Joseph Krist

Publisher

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ISSUE OF THE WEEK

$1,720,000,000

New York State Personal Income Tax (PIT) Bonds

State Personal Income Tax Revenue Bonds are secured by a pledge of payments made pursuant to a financing agreement entered into by DASNY and the state Director of Budget, backed by a dedication of 50% of New York State personal income tax receipts and 50% of receipts of the ECEP. The Employer Compensation Expense Program (ECEP) established a new optional Employer Compensation Expense Tax (ECET) that employers can elect to pay if they have employees that earn over $40,000 annually in wages and compensation in New York State.

The state created security for the bonds through statutory dedication of personal income tax revenues and more recently, ECEP receipts. The comptroller is required to deposit personal income tax withholding receipts and ECEP receipts into the dedicated revenue bond tax fund (RBTF) in an amount equivalent to 50% of the state’s total monthly receipts from each tax. In addition to withholding, personal income tax receipts include estimated taxes, delinquencies, and final returns. Financing agreement payments are made from the RBTF to the trustees for debt service.

The state comptroller deposits the dedicated personal income tax and ECEP receipts into the revenue bond tax fund upon certification of revenues by the commissioner of the state’s Department of Taxation and Finance. The funds are set aside daily from withholding or ECEP receipts to result in 50% of PIT and ECEP receipts set aside monthly. There must be a legislative appropriation to pay debt service and the monthly financing agreement payments must be made in order for receipts in excess of debt service requirements to be transferred to the general fund and used for any other purpose.

The lockbox structure has been a proven winner in terms of credit for the State of New York. Additional security stems from the enabling act which requires the comptroller to transfer funds from the general fund to satisfy debt service requirements if appropriated and certified receipts set aside for the bonds are insufficient to make the certified financing agreement payments. The comptroller is empowered to do so without appropriation. However, if funds are insufficient to pay debt service on the state’s general obligation bonds, the comptroller is also empowered to direct first revenues of the state to that purpose. If those revenues are insufficient, the comptroller may transfer funds from the dedicated PIT or dedicated sales tax funds to pay general obligation debt service. 

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One of our recurring themes is that consolidation remains a significant credit factor in the hospital sector. While it is not determinative, size is one way to mitigate credit risk as those entities with larger and stronger balance sheets remained the best positioned to withstand the various winds of change buffeting the industry. So to that end, here is a list of the 15 largest (by number of hospitals) non-profit hospital systems in the US.

1. Ascension Health (St. Louis) — 76 Aa2
2. Trinity Health (Livonia, Mich.) — 45 Aa2
3. Kaiser Permanente (Oakland, Calif.) — 37 AA-
4. Dignity Health (San Francisco) — 36 A3
5. Catholic Health Initiatives (Englewood, Colo.) — 33 Baa1
6. Adventist Health System (Winter Park, Fla.) — 31 A
7. Sutter Health (Sacramento, Calif.) — 26 Aa3
8. Providence Health and Services (Renton, Wash.) — 26 Aa3
9. Northwell Health (Great Neck, N.Y.) — 21 A3
10. Banner Health (Phoenix) — 20 AA-
11. Baylor Scott & White Health (Dallas) — 19 Aa3
12. CHRISTUS Health (Irving, Texas) — 19 A1
13. SSM Health Care (St. Louis) — 18 A+
14. Intermountain Health Care (Salt Lake City) — 17
15. Mercy Health (Cincinnati) — 17 A

The credits are all rated in at least the A category with the exception of one which has always been characterized by above average leverage. The larger systems tend to have balance sheets with significant resources to survive as they navigate mergers and expansions and changes in reimbursement. We are not surprised by the correlation.

LESS HEALTHCARE CONTROL FOR STATES

Certificates of Need were a significant tool used in the healthcare space to limit uncontrolled and eventually wasteful spending on health delivery facilities like hospitals and nursing facilities. In an era when efficiency is at the core of nearly every aspect of the provision of healthcare and its finance. While they have their detractors, there has largely been little public support for building additional hospital facilities. Current trends in the industry towards consolidation would seem to indicate a market view that the current rate of capital expansion works.

So it is interesting that in the face of those trends, The US Department of HHS’ new report about ways to improve “choice and competition” in the U.S. health care system includes repealing state laws that require providers to ask for permission to build new facilities.  Some observers believe tha tthe Administration might use requests for waivers as a vehicle for pressuring repeal on states.

The effort to repeal CONs is generally considered to be a conservative issue. Repeal would theoretically allow for the opening of more independent free standing facilities privately owned by physician groups.  These facilities have had checkered financial and health related outcomes so their revival would be an issue from a credit perspective.

WHILE HEALTHCARE SPENDING SLOWED DOWN

Overall national health spending grew at a rate of 3.9 % in 2017, almost 1.0 percentage point slower than growth in 2016, according to a study conducted by the Office of the Actuary at the Centers for Medicare & Medicaid Services (CMS). Medicare spending grew at about the same rate in 2017 as in 2016, while Medicaid spending grew at a slower rate in 2017 than in 2016. According to the report, overall healthcare spending growth slowed in 2017 for the three largest goods and service categories – hospital care, physician and clinical services, and retail prescription drugs. 

Hospital spending (33% of total healthcare spending) decelerated in 2017, growing 4.6 % to $1.1 trillion compared to 5.6 % growth in 2016. The slower  growth for 2017 reflected slower growth in the use and intensity of services, as growth in outpatient visits slowed while growth in inpatient days increased at about the same rate in both 2016 and 2017.

Physician and clinical services spending (20 % of total healthcare spending) increased 4.2 % to $694.3 billion in 2017. This increase followed more rapid growth of 5.6 % in 2016 and 6.0 % in 2015. Less growth in total spending for physician and clinical services in 2017 was a result of a deceleration in growth in the use and intensity of physician and clinical services.

Retail prescription drug spending (10 %of total healthcare spending) slowed in 2017, increasing 0.4 % to $333.4billion. This slower rate of growth followed 2.3 % growth in 2016, which was much slower than in 2014, when spending grew 12.4 %, and in 2015, when spending grew 8.9 %. These higher rates of growth in 2014 and 2015 were primarily the result of the introduction of new, innovative medicines and faster growth in prices for existing brand-name drugs. Retail prescription drug spending growth slowed in 2017 primarily due to slower growth in the number of prescriptions dispensed, a continued shift to lower-cost generic drugs, slower growth in the volume of some high-cost drugs, declines in generic drug prices, and lower price increases for existing brand-name drugs.

Closer to the hearts of municipal analysts are the subjects of Medicare and Medicaid.  Medicare spending (20% of total healthcare spending) grew 4.2 percent to $705.9 billion in 2017, which was about the same rate as in 2016 when spending grew 4.3 %. In 2017, slower growth in fee-for-service Medicare (Medicare FFS) spending (1.4 % in 2017 compared to 2.6 % in 2016) offset faster growth in spending for Medicare private health plans (10.0% in 2017 compared to 8.1 % in 2016). The trends in Medicare FFS and Medicare private health plan spending are attributed in part to an increasing share of all Medicare beneficiaries enrolling in Medicare Advantage.

Medicaid spending (17 % of total healthcare spending) growth slowed in 2017, increasing 2.9 % to $581.9 billion following growth of 4.2 % in 2016.  The slower growth in total Medicaid expenditures in 2017 was influenced by a deceleration in enrollment growth and a reduction in the net cost of Medicaid health insurance resulting from an increase in recoveries from Medicaid managed care plans for favorable prior period experience. State and local Medicaid expenditures grew 6.4 %, while federal Medicaid expenditures increased 0.8 % in 2017.  In 2017, states were required to fund 5 % of the costs of the Medicaid expansion population, while in prior years these costs were funded entirely by the federal government.

In 2017, the federal government’s spending on healthcare slowed, increasing 3.2 % after 4.9 % growth in 2016. The deceleration was largely associated with slower federal Medicaid spending due to lower Medicaid enrollment growth, a reduction in the federal government’s share of funding for newly eligible Medicaid enrollees, and a decline in the net cost of insurance for Medicare and Medicaid enrollees in private plans in 2017. 

CALIFORNIA AND PENNSYLVANIA NOVEMBER REVENUES

State Controller Betty T. Yee reported the state received $9.69 billion in revenue in November, exceeding projections in the 2018-19 fiscal year budget by 15.1 %, or $1.27 billion. Personal income tax (PIT), sales tax, and corporation tax –– the state’s “big three” revenue sources –– all were higher than expected in the enacted budget.

For the fiscal year, revenues of $44.97 billion are 5.4 % ($2.29 billion) higher than projected in the budget enacted at the end of June. Total revenues for FY 2018-19 thus far are 9.8 % ($4.02 billion) higher than through the same five months of FY 2017-18.

For November, PIT receipts of $5.96 billion were 22.3 % ($1.09 billion) more than expected in the FY 2018-19 Budget Act. Sales tax receipts of $3.52 billion for November were 12.4 % ($388.4 million) greater than anticipated in the FY 2018-19 budget.
November corporation taxes of $26.9 million were 2.8 %higher than FY 2018-19 Budget Act estimates. 

The Commonwealth of Pennsylvania’s Department of Revenue reported that year-to-date through November revenue collection in the state general fund had reached $12.4 billion for fiscal 2019, which started  July 1. The growth in total general fund revenue is the highest the state has recorded in almost 10 years. Current year revenue collection is trending 2.8%higher than the state had forecast through November of this fiscal year. Income taxes and sales taxes are growing at rates higher than in most years of the current decade. These are the two largest sources of General Fund revenue to the Commonwealth. Income taxes through November are below forecast, but only by 1.4%. Sales taxes are 3.1% higher than the state anticipated through November and up 9% relative to the same time last year.

How enduring a trend this is may be subject to question. Like many other states, federal tax law changes increased the pool of available taxable income. Businesses may have shifted some income from last year to this year to take advantage of the lower federal tax rate. The Commonwealth changed the way corporations report net income, which the state estimated would moderately increase corporate tax revenue.

Underlying all of this is a clear improvement in many of Pennsylvania economic performance metrics. While there has not been a significant improvement in Pennsylvania’s long-term manufacturing outlook,increases in healthcare employment (especially around the state’s medical centers Philadelphia and Pittsburgh) are generating higher incomes. It is also not a sign of significant budget improvement as FY 2018 showed a small surplus in the Commonwealth budget. This after the Commonwealth bonded out the previous accumulated deficit.

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