Joseph Krist

Publisher

The spread of the Delta variant of corona virus has once again put the pandemic at the center of many current debates. We examine several sectors to see how the latest virus-related events are impacting several sectors and issuers. We also note that the argument over vaccine and other health regulations has run into an unanticipated hurdle. Proponents of vaccine requirements will have to overcome legislation and subsequent court decisions which support religious exemptions especially in regard to employment. Those decisions and laws actually make it harder to impose vaccine requirements in the face of claims of limits on religious freedom.

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COVID AND HOSPITALS

Hospitals throughout the pandemic were heavily impacted financially by the pandemic. The unanticipated costs of supplies associated with the pandemic and the loss of revenue associated with elective procedures was highly negative to bottom lines. The initial aid package delivered by Congress enabled many institutions to weather the revenue impact and maintain their credit ratings. The hope was that with the advent of vaccines that the pandemic’s impacts could be lessened and more regular operations would support hospital finances.

The reality has been that the rollout of the vaccine and the reluctance of too many to be vaccinated have led to the situation which prevails today. The rise of more difficult cases has once again strained hospital resources. One unanticipated factor has been the reluctance of healthcare professionals to be vaccinated. In combination with the general issue of a labor pool that is slow to return to the pre-pandemic status quo. When you add in burnout from the pandemic, hospitals are under real pressure.

All of this occurs against the backdrop of the revenue impacts on hospitals as the result of COVID.  Alvarez & Marsal is a consulting firm that specializes in turnarounds in the healthcare field as well as other sectors. They have released research about the impact of the pandemic on hospital revenues. Their data covering the 25 largest not for profit hospital systems showed Net Patient Revenue plunged almost 20 percent from the fourth quarter of 2019 to the second quarter of 2020 as the country locked down. The infusion of federal CARES Act funding enabled revenue to recover at the end of the 2020 calendar year to a drop of just 3 percent from 2019 to 2020.

Operating income declined 11 percent from 2019 to 2020. Discharges decreased 18 percent (4th quarter 2019 to 2nd quarter 2020) and 9 percent year to year (2019 to 2020). Patient Days dropped 13 percent (4th quarter 2019 to 2nd quarter 2020) and 4 percent year to year (2019 to 2020). Length of Stay increased 7 percent (4th quarter 2019 to 2nd quarter 2020) and 6 percent year to year (2019 to 2020). Surgeries fell 36 percent (4th quarter 2019 to 2nd quarter 2020) and 11 percent year to year (2019 to 2020). Emergency Room visits declined 31 percent (4th quarter 2019 to 2nd quarter 2020) and 17 percent year to year (2019 to 2020).

How do hospitals cope? The latest example is the Henry Ford Health System in Detroit. It recently announced the temporary closure of some 120 beds across its system due to the inability to meet state staffing requirements. For a large system like Henry Ford, this represents less than 10% of beds. At smaller facilities, the impact of that number of closures would be significant. It’s not expected to be a serious credit factor at the larger institutions. Once again, the view that bigger is better in healthcare is validated.

COVID MANAGEMENT

From the start of the pandemic, mass transit agencies in general and the MTA in particular have been at the center of efforts to maintain ridership and finances. In New York, this week marked the return to the office for City employees. While there are many concerns regarding the details of the New York City plan (capacity limits, mask requirements, testing for the unvaccinated), one of the major concerns on all sides of the issue has to do with concerns over returning to mass transit.

It is not currently mandatory for MTA employees to get vaccinated, but the authority will begin requiring weekly COVID-19 tests on Oct. 12 for those who do not have proof of vaccination. The agency says that more than 70 percent of MTA employees have received at least one dose of the coronavirus vaccine. Lower rates of vaccination are seen among employees for transit divisions, like trains and buses.

MTA has provided a $500,000 death benefit to its nearly 68,000 employees since last year to vaccinated employees who die from COVID-19. That benefit is being extended through the end of the year. A total of 171 MTA employees have died of COVID-19–related causes since the beginning of the pandemic. Only three MTA employees have died of COVID-19–related causes since June, when the policy was implemented.

The extension of the benefit period through year end is part of the effort to encourage the recalcitrant to get vaccinated. That effort will support efforts to return more private sector employees to an office setting.

COVID LABOR SHORTAGES

Many sectors of the economy are reporting labor shortages, The number of help wanted signs on a wide variety of businesses is significant. It isn’t just private businesses which are seeing the pressure from labor shortages. One area of emerging pressure is an apparent shortage of school bus drivers. Between personal vaccination resistance and the lack of availability of vaccines for many school age children, the situation is not a total surprise. Add to that the uncertainty created by efforts in some states to preempt mask requirements and it is clearly a problem.

It is not clear who will pay the costs of replacing school district workers. In Massachusetts, the governor is committing some 90 National Guard troops to drive school busses due to driver shortages in Chelsea, Lawrence, Lowell, and Lynn. A total of 250 Guard have been activated for the purpose of aiding in addressing a driver shortage throughout the Commonwealth. In Delaware, a charter school in Wilmington, Del., has resorted to offering parents $700 to not use the school bus system to get their kids to and from school.

A more extreme situation confronted Pittsburgh, PA. It postponed the opening of its schools by two weeks. The school district was short 426 drivers (229 CDL and 207 non-CDL), resulting in a seat gap for approximately 10,996 City of Pittsburgh students. A combination of hiring and limits of the availability of buses vs. the option to walk is being used to address the shortage. Pittsburgh also offered to “reimburse” families who transport their children on their own.

COVID LEGISLATION

A review by Kaiser Health News found that 26 states pushed through laws that permanently weaken government authority to protect public health. Some of the more egregious examples are Arkansas (mask ban), Idaho (county officials allowed to override public health orders), and Kansas and Tennessee where school boards, rather than health officials, have the power to close schools.

In at least 16 states, legislators have limited the power of public health officials to order mask mandates, or quarantines or isolation. In some cases, they gave themselves or local elected politicians the authority to prevent the spread of infectious disease. At least 17 states passed laws banning COVID-19 vaccine mandates or passports, or made it easier to get around vaccine requirements. At least nine states have new laws banning or limiting mask mandates. Executive orders or a court ruling limit mask requirements in five more.

The Arkansas law has been stayed by the courts for now. Troubling is the view expressed by the bill’s sponsor who said “It’s time to take the power away from the so-called experts, whose ideas have been woefully inadequate.” The bill was based on a template from the conservative anti-government group the American Legislative Exchange Council (ALEC). ALEC is behind any number of laws designed to achieve conservative goals in state legislatures. The move to limit the powers of local health officials has led to at least 303 public health leaders who have retired, resigned or been fired since the pandemic began.

For ESG investors, these changes should raise flags. When it comes to public health, these issues raise questions about how the potential impact of these changes reduce the ability of officials to deal with crises in real time. That should put issuers operating under those constraints to compare unfavorably with other issuers when it comes to ESG investment measurement.

COVID AND GOVERNMENT EMPLOYMENT

The number of noneducation state and local jobs, which make up about half of the public sector and include workers in areas ranging from city parks and city halls to police forces and correctional facilities, is down by more than 400,000 since the pandemic struck, according to the latest federal Labor Department estimates for August as cited by the Pew Foundation. Private employment is up 3.4% since December, though still not fully recovered from its losses since the pandemic struck earlier in 2020.

The greatest reductions since the pandemic began have been in local governments. As of August, local public payrolls were down 5.3% from pre-pandemic totals, more than 350,000 jobs, excluding education positions.  State government employment—also excluding education—has declined slowly every month this year, with the total down 2.1% from pre-pandemic levels, or about 57,000 jobs.

The research shows that multiple factors are holding down employment. Temporary layoffs have not been fully offset by rehires as in person services are still slow to come back. Budget pressures that led to hiring freezes or furloughs earlier in the pandemic remain in place in some jurisdictions. The “great rethink’ among many workers which is slowing a return to private sector jobs is also hitting government. More workers are leaving government, including retirements. There were fewer noneducation workers in state and local government than in July 2019 except in Rhode Island, South Dakota, Texas, and West Virginia.

One caveat to the numbers. Employment in industries operating in facilities owned by government also include employment at state and/or tribally owned facilities. The best example is tribal owned casinos. Pew notes that Labor Department estimates show that there were nearly 23% fewer workers in state and local government-owned amusement, gambling, and recreation facilities in March compared with a year earlier while fire protection jobs were essentially unchanged.

ILLINOIS CLEAN ENERGY PLAN ENACTED

Exelon plans to refuel its Byron and Dresden nuclear plants ‘as a result of the action taken by the Illinois legislature to enact a comprehensive energy bill.’ The Byron plant was slated for defueling and closure beginning this past week. The Dresden plant was to be taken offline in November.

The municipal credit angle is clear. As we detailed last week, the measure would set a target for the Prairie State Generating Station — one of the top industrial sources of carbon pollution in the U.S. — and Springfield’s city-owned plant to reduce climate-damaging emissions by 45% by 2035 and completely by 2045. If they miss the 2035 target, the plants would get an additional three years but could be forced to shut down generating units if necessary to achieve the 45% reduction.

The takeaway from the battle over energy in Illinois is that it highlighted the issues which impact the debate – nuclear vs, no nukes; the loss of employment and tax base, and the uncertainty as to the actual costs of an energy transition. Over the past half century of the environmental debate, the inability of advocates to estimate the real costs of the contemplated changes have always caused skepticism.

In the case of the Illinois plan, the official estimate of the initial costs—an average electricity bill increase of $3.55 per household per month—is likely to be less than the true costs. Isn’t it always? Already, flaws in the law are being cited. One example is the plan to offer rebates of up to $4000 to support electric vehicle sales. The law does not address the fact that existing programs to provide rebates are funded from eight counties in and around Chicago. Absent additional legislation, only residents of those counties would benefit from the rebate.

CHICAGO – FUNDING THE POLICE

The fact that Chicago’s problems with violent crime have become a national issue and the power of local political interests remains intense does not lessen the impact of the announced contract agreement between the City and its police force. Keep in mind that the agreement occurred in the post- George Floyd environment and in the wake of several incidents of questionable police involved shootings.

In this environment, the City has announced a new contract that gives them a 20% pay raise over eight years, more than half of it retroactive. The agreement was still police friendly on other issues. The city did not get the requirement it sought compelling officers to disclose secondary employment or hours worked at those second jobs. It also did not cap those moonlighting hours.

The agreement creates the need for the city to find $377.6 million for four years of back pay. Retroactive paychecks will range from $18,000 to $36,000, depending on seniority and retroactive overtime pay that will add as much as 20% to that amount; and back duty availability pay that means up to $7,600 per officer.

We view the agreement as credit negative for the City. The issue is as much based in concerns about management as it is on the size of the raise. The Mayor has been dealing from a position of weakness in terms of her relationship with the police. But she inherited the lack of a contract from former Mayor Rahm Emmanuel.

How it is dealt with is another issue. The City’s 2021 budget (the fiscal year is the calendar year) set aside just $103.3 million for back paychecks. The city plans to cover the rest by refinancing $1 billion in existing debt to generate $232 million in savings. The city still must find an additional $325 million to cover future costs of the contract. 

The hope was that the negotiations in the face of the pandemic and fiscal realities would create real change in the police department. Here’s how it impacts individual officers. The contract calls for rank-and-file CPD officers to receive a 10.5% retroactive pay raise and 9.5% more through January 2025. The city has also agreed to increase so-called “duty availability pay” to $950 per quarter and the annual uniform allowance to $1,950.

Duty availability pay will be offered “retroactively” from July 2017 to all officers whose probation period has ended after 18 months. Going forward, that pay will be available after 18 months, instead of 42. Rank-and-file police officers will be asked to absorb half of the increase in health care contributions imposed on police sergeants and Chicago firefighters and paramedics. The second half of that increase will be postponed until July 1, 2022 to allow members to retire under the current levels: 2.2% at age 55, or 0% for those 60 and over.

The failure to seize the opportunity reflects the Mayor’s relatively weak position. The details defer much of the difficult work in addressing long term issues with the police (pensions, increasing costs of managing litigation) to future negotiations. For the Mayor, the most important feature of the deal is its length. It guarantees labor peace until after the 2023 mayoral election.

LADWP

The Los Angeles City Council voted to have the Department of Water and Power transition to 100% renewable energy by 2035. That is ten years sooner than was envisioned just three years ago. In March of this year, the LA100 study was released. The study was conducted by the U.S. Department of Energy’s National Renewable Energy Laboratory in partnership with LADWP and USC. It found that the DWP — the nation’s largest municipal utility — can reach the city’s goal by 2045 or sooner if it rapidly deploys wind and solar power, electrical storage and other technologies.

The LA100 study showed that the transition to 100% will cost between $57B to $87B.  The Council estimated that the clean energy transition could create 9,500 jobs. As of calendar year 2019, renewable energy constituted 34% of the overall mix and 51% of the total power generated at LADWP was free of carbon.

ST. LOUIS FOOTBALL LITIGATION

The lawsuit filed in 2017 in state court in Missouri claims the NFL broke the league’s relocation rules by allowing the Rams to leave St. Louis after the 2015 season, and misled the public about its intention of staying here. The plaintiffs claimed the Rams’ departure cost the city millions in amusement, ticket and earnings tax revenue. The suit alleges breach of contract, fraud, illegal enrichment and interference in business by the Rams and the NFL, causing significant public financial loss.

The plaintiffs in the case are the St. Louis Regional Convention and Sports Complex Authority (RSA), the public entity that owns the Dome and in 2015 and 2016 spent $18 million on a failed plan to keep the Rams in St. Louis with a Mississippi riverfront stadium, and the city of St. Louis and St. Louis County. The RSA gets its funding from the city, county and state of Missouri.

Absent a settlement, a trial is scheduled for January in the midst of the NFL’s playoffs.  St. Louis is seeking $1 billion or more through the litigation. The total return to the plaintiffs will be smaller as they have agreed to pay their attorneys 35% of any award.

NORTH CAROLINA LOCAL GOVERNMENT COMMISSION

One of the longstanding sources of support for the Tar Heel State’s local government credits has been the Commission. The existence of the Commission and the powers it has have long been cited for the State’s generally positive local government credit profile. While the State does not directly support local credits, the Commission has established a perception that it is a key factor in preventing defaults.

Some 1,100 municipalities, counties, boards of education, public hospitals, utility districts, mental health agencies, housing authorities, universities, airport authorities and other public authorities are subject to the Commission’s oversight. Established in response to the negative impacts of the Great depression on local North Carolina credits, the Commission approves debt issuance and reviews the financial operations of issuers. Recently, evidence of the Commission’s positive role came in the announcement that 38 municipalities had been released from its Unit Assistance List. This reflects the strengthened condition of those issuers.

The State is not taking things for granted. SB 314 was passed by the General Assembly and signed into law last month.  The new law provides for a legal process for the voluntary or involuntary dissolution of a distressed governmental unit that is no longer viable. It also gives the LGC the authority to mandate specialized training for officials in a unit of local government exhibiting fiscal distress.

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