Joseph Krist

Publisher

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THE COSTS MOUNT WHILE THE MAYOR WAVERS

The effort to reopen the NYC public school system is becoming a guide book as to how not to get something done. At least the system is not financed and funded with its own source of revenues as is the case in most other big cities. So far the funding of the system directly through the city has not negatively impacted the City’s credit rating. But it is costing the City some serious money while it attempts to execute the Mayor’s hybrid vision.

The City’s Independent Budget Office (IBO)  estimated the additional weekly cost of operating New York City’s public schools while complying with state public health guidance prompted by the Covid-19 pandemic. Although considerable uncertainty remains, it projects that the cost will be roughly $32 million a week across multiple city agencies. It  projects that the cost of hiring additional teachers will account for over 60 % of the additional costs for operating New York City public schools—more than $19 million a week.

Schools across the city would require a 20 % increase in the number of general and special education teachers on their rosters compared with last year (2019-2020), when there were more than 78,000 school-based general education and special education teachers in the system. An additional 11,900 teachers or substitutes would be needed to meet the demands of schools’ hybrid schedules of in-person and remote instruction.

That is just for teaching staff. Custodial costs—including spending for PPE, custodial supplies, and labor costs associated with the extra cleaning—will total nearly $6 million a week and account for more than 17 percent of the additional costs. The weekly cost for testing almost 103,000 students and school-based staff each month (15 percent of each group that has opted into in-person instruction) is estimated at $1.6 million a week. Additional transportation costs would be $1.7 million a week. IBO noted additional capital costs that will be incurred, such as costs for upgrading HVAC systems, purchasing air filters for classrooms, and purchasing additional tablets and hotspots to meet students’ technology needs. It did not estimate those costs.

In the end, it all comes back to the City budget.

HOSPITAL REIMBURSEMENTS

Some of the nation’s largest and best known medical centers are coming in for scrutiny after the results of a RAND Corporation study was released showing that there are significant discrepancies between private insurance payments and Medicare pay for services.

In 2018, across all hospital inpatient and outpatient services, employers and private insurers included in this study paid 247 % of what Medicare would have paid for the same services at the same facilities, including both professional and facility fees. This difference increased from 224 % of Medicare in 2016 and 230 % in 2017. In 2018, relative prices for hospital inpatient services averaged 231 % of Medicare and 267 % of Medicare for hospital outpatient services. Florida, Tennessee, Alaska, West Virginia, and South Carolina) had relative prices that were above 325 % of Medicare.

The RAND researchers collected claims data, including provider identifiers and

allowed amounts, for enrollees in employer-sponsored health benefits from three types of data sources: self-insured employers who chose to participate in the report and provided claims data for their enrollees,  state-based all-payer claims databases from Delaware, Colorado, Connecticut, Maine, New Hampshire, and Rhode Island and health plans that chose to participate.

It puts into stark relief the great fear that many providers have as public sentiment steadily shifts towards at least access to some form of public health insurance. As more work like this is done and data like this becomes more widely available and disseminated, public sentiment is likely to continue to move in the direction of single payer. That was already likely in the aftermath of the pandemic.  

HOSPITALS EMERGE AS PRIME CYBER THREAT TARGETS

In 2017, the National Health Service in Great Britain was hacked by ransom seekers. Shortly thereafter, hospitals in west Virginia and Pennsylvania were attacked. These incidents led to emergency room shutdowns and transfers of patients whose care depended on computerized records. In 2019, 764 American health care providers were hit by ransomware.  At least those cases did not result in deaths. Now however, news out of Germany puts a halt to that streak.

The first death attributed to a ransomware attack was reported this week.  A young patient died after the hospital in which she was treated was attacked forcing her transfer to another facility where the delay in treatment of her emergency condition contributed to her death.  The hospital failed to update its software after a security patch for software it used had been made available. The cybercriminals were able to use the flaw to break in and encrypt data.

F.B.I. advisories warn victims not to pay their extortionists.  Infrascale, a security company, surveyed some 500 corporate executives about their plans or practices for dealing with cyber attacks. Nearly 75% of those surveyed said that they would pay the ransom. This reflects the fact that insurers for these risks have decided that it is cheaper to pay the ransom than the cost to clean up and recover data.

American health centers hit with ransomware this year were Boston’s Children’s Hospital, which saw more than 500 affiliate pediatric offices hit last February and, in June, Arkansas Children’s Hospital in Little Rock, among the largest children’s hospitals in the United States.  The University Hospital in New Jersey was hit with ransomware, and subsequently saw patient medical records published on the internet. The need to access health records and computer systems creates vulnerabilities that increases the likelihood that medical victims will pay their extortionists. The trend comes as hospitals increasing turn to electronic records as their main data source for patient care.

The German experience highlights why analysts are asking more and more questions about how borrowers are dealing with cybersecurity issues. It is understood that information on prevention and mitigation tactics which is provided cannot be too detailed but it is not unreasonable for borrowers to offer some evidence or affirmation of their efforts to mitigate the risk. Asking about what procedures are in place to address issues like the one at the German hospital is not asking borrowers to give up the store. The failure to insure that patches and the like are addressed is no different than asking if adequate audit and accounting procedures are in place. It is a management issue, even if it involves technical issues.

DOWNGRADES ACCELERATE AS THE PANDEMIC LINGERS

It was only a matter of time but the pace of downgrades is beginning to pick up. They are in sectors we have previously noted as vulnerable due to the restrictions on activity related to the pandemic. S&P lowered its long-term rating to ‘BBB+’ from ‘A’ on Rhode Island Commerce Corp.’s first-lien special facility revenue bonds outstanding, issued for Rhode Island Airport Corp. (RIAC). The outlook is negative. The credit in question is backed by the consolidated rental car facility (CONRAC) primarily at the Providence airport. The material negative impact of the COVID-19 pandemic on traffic levels and rental car transaction days, expected financial performance metrics were cited to support the move.

S&P lowered its ratings on Fresno, Calif.’s airport revenue bonds outstanding, issued for Fresno Yosemite International Airport (FAT). The outlook is negative. “The rating action and negative outlook reflect our expectation that activity levels at FAT will be depressed, unpredictable, or demonstrate anemic growth due to the COVID-19 pandemic and associated effects outside of management’s control.”  Essentially the same issues were cited in downgrades of smaller airports including Augusta, GA and Portland, ME.

The largest airport revenue credit to be downgraded was Philadelphia International which saw its rating moved one notch lower to A-. We focus on what S&P said about the airport sector in connection with the Philadelphia action. “We view this precipitous decline not as a temporary disruption with a relative rapid recovery, but as a backdrop for what we believe will be a period of sluggish air travel demand that could extend beyond our rating outlook horizon.

The big name to be downgraded was the City of Milwaukee which saw S&P lower its general obligation rating two notches to A. The city has long had significant pension funding issues which actually were beginning to be addressed. A revision to the City’s discount rate  lowering it to 7.50% from 8.24% is forcing the city to more than double its budget requirements to maintain funding levels. The City has been using reserves to meet rising obligations but home rule limitations on the city’s taxing power restrict its ability to raise taxes to meet the higher obligations. The impact of the pandemic has magnified all of these pressures.

NY SCHOOL DISTRICTS

School districts in New York State approached September and the opening of schools with trepidation as the State explored various options including reductions or withholdings of state aid to deal with its own budget issues. September is the third-highest month of the year for school aid distributed by the state on a dollar basis. It also is generally a period of low liquidity as summer only brings limited cost reductions for districts. So the fact that the state has come through with anticipated funding at a critical time can only be viewed positively.

The districts are not out of the woods yet. It will be halfway through the State’s fiscal year as of September 30. So far the impact of the pandemic on revenues has been shared between fiscal years. The vulnerability is if there is a return of significant pandemic impacts that the bulk of that impact would occur in the remainder of the State’s April1-March 31 fiscal year. With that in mind it is not surprising that uncertainty remains about future payments. there are real concerns around  how any further withholding would impact more economically disadvantaged districts.

The complex structure of payment schedules for each district render generalizations about the district’s credit to be specific to each issuer. New York’s complex school aid formulas and schedules are legislated. They use a number of factors especially wealth to determine the amount and timing of aid payments a given district receives. in some cases – because state aid is a small % of their total revenues (usually wealthy in terms of property values) those districts actually have gotten a larger share of their aid revenues than have less wealthy districts. This means that districts more reliant on state aid for the bulk of their operating revenues are extremely vulnerable to the fiscal problems of the State as the pandemic unfolds.

PANDEMIC REFINANCING

The Harris County-Houston Sports Authority financed Minute Maid Park for Major League Baseball’s Houston Astros, NRG Stadium, formerly Reliant Stadium, for the National Football League’s Houston Texans, Toyota Center for the National Basketball Association’s Houston Rockets, and BBVA Stadium for professional soccer’s Houston Dynamo in its 23 years of existence. Throughout its history it has weathered stormy relations with a bond insurer and even stormier relations with a credit support provider. It has been a credit popular with retail bondholders.

In the middle of the decade, the Authority was forced to effectively accelerate the amortization schedule on some of its debt which led to a cash crunch  that resulted in the Authority’s ratings on its outstanding debt dipping into non-investment grade territory. The Authority used reserves to pay debt service and ultimately was able to resolve litigation with the bond insurer which enabled it to refinance its debt and regain investment grade ratings.

The latest effort to restructure and refinance debt comes as the result of the pandemic. None of its venues generate fan related revenue. Tax revenues pledged to the Authority’s debt – taxes on hotel rooms and rental cars- have been crushed by the pandemic. The planned refinancing will include taxable as well as tax exempt debt reflecting interest rate realities as well as limits on advance refunding. It’s another example of how limits on advance refunding are not a red or blue issue.

CLIMATE AND POWER

Broadly stated, there have been two approaches to climate change and the production and emission of carbon dioxide into the atmosphere. One approach is to limit the emission of carbon dioxide through things like renewable energy and electric vehicles. More radical efforts would seek to limit agricultural production especially the consumption of meat. The other approach is to find ways to manage the carbon dioxide emissions that modern industrial, transportation, agricultural activities which result.

The most prominent of the latter is carbon sequestration or carbon capture. Carbon Capture and Storage (CCS) is a technology that can capture up to 90% of the carbon dioxide (CO2) emissions produced from the use of fossil fuels in electricity generation and industrial processes, preventing the carbon dioxide from entering the atmosphere.

The only coal carbon capture project in the U.S. and the largest post-combustion carbon capture project in the world is the Petra Nova plant at a Texas electric generating facility. It was expected that the plant would remove carbon dioxide from the emissions process and develop stores of C02 which could then be sold to oil drilling operations.

As is often the case with new technologies like this, economics have a way of creating hurdles which manage to trump the science behind them. So, given the crashing economics of the oil and gas industries in 2020 it is not surprising that economics have conspired to sink (for now) the Petra Nova project. NRG, the company that operates the W.A. Parish Generating Station from which Petra Nova captured emissions, the carbon capture project has not operated since May 1, 2020.

It’s easy to cite the economics but filings with the US Department of Energy and the SEC tell a different story. A technical report submitted by Petra Nova to the Department of Energy shows that the project actually experienced so many outages that it did not operate for one of out every three days over the last three years. Overall, the project yielded very disappointing results both technically and financially. The project, fueled by a gas fired generation system, captured carbon dioxide from one of the four coal units at NRG’s W.A. Parish Generating Station near Houston, Texas. Emissions from the gas generator were not captured. The CO2 was then piped 81 miles to an oil field using “enhanced oil recovery”.

Emissions data from the Environmental Protection Agency and a report submitted to the Department of Energy, showed that the carbon capture project actually captured just 7% of the power plant’s total carbon dioxide emissions. The inability of the plant to operate reliably and the fact that oil prices remained well below the break even threshold for the plant of between $75 and $100 per barrel spelled economic doom for the facility. It is now “mothballed”.

While efforts to date have been undertaken by investor owned utilities, the technology offered hope to large coal fired generators both IOUs and municipal systems. The failure of the Texas plant has led the Institute for Energy Economics and Financial Analysis to say ‘that the mothballing of Petra Nova highlights the deep financial risks facing other proposed U.S. coal-fired carbon capture projects, including Enchant Energy’s plan for the San Juan Generating Station in New Mexico and Minnkota Power Cooperative’s Tundra Project at the Milton R. Young Station in North Dakota.”

For municipals which operate coal fired generation, the failure does nothing to decrease the environmental pressure on these facilities. It could likely lead to closures or repurposing (like at the municipal bond financed Intermountain Power facility in Utah) of municipally owned generation facilities.

GAS TAXES RISE UNDER THE RADAR

Alabama and New Jersey have raised their gas taxes effective October 1. Local gas taxes are being implemented as well. Missoula County, MT is beginning to impose a 2 cent/gallon local gas tax increase. The City of Normal, IL voted to double the motor fuel tax from four cents per gallon to eight. The local increases will generate some $1 million which does not sound like much until you consider that this represents some one third of local road budgets for these jurisdictions.

With the demand for gasoline and prices low, gas tax increase are seen as a viable source right now. It helps that gasoline prices vary throughout the year, so differences in price are not always met with consumer resistance. Taxes usually aren’t broken down at the pump so consumers do not readily realize that the taxes have gone up. Also, U.S. motorists drove 11% fewer miles in July than a year ago as drivers stayed home due to the coronavirus pandemic according to USDOT data for the most recent month available. The biggest declines were seen on the East Coast, where mileage in the North fell 15.4% and in the South by 11.3%. Driving on urban Interstate roads fell by 14.8%, the sharpest decline seen in single road category.

In the case of NJ, the impact on volumes may come as much from the resulting drop in demand from out of state buyers. The Garden State’s historically low gas tax rates always made it worth it for travelers to fill up in NJ versus in NY or PA. This was especially true for commercial truck traffic, a mainstay on New Jersey’s Turnpike. Now we will see what a more competitive price environment looks like.

CLIMATE AND TRANSPORTATION

Gov. Gavin Newsom of California issued an executive order directing California’s regulators to develop a plan that would require automakers to sell steadily more zero-emissions passenger vehicles in the state, such as battery-powered or hydrogen-powered cars and pickup trucks, until they make up 100 percent of new auto sales in 2035.

There may be no better time than in the midst of a hugely climate based disaster to make the move. Transportation is seen as California’s largest source of planet-warming emissions, accounting for roughly 40 percent of the state’s greenhouse gases from human activity. The order would not prevent Californians from owning cars with internal combustion engines past 2035 or selling them on the used-vehicle market.

It is a step which was always expected but it seems clear that the wildfires of the past half decade are driving the effort. In June, the state adopted a major rule requiring more than half of all trucks sold in the state to be zero-emissions by 2035. The industry reacted negatively to the concept of a mandate but that is to be expected. California has long been a leader in efforts to combat auto pollution. The nation’s first tailpipe emissions standards and greenhouse gas emissions standards for cars originated in California. “Check engine” lights were also first mandated by CARB before being required by the EPA. 

Electric transportation is becoming more of a chicken and egg conversation. The industry expresses reluctance to fully embrace the change until they see what in their eyes is a sufficient level of demand. At the same time, the technology remains too expensive for the average consumer  so the demand is not there yet. Here a regulatory incentive or stimulus as the case may be could be key to driving the development of affordable electric vehicles. 

PANDEMIC CASUALTIES

The news that the Metropolitan Opera will not resume performances until the fall of 2021 due to the pandemic is a chilling sign to the cultural space. While this is a story about one credit – the Metropolitan Opera – it is still a story about the issues facing the cultural space. In making its announcement, the Met indicated that the revenue losses to date and those to result from the cancellation going forward will require contract renegotiations with the unions representing the bulk of its employees.

This after revenue hits of $150 million led to roughly 1,000 full-time employees, including its orchestra and chorus to be furloughed without pay since April. Other institutions in the space have already executed significant cost cuts through negotiations. The Boston Symphony Orchestra and its players have agreed to a new three-year contract reducing their pay by an average of 37% in the first year. The San Francisco Opera agreed to a new deal that will cut its orchestra’s salary in half this season. Both have provisions to raise pay as revenues return.

It will be easier for outdoor cultural venues like zoos and botanical gardens to slowly ramp up patronage than will be the case for the enclosed entertainment space. The importance and place of the Metropolitan Opera in the American cultural landscape means that decisions by this one institution will resonate throughout the non-profit cultural sector. We would expect to see more such announcements, especially if the much feared second wave occurs.

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