Joseph Krist

Publisher

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The announcement that the President has COVID 19 is potentially a huge hurdle to the ongoing reopening process. One can hope that it moves negotiations on the stimulus. It comes as the most recent unemployment and jobs numbers continue to show that the momentum is slowing and the economy is at a precipice. The case for additional stimulus strengthens every day. The end of many provisions of prior stimulus bills as of September 30 has raised the stakes for individuals as consumers, business owners, and employees. The concern has to be that the economic recovery slows and that revenue pressures facing municipal credits will worsen. Which leads us to this week’s credit happenings.

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NEW  YORK STATE AND CITY

The rating shoe finally dropped on New York State and New York City. Moody’s Investors Service has downgraded the City of New York’s $38.7 billion of outstanding general obligation bonds to Aa2 from Aa1. It also downgraded to Aa3 from Aa2 approximately $4.5 billion of appropriation-backed debt issued through the Hudson Yards Infrastructure Corporation, NY (HYIC), the New York City Health and Hospitals Corporation (HHC), the New York City Industrial Development Agency (IDA), New York City Educational Construction Fund, NY (ECF) and the Dormitory Authority of the State of New York (DASNY). 

it also downgraded to Aa3 from Aa2 approximately $4.5 billion of appropriation-backed debt issued through the Hudson Yards Infrastructure Corporation, NY (HYIC), the New York City Health and Hospitals Corporation (HHC), the New York City Industrial Development Agency (IDA), New York City Educational Construction Fund, NY (ECF) and the Dormitory Authority of the State of New York (DASNY). Here is the rationale – “The downgrade reflects the substantial financial challenges New York City faces caused by the economic response to the corona virus pandemic and our expectation that New York City is on a longer recovery path than most other major cities. The public health response to the pandemic brought the city’s infection rate down to among the lowest of big cities. The lasting economic consequences, however, will likely be amongst the most severe in the nation and require significant fiscal adjustments.

The city regularly identifies and closes future year budget gaps, but has delayed implementing more recurring savings and relied primarily on reserves, the possibility of direct federal fiscal aid, and a request for deficit financing authority from the state. The current budget assumes $1 billion in savings will come from labor concessions or headcount reductions but those savings have not been formalized. Favorably, current year revenue is tracking ahead of forecast. The city also faces additional fiscal pressure from potential actions the State of New York may take to balance its own budget and as the state tries to help the Metropolitan Transportation Authority, the state entity that operates the city’s mass transit system.

Which leads us to the State. Moody’s Investors Service has downgraded to Aa2 from Aa1 its rating on the State of New York’s general obligation (GO), personal income tax revenue, sales tax revenue, New York Local Government Assistance Corporation (LGAC), and NYC Sales Tax Asset Receivable Corporation (STARC) bonds. Moody’s also downgraded to Aa2 from Aa1 its rating on the New York State Workers’ Compensation Board Pledged Assessment and Employer Assessment Revenue Bonds. Moody’s downgraded to Aa3 from Aa2 ratings on other appropriation-backed debt including the New York City Transitional Finance Authority, NY’s Building Aid Revenue Bonds. The outlook for the state of New York and these associated bond ratings has been revised to stable from negative.

Moody’s said that the downgrade “reflects the financial consequences to the state of the disproportionate impact of the corona virus pandemic on the City of New York (Aa2 negative), the state’s economic engine, and on the Metropolitan Transportation Authority, the state controlled and funded transit system in the city and downstate region.”  The MTA has been one of three major capital need sources – along with the City’s general infrastructure needs and the unique needs of the Housing Authority (NYCHA) – for decades. The only leg of that debt stool which has not been directly by the pandemic is the problematic NYCHA.

The lack of federal action (as we go to press) on an additional stimulus is really hurtful to the fiscal position of states and cities. As is the case with so many issues, New York’s role as the nation’s largest city, multi county local government, financial and cultural center as well as being the nation’s most diverse city place it at the front of the pack. That also means that it takes the primary impact of events which are global in nature. This requires that public officials competently manage the reaction to those events.

Since we are always willing to challenge the raters, we have to in fairness say that the outlook assignments of stable to the State and negative to the City are right on. We share their “ongoing uncertainty about how long the pandemic’s economic consequences will impact the city’s economy and budget, including the return of office workers, business and leisure travel and real estate markets.” And normal does not happen until there is a vaccine. 

PANDEMIC CASUALTIES – COLLEGE ENROLLMENT

The National Student Clearinghouse Research Center produces a monthly report on college enrollments. This means that their September report is some of the first real data we have seen on a collective basis for the current semester.  Total undergraduate enrollment is down 2.4% relative to last year. International student enrollment is down 11%. Declines were seen among all ethnic identities.

Some trends bode ill for the future. Community colleges show the greatest losses of 8%, followed by private nonprofit four-year institutions declining 3.8%. Public four-year institutions are suffering far less with a decrease of 0.4%, although they vary by campus setting, with urban institutions increasing slightly while rural schools fell 4%. Community colleges, on the other hand, suffered universally regardless of location . Historically, recessions have driven community college enrollments higher.

In Arizona, Maryland, North Carolina, Tennessee, and West Virginia, enrollments are up at both undergraduate and graduate levels. In Ohio and Pennsylvania, however, both undergraduate and graduate enrollments fell. Much of this follows similar declines in summer session enrolments.

MASS TRANSIT TAKING THE HITS

The problems of New York’s MTA are well documented but it’s not the only MTA facing revenue reductions. The latest is the Los Angeles Metropolitan Transportation Authority. The Authority’s directors voted to approve a $6-billion budget for the 2021 fiscal year, a $1.2-billion reduction from 2020.  It would extend current temporary reductions in service through the end of the fiscal year. It comes as the Authority estimates that sales tax revenue is coming up short to the tune of $100 million per month.

Ridership is at about half of pre-pandemic levels. The proposed cuts would be a 20% reduction in service. Metro will receive about $875 million Metro will receive about $875 million in CARES Act funding. The budget assumes that Metro will see $730 million less from sales taxes, tolls, advertising and bus and rail fares than this year. It projects an 11% decline in sales tax receipts and a nearly 27% drop in grants from gas tax revenue distributed by the State of California. Fare revenue in 2021 is predicted to be nearly 79%, from $284.5 million in 2020 to $60 million this year. The budget cut does include layoffs or fare increases.

In Pennsylvania, the impacts of COVID 19 on the auto and mass transit sectors come together as the Pennsylvania Turnpike will postpone its second consecutive $112.5 million quarterly payment for transit distributed to local systems by the state Department of Transportation. This will be the second postponed payment. Turnpike traffic for the week of Sept. 20 was down 17.5% compared to the same period last year and revenue was down 21.5%. Since the pandemic began in March, traffic is down 32.9% and revenue is off 31.8% or $187 million through July.

The numbers highlight the revenue vise which local mass transit agencies find themselves in. Whether it’s transfers from the Turnpike in Pennsylvania or from the TBTA bridge system in New York, revenues to these agencies are down and are foreseen to remain so for multiple fiscal years. It shows the need for additional federal support for these agencies.

MAKING THE CASE FOR FEDERAL TRANSIT AID

The agency which has been most visible in news coverage of the financial crisis facing large urban mass transit system has been the MTA in New York. That has allowed the city’s longstanding enemies in Congress to try to cast the situation as a New York issue. A new survey by the Center for Neighborhood Technology shows that In the 10 regions it modeled alone, more than 3 million people and 1.4 million jobs would lose access to frequent transit. Second- and third-shift workers would lose an affordable way to commute, and households without vehicles would have an even harder time meeting everyday needs. Opponents of aid seem to think that the only people who use mass transit at night clean offices. the pandemic. NYC identified some 15,000 users who would have been left without service with just a four hour shutdown.

Overall, there would be significant impacts in all of the 10 markets surveyed. The study assumed that there is no aid which would require cuts at the high end of each agencies estimates (40% in NY and Denver). in the New York and northern New Jersey region, large numbers of people and jobs who benefit from access to frequent full-day service today would lose that service. 555,121 people would lose access to frequent full-day transit; businesses would suffer as 184,911 jobs currently near frequent full-day transit lose that access. The numbers are proportionately just as impactful in each of the other districts.

P3 PRESSURES CONTINUE

The private/public partnership concept has had a rough ride lately as some major transportation projects have faced issues with cost escalation which have caused P3 participants to rethink their stances. The biggest example is the Purple Line project in Maryland. The private contractors building the Purple Line have stopped construction. They are securing sites and are preparing for personnel to leave by mid-October. The State officials said the private contractor’s departure would add one to two years of delays to a project the concessionaire says is already more than 2½ years behind schedule.  The Maryland Department of Transportation, said the state would use money from its Transportation Trust Fund to keep some Purple Line construction going, until the state could issue bonds. 

The unfolding debacle with the Purple Line is impacting the potential use of a P3 to add toll lanes to the Capital Beltway and Interstate 270.

In Hawaii, Honolulu’s Mayor told the Federal Transportation Administration that the City and County of Honolulu has decided to cancel the process that would have used a public-private partnership to build the last third of its rail transit project through the city center. The Honolulu Authority for Rapid Transportation had estimated that the segment would cost $1.4 billion while one of the companies competing for the P3 contract had told investors that the cost to build the last rail segment would cost more like $2 billion.

The Mayor offered a different vision. “I hope to see the timely development of an alternative bid strategy, such as a more traditional design-build approach.” The Authority’s manager continues to advocate for continuing with the existing format which creates a major issue for the project in terms of support from the City going forward. It is thought that the Authority might seek to replace its head as it moves away from the current structure of the rail project.

THE PRICE OF CLIMATE CHANGE

Even when attempts are made to advance projects and technologies which have clear societal benefits, it is important to acknowledge the collateral damage that impacts often non-offending parties. One example is the impact of declining oil demand on jobs related to the industry. The impact of declining production has already heavily impacted direct drilling and oil transport jobs. Then oil services companies began to retrench and lay off employees as long term outlooks for oil growth diminished.

Now the job cuts are being associated with the next level of infrastructure – refining – which needs to align its refining capability with the realities of oil supplies. the industry is turning to plants that can process the full range of crude supplies from sweet West Texas oil to Canadian bitumen. Specialty plants which essentially refine only one of two qualities of crude do not deliver the economics which would support long term operations.  

So in the last three months, six U.S. refineries — representing 3% of total U.S. refining capacity — have announced they are shutting down or converting to alternative fuels. Marathon Petroleum Corp., Gallup, N.M.: 27,000 barrels a day capacity, “indefinitely idled,” more than 200 jobs lost. Marathon Petroleum Corp., Martinez, Calif.: 161,500 barrels a day capacity, indefinitely idled but under consideration for conversion to renewable fuels, more than 700 jobs lost. Phillips 66 Co., Rodeo and Santa Maria, Calif.: 120,000 barrels a day combined capacity, converting Rodeo to renewable fuels starting in 2023, unknown jobs impact. HollyFrontier Corp., Cheyenne, Wyo.: 52,000 barrels per day capacity, converting to renewable fuels, 200 jobs lost. Calcasieu Refining Co., Lake Charles, La.: 135,500 barrels a day capacity, closed through December, unknown jobs impact.

The numbers of jobs do not seem so large but their role in the economies of their host communities is significant. These were some of the highest paying jobs in their regions especially for non-college graduates and were usually union jobs with good benefits. In addition to the economic hit to these communities, these sites often do not lend themselves to repurposing. If abandoned, the result is a brownfield site with potentially high remediation costs. The recent House clean energy bill would provide grants to develop transition plans and apprenticeship programs for local governments that lose fossil fuel plants like refineries.

PANDEMIC CASUALTIES – LAYING OFF MICKEY MOUSE

Try as it might, the recreation/hospitality/cultural space has had real difficulty on its path to recovery. This is in spite of mighty efforts by the Governor of Florida to make a recovery from the virus happen before it was under control. It makes the announcement by Disney that it would eliminate 28,000 jobs in the United States all the more dismal. Theme parks will account for most of the layoffs. It is one more case study of the bleak environment for these businesses and by extension the governments which rely on these businesses to drive economic activity.

The company cited the same issues facing governments as well – “limited capacity due to physical distancing requirements and the continued uncertainty regarding the duration of the pandemic.”  The jobs are the sort that satisfied a variety of employee flexibility needs – 67 % of the layoffs will involve part-time jobs that pay by the hour – which served to generate good employment statistics. With current employment stats declining, their loss will still have a significant impact.

Orange and Osceola counties have many Disney employees as residents. Unemployment in Orange County  where Disney World, the Universal Orlando Resort, SeaWorld and the numerous minor tourist attractions are — was 11.6 %. It was down to 3.1 % in August 2019, according to State data. Osceola County, Disney World’s southern county neighbor  had 15.1% unemployment in August, vs. 3.5%.

Universal Orlando laid off a steady stream of employees over the summer and recently notified state officials that about 5,400 workers had been placed on extended furlough. SeaWorld laid off 1,900 employees at its Orlando properties this month.

PANDEMIC CASUALTIES – RATINGS

Ratings continue to move in sectors which we have previously identified as being especially vulnerable to the limitations on activity related to efforts to halt the pandemic. Two of those sectors are airports and privatized student housing projects. This week, S&P announced multiple downgrades in these sectors.

S&P Global Ratings lowered its long-term rating and underlying rating to ‘BB+’ from ‘BBB-‘ on a student housing project for Texas A&M University (TAMU) at the College Station campus. The outlook is negative. “The downgrade reflects our expectation of a decline in net operating revenues for fiscal 2021, which would produce projected debt service coverage below 1.20x and below-covenant requirements.” 

S&P also lowered its rating to ‘BB’ from ‘BBB-‘ on the Pennsylvania Higher Education Facilities Authority’s series 2013A (tax-exempt) and 2013B (taxable) revenue refunding bonds, issued for Lock Haven University Foundation (LHUF), for the Evergreen Commons Student Housing project at Lock Haven University. The outlook is negative. The Foundation has had to subsidize debt service prior to the pandemic so the need for additional foundation support is assumed.

“The negative outlook reflects our belief that all projects in the sector are facing negative economic or fundamental business conditions that could result in downgrades over the next one to two years. In addition, the negative outlook reflects expected challenges facing the industry due to a sudden and potentially prolonged decline in student housing occupancy and the associated loss of rental revenue because many colleges and universities have transitioned to remote learning from in-person learning.”

The airport sector saw more downgrades. S&P Global Ratings lowered its long-term rating to ‘A-‘ from ‘A’ on the revenue bonds outstanding, issued for the Indianapolis Airport Authority (IAA), and removed the rating from CreditWatch, where it had been placed with negative implications on Aug. 7, 2020. The outlook is negative. It did the same for bonds issued for the Louisville airport. The fact that Louisville is a prime facility for UPS couldn’t offset the decline in passenger demand.

NEW JERSEY PANDEMIC BUDGET

The State of New Jersey has enacted a budget for the none months ending June 30, 2021. It includes a millionaires tax. The tax rate on income of more than $1 million will increase from 8.97 % to 10.75 %.  To make that more palatable, the budget will provide rebates of up to $500 for hundreds of thousands of New Jersey families whose single-parent incomes are less than $75,000, or $150,000 for two-parent households. It reinstates a 2.5 % surcharge on corporations that will be phased-out in a few years. 

It does not include any sales tax increases on “luxury” goods and it also does not include so-called baby bonds which would have given $1,000 to newborns.

CALIFORNIA ECONOMIC FORECAST

The September 2020 UCLA Anderson Forecast is out and it paints a picture of a slow recovery. The release projects that the state’s economic outlook will improve substantially in the third quarter of this year, but that a full recovery will not occur before the end of 2022.  The outlook has payroll employment reaching 16 million by the end of 2020 (still far below the roughly 17.5 million jobs as of the first quarter of 2020), and the unemployment rate falling below 10% by year’s end, but still remaining close to 6% at the close of 2022.

The forecast included a number of observations about the economy going forward which have real resonance for the national economy. One example is office space. “An offsetting factor for the demand for office space will be a partial undoing of the two-decade-long trend to densify office space. The WeWork model of having 75-100 square feet of office space per employee does not work in a virus conscious world of social distancing. Office workers will have more space and there will quite a bit of Plexiglas separating workstations.”

For urban planners, the report offers food for thought. “It will take some time before pandemic-scarred commuters accept mass transit as a transportation solution. Hence the much-reviled automobile will once again become the commuter’s choice. This view is supported by a recent Citi survey of 5,000 urban households which indicated a strong desire to move to the suburbs, especially the higher-income ones. 

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.