Joseph Krist

Publisher

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ISSUE OF THE WEEK

$1,208,855,000

THE OKLAHOMA DEVELOPMENT

FINANCE AUTHORITY

Health System Revenue Bonds

(OU Medicine Project)

Moody’s: Baa3   S&P: BB+

OU Medicine, Inc. is the owner and operator of the health system previously known as OU Medical System. OU Medicine is a system of three acute care hospitals, an ambulatory surgery center and operates 22 other related clinics and other access points, composed of: OU Medical Center in Oklahoma City, Oklahoma, OU Medical Center Edmond in Edmond, Oklahoma and the Children’s Hospital in Oklahoma City. The hospitals serve as teaching and training facilities for students enrolled at the University of Oklahoma Health Sciences Center.

OU Medicine has a strong market position as a high acuity provider in Oklahoma. It’s close affiliations with and ties to University of Oklahoma entities and unique ties to the State through The University Hospitals Authority and Trust facilitates steady supplemental reimbursement payments. This helps to generate very good cashflow margins. The recent acquisition of for-profit HCA’s joint venture interest has created a more leveraged credit contributing to the split investment noninvestment grade ratings. Management of the transition to an independent not-for-profit health system is an important ratings consideration.. The rating is constrained by high pro forma leverage following the buyout of for-profit HCA’s joint venture interest, a very competitive market, modest initial liquidity, and high Medicaid and self-pay.

Children’s facilities tend to have very high Medicaid exposure and cash positions are often reflective of this factor offset by their unique abilities to raise funds through donations. Security for the bonds includes unrestricted receivables and a mortgage on certain property (including OU Medical Center and OU Medical Center Edmond). The MTI allows for a replacement master indenture if certain financial tests are met.

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KENTUCKY PENSION PROPOSAL

If the Kentucky legislature and the Governor get there way, future employees of the commonwealth will no longer have guaranteed pension benefits. A proposed bill filed by four legislators would Amend KRS 6.505 to provide that the “inviolable contract” provisions shall not apply to legislative changes to the Commonwealth’s employee  Retirement Plans that become effective on or after July 1, 2018. The bill reflects the view that historic underfunding of the Commonwealth’s pension funds can only be addressed by cutting benefits and not through the increase of any taxes to generate revenues to fund Kentucky’s substantial unfunded pension liabilities.

The bill would also create a new section of KRS 61.510 to 61.705 to establish an optional 401(a) money purchase plan for new nonhazardous members who begin participating in the Kentucky Employees Retirement System (KERS) and County Employees Retirement System (CERS) on or after January 1, 2019, who elect to participate in the plan; provide that the optional money plan that will operate as another benefit tier in KERS/CERS and will include a 4% employer contribution.

The bill was introduced after significant outside pressure was brought to bear. That campaign included a one-page letter, apparently emailed to all members of the General Assembly, which said any pension changes made during the 2018 legislative session must include “moving all future employees from a defined-benefits system to a defined-contribution system.” The letter was driven by conservative think tanks and the notorious tax agitator Grover Norquist. Norquist is behind the “starve the beast” movement which seeks to significantly eliminate public sector spending.

Kentucky’s pension systems have lost more than $7 billion in value over the past 10 years through below average investment performance. The legislation would reduce cost of living adjustments (COLAs), adjust the minimum retirement age, and shift some of the costs of pensions to localities and school districts. The plan would shift more financial pressure to localities while only slowly addressing the state pension burden.

At the same time, the bill would seemingly reduce transparency regarding the pension funds’ funding and investment results. Specifically, it would provide that the Public Pension Oversight Board’s hiring of an actuary to perform a review of state-retirement system rates is voluntary.

Employees and their supporters have opposed the bill on the basis of the ideological stance of the organizations from outside the Commonwealth who are advising the Governor. The primary group – Save Our Pensions – operates outside the jurisdiction of both the Kentucky Registry of Election Finance and the Legislative Branch Ethics Commission. Since it is not advertising on behalf of a candidate, it doesn’t have to register with the state’s election finance branch. And since it isn’t lobbying legislators directly on the pension issue, it doesn’t have to register with the legislative ethics commission.

Registered as a 501(c)(4) tax-exempt social welfare group with the IRS, the group also doesn’t have to publicly disclose its donors.

The approach to pensions extends the Governor’s well established ideological approach to the Commonwealth’s overall finances including his stance on taxes, Medicaid and now, pensions.

EMPLOYEES IN WEST VIRGINIA WIN TENTATIVE RAISE

Early in the week, the US Supreme Court heard oral arguments in what is known as the Janus Case. The case was brought by an individual state employee in Illinois, backed by anti-union groups, who seeks to strip unions of their right to collect dues from all employees on whose behalf it negotiates with employers. It is widely expected that the court will rule against unions.

Ironically, in nearby West Virginia, unionized teachers in the state’s public school systems won the Governor’s support for a 5% raise for themselves after a four day strike. At the same time, all other state employees would receive a 3% raise. The proposal must now be approved by the state legislature. West Virginia law does not recognize a right for public school employees to collectively bargain. Rather, the legislature regulates public school labor by statute.

For the teachers, the legislature has been much less supportive. As we go to press, teachers will have been on strike for seven days and they appear to be dug in. The state’s teacher’s salaries were ranked 48th in the nation in 2016. The dispute comes amidst calls for teachers to become security guards, rising health costs, and a diminished state economy that makes West Virginia a more difficult place to attract teachers to.

KENTUCKY CONSIDERS GAS TAX INCREASE

While Washington dithers over whether to pass an infrastructure plan, how to fund the Highway Trust Fund, and the question of raising taxes to do it, the states continue to move forward with consideration of revenue raising proposals. The latest is in the Kentucky legislature. Like many states, transportation needs are pressing and underfunded and the feeling is that states cannot wait for the federal government to get its act together.

A bipartisan proposal in the Kentucky legislature would raise the gas tax and impose annual fees on hybrid and electric vehicles in an attempt to replenish the state’s stagnant road fund. Kentucky faces a backlog of over $1 billion in road paving projects. This does not include some 1,000 bridges that require repair or replacement. At the same time, the Commonwealth’s road fund to finance repair and replacement projects has not increased since 2014.

A study committee was formed in the summer of 2017 by the then Speaker of the Kentucky House. The results of that study led to House Bill 609 . The bill would add an extra $391 million a year to the state’s road fund. It would do so by setting the average wholesale floor price at $2.90; increase the supplemental tax on gasoline and special fuels by increasing the existing rate from five cents per gallon (cpg) on gasoline and two cpg on special fuels to eight and a half cpg for both and setting that as the minimum rate. It would establish a base fee for hybrid vehicles, hybrid electric plug-in vehicles, and nonhybrid electric vehicles and require the fee to be adjusted with any increase or decrease in the gasoline tax established. It would also increase a variety of motor vehicle fees as part of the overall program.

WHAT TARIFFS WOULD MEAN FOR CREDIT

Trade wars usually do not end well. So we greet the news that the President appears to have been convinced that steel and aluminum tariffs will be good for workers in those industries is dismaying. We see no evidence that employment will be increased in those industries as the result of higher cost US steel and aluminum. The fact is that direct employment in the steel industry is 140,000. While those workers may benefit, workers in manufacturing industries like autos and appliances will be hurt. Construction may become more expensive so employment will be hurt there.

On the other side of the trade, export businesses like agriculture, commodities, energy and technology will all potentially face reduced demand. If you are a wheat farmer in Kansas, you are now facing a wheat farmer in Canada whose country is in the TPP. Airplane manufacturers will lose to Canadian and European producers. So take the strip roughly between Idaho and Minnesota in the north right on down the front range of the Rockies and along the Mississippi and ask where will they sell their commodities?

Now if you are a manufacturer what do you do? Three years ago, Ford Motor gambled when it started selling a new version of its F-150 pickup truck made mainly of aluminum rather than steel. With lower gas prices, fuel economy is no longer a persuasive factor for many truck buyers. While sales are brisk, F-Series trucks — including the F-150 and the brawnier Super Duty — have only slightly increased their share of the full-size pickup truck segment since the aluminum models arrived and share is actually lower than it was in 2013.

In 2017, the company’s income in North America fell 17 percent, in part because of rising steel and aluminum prices. Aluminum prices have risen more than 20 percent in the last three years. New-vehicle sales in the United States are expected to decline this year and next anyway. Now they will be more expensive. And competitors are introducing different materials. For example, G.M. unveiled a GMC Sierra available with a bed of carbon-fiber composite.

The point is about more than the auto industry. The development in materials choices, costs of fuel, introduction of artificial intelligence are all factors impacting employment way beyond the cost of Chinese steel and aluminum. The inflationary aspects of tariffs are more wide ranging and negative for municipal credits than the cost of any one commodity. Lower corporate profits from higher costs and lower sales impact all states. They impact local employment and tax revenues.

It also has not taken long for there to be impacts. Electrolux, a foreign appliance manufacturer which sources all of its materials from US producers for use at plants in the US, announced that anticipated higher steel and aluminum prices would lead them to delay construction of a $250 million production facility in Tennessee. Sales, income, and property tax revenues plus jobs will be delayed as well.

WHERE ARE THE STEEL MILLS AND ALUMINUM SMELTERS IN THE US?

Michigan, Indiana, Ohio, Pennsylvania, Alabama, Colorado, Delaware, Mississippi, South Carolina. These include huge integrated mills as well as specialty mini-mills. In addition to jobs and sales of raw materials, many of these facilities are huge consumers of electric power. Primary aluminum smelters – huge consumers of electricity – are located in New York, Washington, South Carolina, Kentucky. So for the short term these facilities will get some breathing room.

WHICH STATES EXPORT?

Should there be widespread retaliation for the imposition of tariffs, it is useful to know which states have the most to lose in terms of their exporting volume. The five largest exporting states in terms of dollar value of the goods they ship are Texas, California, Washington, New York, and Illinois. This reflects significant manufacturing bases in these states as well as substantial agricultural sectors. Ohio, Louisiana, Michigan, and Florida are also major exporters.

 

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