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TEXAS MOVES FORWARD

Following the devastation from Hurricane Harvey, Texas will require a massive infusion of outside funds to rebuild. We expect that municipal bonds will play a prominent role, as was the case after 9/11 and Hurricane Katrina. It is too early to assess the impact on ratings that will result from the storm, though rating agencies are likely beginning to plan their actions.

Here’s what we do know more than, a week on from Harvey:

PORT OF HOUSTON: One of the city’s main economic drivers, the Port of Houston, came back online September 1. The port closed Friday, August 25, at noon, and reopened to some container ships. As it gets back up to speed over the next few days, shipping activities will be limited to daylight hours, and parts of the shipping channel will stay closed.

Houston’s port is the country’s second-busiest by tonnage after the Port of South Louisiana, and plays a key role in the U.S.’s oil, gas, petroleum, and chemical industries. It is also handles more foreign shipping, by weight, than any other U.S. port. The port’s governing body estimates it contributes more than $600 billion to U.S. economic activity a year. Houston ships more gasoline than any other U.S. port, accounting for some 38% of overall U.S. gasoline exports, or more than $14 billion worth in the first half of this year.

It is the No. 1 container port on the U.S. Gulf of Mexico, and ranked No. 7 in the nation in number of containers handled; servicing all major trading lanes. It is the major container gateway for Houston, for Texas, and for the 100 million people who live between the Mississippi River and the Rocky Mountains. Its Foreign Trade Zone (FTZ 84) ranks first in the country in total merchandise received. The Port of Houston said there had been “no evidence of flooding on terminal. No visible damage to containers, cranes, or other terminal equipment.”

SCHOOLS: The first day of school for Houston Independent School District students will be Monday, Sept. 11, weather and facility conditions permitting. The District operates 245 campuses that HISD Facilities Services had reached to assess by Saturday morning. Of those, 115 schools can be deep-cleaned and ready for the scheduled first day of school on Sept. 11. Fifty-three have “major” damage, while 22 have “extensive” damage. The district is still working to assess 32 schools, as well as in-district charter campuses, but accessibility has been hampered by flooding. 10,000 to 12,000 students from HISD schools will need to be temporarily moved to other campuses during the restoration process, and the possibility remains that the first day of school will be postponed beyond Sept. 11.

DRINKING WATER: The city's drinking water system was not affected, but the wastewater system was impacted and the City has requested that use be minimized. The fact that drinking water has been available will mitigate some of the financial impact of Harvey, as its is usually water usage on which sewer rates are based. The Houston Combined Utility System is the primary regional water provider for an area with estimated population of more than 6 million including the City of Houston with a population of 2.2 million.

MUNICIPALITIES: The federal Community Disaster Loan (CDL) Program provides operational funding to help local governments that have incurred a significant loss in revenue, due to a major disaster, that has or will adversely affect their ability to provide essential municipal services. The CDL Program provide funds to any eligible jurisdiction in a designated area. Loans not to exceed 25% of the local government's annual operating budget for the fiscal year in which the major disaster occurs, up to a maximum of $5 million. The Federal Emergency Management Agency (FEMA) has just $541 million left for disaster management related to Hurricane Harvey. The House passed an initial disaster relief bill of nearly $8 billion, $7.4 billion of which would go toward FEMA's disaster fund.

Other disaster funding is accomplished through the Small Business Administration. Through its Office of Disaster Assistance, the SBA made more than $11 billion in loans after Hurricane Katrina, and more than $2 billion after Superstorm Sandy—most of those to distressed homeowners with no business claims at all. Since its inception in 1953, it has issued more than 2 million loans for more than $54 billion. Historically, the program has been characterized by long delays in implementation which negatively impact economic and related tax revenue recovery.

The Texas Windstorm Insurance Association (TWIA), established by the Texas Legislature in response to regional market conditions following Hurricane Celia in August 1970, provides windstorm and hail insurance in the Texas seacoast. TWIA is governed by Chapter 2210 of the Insurance Code (Chapter 2210).

It is a residual insurer of last resort and is not a direct competitor in the voluntary insurance market. It provides coverage to residential and commercial properties in certain designated portions of the Texas seacoast territory.

The designated catastrophe area is that portion of the seacoast territory where the Commissioner of Insurance has found that windstorm and hail insurance is not reasonably available. TWIA is not a state agency and does not receive General Revenue funds or any other state funds for operations. Losses and operating expenses are paid from the following funding sources: TWIA premiums and other revenue, the Catastrophe Reserve Trust Fund (CRTF), public securities, company assessments, and reinsurance. Funding for the 2017 hurricane season is about $4.9 billion.

In the end, Texas will require a massive infusion of outside funds and munis will likely play some role. A first step occurred when the Congress approved $15 billion in disaster aid. The measure would continue government funding through Dec. 8, and extend the debt limit for the same period. It would also extend the National Flood Insurance Program, which is to expire on Sept. 30, for the same duration. After 9/11 there were Liberty bonds. After Katrina, there were Gulf Opportunity Zone bonds. We would expect a similar program for the area of damage from Harvey. These are just some examples of how the bond market lends itself to state and local governments.

FEDERAL INFRASTRUCTURE FUNDING SEEMS FARTHER AWAY

Meanwhile, it’s becoming clearer that despite promises of federal funding for infrastructure, the plan really counts on locally-generated funding.

Mick Mulvaney, director of the Office of Management and Budget, said to a gathering of 150 state and local transportation leaders: “we’re trying to figure out how to use a little bit of [federal] money to generate a lot of money, to give state and locals the incentives to do stuff you might not otherwise do.”

We think that the emphasis should be on the “little” part. Mulvaney and Transportation Secretary Elaine Chao have talked of funding to put existing projects "over the top" and lots of talk about leveraging.

In a time of constrained state budgets, that does not provide much for new projects or maintenance related spending. It is precisely these areas that issuers and likely voters were looking to when they heard the President touting infrastructure during the campaign. This would be especially true for rural projects whether they be for roads, electric grids, or broadband. Trump’s budget proposals have called for cuts in transportation spending, particularly grants to launch new transit systems and other big-ticket projects.

So far the only tangible details consist of an executive order to encourage agencies to speed up their decision-making, by, for example, issuing rulings on environmental issues within two years, on average. The order also instructs the government to designate one lead federal agency to shepherd all of the needed approvals for a project and come up with a single federal decision on whether it can proceed.

In addition to the lack of detail, the emphasis on privatization and the use of loans rather than grants will be discouraging in some sections of the country. This is especially true of rural areas. Now the plans are likely to be delayed or derailed by the lack of time and attention on the part of Congress. The debt ceiling, tax reform, hurricane relief, and now immigration will all likely have political priority over an infrastructure bill.

As for municipal bonds, none of this is good news. The ongoing uncertainty complicates planning, delays projects, makes projects more expensive, and dampens issuance. It is positive for neither the market nor for credit.