Joseph Krist

Publisher

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TARIFFS INFLUENCE BUT DO NOT YET HURT RESULTS

There has been much to consider in terms of the potential impact of the ongoing US trade wars. One of the ready points of worry is whether tariffs against Chinese goods would lead to sufficiently diminished shipping volumes which would hurt port revenue bond coverage. Initially, that concern was not supported by full year results at at least one major west coast port.

The Port of Oakland reported a record-setting 2018 in cargo movement, thanks to an expected spike in imports aimed at beating new tariffs on goods shipped from China. The Port handled 2.5 million 20-foot containers in 2018, up 5% compared to 2017. Imports were up 5 % and exports were down 3.5 % over the same time period. Empty containers returning to Asia, the port’s largest trading partner by region, increased by 19.7 %. 

The bases cited for the strength of the 2018 numbers especially those for the fourth quarter do raise some ominous signs.  A spokesman for the Port did admit that “some of the shippers we talked to did indicate that there was an attempt to move cargo much more quickly, in hopes of beating the tariffs.”  Other data such as the volume of empty containers exiting the port point to support for the surge theory tied to pending tariff increases.

The same pattern is seen at the other major California ports. The Ports of Los Angeles and Long Beach said they set all-time records for moving cargo in 2018, after U.S. retailers and manufacturers pulled forward imports to avoid higher tariffs on Chinese goods. The Port of Los Angeles, North America’s busiest container port, handled 9.46 million 20-foot equivalent units (TEUs) last year, the most in its 111-year history and 1.2 percent more than in 2017.

The neighboring Port of Long Beach processed more than 8 million TEUs for the first time last year, after container cargo totals jumped 7 percent from 2017.

So like so many things, the near term outlook is really out of the control of the port operators. The failure of negotiations on trade would diminish volumes in both directions and would clearly negatively impact port revenues.

PUERTO RICO

Special Claims Committee announced that it and the Official Committee of Unsecured Creditors in Puerto Rico’s debt restructuring filed an objection in U.S. District Court to a portion of the settlement which would “annul” more than $6 billion of Puerto Rico’s bonded debt. The board and the Creditors’ Committee asked the judge overseeing Puerto Rico’s restructuring case to also disallow the claims of that debt under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa).

All general obligation bonds, which are backed by the full faith and credit of Puerto Rico, issued by Puerto Rico in 2012 and 2014 are considered invalid debt by the board. The board asserts that the so-called “invalid debt” was issued in “clear violation” of the commonwealth’s Constitution and should be declared null and void. This comes in the wake of a study undertaken for the Board to determine the validity of the Commonwealth’s outstanding debt. The matter, involving bond issuances in 2012 and 2014, will be heard during a Jan. 30 omnibus hearing. 

GO creditors including bond insurers have challenged the determination of invalid issuance. Assured Guaranty articulated the concerns of the impacted GO creditors. “Commonwealth’s Series 2012 A GO Bonds insured by Assured Guaranty Municipal Corp. were issued in full compliance with applicable provisions of the Puerto Rico Constitution and related laws, including the constitutional debt limitation provision, and we believe that they are legal, valid and binding obligations of the Commonwealth. In 2012, AGM insured $369 million of 2012 A GO refunding bonds while at the same time coming off risk on $532 million of GO bonds we had previously insured. The $369 million has been included in the amounts of Puerto Rico exposure we regularly disclose.

L.A. TEACHERS STRIKE

The ongoing strike by the teachers of the Los Angeles Unified School District is garnering much attention. Given the job actions undertaken by teachers in several states during last year’s budget cycle, the focus of much interest and coverage has been on the issue of teacher pay.

From this standpoint, we see much much more going on. The issues included in these negotiations also include things like class size which are under the control of the District but also are on much larger issues which go beyond the District’s boundaries. The dispute is designed to focus on things like housing affordability for teachers, state aid levels, and charter schools.

These issues have arisen in other California school districts but they have not been at the scale of those in the nation’s second largest school district. The teachers, by pressing for more state aid are hoping to blunt opposition from property tax payers to  higher school taxes. Reducing that burden makes it easier to make the case for public education and traditional funding. The union also hopes to – from its perspective – level the playing field between pure public schools and charter schools.

But it is fair to ask why would a bondholder care? The rating agencies have put forth a variety of comments on the strike but they all make the point that the dispute is not seen as a credit issue.

BUT IT WILL BE FELT AT THE STATE LEVEL

The headlines make the case: Texas Lt. Gov. Dan Patrick (R), a staunch conservative, has proposed increasing teacher salaries by $5,000 across the board, an expense that would cost the state $3.7 billion over two years.

 Georgia Gov. Brian Kemp (R) has proposed a $3,000 increase, at a cost of $418 million.

 South Carolina Gov. Henry McMaster (R) wants to give teachers a 5 percent pay raise, totaling about $155 million.

Arkansas legislators will debate increasing teacher salaries over the next three years, under a bill introduced this week. 

In Indiana, Gov. Eric Holcomb (R) this week proposed using billions in state reserve funds to pay down pension liabilities, saving the state $140 million. He proposed giving all of those savings to teachers in the form of pay hikes.

Clearly the politics have moved in favor of the teachers. That will drive a demand for more state level funding to keep property taxes as low as possible.

SHUTDOWN IMPACTS

Metro is losing $400,000 a day as the federal government shutdown drags on, cutting into its ridership and parking revenue, according to a letter the agency sent to the region’s U.S. senators. the agency has suffered daily rail ridership losses averaging 16 percent; average daily ridership for Metrobus is down 8 percent.

Any transit agency which relies on federal grant money an agency is owed is not being disbursed, leaving the agencies with varying levels of capital spending that has not been reimbursed. 

States and municipalities which have large SNAP (food stamps) recipients are facing the potential need to either fund the payments due this month and next month from their own resources or see thousands of their residents unable to get food and not generate the economic activity such purchases generate. Either way the impacts of the shutdown expand daily.

The view here is that even another month of shutdown will not lead to muni defaults. It is a problem nonetheless as these sorts of artificial distortions to economic activity are detrimental to realistic revenue estimation and planning. This at the time of year when the majority of budget plans are considered and adopted. Like it or not, the federal budget has become so intertwined with those of state and local government that disputes like that over the federal budget can easily lead to negative impacts at the state and local budget level.

THREE THINGS TO WATCH FOR

The PG&E bankruptcy could be resolved in a number of ways which could easily involve public utilities. There are numerous transmission and/or generation and/or distribution utilities owned and managed by municipal utilities.  The interest is in whether any of the municipal entities become part of a solution. A federal judge is considering ordering Pacific Gas and Electric Co. to inspect its entire electric grid in the coming months and turn off power during windy weather if it has not determined its equipment is safe for those conditions through pending litigation.

The resolution of disagreements over how best to deal with the development of additional nuclear generating capacity at two southeastern US sites in the face of unfavorable economics. The two sites face different initial fates – the South Carolina plant is suspended while the Georgia plant plunges on. The former is more of a regulatory political situation while the likely decision driver in the Georgia situation is at this point a legal dispute.

The unfolding drama surrounding New York’s MTA will ultimately improve the clarity about all of the competing motives and interest groups make the MTA an interesting credit. The latest plan to repair the subway tunnel to Brooklyn is the subject of much controversy. If it is adopted, the City will have taken a number of steps like closing and reconfigurations of the streets to accommodate the lost subway volume. With the line likely to be usable much more of the time, the resulting traffic changes will reveal much about the alternative transportation space.

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