Joseph Krist

Publisher

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We take this opportunity for indulging my interests as we go off for the Christmas holidays. We wish you a hopeful Christmas. We wish you a brave new year. All anguish pain and sadness, leave your heart and let your road be clear.

IMMIGRATION POLICY AND HIGHER EDUCATION

Total international student enrollment is level (0.0 percent change) among responding institutions. Similar to data from Open Doors 2018, the number of international students pursuing employment opportunities following their academic studies on Optional Practical Training continued to increase (+7.1 %), while the number of enrolled students declined (-1.7 %). New enrollment numbers continue to vary based on institutional characteristics and geographic regions with Associate’s and Master’s institutions, less selective colleges and universities, and the Midwest reporting steeper declines. Research universities indicate an uptick in new international student enrollment. 49 % of institutions describe a drop in new international student numbers. However, 44 % of institutions report an increase, and another 7 % indicate new enrollment was stable. Overall,responding institutions report a 1.5 % decrease in the number of international students enrolling for the first time at a U.S. institution, which indicates a third consecutive year of falling new enrollment. The drop is not as steep as the new enrollment decline in Fall 2017 (down 6.6 % according to Open Doors 2018).

Compared to Fall 2017, more institutions attribute Fall 2018 declines in new enrollment to problems with visa delays and denials (83 percent), the U.S. social and political climate (60 %), and student decisions to enroll in another country (59 %). The common thread linking these issues: immigration policy and attitudes. The unending focus on the “danger” posed by foreigners generally cannot be expected to have anything other than a negative impact on foreign demand.

HUD WILL CONTINUE ITS PLAN TO PRIVATIZE PUBLIC HOUSING

One of the quietist privatization efforts has been underway at the Department of Housing and Urban Development. There have been so many larger issues/scandals during the Trump Administration that efforts led by more low key cabinet members have been able to move under the radar in terms of low income housing policy.

His image may be based primarily on parodies (Trevor Noah crushes it) but HUD has been far from sleepy under the leadership of Dr. Ben Carson. One of his biggest “accomplishments” to date has been to steadily shepherd efforts to get the federal government out of the business of managing and funding low income housing. The more obvious methods of doing so have focused on some large situations (NYCHA comes to mind)which are characterized by a wide range of issues. These other issues – day today infrastructure; funding; and local politics – have successfully obscured HUD’s continuing efforts to shift public housing residents into private housing with Section 8 vouchers.

Carson has suggested raising tenant rents and has held listening tours to encourage more private landlords to accept vouchers as public housing complexes are sold or demolished. That arguably makes sense but only when there are facilities and landlords willing to accept Section 8 vouchers. Recent news has not been favorable regarding the acceptance of Section 8 vouchers.

One example of the push to privatize is the situation with NYCHA. Here HUD has quietly used the potential for direct federal supervision of NYCHA, the nation’s largest public housing agency. In order to fight off such supervision, the DeBlasio administration has revived a previously panned Bloomberg era idea to build market rate housing on open spaces and parking lots included in those properties’ footprints. The plan faces significant political and popular opposition.

In other places, HUD is planning to take projects under its receivership and determine if there are grounds to close those facilities. HUD has done so once before and is in the process of undertaking another such action presently. The current situation in Missouri would mark the second time that the agency has exited a receivership by abolishing a housing authority (the first was in Orange County, Texas, in 2004), and the first time HUD has proposed demolishing or selling all of the public housing complexes in the process.

We will see more of this as the agency’s inspector general prepares to send teams of agents out to examine dozens of “troubled” housing authorities nationwide, which it has never done before, officials said. It is a rough process involving evictions.

The troubled projects share characteristics including incompetent if not criminal management and crumbling infrastructure. Municipal market participants will have noticed a decline in issuance for repairs to public housing facilities. These financings were backed by payments from the federal government to local housing which levered those revenues to support municipal bond debt. That program has been hampered by consistent pressure to cut appropriations to the program as well as uncertainty in funding levels through their inclusion in the annual circus known as the federal budget process.

ANOTHER EFFORT TO PUBLICLY FUND PRIVATE SCHOOLS

The State of Montana operates a tax program designed to help to support private-school scholarships. Many are used for attendance at religiously operated schools.  The Montana Supreme Court struck down the state-run program that gives tax credits to people who donate to private-school scholarships, saying the program violates a constitutional ban against giving state aid to religious organizations.

The program giving tax credits of up to $150 for donations to organizations that give scholarships to private-school students amounts to indirect aid to schools controlled by churches. There is a ban in the Montana Constitution on any direct or indirect state aid to such schools, regardless of how large or small the amount is.

Initially a local judge issued an order last year siding with parents who argued that the program is constitutional because it doesn’t use state funds, only taxpayer money. The law was enacted in 2015 as an alternative to a school voucher program designed to give students who want to attend private schools the means to do so. Most private schools in Montana have religious affiliations, and more than 90 % of the private schools that have signed up with scholarship organizations under the program are religious.

The case marks a longstanding effort by religiously based and operated schools to obtain funding from states. I can remember being asked as a fourth grader to write a letter to the Legislature asking for money for books. It was only considered educational if it paid direct costs of which books were not one. This was in the mid 1960s so it isn’t like the internet was around to help if we didn’t get the books.Unsurprisingly, the effort failed as the arguments that the books were not part of education turned out to be unpersuasive. The more things change, the more they stay the same.

It is of interest here because it goes to the root of funding education. The effort to find workarounds to shift funding from public to non-public schools is continuing. Regardless of one’s views on the politics of the issue, the fact remains that every student who moves from public to private is one less source of state aid based on average daily attendance to the public and one more to the private. In the current environment, the supporters of state aid for religiously based schools will continue their campaign. Conflicts like this make school funding and overall budget adoption more complicated and therefore not supportive of credit.

HOSPITAL DSH MAY NOT BE PILED SO HIGH

It appears that the Medicaid and CHIP Payment and Access Commission (MACPAC) is willing to recommend that Congress slowly phase in disproportionate-share hospital (DSH) cuts that are slated to start in October. Congress hasn’t revised its DSH statute since 1992 despite all of the changes in the healthcare space over a quarter century.

MACPAC is considering a proposal for Congress to change how HHS should divide up the DSH payment cuts, as the program’s allotments vary widely among states. The draft recommendation suggested HHS would favor states with the highest total population of poor adults who don’t qualify for Medicare. A state that doesn’t spend its full allotment would see that money deducted from its share the following year. We note somewhat cynically that some of those states would do so as the result of refusal to expand Medicaid under the ACA. It would also incentivize actions to permit short-term insurance providing minimal coverage.

DSH payments are supposed to decrease by $4 billion starting Oct. 1. By October 2020 they will decrease by $8 billion. So even under the status quo, change would be coming. The current debate is over timing and absorption of the lower funding into hospitals’ overall financial position.The decline in these payments, like just about every other policy twist, will work against smaller providers and single site DSH providers. That remains a sector full of credit danger.

MTA WILL CATCH UNENDING BAD PRESS – BUT DOES IT MATTER TO THE BONDS?

As we move closer to the start of the longawaited 15-19 month shutdown of the Millenial Express (to we natives the Ltrain) tunnel connecting the flannel clad beards with their jobs in Manhattan. It is becoming clear that even if the Authority surprisingly completed its project on time and on budget. there will be much to antagonize all sides of the long term transit debate as various governmental agencies  as various governmental agencies seek to mitigate the closure. And the Authority received an early lump of ratings coal in the form of a negative outlook from Moody’s.

But the relevant question for investors is does any of this matter? It will be a brutal period filled with sad commute stories,whining about the impact on real estate, and potential economic interruptions for businesses on both sides of the East River. The MTA will have  little to do with that other than to focus on getting the job done right in the least amount of time.

What will actually be interesting is to see how the many interest groups and companies will position themselves to be beneficiaries of the “disaster”. They include bicycle proponents,anti-car activists, congestion pricers, TNCs, and the like.

MARIJUANA WILL GROW

The upcoming year could mark a turning point in the movement to legalize marijuana for recreation at the state level. Now that the election time is over, the potential for changes has become clearer. New Jersey is in the midst of debating a plan to legalize recreational use.  Recently, Governor Cuomo’s office has confirmed that “the goal of this administration is to create a model program for regulated adult-use marijuana. We expect to introduce a formal,comprehensive proposal early in the 2019 legislative session.”

The debate has seemed to be less about whether cannabis will be legalized but where and how. Those issues will be settled in part by how the expected revenue pie is to be divided. The timing reflects the expansion of legal cannabis to Vermont and now Massachusetts in the last year. In a kind of domino effect, as one state legalizes the next adjacent state seems to move towards it.

We anticipate that the move to legalize cannabis will continue. While some doctors argue about how much research has been done, medical marijuana patients success with cannabis is expanding support for the concept. Medical marijuana seems to be a testing ground for implementation of cannabis deregulation before the tide of public opinion drives approval.

TRADE WILL CONTINUE TO THREATEN JOBS AND REVENUES

The moves may be against tariffs but if the apparent replacement is “quotas”, then the impact on municipal revenues will still be negative. Steel quotas will not lower the cost of infrastructure projects. Less than hoped for relief from agricultural tariffs will alter planting plans, possibly be a basis for longer lasting loss of marketshare and income, drive costs higher thereby pressuring income, and add a level of revenue volatility which did not need to occur.

There are already signs that the trade war is dampening US economic performance. Clearly trade war fears are a significant factor in equity market volatility and performance. Weaker equity markets will hit both the revenue side of the income statement and contribute to underperformance versus pension fund benchmarks. this will require increased spending as well as weaken balance sheets.

PRIVATE HIGHER ED WOES WILL CONTINUE

The latest casualty in the battle by small independent colleges to survive financially, Newbury College in New England announced that it would close at the end of the 2018-2019 academic year. Newbury has been on probation with accreditors since the summer because of financial issues. The school has suffered for several years from declining enrollment. The college was founded in 1961 and has an enrollment of 620,according to U.S. News and World Report.

According to the school, it is”still exploring potential partnerships that would allow us to remain open, but the Board of Trustees and I have concluded that it is in the best interests of our students, prospective students, faculty and staff to notify them immediately, so they can make the best decisions for their future. Financial challenges, the product of major changes in demographics and costs, are the driving factors behind our decision to close at the end of this academic year. “

Newbury will not be the last to suffer this fate. The challenging demographic trends pointing towards an increasingly competitive environment in terms of recruitment will not change and the relative scarce resources available to fund that competition will perpetuate the spiral.

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