Joseph Krist

Publisher

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Three weeks out from Election Day we see little prospect of a stimulus package. We see continuing disruption and uncertainty in the immediate future in terms of state and local finances. The lack of a plan is already impacting not only the governments but their economies which would benefit from the economic stimulus of infrastructure development.

We look at the upcoming election through the lens of a municipal bond investor and analyst. A continuation of the status quo in Washington would leave the handcuffs on the municipal bond market. No advance refunding, no increased private activity limits, and no additional incentives to drive additional bank investment in municipal bonds. Combined with a clear unwillingness and inability of the Trump Administration to develop and articulate an infrastructure policy, the status quo would be an exceptionally poor outcome for municipal bonds.

If a Democratic administration emerges and if the Senate goes Democratic, a more favorable municipal bond environment would be a likely outcome. Increased flexibility, additional stimulus, a likely top marginal tax rate increase, all would drive additional supply and demand for municipal bonds. Stimulus would support credits and by driving economic activity would be credit positive as well.

None of those issues are red or blue.

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ON THE LINE IN NOVEMBER – MEDICAID AND HOSPITALS

The Trump Administration’s choice to press forward rapidly with its Supreme Court Justice appointment simply reinforces the importance of the election and its possible outcomes. Should the appointment be confirmed before November,  one of its decisions could have real ramifications for the credit of states, counties, and hospitals. The U.S. Supreme Court is set to hold hearings on California v. Texas in November, a case in which the plaintiffs hope the court will invalidate the Affordable Care Act (ACA) in its entirety.

 A recent Urban Institute report attached some data to support its view that should the ACA be found unconstitutional it would be a negative event. The bulk of current media and debate is on the idea of coverage as it pertains to the patient side of the equation.  We look at the issue of what is the current situation where theoretically everyone could have coverage as it pertains to the ability of providers to sustain their businesses while states maintain their solvency under conditions which increase the amount of Medicaid and charitable care would be funded.

If the population were to revert to the pre-ACA environment, there would be significant. Opponents like to criticize the increased costs to states for increased Medicaid eligibility but they never provide data to show how increased coverage is not an overall positive for a state’s economy. The fact is that states only have to cover 20% of the expansion cost in their state undermines the budget argument. The return of the 2009 status quo would reduce some medical spending for states but it would increase costs in other ways that mitigate the value of any estimated net budget benefit.

In the context of the pandemic, the resulting upheaval stemming from the medical insurance market would be only more acute. Whether from a healthcare perspective or a purely economic perspective, such a change would damage the financial position of the funding and provider side of the equation will generating little if any net benefit to the consumer/patient side. The potential general economic impact would be negative from both an employment and consumption standpoint. COVID-19 has exposed health care providers to additional social risks related to protecting the health and safety of communities. Specifically, those risks could cause financial pressure should revenue and other federal and state support fail to cover the increased equipment and personnel costs stemming from demand to care for COVID-19 patients and should revenue losses occur as a result of individuals’ forgoing care for health and safety reasons related to the pandemic.

Approximately 5.8 million Americans enroll in individual (single adult) marketplace policies and receive federal help paying for their coverage. The average adult in this group receives $5,550 in assistance each year through premium tax credits. Another 2.7 million Americans enroll in marketplace plans with their family members and receive federal subsidies to help pay their premiums. The average family among this group receives $17,130 in help each year through premium tax credits.

36 states and the District of Columbia so far expanded healthcare coverage under the ACA. Whenever it is on the ballot for voter approval, it wins. That is not an accident.

ON THE LINE IN NOVEMBER – TRANSIT ON THE BALLOT

The operating outlook for many municipal transit systems is negative right now and the projected course of the pandemic so uncertain but this has not removed the pressure off transit agencies who by their nature develop long range plans for long lived assets. This reality is driving a number of municipalities to seek new or additional funding sources from their own revenue bases to fund transportation infrastructure.

Portland, OR – A 0.75% payroll tax on employers to fund a $7 billion transportation plan. Gwinnett County, GA – 30-year, 1% sales tax for transit expansion in the county, including money for bus and rail expansion, expected to raise a total of $12 billion. Austin, TX – 8.5-cent, no-sunset increase in city property tax to help fund Capital Metro’s $7 billion Project Connect plan.

These requests highlight the continuing lack of a federal role in new infrastructure development. Infrastructure week has morphed into something closer to infrastructure decade. These jurisdictions are all integral parts of significant metropolitan areas with real economic aspirations and it is not unreasonable for there to be clear guidance regarding the federal role in funding mass transit. The pending proposals highlight both the need for local funding as well as the policy vacuum at the federal level.

MICHIGAN

Early on, Michigan was one of the state’s hit hardest by the pandemic. The Governor was aggressive in dealing with it though the use of fairly strict restrictions on economic activity and travel. These moves have been undertaken in the face of vocal opposition which has gotten much publicity. The political atmosphere created real uncertainty about the likelihood that a fiscal 2021 budget would be adopted in time for the beginning of the fiscal year on October 1.

Governor Gretchen Whitmer signed the state’s $62.8 billion budget for fiscal 2021 (which ends 30 September 2021). It includes good news for local governments because it preserves their state funding in the face of revenue difficulties stemming from corona virus related restrictions. Preliminary state budget estimates had signaled local government funding cuts. The stable funding will likely allow K-12 school districts to avoid draws on reserves. The fiscal 2021 state budget includes $95 million in onetime supplemental funding for school districts, which equates to $65 per student.

Given the contentious politics of the State, the changes made to funding ratios and policies as a part of the budget were good to see. One is the change in how student attendance is calculated for purposes of distributing state aid to districts. Roughly 95% of traditional public school districts in the state are majority funded based on their individual per-pupil foundation allowance set annually by the state legislature.

Count day is when all districts in the state determine their enrollment and takes place in February and October. The state has also changed the way it will count students for the year, using a blended count more heavily weighted toward last spring’s Count Day which limits the financial impact of an enrollment drop resulting from students choosing not to attend this fall because of the corona virus.

Non-school district localities benefit from the fact that sales taxes – the primary source for state aid distributions – have performed better than was estimated. This has allowed the state to hold funding constant in the current year’s budget. It’s not all milk and honey for the larger municipalities which have more diverse revenue bases. The maintenance of state aid mostly addresses property tax issues. It does not offset losses from things like income and gaming taxes.

DOWNGRADES CONTINUE

S&P continues to lower airport revenue bond ratings. It lowered its long-term rating and underlying rating (SPUR) to ‘A+’ from ‘AA-‘ on Hillsborough County Aviation Authority (HCAA), Fla.’s outstanding senior-lien revenue bonds and to ‘A’ from ‘A+’ on the authority’s ‘s subordinate-lien revenue bonds, both issued for Tampa International Airport (TPA). A negative outlook was maintained. Combined enplanement levels are projected to be down 43% in fiscal 2020 (Sept. 30 year-end) compared with fiscal 2019 and down approximately 67% for the month of August year over year. 

It lowered its long-term rating and underlying rating (SPUR) to ‘A’ from ‘A+’ on Oklahoma City Airport Trust’s revenue bonds. The outlook is negative. It lowered its long-term rating and underlying rating (SPUR) to ‘BBB’ from ‘BBB+’ on the Mobile Airport Authority (MAA), Ala.’s general airport revenue bonds lowered its long-term rating and underlying rating (SPUR) to ‘BBB’ from ‘BBB+’ on the Mobile Airport Authority (MAA), Ala.’s general airport revenue bonds. A negative outlook was maintained.

Other airport credits downgraded by S&P included Kansas City, Palm Beach, Fl, and the Manchester NH airport. Some of the larger airports have been able to maintain their ratings but have received negative outlooks. Memphis and Denver are the latest examples.

S&P maintained the City of Detroit’s negative outlook assigned in April. Fiscal 2020 revenues were in line with projections and while 2021 revenues have been revised downward, the city will likely use less fund balance than expected, factoring in conservative projections, efficient spending below budgeted levels, CARES Act funding, and some one-time transfers. So what is the major risk? “Revenues do not recover and there is no additional stimulus, and if this is expected to lead to a continued budget gap and even further draws on reserves.”

COAL TAKES ANOTHER HIT

The relentless pressure on the economics of coal continues to claim victims. Competitive energy supplier Vistra announced it would retire 6,800 MW of coal by 2027. The company owns seven coal-fired power plants across the Midwest. Company officials blamed state subsidies, declining gas prices, an overbuild of resources and the “systemic failure of the MISO capacity market to provide Illinois-based power plants with adequate revenues” for its coal fleet. 

Interviews with the CEO of Vistra were telling in terms of the future of coal. Among his revelatory statements he indicated that these decisions are not politically driven.  “The one key about coal plants is that they’re closing naturally because natural gas prices are low, which then turns power prices low. Even though the States are anti coal, what is interesting is that’s not why coal plants are shutting down.”

While the policy debate in terms of coal and climate change continues at the political level, we have previously opined the decline of coal would be a market driven rather than a politically driven one. Merchant coal plants are uniquely vulnerable to coal’s failing economics within competitive markets, because unlike vertically integrated rate-regulated utilities, competitive energy providers are unable to recover any losses associated with plants through their rate base. 

Since Mr. Trump was inaugurated, 145 coal burning units at 75 power plants have been idled, eliminating 15% of the nation’s coal-generated capacity, enough to power about 30 million homes.

RETAIL UNDER MORE PRESSURE

If you own a credit which depends on a shopping mall, you got more bad news this week. The owner of Regal Cinemas in the United States, said it would temporarily close all 663 of its movie theaters in the United States and Britain. The move was expected to affect 40,000 employees in the United States. 200 theaters, mostly in California and New York, have been shut since the pandemic began in the spring.

The closure is attributed in part to the lack of new film releases.  In many locations, theaters serve as a significant customer draw especially to food and drink establishments. The loss of associated sales tax revenues to host localities is problematic. In cases where the revenues are specifically pledged to support debt service, the loss is especially problematic. This is the case whether the revenues are collected taxes or are revenues from rent to developers who are responsible for payments in support of bonds. 

PUERTO RICO

The Financial Oversight and Management Board (FOMB) overseeing Puerto Rico’s fiscal recovery had its status cemented this week by the U.S. Supreme Court. The Court refused to grant review of the opinion of the U.S. Court of Appeals for the First Circuit restricting the government’s spending powers to only those authorized by the board. The appellate decision stated that the Puerto Rico governor cannot carry out expenditures unless authorized through a Board-certified fiscal plan and budget. It also ruled that the board can make its fiscal  plan recommendations  mandatory.

At the same time, four groups of investment funds filed a motion in the U.S. District Court for Puerto Rico asking the court to require the board to do one of three things by Nov. 30: Affirm that it will try to finalize the existing proposed plan of adjustment announced in February, file a modified version of the existing plan with a modified disclosure statement, or file a new proposed plan of adjustment and disclosure statement.

The groups seek to have the requested material available by November 30. The motion seeks to require that by Feb. 1, 2021, the court consider the adequacy of the disclosure statement. The motion seeks to require voting on the plan start by early February and tabulation of the votes be completed by April 30. The motion seeks to have  the court to consider confirming the plan no later than May 31 and order that the plan be consummated by no later than June 30.

Now that this has been settled, the Commonwealth can turn its attention to the gubernatorial race. After that, the political establishment can wrestle with status issues while the government attempts to meet the Board’s requirements for balanced budgets.

Oversight of a different sector made news when The Puerto Rico Energy Bureau (PREB) turned down a request by the Puerto Rico Electric Power Authority (PREPA) for an electricity rate hike the public utility contended was necessary to cover spiking fuel costs. A rate hike will be held back as utility officials acknowledged last week that above-market prices are being paid for oil to operate certain power plants. The PREB determined that “it is necessary to carry out an audit of the process of purchase, acquisition, transport, storage and consumption of fuel, carried out by [PREPA] during past years.”

In some cases, PREPA was paying prices 5 times the current market price at time of purchase. This is exactly the sort of thing that drives investors and analysts to drink. Regardless of the underlying economics, time after time the management inadequacies of the Commonwealth government are clear. It is one thing to have to deal with many of the economic and policy distortions which hold back the economy but competence must be developed and supported. The culture of failure has to be changed.

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