Joseph Krist

Publisher

FEDERAL EXTORTION

The Trump administration and Maine reached an agreement that restored funding for schoolchildren. The U.S. Agriculture Department held up around $3 million, which would pay for food preparation in schools and child care centers, and also assist in feeding disabled adults in congregate settings. The Agriculture Secretary called the funding “wasteful, redundant, or otherwise against the priorities of the Trump Administration.” The state’s attorney general said his office had withdrawn a lawsuit it filed in objection to the funding freeze.

A bill to restore more than $1 billion in funding for Washington, D.C., that Congress blocked earlier this year has stalled in the House. Congress, when it passed a continuing resolution in March, omitted standard language routinely included in appropriations bills to approve the city’s budget. Now it is being held up on ideological grounds as votes are being held back by a bloc of conservatives who want to include new restrictions on voting, abortion and other issues.

The Senate approved a separate bill that would allow D.C. to continue operating under its current budget without interruption. Until the House acts and passes a budget for D.C., Washington was forced to revert to last year’s funding levels, amounting to a roughly $1.1 billion cut halfway through the fiscal year. The holdup has already led to one downgrade of the City’s G.O. rating.

NEW YORK TAKES THE HIT FOR BORDER POLICIES

New York City’s tourism agency, New York City Tourism and Conventions, had had projected a full recovery this year with a record number of visitors after the coronavirus pandemic disrupted travel five years ago. Then the realities of Trump administration border policies began to take hold. The agency has now twice revised downward its initial forecast of 67.6 million visitors — international and domestic — since President Trump began threatening Canada, detaining tourists, and advancing a trade war.

The latest forecast now estimates that 64.1 million tourists will visit the city. That includes 400,000 more domestic travelers than last year, but 800,000 fewer foreign travelers. The new forecast sees 12.1 million international travelers, a 17 percent drop from earlier 2025 projections. That is a direct reflection of the reaction in Canada to threats from the President.

Last year, tourists spent $51 billion in New York City. Spending this year is now forecast to decline by $4 billion. Through April, about 117,000 fewer foreign passengers have arrived at Kennedy International Airport and Newark Liberty International Airport compared with the same period in 2024. The Empire State Building Observatory’s operator said it saw a 4.6 percent decline in people in the first three months of the year compared with last year, adjusting for the shift in the Easter holiday this year. About 50 percent of its visitors are from overseas. 

WHY NOT PUERTO RICO?

One element of the Trump administration’s trade and economic plans is returning manufacturing jobs to the U.S. It is clear that on an overall basis, the administration will always take the low or no tax option. You would think that these plans could be used to help industries which already are here to modernize or expand. That you might concentrate your efforts on places where there is both a need and a framework in place to encourage growth and employment.

That is why it makes less and less sense that the point is not being made as a part of the budget process that Puerto Rico is a great candidate for such help. Much has been made of the country’s reliance on foreign often Chinese sources for up to 97% of some drugs used in the U.S. With all of its problems, Puerto Rico does have a significant drug manufacturing industry. It just does not operate to its full potential because of foreign competition supported by low or no tax policies. When Section 936 ended, there’s a reason the industry moved to Ireland.

Fortunately, not all of it left. P.R. still has 11 of the world’s largest drug manufacturers. Before that tax break ended, it has been estimated that it allowed drug companies to keep the 2022 equivalent of about $235 million per year — or 70 cents for every American annually. Given the totality of the circumstances which impacted the drug industry since 2017, it’s not unreasonable to think that tax and industrial policies could be of some help.

Another issue is the reliability issue of the power system. The existing manufacturing base often has its own provisions for power. The trials of PREPA truly impact the residential customers who would be expected to work at these plants. It reinforces the idea that the PREPA bankruptcy needs to be resolved.

WESTERN WATER

Snowpack is variable across the region, but most of the higher elevations currently have about 80%-100% median snow water equivalent (SWE). Pockets of snow drought are present throughout the region, but are mostly confined to lower elevations. Snow has completely melted 1–3 weeks early at some lower elevations. Persistent snow drought in southern portions of Utah and Colorado and a rapid transition to late-season snow drought in much of northern Utah and Colorado have led to low streamflow forecasts. As a result, Governor Cox of Utah issued a drought emergency order, declaring a state of emergency in 17 counties.

Snow conditions remain dire in southern portions of the upper and lower Colorado River Basin. SWE is currently below median in southern portions of the basin, including in the Upper San Juan (31% of median), Gunnison (36%), Upper Colorado-Dirty Devil (22%), and Lower Colorado-Lake Mead (28%) Basins.

The Upper Colorado Basin as a whole (130 SNOTEL stations) is now at 62% of median SWE. As of April 28, the April-July for runoff into Lake Powell is 3.5 million acre-feet (MAF), or 56% of the 30-year average.

Most recent median water supply forecasts have declined in the Colorado River Basin compared to the April 1 forecasts. This is likely due to dry conditions, rapid snowmelt, and early melt out. Most forecast points in the Upper Colorado Basin indicate 50%-75% of median seasonal runoff, with some locations less than 50%. This will put additional pressure on the Upper Basin states to conserve water above that which they are being asked to make in current negotiations.

OAKLAND

Just days before an interim mayor was expected to release a budget proposal for the biennium beginning July 1, the City of Oakland’s Finance Director announced their resignation. This as the City faces an $89 million shortfall in the current fiscal year, and a $265 million projected structural deficit over the next two-year cycle. The City Administrator who is running the City until the new Mayor takes office this month was expected to release his budget proposal for the next two fiscal years on May 1. 

The Finance Director has been at the center of several highly politicized disputes. In late November we reported that the Finance Director was proclaiming that the City was on the edge of insolvency. This followed disputes over public safety funding and overtime issues. The City clearly faces significant financial issues. It has already taken some steps to address expenditures – 42 employee layoffs and 34 demotions while also temporarily closing two fire stations, cancelling all police-training academies and cutting some $2.6 million in funding for NGOs and a host of other grants and citywide programs.

Lagging revenues from taxes on real-estate transfers and business licenses, along with rising overtime costs for the city’s police and fire departments are cited as the most obvious problems. The outlook on the City’s general obligation rating from Moody’s remains on negative outlook. When the City was downgraded in December, Moody’s said “Governance is a key driver for the rating action given that management has not made sufficient and timely budget adjustments to fully absorb the one-time pandemic relief monies that were used to fund operations, and declining revenue, in particular real estate transfer taxes. As such, the city has reduced its flexibility to address ongoing spending pressures.”

INITIATIVES UNDER ATTACK

Gov. Ron DeSantis signed a law creating new hurdles for citizen-driven initiatives. Under Florida’s measure, voters could be charged with a felony if they collect more than 25 signed ballot petitions, other than their own or those of immediate family members, and don’t register with the state as a petition circulator. Under the law, more people will be banned from collecting petitions, including Floridians with felony convictions who haven’t had their voting rights restored.

Noncitizens and people who don’t reside in Florida will also be prohibited from gathering signatures, in a state with a significant population of part-time workers and foreign-born residents. Floridians will have to provide their driver’s license number, voter ID card number, or the last four digits of their Social Security number in order to fill out a petition. The form will ultimately become a public record.

The legislation as the State is still dealing with a scandal involving a charity run by the Governor’s wife that was found to be spending some $10 million on opposition to two ballot initiatives on the 2024 ballot.  Florida voters supported ballot initiatives to protect abortion rights and legalize recreational marijuana, though not by the required 60% super majority needed to pass.

The efforts to limit or eliminate initiatives takes on some almost comical aspects. New laws in Arkansas will bar initiative ballot titles written above an eighth-grade reading level. And canvassers will have to verify that petition signers have either read the ballot title or had it read aloud to them. In South Dakota, sponsors will need to make sure their petition titles appear in 14-point type on the front page and 16-point font on the back, where people typically sign.

According to a review by The Associated Press, roughly 40 bills restricting or revamping the citizen initiative process have passed at least one legislative chamber this year.

FLORIDA BUDGET FIGHT

A deal was announced between the leaders of the Florida House and Senate to cut taxes by $2.8 billion, including a sizable permanent reduction in the state’s sales tax rate as part of a top-line deal on the budget. Perez said the deal means the budget will be smaller than the one initially proposed by Gov. Ron DeSantis. The House and Senate had been unable to reach an agreement on top-level spending levels and tax cuts before the end of the legislative session. House leadership had proposed a $5 billion permanent cut in sales taxes, while the Senate was seen as urging a more cautious approach and advocated a smaller blend of permanent and one-time cuts.

Bills dealing with property insurance, education, increased minimum wages and loosening child labor laws all failed to be enacted. Mixed in with the fiscal issues were a couple of other controversial topics which the Legislature hoped would escape notice amidst the budget fight. The Legislature has agreed to ease the financial burdens of condominium owners and impose strict new restrictions on ballot initiatives.  

Budget sessions are often highly political – look at New York State. It became clear that the impending gubernatorial election in 2026 was the major obstacle. Overhanging the budget negotiations were questions about a charity – Hope Florida which is run by the wife of Governor DeSantis. He would like her to succeed him. That led to investigations of the charity and its activities fighting ballot initiatives in Florida – not its stated purpose.

HOSPITAL MERGER

In June 2024, Oregon Health & Science University (OHSU; Aa3 stable) and Legacy Health (A1 negative) announced an affiliation agreement. This week, the parties terminated their agreement. It comes before state regulators were able to make a decision on approval of the plan. The Oregon Health Authority (OHA) had heard from a variety of interests including a community advisory board which unanimously asked the OHA to reject the proposal.

Concerns over a rise in insurance costs to patients and a reduction in competition, jeopardizing care quality were big issues. Those factors are raising concerns all over as concentration continues to increase. Unfortunately, most patients feel no positive impact from hospital consolidations. Unsurprisingly, hospital labor opposed the merger as consolidations all over generate staff reductions. One of the issues driving the plan was the cost of paying hospital staff in a post-COVID inflationary environment.

OHSU was the financially stronger and higher rated entity. Legacy is under more financial pressure and is dealing with overcapacity. Those factors made a merger more attractive. Of immediate concern is the potential impact on Legacy’s ratings of the decision not to merge. In December 2024 Moody’s said Legacy’s “A1 rating reflects good business fundamentals, the persistence of favorable liquidity, and the strong possibility that a merger with Oregon Health & Science University (OHSU, Aa3 stable) will be completed by the middle of next year. Now the key factors are “ongoing operational headwinds which may result in operating cashflow margins remaining below 3%-4% through at least fiscal 2026, and debt to cashflow remaining unfavorably high at over 4x.”

HAWAII CLIMATE TAX

Starting Jan. 1, 2026, Hawaii will increase the state’s Transient Accommodation Tax from 10.25% to 11%, Each county may also impose an extra 3% tax. Gov. Josh Green said they all will do so, bringing Hawaii’s total TAT to 14%. The increase was passed in the wake of the Maui wildfires of 2023. It is expected that the incremental tax – “the climate impact fee”, or “green fee,” will generate $100 million annually.

Beginning 7/1/2025, the legislation requires the Governor to request in the executive budget or supplemental budget that an amount of general funds that approximates the additional Transient Accommodations Tax revenue generated by this Act be expended to advance certain climate change mitigation and tourism projects.

HOSPITAL DOWNGRADE

University Hospitals Health System, Inc.’s (OH) (UH) is the second largest health system in northeast Ohio the second largest health system in northeast Ohio. This week, Moody’s downgraded UH to A3 from A2. The system includes an academic medical center, 12 community medical center locations, ambulatory healthcare centers, a large network of physicians, and other healthcare services. Like many others, its recovery from the impacts of COVID and inflation have hampered operating results.

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