Joseph Krist

Publisher

________________________________________________________________

It was dismaying to hear that after weeks of efforts to pass another stimulus which could benefit state and local government, the view still holds that additional help for states is a pension bailout. When one hears the continuing focus on pensions by the Administration, it lets you know that the whole negotiating process has been a bit farcical. This all reflects one less well thought out proposal from one Congressperson that specifically cited Illinois’ pension problem. Since May, the Administration and its supporters have hung their hat on the hook of stonewalling based largely on that one comment.

The impasse has seen mostly Senators cite pensions as their basis for stonewalling an additional stimulus. They cast the issue of pensions as a red state/ blue state issue. The reality is that pensions are a color blind issue. For every blue state opponents can cite, one can point to somewhere like Kentucky (sorry Senator McConnell) which has been a historical poster child for pension underfunding.

The inability to come to an agreement actually works against the goal of fully opening the economy. Neither government nor individuals can be expected to jump start the economy so long as the pandemic continues. One has to wonder what the policy goal is from the Republican side. Unemployment claims have leveled off at a steady 800 to 900 thousand a week and millions continue to collect benefits. At the same time, those benefits will begin to expire as we move into the late autumn and early winter setting the stage for a more prolonged and slower economic recovery.

No matter where you fall on the political spectrum, the current state of affairs makes no sense.

_____________________________________________________________________

THE GREAT WHITE WAY REMAINS DARK

The recent announcement that Broadway shows will not reopen until May 31 is a significant blow to the NYC economy. It also highlights the special circumstances that the entertainment/cultural sectors face as they try to deal with the pandemic. All Broadway theaters closed on March 12 as part of an effort to slow the spread of the corona virus by limiting large gatherings; at the time there were 31 shows running, including eight still in previews, and another eight were in rehearsals getting ready to start performances.  In 2019, the industry’s theaters drew 14.6 million theatergoers and sold $1.8 billion worth of tickets. 

Sports and the performing arts occupy a niche along with restaurants in that they depend on in person attendance or patronage. Their unique characteristics have left these businesses in an especially disadvantaged position as the pandemic unfolds. In cities like New York which made sustained concentrated efforts to make tourism an economic pillar, the lack of entertainment, cultural, and sports draws will have a real impact.

There has always been a risk that a tourist based economy would be impacted by exogenous events. Unlike other events whether they be natural disasters or things like terrorism, the pandemic carries with it a lot more uncertainty regarding a municipalities fiscal outlook. The ongoing nature of the pandemic and the lack of easy fixes, makes it extremely difficult to predict a timeline for recovery which makes the fiscal outlook even more difficult to assess.

GREEN MOUNTAIN CANNABIS

Vermont will become the 11th state in the nation to allow sales of marijuana for recreational use after Gov. Phil Scott (R) said he would not veto a measure passed by the state legislature. The law will take effect without his signature however. The legislation creates a cannabis control board that will establish the regulatory framework around sales, along with a significant 14% excise tax on all marijuana products.

The significance of the action is that legalization has largely been through voter initiative. This year there are four states where legalization initiatives will be on the ballot. There the legislative role has been crafting regulatory legislation rather than establishing legality. That has always been a heavier political lift. The move could also have knock on effects for bordering states like New York where legalization would have to occur legislatively. The press for new revenues in a post pandemic world will likely see the Empire State reconsider its previous unwillingness to legalize.

PANDEMIC CASUALTIES – PRIVATE STUDENT HOUSING

The pandemic and its impact on the ability of colleges and universities to hold classes on campus continues to negatively impact ratings. The latest example is Kanawha County Commission, West Virginia’s Student Housing Revenue Bonds (The West Virginia State University Foundation Project).  a 10% enrollment decline at WVSU for Fall 2020, has resulted in weak Fall 2020 occupancy of 71% at the student housing project (Judge Damon J. Keith Hall).

The low occupancy has impacted financial operations to the extent that it will likely trigger required payments from West Virginia State University (WVSU or the University) under the Contingent Lease Agreement, in order for the project to maintain a minimum fixed charges coverage ratio (FCCR) of 1.0x. Under more “normal” operating conditions, fiscal 2019 saw the project generate a 1.17x FCCR prior to payment of subordinated expenses. Given that those coverage levels were achieved with 98% occupancy for Fall 2018 and 82% occupancy for Spring 2019, there has never been much room for error in terms of meeting covenant requirements.

All of this led Moody’s to downgrade bonds issued for the project to B1 from Ba3. The rating downgrade reflects the pandemic’s impact on university housing demand and overall project performance. The rating is still on negative outlook which “incorporates the project’s materially weakened financial position at current occupancy levels, which raises the possibility of future reliance on payments from the University (rated B1/Negative) under its Contingent Lease Agreement, due to reduced rental payments at the project.”

Another downgrade impacted $118,250,000 Maryland Economic Development Corporation’s (MEDCO) Student Housing Refunding Revenue Bonds (University of Maryland, College Park Projects) . The project’s reduced current year revenue expectations due to COVID-related lower occupancy, the project’s diminished trustee-held fund balances, and the lack of any direct financial support to date from the University of Maryland, College Park or the University System of Maryland all contributed to a downgrade to Ba1 from Baa2.

Fall 2020 physical occupancy of the project was 79.6% as of October 1, 2020. Once “normal” campus operations are restored, the likelihood is that historic full occupancy of the facility will be achieved. Even so, the rating remains on negative outlook reflecting “the unknown length of the COVID outbreak and its effect on project occupancy. If project occupancy were to decline further, a significant drawdown of the debt service reserve fund may be required, thus further weakening the credit.”

PANDEMIC CASUALTIES – TRANSPORTATION

As the pandemic drags on, the timeline for recovery continues to be extended. Recent announcements from companies point to the summer of 2021 as the more likely date for a more fully fledged return to offices. The move to remote working has led to clear impacts on those sectors which rely on primarily office based workers. A PricewaterhouseCoopers Remote Work Survey that found 77% of U.S. office employees are currently working from home at least one day a week, with 55% projected to continue doing so once the COVID-19 crisis passes.

Another survey, conducted by StreetLight Data, showed the impact of remote work on commuting patterns. Vehicle miles Travelled (VMT) is the basic metric at the core of the research. StreetLight based its study on an examination of VMT data from five major U.S. metropolitan areas – New York, Los Angeles, San Francisco, Washington D.C., and Chicago.  It found significant impacts on commuting patterns as the result of the pandemic.

The data revealed that the impact of the pandemic has been uneven on a regional basis. Northeast states fall into a group with a larger drop in VMT and a slower recovery. This trend correlates with demographic factors including higher income, higher average population density, and higher share of professional services employment. States with a faster recovery trend have lower income levels, less population density, and fewer professional services jobs. COVID-induced VMT decreases were less pronounced in rural areas. This trend was especially true in counties heavy with essential industries.

The continuing realization by companies that a remotely based workforce does not have negative impacts on their operations complicates the outlook for transit. Just this week, two major mass transit agencies saw negative outlooks assigned to their S&P ratings. The Port Authority of Allegheny County is the mass transit provider in the greater Pittsburgh region. The authority relies on substantial state subsidies for its operations and the commonwealth collects, distributes, and governs the pledged revenues. The Regional Transportation Authority, Ill. finances mass transit in the greater Chicago metropolitan area. The sales tax revenue collections which secure the bonds are likely to be pressured in the coming months, and potentially beyond, due to recessionary pressures stemming from the pandemic.

Two more airports saw negative credit moves from S&P as the airline travel industry continues to suffer. S&P lowered its long-term rating and underlying rating (SPUR) on College Park, Ga.’s customer facility charge (CFC) revenue bonds, issued by the city of Atlanta to fund the consolidated rental car facility (CONRAC) project at Hartsfield-Jackson Atlanta International Airport (ATL), to ‘BBB+’ from ‘A’. The rating remains on negative outlook. Ontario International Airport Authority, Ca. saw its rating affirmed but the negative outlook on the bonds was maintained.

MTA

NYS Comptroller Thomas diNapoli has released his annual report on the finances of the Metropolitan Transportation Authority. It highlights the dire position in which the MTA finds itself in the face of Congress’ inability to generate an additional stimulus bill. The budget gaps are huge: $3.4 billion in 2020, $6.3 billion in 2021, $3.8 billion in 2022, $2.8 billion in 2023 and $3.1 billion in 2024. The 2021 budget gap is more than half (53 percent) of the MTA’s annual projected revenue. 

Although ridership has begun to recover as parts of the economy reopen, fare and toll revenues for 2020 through 2023 are projected to be $10.3 billion lower than expected in the February Plan. The MTA projects ridership — and the revenue it brings — will return to pre-pandemic levels by 2023. Other revenue, from dedicated taxes and subsidies, are forecast to be $5.5 billion lower for 2020 through 2023, before achieving full recovery.

The data on debt is a concern for bondholders. The current burden, which has averaged 16.1% of total revenue for the past decade, is projected to reach 25.7%  in 2021 before declining to around 23% in 2022 through 2024. The portion of fare and toll revenue funding debt service would reach 78.9% in 2020 and 64.6% in 2021 before declining to 47.2%in 2022.

Outstanding long-term debt issued by the MTA more than tripled between 2000 and 2019, rising from $11.4 billion to $35.4 billion. The MTA expects debt outstanding to reach $50.4 billion by 2024, without any potential additional borrowing. If the MTA borrowed $10 billion as allowed by the state, debt service could rise by $675 million annually starting in 2023, bringing it to more than a quarter of every dollar of revenue.

CALIFORNIA BALLOT

The balloting has already begun so let’s get right to the initiatives on the California ballot that municipal bond investors will care about. We see three out of the twelve on the ballot to fit that bill.

Proposition 15, the Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative is a constitutional amendment to require commercial and industrial properties, except those zoned as commercial agriculture, to be taxed based on their market value, rather than their purchase price. This would be a substantial change for commercial owners who have been seen to benefit from the limitations of Proposition 13. Proponents see it as an opportunity to remedy what they see as a defect in Proposition 13 that limited tax burdens for commercial property relative to that of homeowners.

The change from the purchase price to market value would be phased-in beginning in fiscal year 2022-2023. Properties, such as retail centers, whose occupants are 50 percent or more small businesses would be taxed based on market value beginning in fiscal year 2025-2026 (or at a later date that the legislature decides on). Proposition 15 would define small businesses as those that that are independently owned and operated, own California property, and have 50 or fewer employees.

Proposition 19, the Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment would allow eligible homeowners to transfer their tax assessments anywhere within the state and allow tax assessments to be transferred to a more expensive home with an upward adjustment; increase the number of times that persons over 55 years old or with severe disabilities can transfer their tax assessments from one to three; require that inherited homes that are not used as principal residences, such as second homes or rentals, be reassessed at market value when transferred; and  allocate additional revenue or net savings resulting from the ballot measure to wildfire agencies and counties.

It is a way to address the already massive dislocation caused largely by wildfires over recent years. This would represent the second attempt at the same goal after no success in a 2018 effort. It has been recast with The ballot measure would require the California Director of Finance to calculate additional revenues and net savings resulting from the ballot measure.

The California State Controller would be required to deposit 75 percent of the calculated revenue to the Fire Response Fund and 15 percent to the County Revenue Protection Fund. The County Revenue Protection Fund would be used to reimburse counties for revenue losses related to the measure’s property tax changes. The Fire Response Fund would be used to fund fire suppression staffing and full-time station-based personnel.

The third item could have huge ramifications for the future of Mobility as a Service (MaaS). Proposition 22, the Exempts App-Based Transportation and Delivery Companies from Providing Employee Benefits to Certain Drivers Initiative. This initiative is the industry’s reaction to AB 5, the state law which established a three-factor test to decide a worker’s status as an independent contractor. The three-factor test requires that (1) the worker is free from the hiring company’s control and direction in the performance of work; (2) the worker is doing work that is outside the company’s usual course of business; and (3) the worker is engaged in an established trade, occupation, or business of the same nature as the work performed.

Uber, Lyft, and Door Dash are the drivers behind the initiative. It continues their strategy of resistance when it comes to its relationship with labor. Proposition 22 would consider app-based drivers to be independent contractors and not employees therefore, state employment-related labor laws would not cover app-based drivers. The three companies have poured some $145 million into their campaign. In the meantime, on August 10, 2020, the Superior Court of San Francisco ruled that Uber and Lyft violated AB 5 and misclassified their workers. 

BORDER PRESSURES ON CREDIT

As the pandemic drags on, those entities which are facing extended regulatory limits designed to slow the pandemic are beginning to show some wear in terms of their credit profile. One example we saw this week is the downgrade of Cameron County, Texas. The county is the home of Brownsville, an important entry point on the US-Mexico border.

The County saw its AA general obligation rating put on negative credit watch by S&P. Brownsville is the only port of entry from Mexico that provides all four methods of transportation: sea, air, highway, and rail. This puts international trade and travel at the center of the County economy. The continuing closure of the US-Mexican border is a significant drag on the County economy. There is a one-in-three chance that S&P could lower the ratings if reserves deteriorate to levels we feel are no longer commensurate with the current rating level, and if the county’s economy weakens as a result of the challenges presented by the COVID-19 pandemic.

Border cities have benefitted greatly from the expansion of cross border economic activity in the NAFTA era. This has encouraged locally based cross border activity for commercial purposes, especially small businesses. The benefits of the warehousing and expediting sectors in the local economy is obvious. The closure of the U.S.-Mexican border to nonessential traffic in response to COVID-19 will continue to affect the local economy and the county’s finances. 

ANOTHER ONE BITES THE COAL DUST

“OUC Management recommends significantly reducing coal-fired generation no later than 2025 and eliminating it no later than 2027, using coal-to-gas conversion as a technology bridge, positioning solar as the main source of new energy, investing in energy storage, and leveraging other future clean technologies.”  With that, the Orlando Utilities Commission moves to the forefront of municipal utilities dealing with CO2 emissions.

The OUC plan includes the end of coal-fired generation, with a significant reduction no later than 2025, and eliminating it no later than 2027. The Stanton coal units, with 940 MW of generation capacity, while being converted to natural gas, will “ultimately be retired no later than 2040. OUC also owns a 40% share of the 340-MW Unit 3 at the C.D. McIntosh plant in Lakeland, Florida; that unit is expected to shutter by the end of 2024.

The announcement comes amid a changing regulatory environment for power generation. The Federal Energy Regulatory Commission (FERC) proposed a policy statement to clarify that it has jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price in those markets. Currently, 11 states impose some version of carbon pricing. FERC, as a regulator of regional power market activities

We note comments by the FERC chairman about carbon pricing. “If states continue to pursue carbon pricing — and I fully expect this to be the case — RTOs and their stakeholders can and should explore the feasibility and benefits of market rules that incorporate the state-determined carbon price.” The fact that the likelihood of an increased role for carbon pricing is accepted by the major federal regulator even in the face of the Administration’s unending efforts to promote fossil fuel use is noteworthy.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.