraints as New York State considers changes to state funding for safety net hospitals driven by overall state budget concerns.

Montefiore finds itself in the eye of a political hurricane. It has a heavily unionized workforce and a larger than average Medicaid component to its patient base. In New York, the impacts of policy decisions like raising the minimum wage to $15 an hour produce a higher cost base at the same time funding is under consideration for cuts. These issues have led the system’s management to undertake an effort to reposition it as a regional provider. This may or may not serve to diversify the system’s revenue base but it will not improve the situation facing several of its individual hospital components.

Montefiore also has a highly leveraged balance sheet and the abovementioned factors have limited its profitability and ability to generate excess cash to address those leverage issues. All of these issues and a planned upcoming bond issue contributed to moody’s recent announcement that it was downgrading Montefiore’s rating from Baa2 to Baa3. “The downgrade to Baa3 from Baa2 reflects unanticipated and meaningful additional debt beyond what was already considered, that will further reduce Montefiore’s financial flexibility amid ongoing and increasing constraints to operating performance. Leverage, which is already high relative to operations and cash, will rise beyond levels consistent with the Baa2 rating. In addition, the potential for strategic shifts following a change in senior management, will provide uncertainty.”

STATE BUDGETS ALREADY GENERATING TRENDS

The states are only beginning to face their FY 2021 budget processes but certain trends are already emerging. Transportation , healthcare, and education are the emerging points of emphasis. Education is focusing on the university sector as states like Illinois and California contemplate tuition increases. Rising costs and increasing demands for insurance reform are driving efforts to deal with Medicaid from a variety of perspectives. New York is focusing on Medicaid costs as a source of budget pressures. Concurrently, Kansas is expected to expand access to Medicaid under the Affordable Care Act after a change in administrations.

Even just a cursory look at headlines yields a strong emphasis on transportation. We have made the case for a long time that states and municipalities would have to take the lead as waiting for an infrastructure plan from the White House has become akin to waiting for Godot. The poisonous political environment in Washington has made it clear that federal action on a comprehensive is unlikely. So now we see the infrastructure dependent transportation sector moving front and center in the state budget process.

Massachusetts will consider an $18 billion transportation infrastructure funding package. Connecticut will consider a financing and funding program including tolls. New York’s governor has proposed a long term approach to transportation envisioning some $275 billion of investment. Virginia’s Gov. Ralph Northam announced $3 billion in improvements for rail traffic along I-95 that is expected to provide new opportunities for Virginia Railway Express commuter trains. The state’s gas tax hasn’t gone up since 1986, and in fact was lowered in 2013 by a Republican governor who had proposed getting rid of it altogether. It’s currently one of the lowest in the country. The Governor is proposing a 4 cent a gallon increase.

Maryland is poised to move forward on a $9 billion plan to expand capacity on I-270 through a public private partnership. The Michigan Senate approved a bill that would require the Michigan Department of Transportation to hire an outside consultant to study the feasibility of putting toll booths on Michigan highways. The study would have a cost of up to $150,000, and a contract with a third party would be subject to a separate approval. The bill calls for the study to review the economic impact and feasibility of tolling particular interstate highways; the ability to provide discounts or credits to lessen the impact of tolling on local, commuter and in-state drivers; information related to the number and impact of out-of-state drivers who would be expected to use the toll roads.

DETROIT

The City of Detroit and the regional economy got real good news in terms of corporate manufacturing investment in infrastructure. This won’t be located downtown where much redevelopment has occurred but rather will revive investment at GM’s Detroit-Hamtramck assembly plant. The plant was scheduled for closure but a byproduct of the October UAW strike against the company was an agreement on electric car investment and employment. GM is investing $2.2 billion in the Detroit plant where it will produce all-electric trucks and sport utility vehicles.

The plant will employ more than 2,200 people, the company said. Production is scheduled to begin in late 2021 on an all-electric pickup truck, followed by the Cruise Origin, a six-passenger vehicle that is intended for use as a self-driving taxi. The plan addresses a variety of concerns regarding the City’s recovery, its relationship with the auto industry, and it’s place in the future of transportation technology.

Other former GM sites are being converted or revitalized to serve 21st century technology needs in transportation. G.M. and South Korea’s LG Chem will make the battery cells that will power the electric vehicles made at the Detroit-Hamtramck plant in a separate plant near Lordstown, Ohio. Groundbreaking expected later this year and employment is planned for 1,100. This follows the closure of the plant by GM. The production at the Detroit plant of electric vehicles will replace the Cadillac CT6 and the Chevrolet Impala models which are currently produced at the factory.

PRIVATE COLLEGE RATING PRESSURE

Yet another tuition dependant private college is facing rating pressure as enrollments fall. The latest is New York’s Marymount Manhattan College. Moody’s has placed the College’s Baa2 rating on negative outlook after it reported a substantial enrollment decline. FTE (full time equivalent) enrollment declined by 3% in fall 2018 and an unexpectedly large 10% in fall 2019. This places real pressures on the College’s finances as it relies on tuition for 93% of its operating funds. A one-time influx of substantial cash in fiscal 2020 (a sale of its air rights on one of its buildings, generated a one-time $9.6 million influx in cash, which will be booked as in revenue in fiscal 2020). It has bought the College some time but given its low liquidity and poor fundraising effort, the impact of lower enrollments is real and immediate.

One thing in investors favor is the fact that the college owns valuable real estate on Manhattan’s Upper East Side. So there is an exit strategy in the event the College does not turn things around in terms of enrollment. The College will have to balance the need to increase enrollments through increased financial aid with the requirement to meet financial ratio covenants in support of its outstanding debt. It is required to maintain a debt service coverage ratio equal to or greater than 1.25x and an Available Assets to Debt Ratio greater than 25%. It is expected to be in compliance for fiscal 2020.

In the Midwest, Moody’s has downgraded Augsburg University’s (MN) rating to Ba1 from Baa3 with a negative outlook. Weaker financial performance combined with declining liquidity constraining its flexibility to respond to future challenges in a highly competitive environment were cited. It was noted that in fiscal 2019, pressures on operations, in part due to the opening of new facilities and rising debt service, absent offsetting stronger revenue growth resulted in a 6% operating deficit and a narrow operating cash flow margin of 5%.

This drove debt service coverage to below 1x, and below the covenant required by privately held debt. While the covenant requirement was waived for fiscal 2019, coverage, the university will face narrow coverage in fiscal 2020. This means the University will have ongoing exposure to potential acceleration of debt repayment. Risk is further heightened by very low monthly liquidity, which declined to $13.6 million or 66 days in fiscal 2019 due to financing of capital projects, and is insufficient to cover demand debt should payments be accelerated.

At the core is its heavy dependence on student charges, at 83% of total revenue. This exposes  Augsburg’s financial performance to the revenue uncertainty related to potential volatility in enrollment. Net, net – the University’s rating will face continued pressure. It difficult mix of tuition dependence, demand volatility, and less than optimum mix and structure of debt are difficult to overcome. Private higher ed is quickly becoming a high yield staple.

INFRASTRUCTURE “PLAN” FROM DEMOCRATS

The history of the Trump Administration’s approach to infrastructure consists primarily of a lot of talk supported by absolutely no policy follow through. It has resulted in one of the great missed opportunities to take advantage of historically low borrowing costs and a favorable political environment. Rightfully, Democrats in Congress have criticized the lack of serious proposals. So there has been hope that with at least one house under their control, so serious proposals might be offered.

That makes the release of a House infrastructure plan this week so disappointing. The Democrats’ framework (just some ideas without any proposed implementing and funding legislation) proposes $329 billion for roads and bridges, $55 billion for passenger rail, $30 billion for airport investments, $50.5 billion for wastewater infrastructure, $86 billion for expanding broadband access for rural areas, and $12 billion for a “next generation” 911 system for emergency calls.

The release does not deal with how to pay for it. Once again, states are taking the lead on issues of funding. On January 13, 2020, the Washington State Transportation Commission (WSTC) submitted their final report on a possible transition to a road usage charge (RUC) to the Governor, State Legislature and the Federal Highway Administration. The WSTC recommended that the Legislature should begin a gradual transition to road usage charging in Washington State. The Legislature should begin a gradual transition to road usage charging in Washington. From fiscal year 2018 to 2019, gasoline consumption declined 2.1% despite an expected 1.5% increase in vehicle miles traveled, and representing 3.1% lower consumption than forecasted at the beginning of the year.

The report also deals with the issue of car owner acceptance which is seen by many as the major obstacle to adoption. The ranking member of the U.S. House transportation committee is a big proponent of vehicle mileage taxes. The research in Washington supports that view. After experiencing the WA RUC prototype system, pilot participants became more favorable towards a RUC throughout the year, with 68% of respondents preferring RUC over the gas tax or preferring it equally to the gas tax by the end of the pilot, an increase from 52% at the beginning of the pilot. Only 19% preferred the gas tax, up from 17% at the outset.

The report also highlighted some of the realities of the legal, regulatory, and political hurdles to be faced during any transition. After experiencing the WA RUC prototype system, pilot participants became more favorable towards a RUC throughout the year, with 68% of respondents preferring RUC over the gas tax or preferring it equally to the gas tax by the end of the pilot, an increase from 52% at the beginning of the pilot. Only 19% preferred the gas tax, up from 17% at the outset.

HOTEL TAXES

Hotel taxes are pledged in support of a variety of municipal bond funded projects. They support projects which may bring economic activity but are projects seen as having a primarily private benefit – sports facilities are a favorite example as well as convention centers. These taxes had shown consistent growth over the years so they are seen as a good way for an issuing jurisdiction to fund such facilities without creating a burden on the local taxpayer.

So we were interested to see that in at least one market – San Diego – this ever increasing revenue stream may be flagging. San Diego County’s hotel revenue growth fell by more than 2 percent last year, marking the first yearly decline since 2009.  This despite slightly positive hotel revenue growth nationally. The percentage of filled hotel rooms, while still relatively high for San Diego County, at nearly 77 percent, fell in 2019, as did revenue per available room, a standard metric used in the hospitality industry to measure hotel performance.

The firm STR, which tracks hotel industry performance, has generated data that shows that in San Diego County, where overall supply grew by 2.5 percent but demand for rooms was largely flat. Over the last two years, the county saw nearly 3,000 additional hotel rooms come online. Room rates declined in the six consecutive months starting in June, 2019.

For the nation as a whole, STR is projecting growth in revenue per available room to come in at well below 1 percent for 2020. So it would be a good time to review holdings secured by hotel and other tourism related taxes to see if you are still comfortable with debt service coverage for your convention center and stadium bond holdings.

DEMOGRAPHICS AND CREDIT

Next month, the Municipal Analyst Group of New York will devote their monthly meeting to a discussion of demographics, data, and how this all impacts on the analysis of state and local credits. It is a timely subject given the availability of data for 2019 which has caused concern about some credits. Much attention was paid to population data for Illinois and Chicago that showed Illinois suffering the largest rate of population decline of any state. Declines in population for Chicago have also been raised as an issue by the rating agencies as well as investors.

We have argued previously that focus on the headlines numbers documenting outmigration may lead to the wrong conclusion. Chicago may be the best example of this. Chicago Magazine recently looked at data from a comparison of 2010 Census data with the 2013–2017 American Community Survey. It found that Illinois saw a decline in households earning less than $100,000 a year, while those earning more than $200,000 increased by 50 %. The state’s real per capita income is also on an upward trend, from $43,208 in 2010 to $53,727 in 2019. 

In Chicago, not all of the outmigration is out of Illinois. As the cost of housing has steadily increased, lower income residents often move to suburbs to find lower cost housing while continuing to be employed in the city. It is a phenomenon being repeated around the country. In some metropolitan areas, the most vibrant housing markets are in the suburban markets where housing prices have lagged behind overall averages.

These sorts of phenomenon may generate “negative”  trends in per capita debt calculations but may also support improvement in terms of debt to personal income and debt as a percentage of estimated full value ratios.   

COAL TAKES ANOTHER HIT

On 23 January, Dairyland Power Cooperative in Wisconsin announced that its Sustainable Generation Plan includes the retirement of the 345-megawatt (MW) coal-fired Genoa Station #3 (G3) in 2021. Dairyland is an electric generation and transmission cooperative that supplies wholesale electricity to its members (24 distribution cooperatives and 17 municipal utilities) in Wisconsin, Minnesota, Iowa and Illinois. Dairyland and its cooperative members serve 274,000 connected consumers. It is the process of obtaining permits for the construction, along with Minnesota Power, a new natural-gas fired plant, the 625 MW Nemadji Trail Energy Center, in Wisconsin.

That proposed plant has reached several hurdles. A December decision by the Minnesota Supreme Court overruled the Minnesota Public Utility Commission and required an Environmental Assessment Worksheet, even though the plant is based in Wisconsin. In January, the plant received a key approval from the Wisconsin Public Service Commission. Right now the project is caught between forces opposing any new fossil-fueled capacity and those looking to transition from to goal to gas to renewables. Neither of those views have any room for coal in their discussion and after all, that is the point.

Elsewhere in the coal dependent Midwestern power grid, the announcement came that  Hoosier Energy Rural Electric Cooperative Inc. in Indiana will also retire a coal plant. Hoosier is a Bloomington, Indiana-based generation and transmission cooperative providing wholesale electric power and transmission services under long-term, full requirements contracts with its 18 electric distribution cooperative members. The members, in turn, serve about 650,000 consumers through their distribution infrastructure, which spans southern Indiana and southeastern Illinois. The retirement of the 1,070-megawatt (MW) coal-fired Merom Generating Station in 2023 will mean that the cooperative will have successfully retired all of its owned coal-fired generation after first retiring its Frank E. Ratts coal plant in 2015.

ROCHESTER, NY SCHOOL DISTRICT

The SEC launched an investigation late in 2019 into Rochester City School District finances, and potentially false statements RCSD officials made when seeking short-term financing earlier in the year. It is reported that when obtaining a rating for a short-term borrowing, RCSD officials claimed that finances were trending positively, and they would rely less on reserves than anticipated. In reality, the district was running a current deficit, and would finish the year over budget by $30 million. 

The opening of that investigation was soon followed by Moody’s revisiting its rating on the City of Rochester which issues debt on behalf of the school district. In December, Moody’s downgraded to A2 from Aa3 the City of Rochester, NY’s issuer and General Obligation Limited Tax (GOLT) debt ratings and revised its outlook on the city to negative. The city had approximately $290 million in GOLT debt outstanding as of 2019. Moody’s was clear that ” the downgrade to A2 reflects the significant decline in reserves and liquidity at the City School District, which is a component unit of the City. The decline in reserves, which is well in excess of what management projected during our discussion in July of this year, is the result of poor budgeting of teacher salaries, benefits, transportation costs and costs associated with charter schools.

This has all culminated in the Governor’s budget proposal for legislation to create a state monitor to oversee the School District’s finances. The district has already laid off more than 100 teachers trying to close its budget gap. Local public officials are supportive. The District is hoping for an extraordinary infusion of some $25 million as a part of the state budget and it is likely that the money would be tied to the appointment of a monitor.

Bottom line for bondholders is that this is another example of New York’s historically positive hands on approach to local financial mismanagement.

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.

Joseph Krist

Publisher

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PUBLIC HIGHER ED GETTING MORE EXPENSIVE

Two headlines last week caught our eye. higher education and its cost have been in the spotlight during the campaign for the democratic presidential nomination. Promises to forgive student loans and plans for free tuition to public universities have  are among the most prominent. In addition, proposals to emphasize technical and vocational training have been offered. The headlines I refer to help to make the case for some of these proposals.

For the first time in six years, tuition will be going up for in-state students attending University of Illinois schools. Trustees unanimously approved a proposal that will raise base tuition for Illinoisans by 1.8% at the campuses at Urbana-Champaign and Chicago, and by 1% in Springfield. That means tuition for Illinois freshmen in fall 2020 will be $12,254 at Urbana-Champaign, $10,776 at Chicago and $9,502.50 at Springfield.

At the same time, the University of California Board of Regents is considering a tuition increase for in-state students. Ironically, it uses the University of Illinois as a basis for comparison in terms of the rate of tuition increases over the years since 2011.  One of the justification for the tuition increases is the need to maintain the University’s ability to offer financial aid. 

Both of these proposals highlight the fact that state schools are no longer the bargain they once were on an absolute basis. Yes, UC is still a bargain compared to somewhere like Stanford but is that the measuring stick for assessing public policy?

PUBLIC POWER COTINUES TO LEAD ON COAL

Tri-State Generation and Transmission is the power generator to 43 energy co-ops which distribute power across the Mountain West. It has announced that the cooperative will also pursue a 90% reduction in carbon dioxide emissions from Colorado-based generation by 2030, based on 2005 emission levels. As a part of that program, closing the Escalante and Craig coal power plants in New Mexico and Colorado and the Colowyo mine in Colorado ahead of schedule and canceling the proposed Holcomb Station coal plant project in Kansas.

It is another example of public power taking a leadership role in the move towards clean energy. To replace that power, Tri State will add over 1 GW of solar and wind generation by 2024 — raising its overall renewable energy mix to over 50% of generation. Tri-State already achieves roughly 30% renewable generation from solar, wind and hydroelectric, with hydro representing the majority of that mix. The updated plan calls for six projects set to go on line by 2023 to combine for 715 MW capacity, nearly 10 times more solar than has been put on-line by the cooperative so far (85 MW).

It reflects what its customers want. Two of its retail distribution co-ops asked Colorado regulators to establish a fair fee for them to exit from their wholesale power contracts with Tri-State. Both co-ops expressed an interest in increasing renewable generation while keeping customer costs down as reasons to exit. asked Colorado regulators to establish a fair fee for them to exit from their wholesale power contracts with Tri-State. Both co-ops expressed an interest in increasing renewable generation while keeping customer costs down as reasons to exit.

Proponents of the move to renewables are bolstered by a Rocky Mountain Institute study which found that retiring 1.8 GW of coal and replacing it with 2.5 GW of solar and wind power would save the association and its members $600 million through 2030. This move shows that locally driven demand for clean power can be effective. One former co-op customer will derive nearly 1/3 of the co-op’s annual electricity demand from renewables, while saving its members from $50 million to $70 million.

Tri State is rated A- by S&P.

 NEW YORK STATE SCHOOL DISTRICTS

Each year, the New York state comptroller announces the rate of growth for the cap on tax increases under which New York school districts operate for the next fiscal year. The rate of growth is limited to the lesser of 2% or the rate of inflation. This year the rate of growth for fiscal 2021will be 1.8%. That will pressure the districts in their effort to raise revenues. Property taxes are usually the largest source of locally generated revenues. To override the cap, districts must receive a 60% voter supermajority, which is rare. So, districts will have to rely on a combination of cost restrictions and drawing down of reserves to manage their finances.

As a result, Moody’s has announced that in its view, the lower cap is credit negative for New York school districts because it limits their revenue-raising ability – property taxes are their largest revenue source – and reduces financial flexibility. That does not necessarily act as a predictor of rating downgrades. Moody’s notes that New York school districts maintained similar levels of financial reserves to what exist now on an overall basis from fiscal 2013, when the tax levy cap took effect, through fiscal 2019, even as the cap fluctuated and dipped as low as 0.12% in fiscal 2017.

Moody’s notes that New York school districts generally choose not to pursue the 60% supermajority voter approval required to pierce the tax levy growth cap and opt to submit budgets with increases permissible under the cap. The experience of FY 2020 is telling. 18 of the state’s approximately 730 school districts sought a cap override, and 10 of those received voter permission (1.4% of all districts). In no year since the imposition of the cap, has the number of districts obtaining supermajority override approval exceed 2%. Without approval, districts choose between a new budget, which is usually within the cap, or otherwise risk the automatic adoption of the previous year’s budget and no tax levy increase.

We do not expect wholesale changes in ratings as result of the lower rate but it does put the districts in a difficult position. Many of the cost savings (like changes in employee benefits like healthcare) have already be implemented. The next logical step has always been to turn to Albany for increased state aid. This year the state is facing its own budget problems. A $6 billion budget gap for FY 2021has made the prospect of increased state aid somewhat problematic. So it will remain a significant credit concern.

ARIZONA TAX INCREASE FOR TRANSIT UPHELD IN COURT

In 2015 the Regional Transportation Authority was established by the Pinal County Board of Supervisors to be a public improvement and taxing subdivision of the state of Arizona to coordinate multi-jurisdictional transportation planning, improvements and funding. The RTA adopted the Regional Transportation Plan in June 2017 (Proposition 416), which identified key roadway and transportation projects to be developed over the next 20 years.

In November 2017, Pinal County, AZ voters approved Proposition 416 to adopt a regional transportation plan and Proposition 417 to enact an excise tax to fund the plan. Shortly afterwards, legal action was brought by the Goldwater Institute and a court ruling froze all monies related to the excise tax. Now, the AZ Supreme Court has ruled that “We find the Prop 417 tax to be valid. The RTA’s authorizing resolution does not change the substance of the question posed to and approved by the voters; the tax, by its terms, applies across all transaction privilege tax classifications; and the tax includes a valid, constitutional modified rate as applied to the retail sales classification. Accordingly, we reverse the order invalidating the tax.”

Pinal County has already levied a half-cent excise tax for road and street improvements(the Road Tax). The tax was passed by the electorate in 1986 and renewed in 2005. Revenues from the Pinal County Road Tax are generated from a number of different tax categories. Retail sales approach nearly one-half of the total Road Tax receipts while utilities, contracting and restaurants/bars comprise 41% of total revenue. Tax revenue is primarily driven by the resident population of the County; tourism currently contributes little revenue in the way of hotel/motel sales. When the tax plan was submitted to the voters, the RTA estimated that in FY 2020 the proposed sales tax would generate $19.6 million in the current fiscal year.

We think that the ability of voters (and potentially also the folks paying the taxes) to express their will and see it implemented is important. These sort of legal challenges are not particularly useful. In the long run, they usually fail and extend the time of implementation and/or raise the cost of individual projects.

PUERTO RICO

The incredible string of bad luck which has befallen Puerto Rico has obvious negative credit effects. No matter what one thinks about the honesty or competence of the political establishment, few places have been asked to cope with this level of natural disaster over such a compressed time period. It would be difficult for any entity with the level of fiscal distress which faces Puerto Rico to successfully recover. The earthquakes have revictimized some survivors of Hurricane Maria, damaged recently repaired infrastructure, and increased the long term financial burdens facing the Commonwealth.

So it was especially unhelpful to see the news that the Secretary of the Department of Housing, the secretary of the Department of the Family, and the commissioner of the Bureau of Emergency Management and Disaster Management (NMEAD) were fired after the existence of several warehouses with provisions stored since Hurricane Maria was revealed. It gave support to the views of those who feel the Commonwealth is not trustworthy to receive and manage aid funds while at the same time feeding the fears of residents that corruption rules the day.

As for the earthquakes, the impact is obvious. Greater aid needs, slower and less successful economic recovery, and a greater impetus to leave the island all result. Unfortunately, the earthquakes accompanied some economic and demographic good news. Population was up slightly in 2019 and real economic output grew for the second straight year. Total non-farm employment also grew in 2019, along with manufacturing employment. 

Now the exposure to earthquake risk has become a reality. There are concerns that corporations would be deterred from investing in the island due to the natural disaster risk at the same time the US Treasury Department announced its intention to phase out a favorable business tax credit for American corporations based in Puerto Rico. Given the Trump Administration’s efforts to withhold or hinder the distribution of recovery funds, this continues a policy bias against the Commonwealth which has hindered recovery. The federal government has declared an emergency. It is then enabled to  cover 75% of equipment and resources necessary for emergency recovery costs. Given the track record after Hurricane Maria – Congress approved $20 billion in Community Development Block Grant Disaster Recovery assistance in 2018 to help rebuild after the 2017 hurricanes. Only $1.5 billion has been released by the US Department of Housing and Urban Development (HUD) – we make no predictions about timing and use of any federal funds.

As for PREPA, the road to recovery and restructuring of its debt took a significant hit from the earthquakes. One of its largest power plants, Costa Sur, which is nearly 50 years old and located in the Southwest corner of the island, suffered material damage and it will take time to bring it back online. Fortunately, a 454-megawatt coal fired cogeneration facility owned by AES Corporation, did not suffer damage during the earthquake and its aftershocks, but did go temporarily offline. In other forums, we have advocated for using the hurricanes and earthquakes to rethink the island’s power system. The island benefits from abundant sun and wind resources on a year round basis. The potential for more localized generation and distribution is even clearer in the face of recent events.

As the island attempts to recover from its later natural disaster setback, the U.S. Supreme Court declined to review lower court rulings dismissing lawsuits by bond insurance companies Assured Guaranty Corporation and Ambac Assurance Corporation that sued the federally created financial oversight board that is trying to restructure about $120 billion of Puerto Rico’s debt. 

MARYLAND P3 MOVES FORWARD

A controversial plan to expand capacity on Interstate 270 in Maryland has been approved by the Maryland Public Works Board after changes were made to reflect opposition to tolls and perceived underfunding of mass transit. the Maryland Department of Transportation agreed to limit the first phase of construction to the Beltway between the Virginia side of the American Legion Bridge and the Interstate 270 spur, and to the lower part of I-270 between the Beltway and Interstate 370.

The future of the Beltway section  between I-270 and Interstate 95, where widening could destroy homes and public parkland  will be decided at a later, unspecified date.  The  changes also delays toll lanes for the northern part of I-270 between I-370 and Frederick because the environmental study for that portion is further behind.

The project’s contracts are estimated to be worth more than $9 billion creating one of the largest public-private partnerships in the country. Participating contractors will be expected to build up to four lanes on each highway and finance their construction in exchange for keeping most of the toll revenue long-term. The existing lanes would be rebuilt and remain free. The toll lanes would incorporate demand based rates designed to maintain certain average speeds.

To address the concerns of mass transit advocates, the state had agreed to allot 10% of its share of net toll revenue to transit.

NEW YORK STATE BUDGET

Gov. Andrew Cuomo proposed a $178 billion budget Tuesday that closes a $6 billion deficit through reducing the growth in Medicaid, limiting aid to local programs and expecting tax revenue to grow by $2 billion. The budget would increase school aid, legalize recreational marijuana, expand a new child tax credit, reduce business taxes and continue an already planned tax cut for the middle class. The proposal comes as the state faces an estimated $6 billion gap for fiscal 2021.

The Governor proposed several steps to address the gap. They include $2.5 billion through Medicaid restructuring based on recommendations from a Medicaid Redesign Team, $2 billion in expected additional tax receipts, and $1.8 billion in reduced spending to local assistance programs from “targeted actions and the continuation of prior-year cost containment.” Planned tax cuts will continue. Under the new rates, tax rate will drop to 6.09% in the $43,000-$161,550 income bracket, and 6.41% in the $161,550-$323,200 income bracket. Businesses will also get a tax break. The income tax rate would drop from 6.5% to 4% for businesses with 100 or fewer employees and with net income below $390,000.

Opposition is expected from the state’s powerful and politically and financially active hospital industry to the proposed Medicaid cuts. Legalized marijuana will face the demands of “social equity” proponents. Other issues will get support such as expansion of the state’s child care tax credit. New York is one of only six states providing a state-specific credit, and it has been equal to 33% of the pre-2018 Federal Child Tax Credit, or $100 per qualifying child aged 4 to 16, whichever is greater. The budget would expand the credit to include children under age 4. It would aid nearly 400,000 families whose income is $50,000 or less.

Education will remain as it always does front and center in any budget negotiations. Overall, school aid would grow to $28.5 billion — by far the most per capita in the nation. The Governor wants 80% of the money to go to poorer districts. He proposed to overhaul the school-aid formula so less goes to wealthy school districts that rely mainly on property taxes to fund their schools.

If all of this sounds familiar, it is. We expect that absent some farfetched proposals that the budget will be credit neutral.

WHO OWNS THE STREETS?

A recent story caught our eye as the fraught relationship between cities and the rideshare industry continues to play out. The Baltimore Finance Department reports that revenues in the last two years from the city’s parking tax, meters and city-owned garages, meanwhile, have declined a collective $4.1 million, or about 6%. The city attributes the decline to the growth of the rideshare industry in the city. The city also admits that Baltimore has collected no taxes on an estimated 9 million Uber and Lyft rides per year despite a 2015 state law enabling it to do so.

It was clearly a policy choice but it reflects the need for governments to be flexible and nimble as they deal with developments in transportation. Uber, in fact charged Baltimore riders 25 cents extra for nearly a year in anticipation of having to pay a similar tax. When that did not occur, Uber began crediting impacted customers with Uber Cash in recent weeks for a “city-specific fee” that was “ultimately not collected by the city.”

There does not seem to be a legal impediment to the imposition or collection of such a tax by Maryland municipalities. In fact, Annapolis, Brunswick, Frederick, Montgomery County, Prince George’s County and Ocean City successfully collect a 25-cent tax on each ride originating in those jurisdictions. In the case of Baltimore, the disruption resulting from the resignation of the mayor about a year ago seems to have derailed efforts to impose such a tax in Baltimore.

A bill that would have allowed the city to begin taxing Uber and Lyft rides was not introduced until January 2019. It then languished without a hearing for the past year in the council’s Taxation, Finance and Economic Development committee.  Finally, the bill will be considered by the Baltimore City Council.

When Uber and Lyft established service in the city in 2013, officials passed a 25-cent “taxi tax,” the only one of its kind in the state at the time, for any trip originating or ending in the city, but the law initially did not include rideshare. The state passed a law enabling such taxes to include the rideshare companies beginning in January 2015. Baltimore was exempted from a 25-cent cap on the tax. Somehow, the City Council was unaware that it was not collecting such a tax until 2018.

There really has not been offered a good explanation for why the City could not get its act together on an issue which resulted in multi-million dollar revenue losses. This is exactly the kind of situation and response that tech companies count on and highlights the risk associated with governments unprepared to deal nimbly with the challenges of emerging technologies. It is not credit positive when a city effectively ignores an opportunity to tax an entity which is already collecting the revenue and is not objecting to a tax.

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.