Category Archives: Uncategorized

Muni Credit News Week of January 20, 2020

Joseph Krist

Publisher

________________________________________________________________

RURAL CREDIT AND BROADBAND

We have long been promoting the need for financing intervention to develop rural broadband. The problem of the lack of access to these services in rural areas has received increased attention. It has even received some funding from the federal government. That funding is scant compared to the need. As we ourselves are rural broadband consumers, we admit to an above average concern with the subject.

Recently we came across a story in the Fresno Bee that we think highlights the scope of the issue. The Federal Communications Commission, through its Connect America Fund Phase II auctions, is spending $13.5 million over the next 10 years to provide broadband service to about 5,600 rural homes and businesses in Fresno, Kings, Madera, Merced and Tulare counties. That sounds promising until you see the magnitude of the need. In Fresno County, the FCC’s investment of about $4.1 million will cover about 1,800 homes and businesses. That leaves some 71,800 households without access.

The five counties effectively are poster children for the rural broadband dilemma. Rural and economically below average they include some of least cost effective areas to serve for a for profit provider. The report estimates that nationwide, about 17 million households – or 14% of U.S. households – have no internet access. In Fresno County, it’s more than 73,600 households — roughly 25%.

We strongly believe that there is a significant role to be played by state and local government to bridge the internet access divide. The biggest obstacle to implementation currently the difficulty in deriving profits from the service. Municipal bond issuers could be created to finance and provide the sort of backbone infrastructure without the need to run it on other than a lowest cost of service basis. States need to enact authorizing legislation and allow municipalities to pool their resources and address the problem.

NYC BUDGET

Mayor Bill DeBlasio released his preliminary budget proposal for FY 2021. The Fiscal Year 2021 Preliminary Expense Budget is $95.3 billion. After years of steady increases in spending and record high employee headcount, the mayor seems to have finally accepted the realities of the need to curb some of that growth. Unfortunately for investors, the budget as presented is much more of a political document than it is a plan for fiscal stewardship.

In presenting his budget, the Mayor focused on the state’s financial issues rather than those of the city. The basis for the plan is the expectation that the State’s efforts to balance its FY 2021 budget in the face of a projected $6 billion budget gap will disproportionately impact the city generally and the poor specifically. He is positioning himself as the savior of Medicaid in the city. At the same time, the Mayor complains about the need for additional funding for the MTA while continuing to fund the free fare program.

The commentary accompanying the numbers provides some context. “The New York City economy is still expanding but the pace is slowing. Payrolls continued to grow for a tenth year, but it appears that 2019 will mark the fourth consecutive year of softer job gains. Sectors that have been reporting decelerating job growth include finance, real estate, and leisure and hospitality. This latter sector may be partly reflecting slowing tourism activity. Professional and business services and healthcare have been advancing strongly, although healthcare gains appear to be caused by home-care aides funded by Medicaid.” That last comment reflects a belief on the part of many that one of the issues driving Medicaid costs is the $15 minimum wage. Cuts in those services would damage one of the interest groups the Mayor counts on.

Where is the money going to come from? The City of New York is expected to collect $64.4 billion in tax revenue in fiscal year 2020. This represents growth of 4.6 percent over the prior fiscal year. Property taxes are forecast to increase 7.1 percent, while non property taxes are forecast to increase 2.1 percent. Non-property Tax revenue growth is forecast to grow 2.1 percent in 2020 and remains fl at in 2021. Personal income tax revenue totals $13.7 billion in 2020, an increase of 2.9 percent. The increase reflects strong wage growth and slight bonus growth coupled with a decrease in non-wage income. Business income tax revenues (business corporation and unincorporated business taxes) are forecast at $6.3 billion. This represents an increase of 1.4 percent over the prior fiscal year.

Sales tax revenue is expected to experience a growth of 7.0 percent to $8.4 billion in 2020. This increase is spurred by consumer spending and tourism. Hotel tax revenue is forecast at $638.0 million in 2020, a 2.0 percent increase over the prior fiscal year. The numbers reflect the City’s ever increasing reliance on tourism and services.

So this budget seems to be designed to pick a fight with Albany as much as it seeks to achieve necessary policy goals. At least debt service remains below 10% of the budget. That’s important as the City faces staggering capital demands in the face of massive infrastructure needs.

HEALTHCARE

CMS generally has paid more for clinic visits conducted in off-campus hospital outpatient departments (HOPD) than those conducted in the physician-office setting. However, the agency in 2019 began to shift payments for services provided at HOPDs to match those for clinical visits that it pays under Medicare’s Physician Fee Schedule. Known as “site-neutral payment” policies, CMS had planned to implement the site-neutral payment policy over a two-year period by: reducing the payments for routine clinical visits to off-campus HOPDs by 30% in CY 2019 compared with CY 2018, bringing Medicare payments down to $81 for such visits and beneficiary copays down to $16. It would also reduce the payments by 60% in CY 2020 compared with CY 2018, bringing Medicare payments down to $46 for such visits and beneficiary copays down to $9. CMS estimated the change would save Medicare about $380 million in 2019 and $760 million in 2020.

The American Hospital Association, the Association of American Medical Colleges and several hospital members filed a lawsuit in the U.S. District Court for the District of Columbia. A federal judge ruled in September 2019 that CMS didn’t have the authority to make the 2019 cuts. Nonetheless, CMS decided to go ahead with the second round of cuts that started Jan. 1. Hospitals could face a 60% reduction in Medicare payments to off-campus outpatient departments if the cuts aren’t reversed. A judge had previously ruled that the parties could not sue until the cuts were actually imposed.

CMS has to refund $380 million in cuts for the 2019 year to hospitals as a result of the 2019 ruling. A similar outcome seems likely in 2020.

TRANSIT DEVELOPMENTS CULTURAL REALITIES

I have believed and argued for some time that one of the major hurdles to be overcome in a resolution of the ongoing debate over the future of transit has nothing to do with the usual suspects – fares, reliability, access. The hurdle I refer to is best described as the issue of social equity in the provision of public transportation facilities. One of the realities which “alternative transportation” advocates continue to refuse to admit to is the reality that the movement towards micromobility is driven by a less than homogeneous base.

Whether it’s the slower rollout of services like bike rentals in poorer neighborhoods, the use of remote regulators to “depower” electric scooters, or other technological approaches applied to access to emerging service modalities, a pattern emerges. In city after city, these services are rolled out without the agreement of or even the opportunity provided for governmental entities to review the implications and impacts. Even with the involvement of government, the results are not always equitable.

A good example is Mayor de Blasio’s heavily-subsidized NYC Ferry service. This service is back in the spotlight as press reports highlight the apparent inequities of the City’s current scheme to subsidize ferry service to and from Manhattan. The data has been around for some months. For whatever reason, the press seems to have been relying on getting the data through the Freedom of Information Act even though it has been available since the Fall of 2019. So what follows is not news to us.

New York City, through its economic development corporation, operates a fleet of passenger ferry boats which act primarily as an alternative form of transportation for commuters to Manhattan. The ferry service is heavily subsidized and this funding has occurred in parallel with the decline of the New York City bus and subway system. The system is a form of P3 as the city’s Economic Development Corporation runs the ferry network with private cruise company Hornblower.

Over a two week segment in May and June, the operators conducted a survey of more than 5,400 riders. A couple of points of data generated from the surveys have generated a response highlighting the socioeconomic issue raised. The problem is that the agency’s analysts determined that 64% of the boat users are white, and that riders’ median annual income falls in the $75,000 to $99,000 range. A 2017 report from city Comptroller Scott Stringer’s office found that two-thirds of subway riders are people of color, and that straphangers’ median income is roughly $40,000 a year.

The difference in and of itself is not a surprise given the locations of the very stops feeding riders to the boats. The area demographics around those terminals and stops seems to be reflected in the boat ridership demographics. They do not seem to be generating new net users of mass transit. So they would seem to be siphoning demand and patronage from the city bus and subway system. It is that concern that focuses attention of the next data points.

Here’s how the data shape a narrative which support some of the stereotypes. 60% identify as millenials. 75% are commuters to work. This produces a system that is richer, whiter, and younger than is the case with the mass transit system. And yet that system receives a subsidy from the City equivalent to $9.82 in addition to the $2.75. This is a glaring difference between the level of subsidy provided per ride to the ferry service and the level of per ride subsidy provided to

And it screams of economic inefficiency. The EDC has described demand for the ferry service as “booming”. The “booming” ferry ridership includes 2.5 million trips made this past summer, a record for the service. That’s still less than half of the 5.4 million rides the subway does on an average weekday. At the same time, the subway receives roughly $1.05 worth of subsidies per rider, according to a report released earlier this year by the watchdog Citizens Budget Commission.

The data raises some basic questions as to the logic behind the Mayor’s efforts to expand the City’s role in the provision of ferry service. With the onset of the State’s budget process, transportation will again be in the spotlight with the MTA facing extraordinary capital funding needs. The City has been resistant to the concept of increased city subsidies for mass transit even as it continues to subsidize services which support only a very narrow slice of the population.

CALIFORNIA SCHOOL DISTRICT FRAUD

In the Fall of 2019, the SEC announced that it had fined the Montebello Unified School District Superintendent $10,000 after finding the district had broken federal laws involving the sale of bonds used to raise millions for construction projects at the school district. In September, according to the SEC’s complaint and order, immediately before and concurrently with the District’s sale of $100 million of general obligation bonds in December 2016, Montebello’s independent auditor repeatedly raised concerns about allegations of fraud and internal controls issues to the District’s Board of Education and management. In response, Montebello allegedly refused to authorize the fees needed for the audit firm to complete its audit and instead decided to terminate the audit firm. The offering documents for Montebello’s December 2016 bonds failed to disclose this information to investors and instead included a copy of the District’s audit report from the prior fiscal year, which included an unmodified or “clean” audit opinion from the firm.

The SEC alleges that Montebello’s former Chief Business Officer, helped prepare the misleading offering documents and also concealed the audit firm’s concerns by providing deceptive updates about the status of its pending audit to various gatekeepers, including the disclosure lawyers who worked on the bond offering. The SEC’s order found that Anthony Martinez, Montebello’s Superintendent of Schools, signed the final bond offering document and made false certifications in connection with the bonds.

Now the legal difficulties could impact the District’s ratings. S&P Global Ratings placed its ‘A-‘ underlying rating (SPUR) on Montebello Unified School District, Calif.’s outstanding general obligation bonds and its ‘BBB+’ SPUR on Los Angeles County Schools Regional Business Services Corp.’s outstanding certificates of participation issued for the district on CreditWatch with negative implications. S&P has not received responses to requests for information ” regarding the federal investigation . S&P said “We need the information to maintain our rating on the securities in accordance with our applicable criteria and policies.”

We wonder why S&P doesn’t just pull the rating. Yes that might hurt secondary bond values but it would also be a real signal that misrepresentations large or small will not be tolerated. After all, one could make the argument that these misrepresentations have led to a rating not fully commensurate with the District’s financial realities. It would be nice to see the rating agencies take a stand. The SEC’s complaint, filed in U.S. District Court for the Central District of California, charges the business manager with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder as well as Section 17(a) of the Securities Act of 1933, and seeks permanent and conduct-based injunctions as well as a financial penalty.

PENSIONS CLAIM ANOTHER ILLINOIS RATING

S&P Global Ratings lowered its rating to ‘A+’ from ‘AA-‘ rating on Cook County, Ill.’s general obligation (GO) debt, of which roughly $2.8 billion in principal for GO bonds remains outstanding. The outlook is stable. The move comes as the state enters its FY 2021 budget season. Underfunded state and local pension funds are once again front and center in the budget debate.

While much attention is rightly focused on the City of Chicago’s difficult pension situation, Cook County faces substantial issues and relies on the same tax base as does the City. “The downgrade reflects the county’s large and underfunded pension obligation,” said S&P, “and although the county has made steps to address its pension funding levels–specifically with a new sales tax revenue stream beginning in fiscal 2016 that significantly increased its annual contributions–its ability to meets its planned additional payments over the long term will remain an ongoing challenge, in our view. Further, even with these additional payments, in our view, contributions fall well short of both static funding and minimum funding progress, in part because of poor assumptions and methodologies.”

S&P does note some positive factors. ” Although the county’s poorly funded pension will likely place considerable pressure on its finances, in our view, recent progress toward actuarially based statutory payments through new sales tax revenue has reduced the likelihood of plan insolvency. Over the outlook period, pension contributions are known and are not expected to cause significant budgetary pressure. However, given the plans’ assumptions and methods and very low funded ratio, costs are certain to rise and will be a continuing challenge for the county–particularly given the reduced flexibility caused by overlapping entities, in our view.”

The bottom line – the Chicagoland region will continue to be negatively impacted. While legally distinct entities, the troubles of one or the other credits (the city or the county) are inextricably linked. Not only is the scope of the problems significant but the politics may be as difficult as there are in any large city. We think that the rating could have easily accommodated one more notch lower to reflect those pressures.

CALIFORNIA SCHOOL DISTRICTS BENEFIT FROM LEGISLATION

Assembly Bill 1505 was enacted in 2019 and it became effective at the beginning of 2020. The legislation was designed to slow the growth of charter schools, especially in poorer areas where charters and public districts directly compete for students and the state aid that follows them. Aid, after all is based on attendance. K-12 school districts gained more authority via legislation to reject new charter school applications. K-12 districts have more flexibility to reject new charter school applications by allowing them to evaluate the fiscal impact of a proposed charter on the district, and whether the school will duplicate or undermine programs already in place. The law also makes districts the primary authorizers of new charter schools, with the state retaining an appeal review function.

Like it or not, charter schools do indeed move resources from one group of schools to another. Often, charters do not have to deal with legacy employee costs or the costs of special education. The number of charter schools increased 60% statewide between the 2009-10 and 2017-18 school years. The largest number of charter students is by far in the Los Angeles Unified School District. Proportionally, the poorer districts of Oakland and Sacramento see significant proportions of its total enrollment base in charters (27% and 13% respectively.

Limits on new charters has to be viewed positively in terms of general credit factors. The new law provides additional powers for financially struggling K-12 districts to limit potential new charter school competitors, a credit positive for those districts. The districts include those the state says “may not” meet financial obligations, which have a “qualified certification;” those the state says “will not” meet them, which have a “negative certification;” and those under state receivership. Of California’s 10 districts with the largest charter school enrollment, three fit these categories: Oakland Unified, Twin Rivers Unified, and Sacramento City Unified.

CLIMATE CHANGE FOLLOW UP

Last week we commented on the subject of climate change and municipal credit. Since then the National Oceanic and Atmospheric Administration released data regarding damage from floods in 2019. The data is interesting.

Precipitation across the contiguous U.S. totaled 34.78 inches (4.48 inches above the long-term average), ranking 2019 as the second-wettest year on record after 1973. Michigan, Minnesota, North Dakota, South Dakota and Wisconsin each had their wettest year ever recorded. Hence, the downstream flooding which impacted the Mississippi Valley. The combined cost of just the Missouri, Arkansas and Mississippi River basin flooding ($20 billion) was almost half of the U.S. cost total in 2019.

The average temperature measured across the contiguous U.S. in 2019 was 52.7 degrees F (0.7 of a degree above the 20th-century average), placing 2019 in the warmest third of the 125-year period. Here’s an anomaly that always complicates the debate. Despite the warmth, it was still the coolest year across the Lower 48 states since 2014. Last year, the U.S. experienced 14 weather and climate disasters with losses exceeding $1 billion each and totaling approximately $45 billion. Their locations as depicted in the image provided by NOAA reinforces one point we made last week. Simply avoiding “coastal” risk is not a sophisticated enough approach.

NEW YORK CAPITAL DEMANDS RISE

The numbers were already staggering – $30 billion for the Gateway Tunnel, $50 billion for the MTA, and $32 billion for the New York City Housing Authority (NYCHA). At $112 billion the pressure is enormous. So it was a bit disconcerting to see that the new boss at NYCHA has had to increase NYCHA’s need by 25% in his latest estimate. Some change from the 2018 estimate was expected but this a substantial increase. Apparently, the 2018 estimate didn’t fully capture the costs of lead abatement, elevator replacement and other compliance costs.

Sometime this year the agency will release an updated proposal to raise additional capital and therein lies the rub. Debt will clearly be part of the plan but there were vague references that it “might be” looking to disposition. Currently, NYCHA hopes to convert 15,000 apartments to private management by the end of the year as part of the federal Rental Assistance Demonstration program (RAD).

Under RAD, it allows Public Housing Authorities (PHA) to manage a property using one of two types of HUD funding contracts that are tied to a specific building: Section 8 project-based voucher (PBV); or Section 8 project-based rental assistance (PBRA). PBV and PBRA contracts are 15- or 20-years long. The program is “voluntary” but it is important to note that the city is managing NYCHA under the terms of a consent decree with the federal government. There is enormous pressure on the City to use the RAD program. So it is not a purely financial or credit based approach. That raises concerns about the execution of these conversions and the clarity surrounding the potential implications for NYCHA and its investors.

So we look out ahead and see a capital need of some $120 billion just from these three areas. That doesn’t count the normal capital investment requirements of the City. One thing investors won’t have to worry about going forward will be the supply of new bonds.

HIGH SPEED RAIL

After a five year effort, Indian County, FL is expected to let an appeals court ruling stand unchallenged that The U.S. Court of Appeals last month ruled Virgin Trains legally was entitled to finance its private railroad project with government issued, tax-free private-activity bonds. The county has determined that its appeal was unlikely to be heard by the U.S. Supreme Court. It will not pursue such review.

The county will continue to pursue its Circuit Court lawsuit over maintenance of the 21 crossings along the Florida East Coast Railway corridor within Indian River County. The lawsuit, filed last year, claims Indian River County should not be required to pay for crossing improvements that Virgin Trains says are required in order to run 32 higher-speed passenger trains daily. Safety has been a significant issue for Virgin USA as federal data released in December that in terms of deaths by pedestrians on tracks, the Brightliner route is the most dangerous in the US.

These deaths occur at a rate of more than one a month and about one for every 29,000 miles the trains have traveled. That’s the worst per-mile death rate of the nation’s 821 railroads. The company has not been blamed in any of the deaths as suicides and drivers trying to beat or avoid existing gates have been the cause. U.S. trains fatally strike more than 800 people annually, an average of about 2.5 daily. About 500 are suspected suicides. So the issue comes down to who pays for the upgraded crossings – the railroad or the County?

The favorable turn in the legal outlook is clearly credit positive for the bonds.

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.

Muni Credit News Week of January 13, 2020

Joseph Krist

Publisher

________________________________________________________________

We value your feedback as we move forward into the new year. Let us know what you think. Tell us what you would like to see covered. E mail me directly @ joseph.krist@municreditnews.com.

________________________________________________________________

ATLANTIC CITY

Four years into its five year recovery program overseen by the State of New Jersey, Atlantic City has seen the effort to support and reform its finances bear some fruit in the form of a rating upgrade. Moody’s upgraded the City of Atlantic City, NJ’s Long-Term Issuer Rating to Ba3 from B2. The outlook has been revised to stable from positive. The outlook has been revised to stable from positive. This means that if the City were to issue unenhanced general obligation debt it would come at that rating. Currently, all of the City’s outstanding GO debt is secured under state enhancement programs.

The rating reflects not only the City’s fiscal difficulties but also its location as a coastal community. The upgrade “reflects the city’s continued, albeit reduced, financial and economic stress. The upgrade reflects the successful settling of long-term, open-ended liabilities and the concomitant improvement in city finances, the successful implementation of the casino PILOT program, the recent health of the casino industry, and the ongoing efforts to diversity. The rating is also informed by the continued, strong oversight by the State of New Jersey.”

Moody’s also commented specifically on climate related impacts on the rating. This reflects growing interest by the market in climate change related impacts on municipal credits. It follows Moody’s acquisition of climate data providers which it will now incorporate as a factor in its formal rating process. In the case of Atlantic City, “the rating is heavily influenced by the city’s exposure to environmental, social, and governance risk. The city is located on the Jersey Shore and is exposed to rising sea levels and extreme weather events. Income inequality is starkly evident in the city’s juxtaposition of high unemployment and poverty and opulent casinos. Finally, the city’s governance structure is of paramount importance; the city’s ongoing recovery has been largely masterminded by extraordinary state oversight which is set to expire in less than two years.”

In spite of the clear reference to climate change, it is not clear what the ultimate impact of this emphasis will be. Will it act as a hard cap on how high a rating can go for a coastal community? It will be an evolving process as a variety of entities and funding sources would have to be employed to combat climate change. So it is not clear what the limits are in terms of what an individual entity (like Atlantic City) and its ultimate responsibility for mitigating climate change related impacts on its credit. This introduces a level of uncertainty into the ratings process which will take some time to be resolved.

MEDICAID EXPANSION IN KANSAS

It has taken a change in administrations and a more responsive electorate but as we go to press the Kansas legislature is considering a proposal to expand Medicaid under the reached a deal with Republicans who control the Legislature to expand Medicaid under the Affordable Care Act. The agreement includes provisions to help Medicaid recipients find jobs. It does not however, include a work requirement that some Republicans in Kansas and other states have long called for.

The Kansas House passed a version of Medicaid expansion last year. In 2017, a Medicaid expansion passed but was vetoed. Since then, four rural hospitals in the state have closed. The New York Times cited one that closed in Independence, Kan., in 2015 would have received an estimated $1.6 million a year if Medicaid had been expanded.

This plan is a true compromise. The Governor gets a relatively straightforward expansion which is estimated to allow some 150,000 to enroll. The legislature gets a program that has been proposed for driving down private health insurance premiums to make it less likely people would drop existing private plans for Medicaid. The proposal would allow the state to charge new Medicaid participants a premium of up to $25 per individual and $100 per family. It also would ask hospitals to contribute $35 million a year to cover the state’s costs.

The agreement provides for a one year period to fully develop the premium reduction plan and develop a source of funding for it. It does not include a prior plan to increase the state’s tobacco taxes including a $1 increase in the cigarette tax. The new expansion proposal would extend Medicaid coverage on Jan. 1, 2021, to Kansas residents earning up to 138% of the federal poverty level, or $29,435 for a family of three.

As the legislature debates the issue, the Journal of the American Medical Association published a study which finds that counties in states that accepted the Medicaid expansion under the Affordable Care Act (ACA) had a 6% lower rate of opioid overdose deaths compared to counties in states that did not expand Medicaid. It found that Medicaid expansion may have prevented between 1,678 and 8,132 deaths from opioid overdoses between 2015 and 2017. For comparison, there were 82,228 total opioid overdose deaths in that time period, the study states.

PRIV ATIZATION FAILS IN JACKSONVILLE

In July, 2019, the Jacksonville Electric Authority initiated a process by which it would explore the privatization of the city’s municipal electric utility. JEA’s board of directors unanimously has since voted in late December to stop its efforts to sell the city-owned utility. Thus ends a process which cost $10 million and yielded no discernable benefits. The cancellation came as the local press discovered that the head of the utility had positioned himself to financially benefit from a sale to a private entity.

That executive had taken a number of controversial steps including threatening layoffs if a privatization was not allowed to be pursued. Over one fourth of the workforce was at risk. A plan also came to light where employees of JEA would receive “bonuses” from the sale. The plan would have allowed employees to purchase “shares” of JEA, much like an employee stock option, that could grow in value and be cashed in if JEA hit certain financial benchmarks. Auditors said the financial goals were too easy to reach and that limitless nature of the plan could result in employees receiving $315 million if JEA was sold for $4 billion.

The whole mess has cast privatization proponents in a poor light and reinforce the worst fears of customers of public entities considering privatizations. The local state attorney has announced that her office “is — and has been — looking into matters involving JEA.” JEA decided to cancel the bonus plan after the city attorneys determined the plan wasn’t legal under local and state laws.

If public/private partnerships or privatizations are going to have a significant role in the development and expansion of the nation’s infrastructure, the kinds of issues which have arisen in Jacksonville (and to a lesser extent with the St. Louis, MO airport) cannot continue. The use of questionable private business practices especially in terms of a lack of process transparency will only raise suspicions and mistrust on the part of the public who are the ultimate consumers of the service in question.

The change in course comes at a tumultuous time for JEA. It is still engaged in litigation that tries to void an agreement JEA signed to purchase power from the Vogtle nuclear plant expansion in Georgia for a 20-year period. JEA spent about $5 million through Sept. 30 on litigation and related negotiations in that lawsuit. JEA set aside $10 million in the budget that started Oct. 1 to continue on that legal track.

The two new Plant Vogtle reactor units are being built through an ownership partnership of Georgia Power, Oglethorpe Power, the city of Dalton, Ga., and the Municipal Electric Authority of Georgia (MEAG). JEA entered into a contract with MEAG to purchase electricity generated by a 206 megawatt portion of the two units, which is one-tenth of the 2,200 megawatt capacity of both units. There would be a significant impact to ratepayers if the purchase cannot be voided. All in all a fairly credit negative environment for the JEA credit.

NEW ENGLAND HEALTHCARE

Partners HealthCare System is in the process of changing its name to Mass General Brigham. Regardless of the label, the current System is the legal obligor on a significant upcoming bond issue. The system has been at the center of the healthcare finance debate. Healthcare advocates have viewed the System as a source of many of the perceived problems in terms of costs, pricing, and business practices with which universal health insurance advocates often take issue.

In the midst of the unfolding debate, Partners is issuing a total par amount of bonds expected to be approximately $1.3 billion and bonds are expected to have a final maturity in 2060. The bonds come with a Aa3 long term rating. Partners is the sole member of the following entities: Massachusetts General Hospital (MGH), Brigham Health (parent of Brigham and Women’s Hospital and Brigham and Women’s Faulkner Hospital), NSMC HealthCare, Inc. (parent of North Shore Medical Center), Newton-Wellesley Health Care System, Inc. (parent of Newton- Wellesley Hospital), Foundation of the Massachusetts Eye and Ear Infirmary, Inc. (MEEI), Partners Continuing Care (parent of several non-acute service high level providers, including the Spaulding Rehabilitation Hospital Network), AllWays Health Partners (f/k/a Neighborhood Health Plan), Partners Medical International and Partners HealthCare International.

These are institutions with international reputations and historically strong finances which underpin the credit. Given those characteristics, the rating is where it is because of high leverage, competition, and an expectation of moderating results in fiscal 2020. Nonetheless, Partners finds itself in an increasingly challenging environment given its position between all of the various interest groups in the healthcare debate. The bond sale will allow the market to render its verdict.

UTILITIES – MORE BAD NEWS FOR COAL

The Associated press reported that the Colstrip Steam Electric Station in Colstrip, Mont., will close two of its four units by the beginning of this week, or as soon as they run out of coal. The plant employs around 300 people, some 15% of town of Colstrip, with a population of some 2,300 people. The six utilities that own shares of the two remaining units are making plans to stop operations as soon as 2025.

One of the issues associated with the closure of these facilities is the need for protracted environmental remediation. The AP reports that large amounts of ash from burning coal at Colstrip has contaminated underground water supplies with toxic materials and will cost hundreds of millions of dollars to clean up. The same is true of nuclear facilities when they close. These generate significant legacy impacts which can become hindrances to efforts to move the impacted economies forward.

The immediate impact will be on property value as a non-operational facility becomes significantly less valuable. The resulting lower tax obligation for the plant’s owners can result in significant hits to the host community’s tax rates. Often, smaller host communities become dependent on one large taxpayer and face significant disruption caused by lower revenues.

CLIMATE CHANGE AND MUNI CREDIT

Having commented many times on climate change in this and other spaces related to municipal bond credits, we are more than interested to see the market’s current interest in the issue. We are heartened to see attention drawn to it, but we are disappointed in some of the simplistic advice offered. Like sell Florida and California to defend against ocean level increases and reinvest inland. But that stance can lead investors down equally wet roads.

Some examples – the greatest sustained flooding issues in 2019 were in the Spring in the Midwest. Yes there was storm related flood damage where one would expect in the hurricane zones on the coasts later in the year. In the Midwest, there was not only the physical damage to infrastructure but the damage from not being able to raise a crop due to wet conditions and flooding. So maybe those climate related risks (heavy winter moisture and exceptionally low temperatures backed up moisture for months) will continue and you might want to lighten up on exposed Midwest credits.

Or you might look a bit northeast of the Mississippi flood zones. But then you have to ask, where in terms of miles is the greatest coastline or shoreline exposure? The 2,165 miles of coast for the 14 states on the Atlantic Ocean seems significant. There are 1,293 miles of coast for California, Oregon and Washington on the West Coast. But combined they are less than the real coastal exposure to rising levels of water. That would be the 4,530 miles of U.S. coastline for the five Great Lakes.

The Gulf of Mexico has 1,631 miles of coastline (apparently Florida gets it two ways.). Hawaii has 750 miles but the leader is Alaska at 5,580 miles of coastline on the Pacific Ocean. Around the Great lakes, the problems are immediate. According to the Chicago Tribune, in 2013 Lake Huron bottomed out, hitting its lowest mark in more than a century, as did Lake Michigan, which shares the same water levels, according to data from the U.S. Army Corps of Engineers and the National Oceanic and Atmospheric Administration. Since then the rate of lake levels increasing has been astonishing. The swing in the water level of Lake Huron from January 2013 to July 2019 was nearly 6 feet, from historically low to historically high.

Island properties near Michigan’s Upper Peninsula are under water, the lakeshore in Chicago is being overtaken and eroded damaging water access and recreational infrastructure, and intermittent flooding along Lake Ontario in New York State has become more frequent and voluminous. So if we really do take the threat of rising sea levels and altered climatic events seriously than these numbers would make the case that the job of avoiding their impact on municipal bond investments will be that much harder. There are fewer places to hide.

CALIFORNIA BUDGET

California Gov. Gavin Newsom presented his $222.2 billion budget proposal with plans to spend part of a projected $5.6 billion surplus on green technology and homeless aid. The presentation of the Governor’s proposal is the official kickoff to the FY 2021 state budget process. Highlights include funding 677 new CalFire positions over five years and allocating $90 million for new technology and a forecast center to better predict, track and battle blazes. The plan also assumes the continuation of a $200-million annual investment approved by lawmakers to reduce the kinds of vegetation that fuel wildfires, and more than $100 million to fund the Legislature’s pilot program to harden homes in fire-prone areas. There would be $50 million in one-time funding to help critical services prepare for power outages associated with fire prevention plans.

Governor Newsom also has a proposal to set aside $250 million per year for four years to create the Climate Catalyst Revolving Loan Fund, which would help small businesses and organizations invest in projects, such as recycling and climate-smart agriculture, to help the state meet its environmental goals.

The total spend sets a record if it is adopted. Education funding remains a preeminent issue as does funding for healthcare. The budget would deliver more money to Medi-Cal, the state’s health care program for low-income people. Part of that expansion would boost assistance for homeless people and mental health care funded in part by $750 million from the anticipated surplus to be directed to organizations that help homeless Californians. That money could be used to pay rent, build housing and improve shelters.

The budget anticipates an accumulated surplus for the State of $21 billion. Newsom and lawmakers have until June 15 to pass a budget in time for the start of the upcoming fiscal year July 1. The Governor submits a revised proposal in May. If the economy continues on its current course, a budget similar to this plan should be credit neutral.

LOUSIANA P3

The Louisiana Department of Transportation and Development announced the execution of a Comprehensive Agreement with Plenary Infrastructure Belle Chasse, LLC an indirect, wholly-owned subsidiary of Plenary Group Concessions USA Ltd. to build the Belle Chasse Bridge and Tunnel Replacement Project in Plaquemines Parish. The new bridge will be located between the existing vertical lift bridge and tunnel and will include four lanes with a separated, protected sidewalk in the southbound direction.

This the first transportation infrastructure Public-Private Partnership (P3) project in the state. Funding for this project will be combined with funds from the $45 million Infrastructure for Rebuilding America (INFRA) grant that DOTD received in June 2018, $26.2 million in federal/state funds allocated to DOTD, $12 million in federal funds allocated by the Regional Planning Commission, and up to ten percent of the project cost in GARVEE Bond proceeds, as this is a toll project.

The tunnel opened in 1956, and the current bridge was built in 1968. The average daily traffic is approximately 35,000 and this route serves as the primary access point to the residents, businesses, and industries of Plaquemines Parish. Construction is anticipated to begin summer 2021, with an estimated completion of spring 2024, weather dependent. The legislature’s acceptance of the plan had Construction is anticipated to begin summer 2021, with an estimated completion of spring 2024, weather dependent. That approval overcame opposition to tolls for the project. Construction is anticipated to begin summer 2021, with an estimated completion of spring 2024, weather dependent.

The deal is a positive for private/partnerships generally and for Louisiana in particular. With the state facing so many infrastructure challenges especially through its exposure to climate issues, the acceptance of the P3 concept is an important step forward for the state.

Muni Credit News Week of January 6, 2020

Joseph Krist

Publisher

RECENT STATE DEMOGRAPHICS

According to the US Census Bureau, Forty states and the District of Columbia saw population increases between 2018 and 2019. Ten states lost population between 2018 and 2019, four of which had losses over 10,000 people. The 10 states that lost population were New York (-76,790; -0.4%), Illinois (-51,250; -0.4%), West Virginia (-12,144; -0.7%), Louisiana (-10,896; -0.2%), Connecticut (-6,233; -0.2%), Mississippi (-4,871; -0.2%), Hawaii (-4,721; -0.3%), New Jersey (-3,835; 0.0%), Alaska (-3,594; -0.5%), and Vermont (-369 ; -0.1%).

To be honest, these numbers just tell a story from 50,000 feet up so much detail and nuance is lost. We are more interested in things like the incomes and ages of the people moving. States with decreasing but aged populations present one set of issues while growth can still dictate increased demand for capital facilities (especially schools). Both present challenges.

The point is that much will be made of the data depending on where an individual state falls in the rankings. Critics of fiscal policies in Illinois and New York will make much of the negative data while states which grow will likely take a different view. By the way, here are the eight growing states and the numerical increases – Washington (612), Utah (293), Nevada (232), Arizona (175), Idaho (166), Montana (66), Vermont (44), and Colorado (30).

That is not a large number but he direction is still positive. Four states had more deaths than births, also called natural decrease: West Virginia (-4,679), Maine (-2,262), New Hampshire (-121) and Vermont (-53). The top states with net domestic migration loss were California (-203,414), New York (-180,649), Illinois (-104,986), New Jersey (-48,946), Massachusetts (-30,274) and Louisiana (-26,045). We note that the top 5 all are negatively impacted by the loss of the SALT deduction.

MICROMOBILITY

Micromobility advocates will have to wait before they can legally deploy electric bicycles and scooters on the streets of New York’s cities. Legislation legalizing their use was vetoed by the Governor. One of his primary stated issues is the law’s lack of a helmet requirement for users of the bicycles. The legislation would have allowed cities and towns around the state to set local rules for electric scooters and bicycles. Scooter rental companies like Bird and Lime would not have been allowed to operate in Manhattan.

The deployment of these vehicles raises significant safety issues on both sides of the transportation transaction. In Elizabeth, NJ, a 16-year-old boy became the first person killed while riding a shared electric scooter when he collided with a tow truck in November. Another NJ city – Hoboken – started a pilot program in May and stopped it last month while the City Council is considering whether to renew the program.

Leave it to the micromobility advocates to treat this not as a transit safety issue but in terms of race, inequity, and general social policies. That ignores the reality of the real time use and speeds of the bicycles delivering your food and the danger to the unprotected. Of course, these advocates tend to ignore the use of these vehicles on sidewalks, for example. The point is that this clouds the debate and the lack of common sense does not advance development.

SUTTER HEALTH BURIES SETTLEMENT UNDER CHRISTMAS WRAP

Sutter Health, the dominant haelthcare provider in northern California agreed to pay $575 million to settle claims of anti-competitive behavior brought by the California state attorney general as well as unions and employers. The details were not expected to be made public until the first quarter of 2020. Sutter will also be prohibited from engaging in several practices including “all or nothing” agreements which made insurers choose between servicing all of Sutter’s hospitals or none of them.

Sutter will be required to limit what it can charge patients for out-of-network services. These are a leading cause of “surprise medical bills”. The chain was not helped by the fact that there was lots of data available to document the rise in prices Sutter was able to drive through ownership of an increasing number of facilities.

The news ironically followed the release by the California Health Care Foundation of a report documenting the disparity between health costs within the state. It found that various inpatient and outpatient services cost more in California than in other states, and they cost more in Northern California than in Southern California. A critical factor in the fast growth of prices in California compared with the rest of the country is market concentration. The percentage of physicians in practices owned by a hospital/health system has increased dramatically. For specialists, the increase has been even faster.

In 2016, Northern California wage-adjusted prices were on average 24% higher than in Southern California. In the end, the data spoke for itself and the various explanations offered simply did not carry the day.

P3s

Denver International Airport has paid $128 million to Great Hall Partners as part of its divorce from the consortium, which had been hired to redesign and renovate the airport’s main terminal. When all is said and done, DIA will pay between $170 million and $210 million. DIA moved to terminate the contract after the revelation that bad concrete is laced throughout the terminal. The termination also followed big cost disagreements with the consortium, which claimed the project would cost $1 billion — not $650 million, the agreed-upon figure.

DIA officials expect to propose a contract with the new builder, Hensel Phelps, in January. Construction should resume in January but the completion date has been pushed back to 2024.

St. Louis has decided not to pursue a P3 arrangement for its airport after taking initial steps towards such a financing. The announcement came as the four member working group was reviewing 18 submissions to a request for qualifications from firms and working to finalize which firms would be invited to participate in a request for proposals. The city was seeking “to structure a transaction that meets the city’s primary objectives: improvement of the airport for all stakeholders, including incremental uses of the airport’s significant excess capacity and net cash proceeds to the city, upfront and/or over time for non-airport purposes.”

Support for the project was less than universal. The politic s behind the proposed expansion reflect the status of the City as the owner of the airport which actually serves a significant population outside of the city which drives facility demand. The clash between those interests has come to the fore in the form of proposals to reconstruct regional governmental structures. These were defeated at previous elections with concerns about how those changes would shift power and economic benefits throughout the St.Louis metropolitan area. Support for a public vote was growing and in light of the regional politics, such a vote would have been problematic.

In New York, recent successful public/private partnerships has supported an environment for increased use of the concept. Now, Gov. Cuomo approved legislation Tuesday granting New York City the power to issue a single request for proposal and contract for the engineering and construction of capital projects. The bill also forces private contractors to cover any extra costs that come with unexpected changes or delays to a project. Design-build can also be applied to most undertakings of the Department of Design and Construction, Department of Environmental Protection, Department of Transportation, Health and Hospitals Corporation, School Construction Authority that costs more than $10 million. The legislation sets the threshold for the Parks Department or the Housing Authority at $1.2 million.

CYBER ATTACK NETS RANSOM

A December cyber attack on the Hackensack Meridian Health system resulted in the payment of a ransom to the hackers. The attack brought down the system’s computer network for two days, during which facilities were forced to reschedule some non-emergency procedures and revert to using paper—rather than electronic—medical records. Hackensack Meridian said that, “due to the frequency with which healthcare organizations are targeted by cyber criminals,” it had a coverage plan in place to cover the costs associated with the cyber attack, including payment and recovery efforts.

Hackensack Meridian did not immediately comment on which parts of the system were not operational and for how long. there was no initial information provided regarding how much time the system expects it to take to bring those applications online.

The system ran the risk of paying up and then not seeing their systems back on line. It also, by going against broad recommendations from law enforcement that ransoms not be paid, risks encouraging other attacks on Hackensack Meridian but other providers as well.

CANNABIS

In its annual draft report, the California Cannabis Advisory Committee cited high taxes, overly burdensome regulations and local control issues posing significant obstacles to the legal marijuana market in California. Those pressures are reflected in tax revenue about a third of what was expected and with only about 800 of an anticipated 6,000 licensees open for business.

The report estimates that California is expected to generate $3.1 billion in licensed pot sales in 2019. As is so often the case, that would make the Golden State the largest market for legal cannabis in the world. But nearly three times as much — $8.7 billion — is expected to be spent on unlicensed sales. It was originally estimated the state would take in $1 billion annually in tax revenue from cannabis. In reality, the fiscal year that ended in June saw just $288 million collected. The current state budget projects $359 million in tax collections.

An increase in taxes on cannabis cultivation is scheduled for Jan. 1, including a bump tied to inflation that will raise the levy on cannabis flower from $9.25 per ounce to $9.65. The Legislative Analyst’s Office recommended that lawmakers consider overhauling how cannabis is taxed, including a possible potency-based tax to reduce harmful use and eliminating the cultivation tax.

Meanwhile, the Massachusetts Cannabis Control Commission marked the end of one year of legal recreational cannabis sales in the Commonwealth. The first two Marijuana Retailers commenced operations in Massachusetts in November, 2018. Since then, 33 total have opened statewide. Another 54 Retailers with provisional or final license approval were in the process of completing the Commission’s inspection and compliance procedures towards that end. In total, the Commission has licensed 227 Marijuana Establishments, including Cultivators and Product Manufacturers.

ANOTHER PRIVATE COLLEGE IN TROUBLE

Just before the new year, another longstanding private college saw its finances result in a downgrade. This time it’s Hartwick College in Oneonta, NY. The institution’s origin is rooted in the founding of Hartwick Seminary in 1797. That history and tradition has noit been enough to balance the College’s finances. Moody’s Investors Service has downgraded Hartwick College’s bond rating to Ba3 from Ba1, affecting $38 million of debt. The outlook continues negative.

In Moody’s view,” The downgrade is driven by Hartwick’s materially increasing and now very deep operating deficits that will persist through at least fiscal 2020 and most likely beyond. The college is relying on supplemental endowment draws to fund operations which will result in further reductions in liquidity. This weak financial performance is largely driven by a challenging revenue environment with a small scale of operations, $49 million expense base, and a high cost education model. While the college has incrementally trimmed expenses over the past five years, reductions have fallen well short of the 20% decline in operating revenue during this period. The college confronts a difficult student market environment reflected in declining net tuition revenue, which accounts for about 81% of total operating revenue, a business condition which is likely to persist for the foreseeable future.

Hartwick College is a small, tuition dependent private liberal arts and sciences college with fall 2019 enrollment of 1,180 students and fiscal 2019 operating revenue of approximately $39 million. That is not nearly enough to cover some $10 million of expenses over and above that revenue stream. For four consecutive years through fiscal 2019, the college’s calculated annual debt service coverage under the covenant was below 1.0x. The negative outlook acknowledges the college’s structurally unbalanced operating performance driving continued liquidity declines. Absent a significant increase in philanthropy, it will be difficult for the college to restore fiscal balance.

Declining net tuition revenue accounts for about 81% of total operating revenue, a business condition which is likely to persist for the foreseeable future. Over the last five years, operating revenue has declined some 20%.

The news on Hartwick comes as government datat continues to reflect demographic trends which bode ill for college credits which are tuition dependant. declining net tuition revenue, which accounts for about 81% of total operating revenue, a business condition which is likely to persist for the foreseeable future.

The news on Hartwick’s worsening credit were accompanied by government datat reinforcing demographic trends which bode ill for tuition dependant private colleges. According to the U.S. Census Bureau’s national and state population estimates released, forty-two states and the District of Columbia had fewer births in 2019 than 2018, while eight states saw a birth increase. With fewer births in recent years and the number of deaths increasing, natural increase (or births minus deaths) has declined steadily over the past decade. The Northeast region, the smallest of the four regions with a population of 55,982,803 in 2019, saw population decrease for the first time this decade, declining by 63,817 or -0.1%.

NYC BUDGET OUTLOOK

Just before the end of the year, the NYC Independent Budget Office delivered its outlook for the NYC budget as we enter 2020. IBO expects the city to end the current fiscal year with a surplus of $635 million that will be used to prepay expenses for next year, leaving a gap of $2.9 billion for fiscal year 2021, which begins on July 1, 2020. IBO’s outlook for the local economy is for the expansion underway since the end of the Great Recession to continue, although at a slower pace. IBO continues to project relative strength in the growth of city tax collections—thanks largely to the property tax—at rates that exceed planned expenditures. However, as personal income tax revenue grows more slowly and the business income and property transfer taxes see actual declines in revenue, IBO expects tax revenue growth in 2020 to fall sharply from 4.0% in 2019 to 1.9%.

Looking at the economy, the growth of New York City’s economy has also slowed in 2019. IBO projects employment growth of 65,000 for the year (4th quarter to 4th quarter), compared with an average of 98,000 jobs a year from 2010 through 2018. IBO forecasts slower employment growth of 50,100 in 2020, and even smaller job gains in the following years. Slower employment growth coupled with slowing growth in the labor force is expected to increase the unemployment rate but only slightly—from a projected 4.2 percent in 2019 to no more than 4.5 percent during the forecast period. Health care and social service employment is expected to grow more slowly but this sector will continue to provide more new jobs than any other.

QUICK THINGS TO LOOK FOR IN 2020

The year opens with a mediator’s recommendation that settlement talks continue in the Commonwealth’s debt restructuring case of debt including commonwealth general obligation, Highways and Transportation Authority, and Public Buildings Authority bonds. The outcome of this process will raise as many questions as it answers about any comparable action. On Dec. 23 the Mediation Team Leader Houser described the ongoing mediation talks as being “productive.” She said if the parties reached further progress, she would have to add other parties to the discussions and that coming to an agreement would take additional time.

The judge managing the case extended the deadline for the team to submit a report to Feb. 10 from Jan. 10. She extended the planned hearing on the report and any possible further extension of the stay on litigation to March 4 from Jan. 29. She also extended the stay on litigation to March 11 from Jan. 31.

Annual appropriation debt will have its day in court as the trustee for $29 million of debt sold through Platte County, MO’s industrial development authority for the Zona Rosa Shopping Center project has been granted of an appeal of a decision rendered against the Trustee in May, 2019.

The county argued that the pledge provided on the bonds was not a promise to pay, but a pledge that the auditor could request coverage of a shortfall with the decision resting with the county on an annual basis. Platte County sued the bond trustee UMB Bank NA in November 2018 to secure a legal determination that it was not legally on the hook to make the appropriation.

The Zona Rosa bonds are repaid with a dedicated 1% sales tax in Zona Rosa, but the revenue doesn’t fully cover debt service. It is another reminder of the need to evaluate economic viability along with project documents.

Muni Credit News Week of December 16, 2019

This is our last post of 2019. We wish you a hopeful Christmas and a brave New Year. The MCN will return in the first week of January.

Joseph Krist

Publisher

________________________________________________________________

CORPORATE AND MUNI CREDIT CONVERGENCE

As much of the analytical work current being done on municipal credit increases its focus on legal provisions after Detroit and Puerto Rico, the differences between our markets emerges. There is extensive case law on Chapter 11 but the number of completed municipal bankruptcy cases is perhaps 1,000. That lack of case law became painfully apparent in the Detroit case when bondholders were pitted against employee pensions. The concerns raised about special revenues in the Puerto Rico bankruptcy reinforce the lack of substantial case law.

Much will ride on the outcomes of the various proceedings involving Puerto Rico and its investors. Decisions which produce results which threaten long established norms in terms of the relative strength and standing of various creditor claims will clearly be a concern. At the same time there is enough about the Puerto Rico bankruptcy relative to that of states given its Commonwealth status to see a bit less concern. The different local governmental structure versus those of the lower 48 states puts a number of key municipal functions under central government rather than state/local control. The applicability of the outcome in Puerto Rico is not clear.

One thing which the Puerto Rico experience has done is to lessen the attractiveness of a Chapter 9 filing by a state from the investor standpoint. It is not clear how much weight legal provisions including constitutional provisions could be given if maximization of creditor recoveries were subjugated to other creditor classes (pensions and benefits versus debt service). We believe that state bankruptcies are not a likely result (no Illinois is not going Chapter 9). If we believe that Puerto Rico will have limited applicability, it still means that one basic credit tenet will remain true. That is the fact that if you make an investment based on sound economics, they will trump legal provisions every time.

What this does however, is make the case that harmonization of ratings between the municipal and corporate sectors will remain difficult. We think that the differences in accounting, reporting, and disclosure standards and scheduling will effectively block full harmonization.

FLORIDA GEORGIA WATER DISPUTE

As drought impacted the southeastern US earlier in the decade, the State of Florida and the State of Georgia found themselves at odds over the State of Georgia retention of water by Georgia which eventually flow to Florida. The dispute was submitted to the federal courts where the State of Florida had suffered defeats in its effort to have Georgia’s water restrictions overturned on environmental grounds. Florida had appealed adverse decisions to the US Supreme Court.

The Supreme Court held, however, that a prior Special Master had applied too strict a redressability standard. In light of that holding, the Court remanded the dispute to a new Special Master with instructions to make findings concerning the following questions on remand: (1) whether Florida suffered harm caused by decreased water flow into the Apalachicola River; (2) whether Florida showed that Georgia’s use of the Flint River is inequitable; (3) whether that potentially inequitable use harmed Florida; (4) whether an equity based cap on Georgia’s use of Flint River waters would materially increase stream flow in the Apalachicola River given the Corps’ operational rules or reasonable modifications that could be made to those rules; and (5) whether such additional stream flow in the Apalachicola River may significantly redress the economic and ecological harm that Florida has suffered.

Now the Special Master has issued his findings to the Court. He did recommend that the Supreme Court grant Florida’s request for a decree equitably apportioning the waters of the ACF Basin because the evidence has not shown harm to Florida caused by Georgia; the evidence has shown that Georgia’s water use is reasonable; and the evidence has not shown that the benefits of apportionment would substantially outweigh the potential harms. The complaining state must demonstrate by clear and convincing evidence “that it has suffered a threatened invasion of rights that is of serious magnitude.”

Florida was attributing declines in its oyster industry to lower water flows. Florida alleged that lower flows in the Apalachicola River (the “River”) have harmed the ecosystems in both the River and the Apalachicola Bay (the “Bay”). Florida highlights the collapse of the Bay’s oyster fishery, but Florida has not proved that the harm to the oysters resulted from “the action of [Georgia].”

The Special Master said that ” Florida has pointed to harm in the oyster fishery collapse, but I do not find that Georgia caused that harm by clear and convincing evidence. Next, although Georgia’s use of the Flint and Chattahoochee Rivers has increased since the 1970s, Georgia’s use is not unreasonable or inequitable. Last, I have determined that the benefits of an apportionment would not substantially outweigh the harm that might result. This is especially true given that the Army Corps’ reservoir operations on the Chattahoochee River would prevent most stream flow increases from reaching Florida during the times when more stream flow is needed to alleviate Florida’s alleged harms.

As time goes on and climate change impacts water supplies and demands, the use and distribution of water from sources in multiple jurisdictions will continue to be a flashpoint for disputes. Although not the case in this dispute, other water disputes could definitely have credit implications.

PUERTO RICO

The bankruptcy judge overseeing Puerto Rico’s efforts to restructure and eliminate its debt has approved a scheduling plan proposed by a court-appointed mediation team. the mediator has recommended that the case be litigated after efforts to avoid that did not succeed. The mediation team will submit an amended report by mid-January.

The action follows the mediator’s recommendation last month that litigation should proceed over the rights of owners of revenue bonds against the U.S. commonwealth, as well as the validity of general obligation and Public Buildings Authority bonds and whether bondholders’ claims were secured or unsecured.

The mediator said bond-related issues “have the potential to drive overall restructuring outcomes.” As the litigation unfolds, negotiated settlements of the items in dispute could occur but we see it as more likely that the litigation will determine how the parties pursue their claims. The debt subject to the litigation currently include commonwealth general obligation, Highway and Transportation Authority, and Public Building Authority bonds.

Litigation will establish creditor classes and hopefully will provide clarity over the status of special revenue bonds. It is the special revenue bond question which seems to have most perplexed the market. There are significant worries that a resolution of Puerto Rico’s fairly unique credit issues would lead to a significant change in the treatment and application of special revenues could establish a very negative precedent for holders of revenue bonds nationwide. The likelihood that an unfavorable litigation result through efforts by nontraditional investors with much more short term perspectives than are the case for the vast bulk of municipal bond investors is a huge concern which will overhang the market into 2020.

IOWA UTILITY P3 MOVES FORWARD

The demise of the public/private partnership concept when it involves a public university had been predicted by some after a couple of private student housing projects failed financially. The likelihood that this would be the case was lessened by news out of Iowa this week. The Board of Regents for the University of Iowa recently approved the establishment of a $1.165 billion public-private partnership (P3) with the University of Iowa (UI) utility system and ENGIE North America and Meridiam.

Under the agreement, ENGIE and Meridiam will pay $1.165 billion to the University of Iowa for a 50-year operating agreement for its utility system. Most of this upfront payment will be placed into an endowment. Annual proceeds from this endowment are projected at $15 million by the University. The UI retains ownership of the utility system and operation of the utility system will return to the university following the 50-year deal. No university staff positions will be eliminated under this agreement.

The University of Iowa will pay ENGIE and Meridiam a $35 million annual fee in years one-through-five of the deal, with the fee increasing by 1.5% annually thereafter. The UI will use $166 million of the lump sum to pay off existing utility bonds and consulting fees. The deal also addresses environmental issues. ENGIE and Meridiam will adopt the UI’s existing goal of operating coal-free by 2025 or sooner and continue campus-wide sustainability efforts.

The project has been supported by the Governor as a way to increase university funding from other than state sources.

WHAT WE’RE LOOKING AT FOR 2020

Here are the topics we think that municipal bond investors concerned about credit should watch.

Chicago – The largest city with the most serious credit problems. A diverse range of issuers rely on a common tax and revenue base and their demands on that base individually and collectively will cause significant strains. The flexibility these issuers have is limited both legally as well as practically and we expect that the City especially will be in the news all year. Strap in.

California – the state is facing a potentially huge disruption to and reconfiguration of its electric supply system. The PG&E bankruptcy and the state’s political environment could easily lead to a resolution which sees PG&E’s physical assets and their operation moved to a public rather than a private entity. The move towards a public power resolution is gaining momentum and political support. There is also a strong likelihood that Proposition 13 will come under assault from a proposed ballot initiative. If adopted, the local financial picture would be significantly altered.

New York – The state is facing a significant projected budget gap for FY 2021. It is the first state to adopt a budget each year. This year policy issues will complicate the budget process as congestion pricing details have to be adopted for NYC to put its proposed scheme into effect. The budget will also be a mechanism for addressing ongoing capital needs for mass transit and public housing in NYC.

Florida – Just as California considers a public power option for tat state, Jacksonville, Florida is undertaking a proposed sale of its municipal utility to private interests. The proposed sale is controversial and there are already signs of pushback from the City Council which must approve any transaction. A sale would have to address outstanding debt from the Jacksonville Electric Authority.

Transportation and Micro Mobility – The ongoing battles between providers of ride sharing and individual mobility modalities will continue. The continuing practices of service providers which essentially ignore local regulatory concerns will insure that the currently contentious environment in which these issues are dealt with continues. Mass transit will continue, especially in the Northeast, to face significant capital demands even as utilization slows or even declines. Systems in D.C., Boston, and New York face significant rolling stock and basic infrastructure needs which will require significant debt issuance.

TAX INCENTIVES UNDER SCRUTINY AGAIN

The past year saw a turn in the trend of municipalities and states falling all over themselves to offer tax incentives to businesses to locate within their boundaries. Opponents of a massive tax incentive plan to lure Amazon to build its headquarters 2 facility in the borough of Queens were successful in their opposition to a large tax “giveaway”. The issue continues to be debated as Amazon locates distribution facilities throughout the city while it has just announced an agreement to lease space in Manhattan to house 1500 employees. And they are doing it without direct tax incentives.

Now in Wisconsin, the state and Foxconn are engaged in a new dispute after a heavily incentivized facility has undergone a change of plans. Originally intended as a large screen production facility, the company has shifted its emphasis away from large screen to small screen products. This after it appeared that such a facility would not deliver the number and type of jobs originally promised but at lower average salaries to boot. A Governor took office in January, 2019 after the companies leading ally in the state lost his bid for a third term as Governor. The new administration has taken a dim view of the plans to reconfigure the plant away from its originally conceived form.

This has led the current administration to respond to a recent request from Foxconn to receive tax credits under its agreement for some $150 million of contracts which have been let to commence construction. In response, the state has informed Foxconn that the new project doesn’t qualify for incentives under the existing contract. The scaled-down factory in Wisconsin won’t qualify for tax credits unless the Taiwanese electronics giant renegotiates with the state. The Wisconsin Economic Development Corporation is taking the position that WEDC hasn’t evaluated the Generation 6 project (the downsized version) or properly contracted for it. As such the project is ineligible for tax credits under Wisconsin law.

Past experience with Foxconn in other states, particularly Pennsylvania where Foxconn did not deliver on its promises of new facilities in exchange for tax incentives, made many in Wisconsin cautious. Perhaps the Pennsylvania experience made Foxconn think that they could change the terms of its deal with Wisconsin without any ramifications.

We think that it is perfectly legitimate for states and cities to rethink tax incentives in the event of project changes. The history of tax incentives has yielded such a mixed bag of results versus promises that it is refreshing to see at least one jurisdiction trying to get the phenomenon under control.

Muni Credit News Week of December 9, 2019

Joseph Krist

Publisher

________________________________________________________________

MASSACHUSETTS CONSIDERS GAS TAX ALTERNATIVES

The Commonwealth of Massachusetts is considering legislation which would allow it to join with states like Oregon in implementing mileage based taxes on automobiles. The impact of alternative vehicles and increased fuel efficiency on gas tax revenues is well established. Now a bill has been offered to create a pilot program to test fees based on the miles people travel rather than the amount of gas used.

The idea is being considered as a part of a package of increased revenues for transportation. One plan would instruct the Department of Transportation to report on the feasibility of implementing all-electronic tolling on state and interstate highways “not currently subject to a toll.” A second bill would expand tolls to stretches of Interstate 93, Interstate 95 and Route 2 in an attempt to apply equal charges to drivers across the Boston region. That bill also calls for implementation of dynamic “peak pricing” where the toll varies based on road conditions.

Another bill would increase the fees on ride-sharing companies such as Uber and Lyft. The state currently assesses a flat 20-cent fee on each ride through those services, regardless of length. The legislation would change that to a scaled percentage of the overall fare. Under the proposal, the fees would be 4.25 % of the total fare paid for shared rides and 6.25 % of the fare for a single passenger trip.

Reactions to the plan show the split in approaches between and among the ride sharing companies. Uber has come out general in favor of congestion pricing versus limits on the number of vehicles (like in NYC). In this case, Lyft said in a statement that the company believes higher fees will not significantly reduce congestion. Such a position favors the ride sharing companies as it reduces funding for mass transit which has been the primary competitor targeted by these companies.

The Metropolitan Area Planning Council in July said the MBTA missed out on more than $20 million in foregone fare revenue from passengers who substituted TNCs for public transit. It is just another example of the clash of interests between private providers profiting through use of the public streets and providers of public mass transit. It is a battle without an apparent end.

However this saga ends, it highlights the ongoing need to fund public transit in an environment where many of those best positioned to fund or use it pursue alternatives. Until states and cities come up with a regulatory and taxing scheme which reflects the real benefit to the TNCs, transit funding will continue to be a clash with no real winners.

HEALTHCARE SPENDING DATA DRIVES CAUTIOUS CREDIT OUTLOOK

A colleague observed this week that AA and rated hospital credits traded anywhere from 40 to 100 basis points wide to AAA general obligation yields. We think that there is ample reason to ask for additional yield return when holding healthcare credits. Here is some data from the Centers for Medicare and Medicaid about costs which should give one pause.

National health expenditures (NHE) grew 4.6% to $3.6 trillion in 2018, or $11,172 per person, and accounted for 17.7% of Gross Domestic Product GDP).Medicare spending grew 6.4% to $750.2 billion in 2018, or 21 percent of total NHE. Medicaid spending grew 3.0% to $597.4 billion in 2018, or 16 percent of total NHE.

Private health insurance spending grew 5.8% to $1,243.0 billion in 2018, or 34 percent of total NHE. Out of pocket spending grew 2.8% to $375.6 billion in 2018, or 10 percent of total NHE. Hospital expenditures grew 4.5% to $1,191.8 billion in 2018, slower than the 4.7% growth in 2017. Physician and clinical services expenditures grew 4.1% to $725.6 billion in 2018, a slower growth than the 4.7% in 2017. Prescription drug spending increased 2.5% to $335.0 billion in 2018, faster than the 1.4% growth in 2017.

The largest shares of total health spending were sponsored by the federal government (28.3 %) and the households (28.4 %). The private business share of health spending accounted for 19.9 % of total health care spending, state and local governments accounted for 16.5 %, and other private revenues accounted for 6.9 %. That state and local share poses a real risk to the states.

Under current law, national health spending is projected to grow at an average rate of 5.5 % per year for 2018-27 and to reach nearly $6.0 trillion by 2027. Health spending is projected to grow 0.8 percentage point faster than Gross Domestic Product (GDP) per year over the 2018-27 period; as a result, the health share of GDP is expected to rise from 17.9 %in 2017 to 19.4 % by 2027.

The report also provided a wide look at the geography behind the data although it is noted that the most recent year in the 15 year record was 2014. Nonetheless, in 2014, per capita personal health care spending ranged from $5,982 in Utah to $11,064 in Alaska. Per capita spending in Alaska was 38 percent higher than the national average ($8,045) while spending in Utah was about 26 percent lower; they have been the lowest and highest, respectively, since 2012.

Health care spending by region continued to exhibit considerable variation. In 2014, the New England and Mideast regions had the highest levels of total per capita personal health care spending ($10,119 and $9,370, respectively), or 26 and 16 % higher than the national average. In contrast, the Rocky Mountain and Southwest regions had the lowest levels of total personal health care spending per capita ($6,814 and $6,978, respectively) with average spending roughly 15 % lower than the national average.

So now the data provides a map of where higher growth in the expense side of the income statement might occur geographically. Combine that with the demographic trend of a longer lived aged population and the potential for limits on revenues and you have a risk profile which demands compensation. And remember, the elderly were the smallest population group, nearly 15 % of the population, and accounted for approximately 34 % of all spending in 2014. The question is how long will it be politically sustainable for healthcare to account for 1 out of every 5 dollars of economic activity?

PG&E WILDFIRE SETTLEMENT

Pacific Gas & Electric on Friday announced a settlement with insurers and others for several Northern California wildfires including the wine country blazes in 2017 and the fire that nearly destroyed the town of Paradise in 2018. The wine country fires in 2017 impacted more than 200,000 acres mostly in Napa County, destroyed or damaged more than 5,500 homes, displaced 100,000 people and killed at least 41. The Camp fire, which raced through Paradise in 2018, killed 86 people and destroyed more than 13,900 homes.

PG&E already had agreed to pay $1 billion to cities, counties and other public entities, and $11 billion to insurance companies and other entities that have already paid claims relating to the 2017 and 2018 wildfires. This settlement is intended to help victims with no insurance and victims whose insurance was not enough to cover their losses. People have until Dec. 31 to file initial claims for a share from the trust fund that the settlement will create.

The settlement will largely reimburse insurance companies who have been largely taking the lead in funding recovery from the fires. Some $11 billion of the settlement will cover those costs. This highlights the importance of insurance in the recovery process highlighting the concerns around the willingness of the insurance industry to write business in the state. A one year regulatory halt to non-renewals is only a band aid while the industry and the state seek to craft longer term solutions to the ongoing wildfire risks in California.

Insurers have responded by raising rates, re-underwriting the risk, purchasing additional reinsurance if available and reconsidering risk models. The moratorium applies retroactively to the October 2019 state of emergency declared by current Governor Gavin Newsom, and insurers will need to offer to reinstate or renew the policies that have not been renewed or were canceled since October because of wildfire exposure.

OIL STATES TAKE DIVERGENT REVENUE PATHS

Texas sales tax revenue for November set a record for any month at $3.18 billion, an increase of 6.2% over the same month last year, state Comptroller Glenn Hegar reported. In the same month, neighboring Oklahoma recorded its first drop in monthly receipts in more than two and a half years, Treasurer Randy McDaniel reported.

The drop in revenue in Oklahoma is another sign of the weakness in reliance on one major industry. Oklahoma’s less diverse economy has already seen negative impacts in its agricultural sector due to the ongoing trade wars. Less prominent has been the fact that lower oil prices are impacting the state economy as well.

The news about declining Oklahoma revenues comes in the wake of recent announcements by Halliburton that it was making permanent the loss of some 1500 jobs in the state. These were not layoffs but absolute cuts in headcount. Oil services are an important source of well paying jobs so this does not bode well for Oklahoma’s near term revenue outlook. Recent moves by international producers to prop up prices highlight the weakness in oil pricing.

On the positive side, the Texas economy continues to reflect the increasing diversity of its economy. The Lone Star state benefits from migration and increasing employment away from the oil industry. That accounts for the positive revenue growth trend in Texas versus the negative trends in Oklahoma.

PRIVATE STUDENT HOUSING

Another private student housing deal has come under credit pressure as colleges and universities confront pricing and demand issues. The latest is at Claremont College in California.

A privately operated and financed housing facility saw the rating on outstanding debt (NCCD – Claremont Properties LLC’s (CA) University Housing Revenue Bonds) from 2017 was downgraded by Moody’s to Caa2. The rating change reflects insufficient project revenues to cover operating expenses and debt service obligations, weak market position and demand that will prolong financial distress, and an imminent tap to the debt service reserve fund (DSRF) to supplement net operating income to pay semi-annual bond debt service.

Moody’s cited the fact that “the project’s 60% occupancy rate generates insufficient revenue to cover budgeted operating expenses and debt service obligations. As a result, the borrower has requested that pledged revenue be disbursed to pay operating expenses prior to required deposits to the bond fund for debt service.” Most importantly, the rating also incorporates that there is no express or implied guaranty from the universities. Though The Claremont Colleges, Inc. (Aa3 stable), Keck Graduate Institute (KGI), and Claremont Graduate University (CGU, Ba1 negative) have entered into cooperation agreements with the project, the institutions do not provide any assurances that it will take any actions to avoid a default of the project’s bonds.

The lack of a guaranty is not unusual nor is it unusual that existence of cooperation agreements does not lead to financial pledges. This has been an item of concern especially for private partners in these transactions who have often operated under the erroneous assumption that promises to direct students or to include privately operated living facilities in the array of choices available to students of a given institution imply an obligation to provide financial support to these projects when they fail to meet occupancy and/or profitability targets established by those operators.

Muni Credit News Week of November 25, 2019

Joseph Krist

Publisher

________________________________________________________________

NEW YORK UTILITIES DIMMING CREDIT OUTLOOK

Over recent months, National Grid has been engaged in a serious fight over its efforts to secure permits for natural gas pipeline expansion. In an effort to generate pressure on state politicians and regulators, National Grid decided to stop new natural gas connections in and around the New York metropolitan area. This is generating significant pressure from developers and potential business operators.

The state and the Governor in particular have maintained their opposition to the pipeline project. Now in the face of a continued moratorium on hookups, the governor has significantly raised the ante in the dispute. He has suggested that the franchise from the state under which National Grid is permitted to operate its gas facilities could be revoked.

The next step is not clear but at least one rating agency has weighed in on the impact of the Governor’s move. Moody’s has issued a warning that all the utilities operating under state franchises are now at risk of revocation. That is indeed technically true. It is also true that the risk of revocation is significantly higher for National Grid relative to the other utilities. Moody’s referenced a perception by the New York governor that NG did not look at finding alternative (short and medium term) measures to manage the supply constraints, absent the pipeline, such that the moratorium could be lifted; and its poor handling of the moratorium with its customers.

While the method may be different now, the state can arguably be said to be doing something it has done before. In many cases, the regulatory ratemaking process accomplished sufficient pressure as to lead to the eventual dismantling of the Long Island Lighting Company. It was succeeded by the public agency, the Long island Power Authority. We do not believe that the state’s ultimate goal is to revoke the franchise but it is a bold escalation of the conflict. Moody’s views political intervention as a material credit negative, especially when the intervention emanates from a governor’s or attorney general’s office.

AUTONOMOUS VEHICLES

The National Transportation Safety Board called upon federal regulators Tuesday to create a review process before allowing automated test vehicles to operate on public roads, based upon the agency’s investigation of a fatal collision between an Uber automated test vehicle and a pedestrian. The March 18, 2018, nighttime fatal collision between an Uber automated test vehicle and a pedestrian has focused much attention on both the technology but more importantly on the approach taken by the AV industry towards government’s role in managing its streets. The NTSB said an Uber Technologies Inc. division’s “inadequate safety culture” contributed to the crash.

The NTSB determined that the immediate cause of the collision was the failure of the Uber ATG operator to closely monitor the road and the operation of the automated driving system because the operator was visually distracted throughout the trip by a personal cell phone. Contributing to the crash was Uber ATG’s inadequate safety risk assessment procedures, ineffective oversight of the vehicle operators and a lack of adequate mechanisms for addressing operators’ automation complacency – all consequences of the division’s inadequate safety culture. “The collision was the last link of a long chain of actions and decisions made by an organization that unfortunately did not make safety the top priority.”

The really sad/annoying part of this is that the attitude towards safety takes us back over half a century to the days of the rear engine Corvairs and the arguments against seat belts. We are asked time and time again by companies like Uber to trust them or to learn how to think of things in different ways or to think outside of the box. So when you see the NTSB conclusions you can see why these companies whether they be AV producers or ride share companies cannot be trusted.

“The Uber ATG automated driving system detected the pedestrian 5.6 seconds before impact. Although the system continued to track the pedestrian until the crash, it never accurately identified the object crossing the road as a pedestrian — or predicted its path. Had the vehicle operator been attentive, the operator would likely have had enough time to detect and react to the crossing pedestrian to avoid the crash or mitigate the impact. While Uber ATG managers had the ability to retroactively monitor the behavior of vehicle operators, they rarely did so. The company’s ineffective oversight was exacerbated by its decision to remove a second operator from the vehicle during testing of the automated driving system.

SOUND TRANSIT

Sound Transit will continue to collect car-tab taxes Sound Transit will continue to collect car-tab taxes even after the success of Initiative 976, approved by voters statewide this month. Cities and counties, including Seattle, have already sued to challenge I-976, claiming it’s a “poorly drafted hodgepodge that violates multiple provisions of the Constitution,” including a ban on multiple-subject initiatives.

They’ve sought an injunction to block I-976 before Dec. 5, when much of the initiative is expected to go into effect. it would cut state funding for multimodal projects, ferries and state troopers; revoke city car-tab fees such as the $80 in Seattle for added bus service and roadwork; and remove 11% of Sound Transit’s roughly $2 billion yearly income. Sound Transit has pledged tax proceeds to the repayment of debt issued to finance the capital needs of the regional district which serves the greater Seattle metropolitan area.

Does it mean bondholders are at risk? Previous efforts to cut funding for Sound Transit through initiatives have succeeded at the ballot box but have not been able to stop tax collections related to bonds. The state Supreme Court agreed bond contracts signed in 1999 allowed the agency to collect the taxes until 2028 when those bonds expired.

Without court intervention, drivers whose vehicle registrations renew on or after Dec. 5 will see a tax cut —. They don’t have to pay city transportation-benefit district fees ranging from $20 to $80, such as Seattle’s voter-approved charges for extra bus service. Contrary to the image many have of Seattle as a progressive bastion, support for the car taxes in the metro area is far from unanimous. Unlike King County voters, majorities in both Snohomish and Pierce counties supported the initiative.

PUERTO RICO FACES DAUNTING CHALLENGE

The American Society of Civil Engineers (ASCE) Committee on America’s Infrastructure, made up of expert civil engineers, assigns grades using the following criteria: capacity, condition, funding, future need, operation and maintenance, public safety, resilience and innovation. It has also included Puerto Rico in its assessment and the results of its study show the scale of the capital finance challenges facing the Commonwealth.

The ASCE Puerto Rico Section announced a near failing grade of a ‘D-‘ for the island’s infrastructure. The Report Card graded eight categories of infrastructure: bridges (D+), dams (D+), drinking water (D), energy (F), ports (D), roads (D-), solid waste (D-), and wastewater (D+). None of this is a surprise in the aftermath of Hurricane Maria. Energy received the lowest grade of ‘F,’ meaning the system’s infrastructure is in unacceptable condition and has widespread advanced signs of deterioration.

The Puerto Rico Electric Power Authority (PREPA) proposed a $20 billion plan to renovate the energy grid on the island. How to finance and fund the needs is a different story. According to ASCE, “If the island wants to rebuild and modernize its infrastructure, it must increase received investment by $1.23 billion to $2.3 billion annually—or $13 to $23 billion over 10 years. However, when considering deferred maintenance and hurricane-related recovery projects, the investment gap is even larger. There is a dire need for the island to rebuild smarter by building to adequate codes and standards, acquiring funding from all levels of government, and incorporating resilience into infrastructure plans by using climate-resilient materials.”

Muni Credit News Week of November 18, 2019

Joseph Krist

Publisher

________________________________________________________________

ASCENSION CAUGHT UP IN TECH DISPUTE

The Department of Health and Human Service’s Office for Civil Rights, the federal agency that enforces HIPAA, would “like to learn more information about this mass collection of individuals’ medical records with respect to the implications for patient privacy under HIPAA,” associated with “Project Nightingale”.

“Project Nightingale” is a project that Google launched last year. It analyses health data from patients who received care at St. Louis-based Ascension, one of the nation’s largest health systems. Ascension is a large issuing presence in the municipal bond space. Data reportedly includes patients’ lab results, medications and diagnoses. Google’s partnership with Ascension also involves a commercial contract to move Ascension’s on-premise data centers to Google’s cloud-computing system.

Here’s the problem, one not unlike many of the tech industry’s disputes with government. Ascension patients were not notified about the partnership with Google so they did not get a chance to opt out. According to Google the intended goal is to use Google’s artificial intelligence tools to recommend changes to a patient’s care, such as different treatment plans, diagnostic tests or additional physicians, as well as to flag unexpected deviations in the patient’s care.

Google has struck similar partnerships with the health systems of Stanford University, the University of Chicago and the University of California at San Francisco. The concern is that a higher level of detail is being analyzed under the arrangement with Ascension. The University of Chicago is being sued by a patient over its sharing thousands of medical records with Google for a research project on predicting patient outcomes, claiming that the health system had not properly de-identified patient information. Google and UChicago Medicine have maintained that they followed regulations, including HIPAA.

It is difficult to deal with the single mindedness of the tech entities in terms of their use of data. It’s the modern equivalent of and ends justifies the means approach whether is the management of public streets and roadways or whether it’s over issues of patient privacy. There just seems to be a lack of common sense manifested in the industry’s inability to see the concerns of the other parties they interact with.

Until the scale of the issues can be determined, it’s not possible to assess the level of risk to the Ascension credit if violations of HIPPA have occurred. Only then can the potential scale of the potential costs of any resulting litigation be determined. There should be some sort of trust penalty associated with Ascension. It seems inconsistent for a religiously based system that deigns to use its beliefs to deny certain medical services should have entered into such an arrangement with Google on what appears to be a secretive basis.

HIGHER EDUCATION REMAINS UNDER PRESURE

For some time we have commented on the potential for credit problems in the higher education sector. There have been several defaults and closures of institutions. So we are interested in comments made this week by Moody’s Investors Service based on its tenth annual tuition survey.

The data is stark. Median net tuition revenue will grow 1.0% and 2.3% for public and private universities, respectively, for fiscal 2020, according to the results. The continued trend of softening net tuition revenue growth for both public and private universities reflects enrollment and pricing challenges. Moody’s also cited factors we have been concerned about including flat numbers of high school graduates, a favorable economy drawing students into the workforce, and some declines in international student enrollment. These factors are not one offs but are rather reflective of trends.

The report highlights issues more specific to the private schools The median growth in net tuition revenue among private universities is likely to soften slightly, partially because of increasing competition reflected in continuously rising discount rates. » The first-year discount rate at private universities rose slightly to 51% for students entering in fall 2019. Overall, nearly one quarter of private university survey respondents reported a first-year tuition discount of 60% or higher, an indicator that private universities will struggle to sustain net tuition revenue growth.

Other more specific points include some focusing on the public universities. Among public universities, the median annual growth in net tuition revenue in fiscal 2020 is projected at 1%. This represents a decrease from 1.8% in fiscal 2019, due in part to relatively flat enrollment. Nearly two-thirds of public universities are projected to grow overall net tuition revenue at under 3% for fiscal 2020, our proxy for inflation in the higher education sector. This is almost double the level five years ago. Continued declines in the number of international students also contribute to more constrained revenue growth. Among our public university survey respondents, the median decline in international students for fall 2019 was 3.7%.

Overall, the public schools offer more safety. They have a larger constituency, the provide much research and support for economic drivers in state economies, they are the low or lower cost alternative for a larger segment of demand. They also have more a more diversified mix of undergraduate, graduate and professional programs. That drives demand as well.

MORE MONEY RAINS ON THE PRAIRIE

We have expressed concerns about the potential impact on state credits in the farm belt resulting from the ongoing trade war, primarily with China. early on the trump Administration disbursed aid to farmers for 50% of their estimated losses resulting from reduced demand for US agricultural products. Now as the trade disputes have dragged on well after previously announced potential settlement dates, the federal Agriculture Department will begin distributing another round of tariff relief payments next week to farmers and ranchers.

The aid payments have been coming across two years. The Administration has already paid farmers at least $6.7 billion for their 2019 production. It paid $8.6 billion for last year’s production and additional trade relief efforts like commodity purchases and marketing assistance. The first set of 2019 payments covered 50% of a farmer’s eligible production; the new funds announced will cover an additional 25%.

Hog and dairy farmers have been the primary recipients. They are on the front lines of the trade war but coincidentally are in areas key to the president’s reelection hopes so the additional funding is not a surprise. And they do help to mitigate the credit impact on the agricultural states. They are nonetheless a band aid. They also to some extent insult farmers. As one said to the Boston Globe, “I don’t know what socialism is if it’s not receiving a check from the government.”

TIME TO PAY FOR THE CPS CONTRACT

The news out of Chicago about the city’s ability to fund its recently negotiated labor contracts not good. – especially the one for the CPS teachers – was not good. It puts the already beleaguered tax base supporting both the City and CPS under even more pressure. The situation augers poorly for the ratings of the City and its associated underlying taxing entities. Mayor Lori Lightfoot and Chicago Public Schools leaders have agreed on where the funds to pay for the first year of new union contracts will be found. The problem is that some of those revenues are not recurring leaving a significant hole in future budgets.

The district is relying on the state to keep its pledge to increase school funding, which can change year to year. CPS also is relying on its own ability to significantly raise property taxes. The additional contract costs for the current school year total $137 million: $115 million for the CTU contract and $22 million for the SEIU contract. In addition, the district has to pay $60 million or so in teacher pension contributions formerly paid by the city.

CPS already budgeted $89 million to cover higher personnel costs clearly not enough to cover the full cost increase. By the fifth year of the CTU contract, CPS will need $504 million more a year to cover the added costs. For SEIU, that cost will be at least $54 million. That comes to $558 million in additional costs by the 2024 budget year — about 8% more than the $7 billion that the district spent last year.

PROPOSITION 13 CHALLENGE

When it was passed 40 years ago, there were many doom and gloom predictions about the credit impact of the limitations on property taxes enacted under Proposition 13 in California. As it turns out, Prop. 13 has not become an issue in terms generally of state and local credit in the Golden State. That does not mean that it is universally supported. The law’s reliance of assessed value based on the purchase price of the home has created inequities between the taxes paid by owners on property for which ownership has been extended versus those paid by properties which have recently turned over. Essentially, two very similar properties directly adjacent to each other may have significantly different tax bills. Now, this situation is generating more and more concern.

An effort is underway to address some of the perceived shortcomings of the law. Efforts are underway to place an initiative on the November, 2020 ballot which would allow county assessors to split their tax rolls into two lists. Homeowners and some small businesses would still receive the full Proposition 13 benefits: a 1% tax based on a property’s purchase value and annual tax increases of no more than 2%.

Commercial and industrial property owners would be subject to different rules. While their tax rates wouldn’t change, beginning in 2022 the levy would be based on the current market value of the real estate. Business property values would have to be updated by county assessors at least every three years. Some of California’s most powerful public employee unions — including Service Employees International Union, the California Teachers Assn. and the California Federation of Teachers. They represent those at the forefront of the affordable housing debate in California.

Proponents want to include provisions directing the application of the additional revenue to be derived from the proposed taxing changes. Schools would receive most of the new tax revenue while municipalities also would receive a share of the new property tax revenue. The allocation is not accidental. Initiative supporters see a connection in that public support for the idea of loosening the property tax limits on businesses increases in polls by as much as 10 percentage points if voters are told the money will go to education.

The ballot initiative will be strongly challenged and if on the ballot strongly opposed by the commercial business interests which will be impacted. The California Business Roundtable has promised California Business Roundtable an “aggressive” campaign to kill it. They suggest that the tax will create just another cost to retailers which will be passed onto consumers. The president of the nonpartisan Public Policy Institute of California offers some sage advice for handicapping this one. “Initiative campaigns often focus on the idea of unintended consequences,” he said. “To me, that’s what this is going to be all about. You’re going to hear that from both sides. And the voters will have to decide.”

Muni Credit News Week of November 11, 2019

Joseph Krist

Publisher

Last week marked the 300th edition of the municreditnews.com. Over the five years of its publication, we have tried to cover the entire range of issues which impact on the creditworthiness of state and local credits. We hope that you find our comments useful and informative. We appreciate your support. Let us know what you want to hear about.

________________________________________________________________

NORTH CAROLINA BUDGET

It isn’t a state normally in the news for budget trouble but these are not normal times. The North Carolina General Assembly adjourned without passing a biennial budget for fiscal 2019-21. The legislature could not overcome disagreements about teacher pay and Medicaid expansion among other things. The good news is that a full budget is not needed to ensure that things like debt service payments are made. A continuing appropriation and the passage of several standalone measures ensure that those payments will occur.

As a relatively state with historically stable finances, the ongoing budget dispute which played out in the summer did not garner much attention. It does however mark the second time in three bienniums that the state has not managed timely budget adoption. The direct impact on the state actually is most visible in its impact on programmatic implementation. One example is the fact that a planned launch of a Medicaid managed care plan this month has been delayed because of the budget impasse

The real losers in the dispute are the counties and localities in the state. Counties with new state funds included in the 2019-21 Appropriations Act may need to delay the start of intended capital projects. Counties could also find themselves under pressure to provide funding to local school districts. Counties routinely supplement the local BOEs’ operating budgets and are required by state law to provide for their capital needs. Local school districts may have to look to the counties to make up funding shortfalls. As a growing state, schools need to expand to keep up with demand. For those counties with already tight finances, school needs dictated by state law could run up against other expense requirements of the counties.

The dispute also comes at a time where the state’s steadily increasing exposure to climate change related capital demands is becoming more evident. The NC Department of Transportation (DOT) has requested general fund support because of large expenses related to storm damages, including Hurricane Dorian in early September. DOT must also fund settlements resulting from a state Supreme Court ruling that the DOT cannot reserve land for future roads without paying for the land. Landowners seeking compensation from the DOT have forced the DOT to find some additional funding to cover those costs estimated at up to $360 million.

To fund the settlement and storm related costs, legislation pending in the Legislature recommends transferring $360 million from the state’s general fund to help cover the settlements as well as another $300 million loan from the state’s savings reserve to help with projects delayed by Hurricane Dorian. The transfer of $360 million would equal about 1.5% of general revenue. At the same time, the Legislature passed two bills designed to reduce revenues to the state including a corporate franchise tax cut and increases in the standard deduction for income tax filers. At the same time, all of the spending bills passed by the legislature to date would result in fiscal 2020 appropriations similar to those in the budget vetoed by the governor, totaling nearly $24 billion.

NEW YORK BUDGET SHORTFALL

A cash report released by NYS Comptroller Tom DiNapoli’s office is a preliminary warning sign that the state budget is under increasing pressure. The source of that pressure is Medicaid spending. New York’s Medicaid program is on track for a $2.9 billion shortfall as the program has already spent more than 60 percent of its state-funded budget by the end of September, about $13.1 billion. That is only five months into the fiscal year.

The problem reflects both budget maneuvering and the realities of higher expenses tied to things like local minimum wage laws which are increasing costs for providers. The budget maneuver which benefitted FY 2019 results came from the Cuomo administration’s decision to delay $1.7 billion in Medicaid payments from the end of the 2018-19 fiscal year to the beginning of 2019-20. The impact was to effectively double expenditures for April.

Medicaid has been running over budget for at least the past year, which should have triggered across-the-board payment cuts under the state’s “global cap” statute. Pressures from providers (a powerful lobby in the state) drove the maneuver. Now however, it is time to pay the piper. A real answer will not come until the release of the governor’s Executive Budget in January for the FY beginning April 1.

NEVADA HITS RATINGS JACKPOT

Ten years after the Silver State was at the center of the mortgage and financial crisis, the State is finally reaping the benefits of the long economic recovery. Moody’s announced that it has upgraded to Aa1 from Aa2 the rating on the State of Nevada’s approximately $1.2 billion of outstanding general obligation (GO) bonds, which includes all bonds issued by the state described as general obligation (limited tax). Moody’s cited the state’s strong and growing economy as demonstrated by robust employment and population growth and an increase in rainy day reserves.

By all measures, the state economy has achieved consistently strong growth in both employment and income since the time of the financial crisis. It has a moderate debt and pension burden and favorable demographic trends. The state’s relatively favorable tax burden relative to states like its neighbor California continues to benefit the state and support current economic and employment trends. The significant role of the gaming/tourism industries does continue although the state has managed to attract a more diverse set of businesses attracted by relatively lower costs and the availability of land for distribution facilities for several online retailers. The reliance on the Las Vegas attractions is one potential concern but that would be more based in national trends in the economy rather than any action by the state.

The only real concerns expressed in support of the rating action revolve around the need to manage the state’s reserves and the potential negative impacts from a prolonged decrease in tourism, reduced visitor spending or severe economic stagnation.

SALES TAXES AS A CREDIT INDICATOR

Historically, sales tax revenue trends have been a great current indicator of overall conditions and likely trends in state revenues. They reflect current activity as they are collected and remitted without much lag time so they can often be the credit equivalent of a canary in a coal mine. So we looked with interest at sales tax revenue trends in Texas.

Texas Comptroller Glenn Hegar has released totals for fiscal 2019 state revenues, in addition to announcing monthly state revenues for August. State sales tax revenue totaled $2.99 billion in August, 4 % more than in August 2018. Total sales tax revenue for the three months ending in August 2019 was up 3.9 percent compared to the same period a year ago. Growth in August state sales tax revenue was led by remittances from the construction, manufacturing and wholesale trade sectors.

The data points to continued positive economic growth even as its energy sector seems to slow a bit. This is reflected in individual category data for August. In August 2019, Texas collected the following revenue from motor vehicle sales and rental taxes — $488.3 million, up 0.3 percent from August 2018; motor fuel taxes — $327.1 million, up 5.7 percent from August 2018; natural gas production taxes — $102.3 million, down 19.2 percent from August 2018; and oil production taxes — $355.5 million, down 6.2 percent from August 2018.

FLOOD FUNDS IN TEXAS

Voters approved a constitutional amendment to provide for a source of funding for flood control projects in the state. Support for such a measure grew out of the state’s experiences after Hurricane Harvey in 2017. The largest city, Houston, saw whole neighborhoods inundated when waters were released onto properties which probably should not have been developed. The much higher number of residential and small community properties which are subject to flooding from consistently heavier precipitation events created a broad base of support for the plan.

Proposition 8 authorizes the Flood Infrastructure Fund, which seeks to help the state recover from recent flooding while also preparing communities for future storms. It calls for the fund to receive a one-time, $800 million allocation from the state’s rainy day fund as a starting point, and lawmakers could refill it in the future. The author of the measure points to the fact that it creates a lockbox for those funds,” he said. This means future lawmakers can add to the fund, but they cannot drain it for other purposes, even if the money goes unused for multiple years.

The process would provide a source of state funding the use of which would not have to be reauthorized legislatively. This results from the State Legislature meeting only 60 days biennially. This extends the time between an event and the state’s ability to extend funding for projects. It is one of the weaknesses of the state’s legislative structure.

Muni Credit News Week of November 4, 2019

Joseph Krist

Publisher

________________________________________________________________

STATE OVERSIGHT SUCCESS

On October 24, the Massachusetts Executive Office of Administration and Finance announced that the state will end its financial oversight over the City of Lawrence . After 10 years of oversight, city management projects balanced operations with slight surpluses during fiscal 2020-24. Between 2008and 2011, the city accumulated over $27 million in operating deficits, equal to 10% of annual general fund revenue.

The City’s financial difficulties led to the appointment of a fiscal overseer in fiscal 2010 as part of special legislation. With a fiscal overseer, Lawrence fell under the second most intense level of state oversight of municipalities in Massachusetts. The fiscal overseer has supervised all financial operations in consultation with the city’s financial management team. The city’s financial challenges before oversight stemmed from weak budget management, including managing financial obligations tied to collective bargaining agreements, combined with limited operating flexibility to absorb state aid cuts.

The special legislation also authorized the issuance of deficit financing notes ($16.4 million outstanding as of 30 June 2019) to cure the accumulated operating deficits from 2008-11. Over the period of supervision, a five-year budget forecast and capital plan were updated annually, as well as formally adopted financial policies

City management’s projected surpluses are modest at less than 1% of the city’s $321 million annual budget. Even with outside supervision, Lawrence faces practical constraints on raising property taxes with a tax base that has a median family income equal to 59% of the US average and a high 24% poverty rate. The city is heavily dependent on state aid, which has grown 3% annually over the past 10 years. Rising costs associated with education, health insurance and pension contributions will continue to exert hard to control pressures on the operating budget. Management projects that annual pension contributions will increase 3.3% annually over the next five years.

State aid represented 70% of fiscal 2018 general fund revenue, with property taxes the second largest revenue source at 20%. Education is the largest expenditure, comprising 62% of fiscal 2018 general fund expenses followed by public safety at 8%.

Currently, the cities of Lynn (Baa1 stable) and Methuen (A3 negative) are each coordinating with a fiscal stability officer.

HOUSING IN CALIFORNIA

Apple announced a $2.5 billion plan to help address the housing crisis in California. The plan includes $1 billion for an affordable housing investment fund and another $1 billion to help first-time home buyers find mortgages. Facebook said last month that it would give $1 billion in a package of grants, and loans. In June, Google pledged $1 billion for a similar effort in California.

Apple’s plan is not just based on spending. Part of the $2.5 billion figure includes making available land it owns in San Jose, worth $300 million, for new affordable housing; $150 million to support affordable housing in the Bay Area, including long-term forgivable loans and grants; and $50 million to address the causes of homelessness in Silicon Valley.

Will all of this spending really put a dent in the State’s housing shortage? It is hard to say that this will be enough. The issues in California which lead to a housing shortage include issues of land availability relative to jobs, zoning issues which restrict the ability to develop affordable multifamily housing in coordination with transportation policies, and property tax policies which hinder movement. Only by addressing all of these issues in concert will California be able to make meaningful progress in the development of sufficient affordable housing in the state.

SALES TAXES ON THE BALLOT

A good test of the appetite for tax increases occurs in California as a number of localities are asking their voters to approve sales tax increases. In Irwindale, voters will decide on Measure I, a sales tax increase that will push the local rate to 10.25%, the state maximum. The tax increase could translate to an estimated $1.2 million annually and would help fund police protection, 911 emergency response and other public safety initiatives, senior citizen resources, parks, infrastructure and road improvements, transportation, recreation programs, maintaining library services and maintaining programs that create jobs and attract businesses.

In Monrovia, Voters will decide on Measure K, a sales tax increase that will push the local rate to 10.25%, the state maximum. If passed, Monrovia would yield about $4.5 million annually. It would be earmarked for projects that have been on hold. In Sierra Madre, voters will decide on Measure S, a sales tax increase that will push the local rate to 10.25%, the state maximum. Measure S may bring in a $225,000 a year, according to the L.A. County Registrar-Recorder. The potential monies would maintain police patrols, police, fire and paramedic response times, maintain emergency planning and response, maintain for parks, streets, sidewalks and parkway trees, maintain library services, recreation and senior programs and supplement general finances. In South Pasadena, voters will decide on Measure A, a sales tax increase that will push the local rate to 10.25%, the state maximum. The funds, if passed, would be used to maintain 911 emergency response times, focused on home break-ins and thefts, maintain neighborhood, school and park police patrols, fire and paramedic services, fire station operations and emergency preparedness, retain and attract local businesses, maintain streets and infrastructure and maintain general services and city finances.

In terms of property tax increases, in San Marino voters will decide on Measure SM, a parcel tax that is estimated to yield $3.4 million each year until 2025. The money would go for paramedic services, fire protection and prevention and police protection, according to the county registrar. Parcel taxes are a form of property taxes, based on the characteristics of the property — in San Marino’s case, primarily focused on zoning — instead of the value of it.

YONKERS

One of the historically troubled credits in New York State has been the City of Yonkers, located on New York City’s northern border. This proximity to the city has not yielded the benefits one might expect over the last half century. The city’s credit has reflected the decline of its jobs and housing base. It resulted in state oversight and the creation of security mechanisms for the City’s debt. It is this assistance which has maintained the City’s market access.

Now the City hopes to issue just under $100 million of debt. The City is rated A2 with a negative outlook by Moody’s. The credit was assigned a negative outlook. This despite the acknowledgement of a significant number of new multifamily rental and condominium complexes being built around the city’s mass transit centers. Moody’s notes that new high density complexes will bring a significant number of new residents which will increase income tax revenue and likely contribute to growth in sales tax revenue, two major revenue sources for the city.

Nonetheless, the city’s narrow reserve position, above average long-term liabilities and below average wealth and income profile relative to regional averages weigh on the credit. This is offset to some degree by significant state oversight, including the segregation of funds into a lock box for the payment of debt service. This is a key mechanism which effectively directs first property tax collections to the payment of debt service. Additional security is provided under the New York State Section 99-b Intercept Program.

The rating on the bonds reflects a quirk in the City’s security provisions. The bonds are secured by a General Obligation pledge as limited by New York State’s legislated Property Tax Cap (Chapter 97 (Part A) of the Laws of the State of New York, 2011) as well as by the city’s pledge of its faith and credit. However, the City’s rating does not get full credit for that pledge as Moody’s considers the current issues and the city’s outstanding debt to be GO Limited Tax because of limitations under New York State law on property tax levy increases. The absence of distinction between the GOLT rating and the Issuer rating reflects the city council’s ability to override the property tax cap and the faith and credit pledge in support of debt service.

Muni Credit News Week of October 29, 2019

Joseph Krist

Publisher

________________________________________________________________

CITY REVENUE OUTLOOK

The National League of Cities has released the results of its annual survey of City Fiscal Conditions. This year’s City Fiscal Conditions research looked at the fiscal conditions and factors across 500+ U.S. cities. It found that almost two in three finance officers in large cities are predicting a recession as soon as 2020. Cities’ revenue growth stalled in the 2018 fiscal year, but this year’s continued drop indicates mounting pressures on city budgets. The Midwest is bearing the brunt of declining conditions, the report found. Overall general fund revenues in Midwestern cities dipped by 4.4% in fiscal year 2018.

In fiscal year 2018, total constant-dollar general fund revenue growth slowed to 0.6 percent. Income tax and property tax revenues slowed, while sales tax revenue growth was unchanged from the prior year. Property tax revenues grew by 1.8 percent, compared to 2.6 % in FY 2017. Sales tax revenues grew by 1.9 %, compared to 1.8 % in FY 2017. Income tax revenues grew by 0.6 percent, compared to 1.3 percent in FY 2017. expenditures are climbing, increasing by 1.8 percent in fiscal year 2018. While that’s a growth rate is slightly lower than the prior three years, officials also expect it to climb again to 2.3 percent for fiscal year 2019. Infrastructure needs, public safety spending and pension costs are among the most significant expenditures.

The data shows the impact of the continuing decline in manufacturing and the impacts of tax and trade policies and their very detrimental effect on the Midwest. Overall, revenues in Midwestern cities declined 4.4%. Much of that appears to be driven by large revenue drops in big cities. Chicago, Illinois, recorded an 11.7 percent revenue decline in fiscal year 2018 while Minneapolis, Minnesota, dropped by 9.6 percent. According to the NLC survey, finance officers from large (63%) and larger mid-sized cities (49%) are more likely than finance officers from smaller mid-sized cities (38%) and small cities (35%) to predict that the next recession will occur in the next one to two years.

The NLC attributes the difference in outlook to a couple of factors. large cities are experiencing a bigger gap between revenue growth and spending growth than their smaller counterparts. Housing market growth is also reaching its peak in large cities and is already slumping in some large West Coast cities such as Seattle, Washington, and San Francisco, California. June home prices for major West Coast cities fell for the first time since 2012, declining by 1.7 percent. Business investment in 2019 is also on the decline, a metric which tends to hit larger cities first.

The report reiterates the leading pressures on local budgets. Infrastructure needs, public safety needs and pensions were reported as the top three burdens on city budgets in 2019. At the same time, the survey revealed several trends on the revenue side of the credit equation that should give one pause. Sales and income tax growth rates peaked in 2015 and growth rates for property taxes peaked a year later. Another source of concern is the growth of state level preemptions which limit local powers to tax and regulate. For example, this year the Texas state legislature signed into law a bill to cap local property tax revenue growth at 3.5%. In addition to preemptions that have been in place for years in states like Michigan and Colorado, new legislation was passed this year to cap local spending in Iowa, to require elections for tax increases in Texas, and to prevent cities from imposing their own commercial activity taxes in Oregon.

Put all of this together and one begins to ask, at current market conditions do I get paid for the risk I’m taking? It’s not so much a question of whether the market is most effectively pricing municipal debt relative to different asset classes but rather a question of whether current absolute rates generate a sufficient reward for the risk potentially being assumed. It’s clear that the best days for revenue growth have passed while the same pressures plaguing local budgets have not subsided and in many cases have increased. We don’t propose the end of the world as we know it but we do wonder when the market will wise up and asked to be paid for the risk they take.

NEW YORK MAKES ITS CHOICES

The war on mass transit continues in New York City. The MTA continues to scramble to find funding for projects expanding access in poor neighborhoods (the Second Avenue subway extension to 125th Street), improving accessibility for the disabled and the aging, and maintaining its capital plant in general. The affordable housing crisis continues with the revelation that there are some 110,000 homeless students enrolled in the City’s public schools ( that’s a lot more than the City’s regularly peddled number that there are 60,000 homeless overall in the City). Not to say that the NYCHA is in a bit of a funding pickle for capital themselves.

So what has the City government agreed on for $1.5 billion in spending over a ten year period? 250 miles of protected bike lanes. Lanes by the way which are paid for by some sort of user fee, right? Some form of safety regulation (helmets) or insurance requirement? Some form of revenue generated from the user base (even the farebox covers a much higher % of operating costs than most other US transit systems)? No. None of that. Instead, the City will spend this money which intentionally or not really covers a very specific cohort (white males under say 45) at the expense of other more diverse population cohorts.

In the end, it’s up to the City to do what it wants but it is fair to question the capital priorities especially when there is no connection between use and funding of an asset. It’s one side of the dilemma posed by the advances of various modes of micromobility. Until the issues of funding relative to utilization are more clearly established, issues not directly related to transportation will continue to intrude on the debate over the future of transportation.

CHICAGO BLUES

This is shaping up to be a tough budget season for the City of Chicago. The Mayor’s budget proposal is receiving lukewarm support from a variety of constituencies. Many are expressing concern about the need for the state to take actions in order to allow the City to address its revenue and pension problems. And the teachers strike against the Chicago Public Schools continues. The longer it goes the more vicious the cycle gets as more people will look for permanent alternatives to CPS schools. With each passing day, the district doesn’t get aid based on average daily attendance.

It can be hard to see through the rhetoric of this strike. The union is taking on a variety of issues outside of traditional workplace issues. They are attempting to direct funds from tax increment districts. According to the Chicago Tribune, TIFs now cover about one fourth of the city’s real estate, including some areas downtown. The city can redirect money from TIF districts that isn’t committed to specific projects through a process called declaring a surplus. Mayor Lightfoot has proposed declaring a record $300.2 million TIF surplus in 2020. That’s up from the $175.7 million this year that Emanuel included in his final budget. As the biggest taxing body, CPS stands to collect $163.1 million of the proposed $300.2 million surplus.

We do not take the view that the City is in danger of default. What we do however believe is that investors need to be compensated for the risks they are taking in connection with the direct debt of the City or the schools district. These entities are fortunate that absolute market levels provide reasonable borrowing costs for both new money and refunding purposes. In a market where rates rise and are expected to continue to do so, credits like the City of Chicago and the CPS are in a position to get hammered in terms of spread.