Joseph Krist

Publisher

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The increasingly partisan approach to the fiscal damage done to state and local budgets as the result of the pandemic is at best, disappointing. While politics have always been one of the elements to be evaluated in the successful analysis of municipal credit, partisanship is another story. What we are seeing now is ideology, not practicality. The impact on the economy is clear at 30 million new unemployed. The numbers are bound to increase as even tech based companies like Uber and TripAdvisor are seen to be ready to announce layoffs. That’s in addition to the expected wave of unpaid commercial rent from many of the companies laying off staff. and from retail outlets with few or no customers. These things are happening in a variety of states led by both Democrats and Republicans.

One  good example is the pension funding red herring thrown out there by the Senate Majority Leader. and the White House.  Kentucky has the worst funding ratio among any of the states. At the same time, New York has one of the five best funding ratios. Yes, Illinois, Connecticut, and New Jersey have pension problems but what they have in common is their relative bipartisan history in terms of who held the Governorships. How many downgrades did New Jersey suffer during Chris Christie’s tenure? counting isn’t constructive but the point is that pension funding is a national problem not a partisan problem. It’s also fair to note that a federal entity, the Pension Benefit Guaranty Board exists to bail out pensioners from poorly managed corporations. But not governments?

The discussion during the effort to save the economy from the pandemic is beyond a distraction. It is an impediment to the realization of the goals held on either side of the partisan debate. And it is bad for the process of shoring up state and local credits which have done the majority of the work on the pandemic. It is clear that there is no consensus in support of state bankruptcy.

Now, the President is refusing to extend the federal guidelines regarding things like social distancing .So it’s clear that the attack on state and local government finances is on in earnest. Hit to revenues because you didn’t open as fast as another? That was your fault. More people on unemployment because it’s not safe to return to work? Yup, the states fault. This, as just this week the medical professionals messaged that social distancing must continue for months. The implication is that recovery to the status quo is a few quarters away. Our views are based on the belief that the reality is that a  vaccine will be the answer to the pandemic and a full return to the status quo. That cannot be rushed and it must be safely effective which takes longer. In the interim, a return to 90% of where the economy was might be a good norm to assume as you do your near term forward analysis of the next two to four fiscal years.

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POST PANDEMIC MUNIS.

We are seeing much speculation as to the impact of the pandemic on the US economy and way of life. Much of this commentary is about the future of cities and whether one result will be a paradigm shift in how people locate themselves in relation to where and how they work. Many of the ideas being advanced would require major alterations to the way municipalities are run. There seems to be an assumption that the resulting changes in demand for capital projects would be accommodated easily in spite of the potential changes to how revenues are generated.

One example is the assumption that the responses to the pandemic which have been salutary can be maintained in the context of a restoration of a fully functioning economy. We would remind everyone that there are significant vested interests in returning to something like the ways of life we had going in. The post-pandemic era will not necessarily feature a return to the status quo but it will not be one without large gatherings, mass transit, or private vehicles.  None of the major population centers of the US in 1918-1919 experienced a slowdown in growth. We believe that this will be the case again.

We are seeing much speculation as to the impact of the pandemic on the US economy and way of life. Much of this commentary is about the future of cities and whether one result will be a paradigm shift in how people locate themselves in relation to where and how they work. Many of the ideas being advanced would require major alterations to the way municipalities are run. There seems to be an assumption that the resulting changes in demand for capital projects would be accommodated easily in spite of the potential changes to how revenues are generated.

Mass transit presents a significant issue. Now, the lack of cars and essentially any transportation is being treated as if it is a sustainable long term plan for cities. At the same time, the micro mobility industry is already feeling the pain of pandemic restrictions on movement. Bird, a major e scooter provider has laid off nearly one-third of its direct staff. in a business which has yet to generate profits while relying on regular outside cash infusions, expenses are just not tolerable without operating revenue. Much has been made about the improvements in noise and air pollution underway in the major cities. That improvement, at the expense of a functioning economy and education system, is sparking much thought about cities and transit in the post-pandemic era.

One thing which will not be viable is the approach to urban transit planning taken by the micro mobility industry. ‘We shouldn’t have to pay a city, the city should be paying us” is an attitude attributable to an executive at Bird, the scooter provider. If that is the underpinning of the sector’s business model going forward, it’s not going to work. All of the new modalities will be tested for their full public revenue potential under the economic circumstances of the next couple of years. That will be driven by necessity based on the significant revenue hit municipal credits have faced.

Already the outlook for congestion pricing taking effect as scheduled in Manhattan is waning. The troubles of the MTA (see more later) are likely to become an impediment to a shift away from private vehicles. The capital cost and operating/maintenance cost of new facilities such as protected bike lanes will be more of a burden relative to available resources. It will be in the system’s financial interest to drive as much demand as possible for mass transit services. A sort of policy triage will result that will act to limit the ability of states and cities to fund substantial additional infrastructure. Those facilities which can be produced at the least cost to benefit the most people will be undertaken and others will become delayed or unaffordable luxuries.

There will have been an existing economic infrastructure which will have many interests supporting its rapid restoration. Sports, entertainment, and cultural institutions will not simply disappear. They will still retain their places as significant drivers of economic activity. Look back at the 1918-1919 pandemic and see what followed as the nation moved beyond the limits it imposed. Some of the nation’s most iconic sports venues – Yankee Stadium, the Rose Bowl and the Los Angeles Coliseum, Chicago Stadium, and Madison Square Garden were all constructed and put into operation within the ten years after the pandemic. In New York, active planning and construction of the independent subway system took place throughout the decade of the 20’s.

The point is that mass gatherings not only resumed but thrived and were supported by significant capital investment in facilities to support them. We believe that large events will return and that they will regain their role as drivers of economic activity. We believe that people will want to return to restaurant and drinking venues. They will need to be able to get to them. One of the issues which the economic restrictions has highlighted is the difficult straits in which major public transit agencies find themselves. The MTA in New York is carrying something between 5-10% of its normal load.

The decrease has impacted revenues but has also damaged the non-fare tax and spending base. This creates a serious problem as the same forces impacting the revenue base will also impact the capital finance base on which the maintenance and expansion is reliant. It is ironic that as the MTA was poised to complete the northern portion of the 2nd Avenue Subway, it faced a situation very similar to the one which prevented the construction from 125th Street south in the early 1970’s – the dire fiscal straits of the state and city.  

MTA

New York’s Metropolitan Transportation Authority is in the process of trying to sell some $670 million of its core financing credit, the Transportation Revenue credit backed by fares. The offering gives us a chance to quantify the impact of the pandemic and its socialization restrictions on the Authority’s finances. The official statement for the offering provides us with hard data on ridership and utilization.

As of the beginning of April, ridership on the subways was down 91%. The bus system saw even greater declines at 98%. The commuter railroads have also seen declines of 98%.  The resulting revenue losses will be brutal. Traffic on the bridges and tunnels operated by the MTA and its subsidiaries is down by two thirds. The revenue impact in terms of lost revenues is $142 million a week. Over a full fiscal year, that comes to $7.4 billion. On top of that, MTA relies on state and local subsidies totaling some $6.4 billion.

The impact on the capital program is clear. MTA has for now halted the award of new Capital Plan construction or consulting contracts. It has also suspended the solicitation of bids for contracts. At the same time, the CARES Act is projected by the MTA to generate about $4 billion to the agency. The MTA also expects funding outside of the CARES Act from FEMA to cover costs for things like sanitizing  and safety equipment for MTA workers. While there is no local matching effort required for the receipt of CARES Act funding, the state has nonetheless taken a variety of steps to help the MTA through this period. The budget for the FY beginning April1 includes a significant increase in the borrowing authority of the MTA. It also loosens restrictions on the use of revenues derived from congestion pricing. The budget also obligates the City of New York to increase its share of the cost of paratransit services supplied by the MTA to city residents.

 ECONOMIC OUTLOOK FACING THE STATES

The Congressional Budget Office (CBO) has developed preliminary projections of key economic variables through the end of calendar year 2021. Inflation-adjusted gross domestic product (real GDP) is expected to decline by about 12% during the second quarter, equivalent to a decline at an annual rate of 40% for that quarter. The unemployment rate is expected to average close to 14% during the second quarter. Interest rates on 3-month Treasury bills and 10-year Treasury notes are expected to average 0.1 percent and 0.6 percent, respectively, during that quarter.

In 2021, real GDP is projected to grow by 2.8 percent, on a fourth-quarter-to-fourth-quarter basis. Under that projection, real GDP at the end of 2021 would be 6.7 % below what CBO projected for that quarter in its economic outlook produced in January 2020. The labor force participation rate is projected to decline from 63.2 % in the first quarter of this year to 59.8 % in the third quarter. The unemployment rate at the end of 2021 would be about 6 percentage points higher than the rate in CBO’s economic projection produced in January 2020, and the labor force would have about 6 million fewer people.

LIQUIDITY FOR MUNICIPALS

The Federal Reserve has broadened eligibility for the Municipal Liquidity Facility to let more local governments participate. The central bank has lowered the population requirement to 250,000 from 1 million for cities and to 500,000 from 2 million for counties and plans to buy as much as $500 billion in short-term notes issued by states. The Fed has also expanded the duration of debt it will purchase to three years from two. More than 200 municipalities are eligible to participate. While welcome, the program leaves out a significant portion of the short term municipal borrowing universe.

New Jersey has announced a plan to fill some of the void. The New Jersey Infrastructure Bank (I-Bank) will have available $50 million to provide liquidity for municipalities in New Jersey that experience difficulty rolling over BANs. There will be sector, issue, and credit limits, interest rate guidelines, and a maturity limit of 90 days for any BAN submitted for consideration. While the $50 million looks small in comparison to the levels of federal support, it will  support smaller borrowers where they do not meet the test for federal liquidity assistance.

New Jersey’s I-Bank has amended its investment policy to permit it to invest in local government unit BANs in certain circumstances. The BAN purchase program is a limited and specialized resource made available only to participants in I-Bank associated financing programs to address failed sales occurring during BAN rollovers. This program is designed to ensure solvency and fiscal stability for New Jersey’s local government units, providing protection against potential defaults during the present liquidity crisis.

VIRUS ECONOMIC FOOTPRINTS BEGIN TO EMERGE

The data on urban surface transit ridership has been clearly and sharply lower inflicting significant short term damage on the financers of these systems and credits. Now we begin to see data on the impact of the overwhelming drop in aviation passenger traffic. Las Vegas’ McCarran International Airport serviced 53 % fewer flights in March of this year than it did in March 2019. 2.3 million fewer travelers boarded flights last month. Southwest Airlines, the dominant carrier at the airport, serviced 1.6 million Las Vegas flyers in March 2019. This March, that number dropped to around 600,000 passengers. McCarran International Airport completely shuttered two of its concourses in early April.

State departments of transportation are experiencing significant drops in revenues as the lack of driving has driven down demand for gasoline. The result is that there is significantly less revenue from fuel taxes available to fund projects. The lack of gas revenues has overtaken the impact of social distancing measures on the ability of these departments to execute their projects. The American Association of State Highway and Transportation Officials, or AASHTO, estimates state transportation departments will lose $50 billion in expected revenue over the next 18 months.

States including North Carolina, Ohio, Oklahoma and Pennsylvania are already cutting projects or furloughing workers ahead of revenue shortfalls. Recently, the director of the MO Department (MO DOT)outlined the scope of his state’s dilemma. MoDOT expects to lose 30% of its expected revenue over the next 18 months, about $925 million. According to the MO DOT director, Missouri would lose the ability to draw down $2.1 billion in federal funds for construction projects without those tax revenues or additional federal aid. Added to a loss of $530 million in state funds, the state wouldn’t be able to award $2.6 billion of the $4.9 billion in construction projects it planned through 2025. “To put this into perspective, that would equate to approximately 400 bridges and 20,000 lane miles of Missouri roadways NOT being repaired that are in our current plan.” 

The North Carolina Department of Transportation says that the traffic volume falloff is projected to cause at least a $300 million budget shortfall for the agency in its current fiscal year, which ends June 30. The Washington State Department of Transportation expects a loss of revenue of as much as $100 million per month; approximately 38 % of its average monthly transportation revenue collections.

The City of San Francisco has shown how the pandemic and its demands on resources can and will alter normal operational practices. As a result of the pandemic, SF will present and consider a balanced interim budget before July 1. A full budget will not be presented until August 1 and that budget will be considered over a period not to go beyond October 1. The August plan will cover the two fiscal year period ending June 30, 2021. The City entered the pandemic with reserve of some $740 million but these will quickly be absorbed by the to date impacts on the local economy and tax base for the tourism dependent city. The city estimates that tax revenues will experience a negative imp[act relative to budgeted amounts of between $225 and $575 million depending on the exact timing and magnitude of any economic recovery.

The City’s disclosure – something for which they deserve real credit – highlights another problem facing government at all levels. That is pensions. We have written about the country’s public pension problem and its has been at the center of general obligation analysis for some time. The City points out the problem faced by so many pension funds face. The plan assumes an annual rate of return of 7.4% on its pension investments. Through February, the city’s return was 3%. That was before the equity markets got crushed. Where similar experiences occur and they will,  the low returns will require higher current funding to maintain efforts to more fully fund pensions.

The phenomenon is clear across the country. This is not the fault of the pensioners. It isn’t really the fault of fund managers. It’s a black swan event that nonetheless has done some real damage. The language coming out of the President and the Senate Majority Leader casting the present situation confronting their states as something to assign fault about is not helpful. It only obscures the lack of understanding the Administration and its Congressional allies have of basic tenets of municipal finance and credit. The casting of the current situation in partisan terms only weakens the ability of the federal government to respond constructively.

I would be remiss if I did not reference the news that the Department of Health and Human Services, in its haste to get money out, distributed grants of some $50 billion to closed hospitals. The distribution relied on Medicare reimbursement data for fiscal 2019 which ended on September 30. ” If an institution is closed and their bank account is also closed, the funds are automatically returned,” a HHS spokesperson said. The glass is apparently half full.

TECHNOLOGICAL CHANGE AND THE PANDEMIC

Two items caught our eye this week as the longer term impacts of the pandemic begin to emerge. They have real implications on the process of deciding if and how to develop public infrastructure in an era of technological change. The first was the announcement that Ford Motor Co. was stepping back from its relationship with electric vehicle developer Rivian. Ford had invested $500 million in Rivian which was helping to develop an electric Lincoln model. Ford said it is still making preparations to launch the Mustang Mach-E, a flagship electric vehicle. Nevertheless, the economic decline in the first half of this year has and will damage the environment for new vehicle development.

The second comes in a series of regulatory filings from the state’s major utilities, electric automakers, EV charging providers and New York City’s transit agency. The state’s Department of Public Service in January, released a plan which would put utilities in charge of identifying the best sites for building new chargers and upgrading nearby grid infrastructure. Most of the costs associated with the preparations, meanwhile, would be covered by new incentives. Currently, the state is providing $580 million in incentives for such development. In light of the economy, these entities are looking for more from a state which finds itself in a serious financial crunch of its own. The six New York power utilities in a joint filing said that the charger plan’s incentives should be expanded to cover 100% of the costs associated with preparing the grid to accommodate the new stations. 

The state committed in 2013 to registering 850,000 electric cars by 2025 — up from fewer than 50,000 at present. By midcentury, the state wants to phase out gas car sales entirely. Transit agencies also have new mandates for converting buses and fleet vehicles to electric models. By 2025, five county agencies in upstate and suburban New York must electrify a quarter of their fleet and finish that conversion by 2035, in accordance with an executive order by the governor in January. New York City’s buses are slated to go all-electric five years later.

This just one example of why it might have been good that municipalities  did not run headlong into massive adoption of tech based infrastructure. We are seeing increasing examples of companies pulling back from office based models to integrated models of employment with a heavy emphasis on telecommuting. Some of the recent redundancy announcements have been accompanied by the closing of physical locations. The whole system of transit as a way to deliver workers to businesses is being reexamined. These issues will generate real demand (rather than anticipated) for infrastructure which can then be sized and funded appropriately.

NECESITY AS THE MOTHER OF INVENTION

All across the country, the closure of schools and a shift to online learning highlighted a topic on which we have written much – the availability of rural internet service. The phenomenon has generated a variety of responses. It’s not just about the availability of hardware to students in poorer rural areas but also about the lack of access to a viable internet service provider (ISP). Now we see that the realities of the pandemic are leading some entities – primarily school districts – to take on the role of ISP for their students.

The Visalia Unified School District in Tulare County, CA has announced that over the next three months, it will begin to install antennas at seven Visalia-area schools. The project is expected to provide 91% of the district with WiFi access. Countywide, 45% of households don’t have a broadband internet subscription — among the highest in the entire state — according to a 2019 Public Policy Institute of California report. The District estimates that about a quarter of VUSD students don’t have internet service or don’t have a high-speed connection required by many learning programs. The project has an estimated cost of $700,000, over half of which will be covered through emergency dollars the state has distributed to all California districts. VUSD received $466,000 which will be applied toward the ISP project.

The Tulare County Office of Education has already secured a frequency from the Federal Communications Commission to make high-speed internet a reality for all Tulare County students by this fall.

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