Joseph Krist

Publisher

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What a difference a day makes. Now it is possible in the wake of the Georgia Senate runoff to look forward with a lot more visibility about the outlook for municipal credit. One would hope that the Democrats will take the opportunity to take advantage of their electoral hat trick and actually pursue an agenda. It was the squandering of such a majority in the first two years of the departing administration that contributed to the recent electoral outcome.

Clearly, the outlook for additional aid to state and local government has improved  as has the outlook for better funding for mass transit and public housing. The most important change may simply be a change in the atmosphere. The incoming Biden Administration featuring mayors and governors bodes well for an improved attitude towards government.

It did not take the events of Wednesday to convince this observer that his view of the fallacy of an ideological approach to governing is valid. We have now seen on both the state and local level of the dangers of an ideologically based approach to government. It failed on the state level in Kansas where the budget is still recovering from the Brownback era and yesterday showed how such an approach failed on the national level. It is hard to argue that the country’s healthcare system, infrastructure, or education systems are better off than they were four years ago.

Now that the Capitol building has been cleared that does not mean that all of the terrorists are out of those halls. There remain a significant number of legislative terrorists who will do all that they can to obstruct and delay any Biden Administration agenda. Nonetheless, the outlook for municipal credit generally just got a little better.  And the potential for things like the repeal of the limit on the SALT deduction and limits on advance refunding should be easier to accomplish. But the impact of four years of policy and funding neglect leaves many rivers to cross for many municipal issuers.

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MORE LEGAL TROUBLE FOR SUTTER HEALTH

In late 2019, Sutter Health and the California Attorney General settled an antitrust action against Sutter. The State sued Sutter for anticompetitive activity and Sutter eventually settled for $575 million. That litigation was well known. It was widely covered in the press and was specifically cited by rating agencies as one of the factors weakening Sutter Health’s ratings this past fall. It seemed that Sutter was positioned to move forward from the litigation.

Now however, a new case is moving forward in the federal courts.  Sidibe v. Sutter Health was actually filed before the state action. The complaint raises many of the same issues in the state case. The plaintiffs, purchasers of commercial health insurance from certain health plans that contracted with Sutter, claim they paid inflated premiums, co-pays, and other charges as a result of Sutter’s anticompetitive conduct. 

The conduct in question is the use of so-called “all or nothing” contracts with insurers. Sutter included “all-or-nothing” clauses in its contracts that required plans to contract for all of Sutter’s services if it were to buy any of those services.  If an insurer wanted to serve patients at some of Sutter’s hospitals it had to serve patients of all Sutter hospitals. The idea was to force insurers to cover facilities where Sutter had more pricing power.

The complaint also the plaintiffs alleged that Sutter used a second anticompetitive contractual strategy called an “anti-steering” clause, which prevented health plans from encouraging their members to seek care from other lower-cost, in-network providers. Under the contracts, the health plans would be penalized with higher rates for failing to “actively encourage” members to use Sutter services, as opposed to cheaper alternatives. This all works as Sutter dominates the northern California provider market.

The case differs from the state action in that the plaintiffs represent different groups. In this case, the ultimate beneficiaries of a decision in favor of the plaintiffs would be payments to offset higher premium charges to individuals. This sets up a potential class of some 2 million. The affected class includes anyone living in nine specific areas in Northern California who paid premiums to Anthem Blue Cross, Aetna, Blue Shield of California, Health Net or UnitedHealthcare since 2011. 

The complaint was initially dismissed summarily but an appeals court judge overruled and set an October 2021trial date. Sutter will have many motivations to settle the case so we believe that judging the credit impact should be more a matter of how much it will cost rather than a bet on the outcome of a trial.  

JACKSONVILLE – WE HAVE A DISCLOSURE PROBLEM

The Special Investigatory Committee on JEA Matters was convened in February, 2020 in the wake of a spectacularly failed effort to sell the city-owned utility system (JEA). On July 23, 2019, the JEA Board of Directors authorized it’s senior leadership to start a process, the Invitation to Negotiate (the “ITN”), to sell JEA.  At that same meeting, the JEA Board also authorized senior leadership to implement a long-term incentive plan, the Performance Unit Plan, that would compensate participants based, in part, on the amount of proceeds the City received from the sale of JEA (the “PUP”).  

The Committee has now released a report that affirms the worst fears of investors and customers. The public customer base was at best skeptical of the plan to privatize the utility. In the late summer of 2019, JEA imposed what has come to be known as the “Cone of Silence” about the ITN process, purportedly prohibiting members of City Council (and others) from talking about the merits of the ITN.  

In the next month the Mayor got the City Council to approve legislation resulting in the transfer to the City liability for JEA’s unfunded employee pension plan upon the occurrence of a JEA “Recapitalization Event” (a sale). That seems to have been a bridge too far and the Council hired its own counsel to investigate the sale. This culminated in actions in November which led the JEA CEO to “postpone indefinitely” the PUP after the City’s Office of General Counsel (“OGC”) determined the PUP violated Florida law and the Council Auditor’s Office asked JEA probing questions about the PUP. 

Those questions resulted in a report which showed that disclosed the PUP would provide JEA senior executives with grossly excessive compensation.  According to the Council Auditor, the PUP could result in payouts to PUP participants in excess of $600 million dollars. Support for the plan crumbled and by year end the sale process was terminated.

Here is where the disclosure issue arises. The investigation revealed that the Curry administration and JEA engaged in a multi-year effort, from at least 2017 through 2019, to explore selling the City’s municipally-owned utility.  Knowing that public sentiment disfavored transferring JEA to private ownership, the City’s effort to market JEA was conducted with a purposeful lack of transparency. You would never know it from the Authority’s disclosure postings and that is a problem.

Lately we have heard much criticism of borrowers not making payments under the terms of a particular issue that they are not legally obligated to make. Here, the Authority had a real obligations not just to the customers and constituents  but to their investors. It is an obligation they took on at issuance and in this case failed to live up to. JEA should pay a price for the weak governance and oversight structure that allowed it to occur. It should be penalized with the same vigor as when it was penalized when it sued to get out of its power purchase agreement.

Given that this level of nondisclosure was easy to accomplish under the current rules governing the market, we are less optimistic about the potential for things like formal quarterly disclosures from issuers.

MBTA BUDGET CUTS

The impacts of the pandemic and the lack of an effective federal response can’t wait for the regime change in Washington at some agencies. Without a likely source of outside aid, the MBTA in Boston’s Fiscal and Management Control Board approved virtually all of the service cuts that MBTA staff had proposed. The cuts will be phased in over the coming weeks. They include a halt to weekend commuter rail service on all but five lines starting in January, as well as reduced Hingham and Hull ferry service and cuts to all Charlestown and Hingham direct ferry service to Boston.

The lack of service also has employment impacts. The “T” will ask one-sixth of the MBTA’s workforce, including its general manager and other top executives, will be forced to take up to five furlough days in the remaining fiscal year 2021. MBTA drivers and operators will not be required to take furlough days.

If Congress cannot come up with additional funding for agencies like the “T” by March, 20 bus routes will be eliminated; frequency will drop 20% on non-essential bus routes and 5% on essential bus routes; gaps between Red Line, Orange Line and Green Line trains will increase 20 %; Blue Line trains will run up to 5% less frequently.

PANDEMIC LIMITS LINGER

Massachusetts will extend its lockdown provisions and pressure is rising in connection with rising positive test levels in NYC to reimpose limits and closures on schools. Southern California remains fully locked down. Nationwide we see continuation of school closures. This is imposing real constraints on the ability of the economy to recreate jobs. Lower income employment groups who saw gains in the last four years have been the most heavily impacted.

As the economic limits of the pandemic continue, states are beginning the FY 2022 budget process. We have previously opined that this year’s budget cycle will create incentives for expansions of state revenue bases. One of the first signs of that comes from news that the NYS Governor’s proposed budget due this week will include a proposal for state run mobile sports betting. It comes as the handle for New Jersey’s sports betting market has increased to $5 billion.

That provides motivation for New York to consider it. New Jersey estimates that some 20% ($1 Billion) comes from New York bettors. It is that revenue flow that the State of New York would like to capture. In comments to the press the Governor said “At a time when New York faces a historic budget deficit due to the COVID-19 pandemic, the current online sports wagering structure incentivizes a large segment of New York residents to travel out of state to make online sports wagers or continue to patronize black markets.”

We would not be surprised to see a similar dynamic apply to the legalization of cannabis in NY given that New Jersey is now a legal marijuana state. The restricted NY market makes less sense from an economic standpoint as legalization makes its way to surrounding border states.

COAL CONTINUES ITS DOWNWARD TRAJECTORY

You know it’s for real when you see stories about American Electric Power, one of major symbols of coal generation, announcing that its considering retiring one of its coal fired generating plants in West Virginia before the end of its useful life. It comes as the South Carolina Public service Commission has ordered Dominion Energy to conduct a comprehensive coal fleet retirement analysis and assess replacing its South Carolina plants.  

Dominion had submitted a resource plan which failed to include a demand side management resource option or power purchasing options. The plan did not include any renewable energy additions prior to 2026, nor any coal retirements prior to 2028. the same plan proposed raising solar customers’ basic service charge to $19.50 a month, adding a “solar subscription fee” of $5.40/kW a month.

The tie to municipals? Dominion purchased South Carolina Energy & Gas and the partner with the muni utility South Carolina Public Service Authority (Santee Cooper). It is now absorbing the revenue impact of the failed Sumner nuclear expansion that has cast the future of Santee Cooper into great doubt.  

Washington State has established new rules governing the development of power generation resources in the state. They require the state’s electric utilities to eliminate coal-fired electricity by 2026, transition to a carbon-neutral supply by 2030, and source 100% of their electricity from renewable or non-carbon-emitting sources by 2045. These rules, in tandem with those promulgated by the State’s Commerce Department, will cover both investor owned as well as public municipal utilities.

GREEN JOBS BEGIN TO SPROUT

A quick look at a variety of headlines shows that green practices and job growth are not mutually exclusive. One is an announcement that the world’s largest lithium producer, Albemarle plans to invest between $30 million and $50 million to double production at an existing Nevada site by 2025.  The company is the only U.S. lithium producer and it attributes the increased production to the need for electric vehicle batteries.

General Motors Co. reportedly will build two new electric vehicles for Honda at its Spring Hill, TN assembly plant. In Massachusetts, a wind power contractor has announced that its proposed facility will result in cheaper rates than projected as the result of a new federal tax credit included in the recent COVID-19 stimulus package. With the bigger tax credit, Mayflower Wind will cut its price to 7 cents a kilowatt hour, which will save ratepayers roughly $25 million a year. Mayflower expects its 804 megawatt offshore wind farm to be operational by the mid-2020s.

These announcements come as data on declining coal production shows production from the Powder River Basin coal, year on year, declined 15.9%. Central Appalachian production declined from the year-ago week 23.9%. Output in the Illinois Basin was down 15.9% year on year. In Northern Appalachia, production was down 23.9% from the year-ago week.

SEATTLE TRANSIT COST REVISION

While the Purple line in Maryland begins to make progress on its effort to complete its light rail facilities and manage the cost problems which have plagued  other planned projects are having cost problems. These sorts of developments are one of the problems which mass transit advocates need to overcome.

The latest example comes from Seattle’s mass transit system. Sound Transit management has admitted that cost estimates for extending Sound Transit light rail to both Ballard and West Seattle have risen by about $5 billion — more than 50%. For the West Seattle and Ballard light rail lines, more than half of the increase is due to higher prices for land than assumptions made in 2015, before the $54 billion transit ballot measure was approved by voters.

That is the kind of change that erodes support for these projects. Projected costs for those two lines went from a total of $7.1 billion to between $12.1 and $12.6 billion, depending on where stations are located and how they are built. Voters in 2016 approved the $54 billion Sound Transit 3 tax measure to expand regional rail and bus service. The agency had promised West Seattle stations in 2030 and stations in Seattle Center and Ballard by 2035. 

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