Joseph Krist

Publisher

This year we see the effective convergence of holidays of three major faiths – Easter, Passover, and Ramadan. With so much to celebrate, we think that we could all use some time to rest and reflect. So, the Muni Credit News will take a week off. Our next edition will be April 25.

TIS THE SEASON

This year the relative financial cushion provided by the federal government to the states has made the budget process on its own less contentious than it has in the past. That is not to say that the process is smooth just that the outstanding budget debates are about policy not revenue levels. The various state budget debates seem to be moving along the same political lines as other issues.

New York represents one perspective. The unexpectedly favorable revenue influx reflects the fact that for the first time in decades the state received more federal money than its residents paid in federal taxes. That has framed the NYS budget debate in terms of what new services could be provided. In other states, the effort is being directed towards financing tax cuts. In either case, the fact that some three quarters of governorships are up for election in 2022 is driving the debates.

The latest example is Virginia. The Republican Governor wants to double the standard deduction on personal income taxes and eliminate state and local taxes on groceries. The Democratic state senate wants to eliminate the 1.5 percent portion of the grocery tax levied by the state but leave in place a 1 percent levy that goes to localities.

NEW YORK STATE BUDGET

One week late, New York State has a fiscal 2023 budget. It is a record setter at $220 billion. One year after the sky was falling fiscally, the budget speeds up the timing of tax cuts for the middle class. It also includes another record – the largest public subsidy for a stadium. The $600 million to be applied to a new stadium for the Buffalo Bills is due to be funded with monies from the State’s settlement with the Seneca tribe and its casino operation (January 31, 2022 MCN).  

As is always the case with the NYS budget process, a number of policy issues were addressed. They include significant increased spending for child care – $7 billion dollar investment over four years that will help subsidize child care for families who earn up to $83,000 for a family of four. It also funds some $350 million for increased childcare salaries. It does not include a statewide ban on new natural gas hookups. A tax break for the development of “affordable” housing in NYC was not renewed or replaced. Mayoral control of the NYC school system was not extended.

The budget would also allow the licensing of three casinos in New York City. It will likely expand the operations of two existing gaming facilities on the edge of the City. A third license is thought to go to a Manhattan location. Each new license is expected to generate $500 million.

A couple of provisions highlight the fact that this is an election year in NYS. A gas tax holiday from June through the end of 2022 was included. The sale of individual alcoholic drinks to go by restaurants and bars was renewed for three years. A higher minimum wage for home care workers is effectively funded by the State which reimburses many of those costs.

We view the budget as credit neutral in the short-term. The issue is whether the long-term spending trends baked in to this budget will be sustainable in the long run. Two items of interest to New York City remain – transit funding and public housing funding. The huge capital backlogs facing those two sectors represented by the MTA and the NYC Housing Authority still face daunting funding challenges for the nearly $100 billion of capital investment needs the two agencies have identified.

Let the election process begin!!

HOSPITAL MERGER

Colorado-based SCL Health, which operates eight hospitals and dozens of clinics across three states has received an opinion from the Colorado Attorney General that its proposed merger with Intermountain Healthcare does not violate Colorado law. The resulting entity will operate under the Intermountain name. SCL has about 16,000 employees and owns four hospitals in Colorado while Intermountain has about 42,000 employees and operates 25 hospitals, along with a number of clinics, in Utah, Idaho and Nevada.

Intermountain Health comes into the deal with a AA+ rating. It is likely that the merged entity will reinforce the benefits of size and consolidation.  The biggest public concern about the merger revolves around perceived improved pricing power at the merged entity. A 2020 report by the Rand Corp. found that SCL’s hospitals charge patients 187% of Medicare prices, on average. That was below the national average of 247%. The report found that Intermountain’s prices were 271% of Medicare’s.

The attorney general’s office did not evaluate whether the merger will raise prices at SCL’s hospitals in Colorado. It did opine that the merger would not change the charitable purpose of SCL Health and it would also not cause a “material amount of hospital assets” to leave the state.

The credit implications are clouded by the fact that Neither SCL Health nor Intermountain agreed, upon completion of the Merger, to assume any liability for or otherwise guarantee the debt of the other party.

BELIEFS VS. BALANCE SHEETS

Another side of the consolidation wave in the healthcare sector is playing out in southern California. In 2013, the California Attorney General’s Office approved the affiliation of then-St. Joseph Health System (now Providence) with Hoag Memorial Hospital Presbyterian (Hoag) in Orange County. In 2020, Hoag filed a lawsuit to terminate the affiliation as it was prohibiting the provision of abortion services. The settlement will allow Hoag to become an independent entity, and as part of the agreement, Hoag has committed to expand reproductive health services in Orange County. 

Now the fiscal impact of the disaffiliation is being felt at Providence. Moody’s downgraded the Providence credit to A1. Specifically, it cited the disaffiliation. PSJH disaffiliated with Hoag effective January 31, 2022, and the result was to reduce unrestricted cash and investments by $2.9 billion (23% of PSJH’s total), reduce debt by $573 million (just 8% of PSJH’s total), and reduce operating cashflow (proforma 2021) by $303 million (43% of PSJH’s total in 2021; in 2019 and 2020 the average was more typical at 14.5%). The reduced financial position in at least the short run is the price paid for the restrictions on services resulting from religious sponsorship.

PSJH remains a strong credit with a very large revenue base of over $25 billion; leading market share in all of its markets; The loss of financial flexibility during a very difficult operating environment generally does increase the vulnerability to factors such as significant and persistent operating pressures, variable utilization, and weaker liquidity (excluding Medicare advance payments and deferred payroll tax), pressure from payers, exposure to labor unions, material competition in many markets, the reliance on temporary labor, and persistent underperformance in certain markets.

SOUTHWEST CANNABIS

On April 1, New Mexico became the latest state to implement a retail system for recreational marijuana. Anyone 21 and older can purchase up to 2 ounces (57 grams) of marijuana or comparable amounts of vapes and edibles. New Mexico is the18th state, including neighboring Arizona and Colorado as well as the entire West coast, that have legalized pot for recreational use. That means that the US side of the Mexican border from San Diego to El Paso now includes legal recreational markets.

The entrance of New Mexico now positions a fully legal market on the Texas border. Unlike many other states, local governments can’t ban cannabis businesses entirely, though they can restrict locations and hours. Local governments will receive a minority share of the state’s 12% excise tax on recreational marijuana sales, along with a share of additional sales taxes.

The emergence of the market could put Texas back in the spotlight over the issue of marijuana. The lone Star State has long been an outlier in terms of its enforcement of marijuana laws.  

EMINENT DOMAIN

We’ve commented on the issue of eminent domain as it pertains to Iowa and its role in proposed regional carbon transmission pipeline developments. Under legislation passed by the Iowa House and is in front of the Iowa Senate, the Iowa Utilities Board could not schedule a hearing before Feb. 1 in which a carbon sequestration company is requesting the right to use eminent domain for a project. The proposed moratorium would take effect as soon as the bill becomes law.  The hope is that negotiations can be concluded in the open time window the legislation would establish.

In Iowa’s immediate neighbor to its south Missouri, the proposed transmission line is dealing with the same issues. A Senate panel was scheduled this week to hear testimony on a House bill which seeks to halt the Great Basin Express power line, which would carry wind energy from Kansas across Missouri and Illinois before hooking into a power grid in Indiana that serves eastern states.

While this process is playing out the private line developers have moved ahead with land acquisition. It claims that it has now completed voluntary right-of-way acquisition on 71% of the route in Missouri and Kansas. It has filed 12 eminent domain proceedings. Grain Belt Express said it is paying landowners 110% of the market value of the land and $18,000 for every transmission structure sited on their property. Iowa’s Agriculture Secretary has said he would “much rather” see the companies strike voluntary deals with landowners and the Iowa Utilities Board should be careful in considering private property rights before granting eminent domain for land seizures.

It is a process which will continue to play out as the nation’s transmission system is realigned to reflect the realities of how and where power can be most effectively produced. There is a consensus which supports the view that significant new transmission capacity must be developed to satisfy an “all electric” world. Transmission is at the center of disputes over the pace of individual solar development, the scale of industrial solar, and siting of windmills.

POPULATION PANIC

Interim data from the U.S. Census is showing that large cities experienced significant population declines in 2021. Combined with the emerging resistance to full time office attendance, such declines can be a real concern. Given the inherent flaws in the information used to allow Census Bureau models to estimate annual population changes the data may reflect temporary realities. We know from the pandemic experience that many of the moves were not necessarily permanent. Nonetheless, things like voter registrations, tax submissions, and mail changes did serve to contribute to the decline measurement.

The other side of the coin is that as the nation and its hot spots emerge from the pandemic that certain data looks positive. Rents in places like NYC are up significantly even before all restrictions were removed. One issue is that many of the renters who left often decamped to already owned second homes. In some cases, the pandemic merely accelerated some plans to move by families.

One other aspect of the urban population decline is the impact of more restrictive immigration policies over the recent 6-10 years. The reality is that large urban centers provide a relatively “safer” environment for many immigrants – legal and illegal. We also know that the population of largely legal immigrants was intentionally undercounted under the Trump Administration. That means that the data is essentially unreliable.

What would be of more concern are the actual socio-economic characteristics of the permanent departees. We know that the lower end of the economic spectrum took the biggest illness hit in places like NY, LA, Chicago. That may account for new data showing large numbers of sustained absences from the public school systems in L.A. (250,000) and New York (375,000). That would support a guess that many poorer people left dangerous jobs (like healthcare) and moved elsewhere

BANKS, FOSSIL FUELS, AND LEGISLATION

Texas has been most prominent in using litigation and legislation in an effort to punish those who believe in a future without fossil fuels. The State and its local governments are now restricted from allowing financial institutions which will not provide financing to the fossil fuel industry from participating in things like underwriting their securities.

While that process has attracted the majority of the market’s attention, another effort to achieve a similar aim advanced in West Virginia. The legislature recently enacted a law which directs the State Treasurer to publish a list of financial institutions engaged in boycotts of energy companies; publicly post the list and submit the list to certain public officials.

It authorizes the Treasurer to exclude financial institutions on the list from the selection process for state banking contracts; to refuse to enter into a banking contract with a financial institution on the list; to require, as a term of a banking contract, an agreement by the financial institution not to engage in a boycott of energy companies; limiting liability for actions taken in compliance with the new article; and exempting the Investment Management Board from the new article.

GAS TAX POLITICS

This week, legislation which would have suspended Michigan’s 27-cent-per-gallon tax on fuel for six months was vetoed by Governor Whitmer.

Interestingly, the bill would not have suspended the tax until 2023. The nonpartisan Senate Fiscal Agency estimated that the average driver in Michigan would save about $75 over six months had the bill been signed into law based on driving habits from 2019. This tax is in addition to the retail sales tax (6%) also imposed on fuel.

The Governor supports suspension of the 6% retail sales tax on gasoline. Legislative opposition is based on a belief that the sales tax suspension would cause the amount of savings to fluctuate with the price of gas, whereas suspending the state’s gas tax would be a constant 27-cent-per-gallon savings.

An opposite tack is being taken by Virginia’s Governor. Governor Glenn Youngkin has sent legislation to the General Assembly to suspend Virginia’s gas tax for three months. The Motor Vehicle Fuels tax (26.2 cents per gallon of gasoline and 27 cents for diesel) would be suspended in May, June and July before being phased back slowly in August and September. The annual adjustment to the gas tax would also be capped at no more than two percent per year.

New research by the American Road & Transportation Builders Association found that state-level fuel tax “holidays” do not necessarily result in significantly lower diesel and gasoline retail pump prices, nor deliver “big savings” to motorists. The association examined 177 changes in state-level gasoline tax rates in 34 states between 2013 and 2021 and found that, on average, motorists received just 18 percent of an any increase or decrease in the retail price of gasoline in the two weeks after a change took effect.

TRI-STATE TRANSMISSION IN ANOTHER FIGHT

A small electric distribution co-op is at the center of a dispute with the New Mexico city it serves. Socorro is a town of some 9,000 in eastern New Mexico. It gets its electricity from the Socorro Electric Cooperative under a franchise agreement which ends in 2024. The City has long disputed Socorro Co-op’s ratemaking methods which have been the subject of a state Public Regulation Commission review. That review orders Socorro to restructure its electric rates. 

That restructuring would require Socorro to lower rates to larger commercial and industrial customers while raising rates for residential and small commercial users. This led the City Council to offer a proposal to buy out the co-op. That was rejected by the co-op. Now, the City is planning to terminate the co-op’s franchise in 2024. The City contends that it would be able to better and more cheaply serve its needs through a municipal electric distribution utility.

That determination reflects negotiations which the City says can allow it to provide power to more customers at lower cost. These savings are based on negotiations with third-party power providers who could supply wholesale electricity through such renewable resources as solar generation at nearly 50% lower cost than the co-op. Where does the Socorro Co-op get its power? Tri-State Generation and Transmission. The City points out that Socorro pays 8.5 cents per megawatt hour to Tri-State, but the City can get “greener” wholesale power for just 4.5 cents.

PORT FEES AND THE ENVIRONMENT

The Ports of Long Beach and Los Angeles find themselves in the middle of any number of contentious situations. Many of them are tied to the perceived environmental impact of the ports and of the vehicles which service them. For years the ports have been under pressure to streamline and reconfigure operations to try to reduce the pollution coming from trucks transporting freight from the ports. The latest effort began this week.

The two ports began to charge a Clean Truck Fund Rate fee on cargo using the port which is not transported on zero-emission vehicles. Cargo that is not being transported on zero-emission vehicles is subject to the tariff, which is $10 per 20-foot-equivalent unit—the standard measurement for shipped cargo—and $20 for every container that is larger than that.

The fee is charged to the companies that own the shipments. The ports expect to generate $90 million in the first 12 months from these fees. The revenues will be used to fund purchases of emission-free trucks. Natural gas-powered trucks that emit low amounts of nitrogen oxides—also known as low NOx trucks—are exempted from the fee.

Each of the ports will levy slightly different fees.  For the Port of Long Beach, exemptions will last until either Dec. 31, 2034 or Dec. 31, 2037, depending on when the vehicle was purchased and registered with the Port Drayage Truck Registry. The Port of Los Angeles will sunset its exemption on Dec. 31, 2027.

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