Joseph Krist

Publisher

________________________________________________________________

As the infrastructure funding standoff continues in Washington, it is easy for the gross spending figures to overwhelm some of the sector by sector spending items. This tends to make one think that a fairly sizeable amount of money being spent on a problem should actually fix the problem. Much attention is being paid to how much as opposed to how little of the real size of infrastructure capital needs are actually being met.

A good example is housing. The next attempt at stimulus, the American Jobs Plan would provide $40 billion for rehabilitation of existing public housing stock across the country. The Administration estimates that some 1 million apartments are over 50 years old. Many come close to exceeding the limits of habitability – water and heat are often recurring problems and capital repairs long delayed.

While federal funding for new public housing ended with the budget compromises of the mid 1990’s, spending for capital maintenance continued. As time passed and politics hardened, spending for upkeep like boilers for water and heat and functioning elevators consistently reduced. That left public housing authorities with little to leverage in support of tax exempt bonding for those costs as had historically been the case.

So we see a substantial sum proposed for many of these issues. Here’s the rub. While New York does have by far the largest number of public housing units in the country, most major cities have substantial public housing infrastructure. So if the $40 billion was applied to fill the capital needs of the NYC Housing Authority there would still be a multi-billion dollar shortfall in NY and none for the rest of the country. It is just another example of the challenges faced by municipal bond issuers.

__________________________________________________________________

PANDEMIC PRESSURES LINGER

The economy may be opening up again but that does not mean that some credits are no longer in trouble as the pace of the reopening may not be fast enough for some credits to avoid problems. The latest example comes from San Antonio where the impacts on travel, tourism, and convention activities have not been mitigated sufficiently to generate necessary cash flows to meet debt service.

Moody’s has downgraded to Baa1 from A3 the city of San Antonio Convention Center Hotel Finance Corporation, TX’s bonds and has placed the rating under review for further downgrade. The pandemic so limited business that “the accumulated pledged revenue and reserve in the equity fund for the hotel special tax bonds were depleted and used to meet the July 15, 2020 obligation, reducing the flexibility for future payments. Accumulated pledged revenue was also used to make the January 15, 2021 payment. Following the January payment, the city has continued to receive pledged revenue but collections have remained weak and are projected to be insufficient for the July 15, 2021 payment.” 

It is expected that debt service reserves will be used to fund some $1-1.4 million of debt shortfalls. The downgrade to Baa1 also reflects a much weaker credit profile from a year ago with limited flexibility although the city is exploring various options for the future. None of those alternatives, however, are projected to be available to meet the July 15 debt service payment.

With an end to the harsh limitations of the pandemic clearly in sight, timing of the return to revenue sufficiency for many similar projects will be a key factor in determining whether other similar credits will face similar issues.  

TREASURY REGS FOR STIMULUS SPENDING

The U.S. Treasury Department released much-anticipated guidance for the American Recovery Plan’s (ARP) $350 billion in direct state and local aid, including details on how it will implement the law’s restriction on using ARP funds for state tax cuts. The long awaited guidance allows those governments to properly apply the funds without risks to the state budgets they are right in the middle of enacting.

During the debates over the various stimulus packages since the onset of the pandemic, the specter of a “blue state bailout” was consistently raised. It all stemmed from an ill advised item in the original stimulus bill mentioning funding of Illinois’ pensions  shortfall. At the same time, representatives from “red states” sought to use funding for their pet cause – tax cuts.

Now at least the states have guidance at this important point in their budget processes. The ARP’s legislative language was fairly broad: States “shall not use [ARP] funds … to either directly or indirectly offset a reduction in net tax revenue … or delay the imposition of any tax or tax increase.” The rule applied to any “change in law, regulation, or administrative interpretation.” The law also provided the Treasury to clawback any ARP money used for such tax cuts.

The new guidance addresses some of the issues raised by litigation from a group of red state attorneys general challenging the rules. Several of those states intended to use aid to finance tax cuts regardless of any guidance. Hence, the litigation. Now, Treasury will compare each state’s fiscal year tax revenue during the ARP years (March 2021 to December 2024 or whenever a state exhaust its ARP funds) to its fiscal year 2019 tax revenue—as reported by the Census Bureau and adjusted for inflation.

This formula allows Treasury to work the numbers such that if a state’s tax collections in one of the ARP years are above its real 2019 level, any tax cuts passed that year were paid for with economic growth and not ARP funds. Problem solved! Additional cushion is provided by the fact that each state gets a 1% de minimis exemption to account for “the inherent challenges and uncertainties that recipient governments face.”  It allows for a state to pass a tax cut as part of a revenue neutral budget and then see revenues decline, it will not count as a violation of the rules. 

Conversely, if a state sees revenue cuts directly attributable to tax legislation it would potentially run afoul of the rules. If that state passed significant tax cuts and its next year’s revenue was below its real 2019 baseline, it must document how it financed the tax cuts without ARP funds. It cannot make cuts to a department, agency, or authority that used ARP funds. A state would need to point to offsets – taxes raised, spending cut—but no cuts to a department, agency, or authority that used ARP funds are permissible. 

Pensions even got a bit of help when all was said and done. While pension deposits are prohibited, recipients may use funds for routine payroll contributions for employees whose wages and salaries are an eligible use of funds. Treasury’s Interim Final Rule identifies several other ineligible uses, including funding debt service, legal settlements or judgments, and deposits to rainy day funds or financial reserves.

AUTONOMOUS VEHICLES

It will take some time before all of the ultimate impacts of the pandemic are clear. One of the sectors to have seen much of that impact has been the mass transit sector. Now that systems are reopening – in NY the MTA has resumed 24 hour service – we can begin to see what the true impact will be. One of the fears of the mass transit sector is that people will be unwilling to use those systems and will instead choose to use services from transportation network companies (TNC) instead of public mass transit. The initial signals we’re seeing don’t necessarily spell the beginning of the end for public transit.

It is clear that at present the core transit functions of Uber and Lyft are not moneymakers. The history of the business is that the demand for it has been driven by price considerations. The subsidized prices they charge are what generate the favorable cost/benefit assessment a customer makes. While there will be some acceptance of higher prices, the rate of increase in that cost is likely to exceed the rise in the benefit of the service.

As is well known, the one place that these companies can improve that ratio and drive demand is by lowering the costs. The most obvious cost is that of the driver. It has long been clear that ultimate profitability for the TNC is reliant on autonomous vehicles. That drove much of the TNC investment in autonomous technology and development which did not produce the desired result.

With the reopening expanding over the summer we expect to see lots of noise over transit and vehicle use going forward. There will be a real push and pull between those who wish to maintain services and modalities and those who demand that public infrastructure accommodate large scale autonomous utilization now. I’ve always been skeptical of claims about the speed of new technology. That’s the product of time and experience.

We don’t think that AV adoption will occur nearly as fast as proponents hope. Two recent comments in the press happened to be timely.

“If you look at almost every industry that is trying to solve really, really difficult technical challenges, the folks that tend to be involved are a little bit crazy and little bit optimistic.”  – president of Nuro.

“These cars will be able to operate on a limited set of streets under a limited set of weather conditions at certain speeds. We will very safely be able to deploy these cars, but they won’t be able to go that many places.” – an executive at Lyft.

If that is the state of play for the foreseeable future, it is not realistic to expect public agencies to make capital funding decisions for a truly nascent technology at the expense of current modes of transportation.

CARBON CAPTURE AND MUNIS

Sens. Michael Bennet (D-Colo.) and Rob Portman (R-Ohio) introduced the Carbon Capture Improvement Act to help power plants and industrial facilities to finance carbon capture and storage equipment as well as more unproven direct air capture projects. The bill would permit businesses to use private activity bonds, which local and state governments currently have access to, in order to finance a carbon capture project.

We note that both Senators represent states with significant economic interests tied to the extraction of minerals. So their approach to climate change is not about shifting to renewable fuels and away from the environmental destruction of associated with fossil fuel extraction and production. It is interesting that Senator Portman has discovered the joys of private activity bonds after supporting the 2017 tax legislation.

This is just the latest example of the effort to save the fossil fuel industry through the subsidy of tax exempt financing. At the same time the industry fights the financial claims of municipal issuers in association with pending litigation on the impact of climate change, the industry seeks to use the benefits of issuance by municipal issuers to subsidize their share of the costs of climate change.

ESG

The “social cost of carbon”  is an effort to measure the economic harm of putting one additional ton of carbon dioxide, the prime greenhouse gas, into the air. A 2019 Colorado law regulating utilities includes a minimum of $46 a ton to estimate compliance. The 2019 law directed the Colorado Public Utilities Commission to use a social cost of carbon in evaluating all existing electric generation and in the approval of the plan by Xcel Energy, the state’s largest electricity provider, for closing plants and adding new generation.

Now there are two new bills pending which would extend the use of the concept to cover methane in evaluating energy efficiency and demand management programs for utilities, like Xcel and Atmos Energy, selling natural gas to homes and businesses. The emerging weaknesses of the approach is reflected in the fact that there is no agreement as to how one calculates the social cost of carbon.  And that is a huge problem.

Over the years many efforts have been made to develop consistent replicable calculations to measure a number of factors. These would be used to develop scores and/or rating systems for investors who wished to be able to use them to meet a variety of purposes. The fact is that the process is complicated and not always open, so the results to date have not produced the desired metrics.

Even after you crack open the black box and perfect the math, there is still the issue of what exactly defines green. At one point, issuers were using eight different sets of standards to support their assertion of “green” status. Some of the “standards” were developed internally by the issuers. That is not how one validates the concepts underpinning ESG  investing.

Investors are getting wise. The municipal analyst community through the National Federation of Municipal Analysts is undertaking an effort to reach a consensus on what is green for purposes of the municipal bond market. In the meantime, there are some federal efforts to calculate these costs dating back some 25 years. Nonetheless, no clear consensus has emerged.

That reflects the model based nature of most of the effort to date which can provide widely divergent results and prices. As one researcher put it, ““We think we can describe the range.  “We have to pick a number somewhere in the middle of the range, that is all you can do.” That’s a problem for investors who increasingly rely on a data based analytic approach to portfolio management. An imprecise number lowers its value for trading valuation purposes and can create compliance nightmares for management and marketing purposes.

NUCLEAR SUBSIDIES

Senator Ben Cardin (D-MD) said he would introduce an amendment with fellow Democrats, Senators Sheldon Whitehouse (D-RI)  and Bob Casey (D-PA) which would provide a production tax credit of $15 per megawatt hour for existing nuclear plant owners or operators in states such as New York, Illinois, and Pennsylvania with deregulated power markets. The credit would be reduced by 80% for any market revenues above $25 per megawatt hour. The credit would begin to phase down when greenhouse gas emissions fall by 50% below 2020 levels and ends entirely after 2030. The proposal comes as the Ohio legislature considers the expulsion of its former Speaker and the chief of staff for the former Illinois House Speaker indicted over efforts by power companies to obtain subsidies from state governments.

IOWA CHARTER SCHOOLS

Typically, the supervision and regulation of charter schools has been the province of local school districts. Local control stems from the fact that many charter schools are paid for by the local taxpayers. We have long had concerns about the drainage of funding from local school districts to charter schools especially where it creates funding shortfalls for the public system.

Now in Iowa we see new legislation which takes the authorization for charter schools out of the  hands of the local funding entity. HF 813, which was signed recently allows private charter school operators, known as founding groups, to seek approval to operate directly from the state Board of Education. Charter school founding groups can still be created by a local school board, but the new state-approval option provides an opportunity to pursue approval free of local opposition. The state board will approve and monitor the performance of all charter schools.

In Iowa, funding is based on enrollment using a state cost-per-pupil (SCPP) formula. Under HF 813, the state will fund 100% of the SCPP for the first year of a charter school’s operation because the formula is based on prior-year enrollment. Thereafter, these costs will be funded by the combination of state and local funds. At the same time, the law allows charter schools to avoid some of the costs borne by traditional school districts. Charter schools will be required to operate a brick-and-mortar “attendance center” but they are not required to provide remote options.

Even though it allows charters to be approved by local entities, the law  is another form of preemption. The new state-approval option provides an opportunity to pursue approval free of local opposition. That creates a real problem for districts which are required to fund schools they do not want.

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.

Joseph Krist

Publisher

________________________________________________________________

The quick reversal of trend in terms of municipal credit is impressive. The much more optimistic outlook for the economy through year end is already showing up in rating activity. Negative outlooks are being revised to stable and upgrades are clearly shoring up the municipal market.

If travel picks up as many expect, there will be a clear impact on airport and airport related credits. The economic activity generated by travel and tourism is already relieving pressure on credits supported by revenues derived from hotel taxes and sales taxes. Multiple states have seen upgrades to outlooks. Connecticut was the most prominent example. After several years as one of the more troubled state credits, the Nutmeg State has seen its ratings upgraded by all four rating agencies. Louisiana, a state whose major industries are under pressure, has been assigned a positive outlook.  

At the same time, we are a bit more restrained in our outlook for state credits. One concern has been the application of what are arguably one-time revenues to fund significant rounds of new spending. NYC is doing it. California’s Governor has proposed a budget which allocates $25 billion to one-time or temporary spending, including nearly $15 billion for capital outlay; $7 billion to revenue-related reductions; $3.4 billion to the Special Fund for Economic Uncertainties (SFEU) balance; and nearly $2 billion to ongoing spending increases, although these costs would grow substantially over time.

Other sectors which stood to benefit from the improving outlook for the pandemic include some hospitals, higher education institutions, cultural and entertainment facilities. As these facilities reopen and demand reestablished, we would expect the perception of these credits to improve fairly dramatically. ports are another sector seeing immediate benefits. After a year of reduced activity, ports are now dealing with capacity issues which are expected to last through the summer.

__________________________________________________________________

CALIFORNIA BUDGET REVIEW

The Legislative Analyst Office (LAO) in California has reviewed the Governor’s May Revision to his fiscal 2022 budget proposal. Much has been made of the huge surplus the state has accumulated through a combination of better than expected revenues and a federal stimulus windfall. The LAO starts off with a disagreement over the actual size of the surplus truly available for new spending.

LAO estimates the state has $38 billion in discretionary state funds to allocate in the 2021‑22 budget process, an estimate that is different than the Governor’s figure—$76 billion. The differences in estimates stem from differing definitions. The Governor counts $27 billion in constitutionally required spending on schools and community colleges, nearly $8 billion in required reserve deposits, and $3 billion in required debt payments in his calculation of the surplus. After excluding these amounts, the two surplus estimates are nearly the same.

The Governor’s estimate includes constitutionally required spending on schools and community colleges, reserves, and debt payments which must be allocated to specified purposes. The constitution requires the state to spend minimum annual amounts on schools and community colleges (under Proposition 98) and budget reserves and debt payments (under Proposition 2). Mainly as a result of higher revenues, relative to January, constitutionally required spending is higher by nearly $16 billion across the budget window.

The May Revision includes roughly 400 new proposals costing $23 billion in new spending. That leaves $16 billion of surplus for other purposes. The revision sends some definitely mixed messages..Under the administration’s estimates and proposals, total reserves would reach $19.8 billion in 2021‑22. Yet some of the new spending uses $12 billion in reserve withdrawals and borrowing to increase spending. Overall, the State’s reserves are pegged to be lower by nearly one-half.

Schools and community colleges would receive the largest spending allocations. The major components of the next largest  category are $5.5 billion for broadband, $1.1 billion to replenish the state Unemployment Insurance Trust Fund, and $305 million for the Employment Development Department to more quickly address workload. Those are three major areas where the pandemic directly impacted life across the board.

The State Appropriations Limit (SAL) limits how the state can use revenues that exceed a specified threshold ($16 billion for FY 2022). Each year, the state compares the appropriations limit to appropriations subject to the limit. If appropriations subject to the limit exceed the limit (on net) over any two-year period, there are excess revenues. The Legislature can use excess revenues in three ways: (1) appropriate more money for purposes excluded from the SAL (under the Governor’s proposal, the common new spending for this purpose is capital outlay), (2) split the excess between additional school and community college district spending and taxpayer rebates, or (3) lower tax revenues.

NYC OUTLOOK UPGRADE

New York City was the beneficiary of an improved outlook from Moody’s. The outlook was moved from negative to stable. The fortunes of the City were greatly enhanced by its designation for significant funding from the federal government. The move comes as the City Council begins its deliberations on the FY 2022 budget.

The Mayor’s Executive Budget plan is the current administration’s last opportunity to present an executive budget, and the last time their budgetary priorities and vision will shape an adopted budget. Those priorities are apparent as the City’s Independent Budget Office (IBO) estimates that about a third ($4.2 billion) of the federal stimulus funding added in the Executive Budget is proposed for baselined initiatives that will continue past current plan years, and the expiration of the stimulus funding.

The stimulus funds, including $5.9 billion of ARPA funding provided directly to the city for general purposes and $7.0 billion of ARPA and CRRSA funds allocated to the Department of Education, along with FEMA moving to full reimbursement of city Covid-related expenses, have filled a large portion of the revenue shortfall brought on by the pandemic.

OREGON FIRE FALLOUT

A lawsuit filed on behalf of 70 landowners in Oregon’s McKenzie River Valley seeks $103 million from two public utilities, Lane Electric Cooperative and Eugene Water & Electric Board, for damages arising from the Holiday Farm fire. The Labor Day fire destroyed 430 homes, killed one person and burned 173,393 acres. The lawsuit alleges that fires were started when tree branches contacted power lines.

The plaintiffs contend that the utilities had been warned about fire conditions but chose to maintain power throughout their systems. In addition to homes, fires such as these have significant impacts on businesses related to logging and lumber activities. The municipal utilities now join several investor owned utilities in Oregon as well as California as defendants in similar lawsuits.

WASHINGTON CLIMATE BILL RAINS ON SUPPORTERS

As the nation and the states move to cope with the realities of climate change, a number of conflicts have arisen between various interest groups. Those conflicts have played out in ways which increasingly are surprising. Issues like carbon pricing and vehicle mileage taxes have been considered. While this has not necessarily resulted in positive legislative action, the debate on the issues sheds light on the viability of many proposed actions and solutions. It also creates some dilemmas.

One of the best examples of the resulting inconsistencies is currently playing out in Washington State. The Legislature passed a broadly backed package to address climate change and the Governor has positioned himself as a national environmental champion. The issue was contentious and a variety of compromises were struck which overcame objections to individual provisions of the proposals (a low carbon fuel standard and a “cap-and-trade” policy). In return, legislators agreed to increase the gas tax by 5 cents. 

So when the legislation passed, the Governor’s signature was seen as a formality. Instead, the Governor vetoed the portion of the legislation raising the gas tax. The state Constitution allows for a governor to veto sections of a bill while signing the rest into law, but Inslee vetoed a specific provision. The Legislature has done this previously when the Governor in 2019 after he vetoed certain sentences in particular areas of the transportation budget. A County Superior Court judge invalidated those vetoes. The Legislature, including members of the Governor’s party, plan to sue on similar grounds again.

How is this all going to work? Under the new laws, fuel companies must start reducing their emissions a little each year in order to hit a statewide goal of emissions 20% below 2017 levels by 2038. Fuel companies can clean up their fuels by producing biofuels or mixed fuels. If they can’t, they would be required to purchase “credits” to make up for emissions that go above the allowed amount. The cap-and-trade plan puts a cap on carbon pollution and greenhouse gas emissions beginning in 2023. The largest polluters in the state would need to either clean up their work to meet the cap or purchase allowances from the state. The state would receive the revenue from those allowances.

ILLINOIS DEBT CHALLENGE FAILS

Billed as an issue of a concerned citizen contesting a bond issue rather than as a front for the effort to create a successful short trading strategy by a private equity investor, the latest challenge to the State of Illinois’ debt issuance powers has failed. The Illinois Supreme Court in a unanimous decision cited the issue of laches. This doctrine deals with how long a plaintiff can wait to take an action. In this case the Court directly referred to the fact that the ” petitioner waited to file his taxpayer action until 16 years had elapsed following enactment of the 2003 bond authorization statute and 2 years had elapsed following enactment of the 2017 bond authorization statute.”

The Court neatly found a way to stop the challenge without ruling directly on the issue of the validity of the debt – $10 billion of 2003 pension bonds and $6 billion of bill backlog borrowing in 2017. A decision of the issue of the validity of the debt would have to wait for another legal challenge.  The use of litigation by motivated political players to halt state borrowing efforts are a fairly regular occurrence as is their general failure to succeed in their efforts to stop or invalidate debt.

The opinion reflected the Court’s understanding of the implications of allowing the case to proceed. It specifically referenced the fat that “enjoining the state from meeting its obligation to make payments on general obligation bonds will, at the very least, have a detrimental effect on the State’s credit rating.” The Court effectively found that the long wait time before the original lawsuit was filed was done to make the State’s position more difficult.

We find this decision to be reinforcing of a general lack of willingness by the courts to invalidate debt. That long established pattern made us confident that the suit and others like it which are a fact of life will continue to be losing efforts.

ROCKY MOUNTAIN WAY

Colorado now relies largely on the 22-cent per gallon gas tax and 20.5-cent diesel rate to fund transportation work.  Newly created fees would be collected from electric vehicle registrations, fuel taxes, retail deliveries, passenger ride services, and short-term vehicle rentals. The fees would be phased in from fiscal year 2022-23 through fiscal year 2031-32 and then indexed to highway construction costs.

Raises in the gas tax would start at 2 cents per gallon and ultimately reach 8 cents per gallon. A fee applied solely to diesel sales initially would be 2 cents per gallon and later increase to 8 cents per gallon. Also included in the bill is a requirement for the $50 existing registration fee charged per electric vehicle to be adjusted annually for inflation. The tax increases are accompanied by transfers from the State’s general Fund.

$507 million in one-time funding would come from the state’s general fund for fiscal year 2021-22. The State Highway Fund would receive $355.2 million. Another $24 million would go to local governments. The remaining $127.8 million would be directed for multimodal uses. Currently, state law requires $50 million to be transferred annually from the General to the Highway Fund. That has been repealed in the face of the significant one time transfer.

MORE NUCLEAR DELAYS

MEAG, Oglethorpe Power, and the Jacksonville Electric Authority got more bad news about the operating schedule for the Plant Vogtle expansion. Georgia Power Co. said that delays in completing testing means the first new unit at its Vogtle plant is now unlikely to start generating electricity before January at the earliest. The additional month will add another $48 million to the cost of the two nuclear units.

The reactors, approved in 2012, were initially estimated to cost a total of $14 billion, with the first new reactor originally planned to start generation in 2016.  Now the plant’s costs are expected to come in at or above $26 billion. The second new reactor is supposed to start operating in November 2022. The company says it is still on schedule.

CLIMATE LITIGATION

By a 7-1 decision, the Supreme Court ruled that suit filed by the City of Baltimore in July 2018 against the major oil companies should be sent back to the U.S. Court of Appeals. The suit, and some 20 others like it from other jurisdictions, argues  that the companies’ “production, promotion and marketing of fossil fuel products, simultaneous concealment of the known hazards of those products, and their championing of anti-science campaigns” harmed the city.

The fossil fuel companies requested an expansive review of issues in the decision to send the case to state court; the city requested that the rules of appeal be interpreted narrowly, in a way that would have allowed the case to proceed in state courts. The court majority ruled that the appeals court should not be overly limited in its review of issues.

There some 20 similar lawsuits to the one filed by Baltimore. They by and large seek to have their claims adjudicated in state courts which are seen as friendlier to the arguments advanced by the cities. So the decision to send this case back to the federal courts for review is being seen as a “loss” for the City of Baltimore and the other cities suing.

But it is important to note that the decision was not about the merits of the cities’ cases. The decision reflected in part a unanimous 2011 Supreme Court ruling which said that, under federal law, the Clean Air Act displaced the common law of nuisance, giving jurisdiction to the Environmental Protection Agency. So the decision at least establishes the proper forum for these cases to be adjudicated in.

PRISONS AND RURAL ECONOMIES

Where I live in upstate NY, the role of prisons as drivers of employment and incomes for local residents could not be clearer. While the drive for criminal justice reform is driven mainly by urban constituencies, the economic impacts of reform of bail and imprisonment policies fall primarily on rural host communities.

It is a pattern which repeats itself across the country. In California, the impact of prison closings is generating concern about host localities and their economies. California’s prison system employs some 50,000 people and consumes about $16 billion in annual state spending. So when a prison is closed, the impact is quickly felt. Taft in Kern County, which had its federal prison close last year, lost 18% of its population in 2020, the highest population loss in the state that year.

Susanville and Tracy are two California communities scheduled to see prisons in their jurisdictions closed. The City of Susanville estimates that the closure of the California Correctional Center scheduled for June 2022 means Susanville could lose an estimated 25% of its employment base — jobs that can pay as much as $90,000. The prison helped to offset job losses from the decline of the regional lumber industry in the late 20th century.

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.

Joseph Krist

Publisher

________________________________________________________________

This week, we get to see how policy matters. The immigration policies of the Trump Administration had consequences and we see them in California’s population trends. We see the results of a regulatory “soft touch” approach which let a major infrastructure facility be vulnerable to just about any hacker who wanted to create some disruption. We see approvals move forward on major wind generation now. The impact of environmental regulation and economics on coal will continue.

On other fronts, we see Puerto Rico moving a bit closer to a resolution of its ongoing bankruptcy and debt restructuring efforts. At the same time, we see some issuers taking steps reminiscent of other declining credits such as pension bonds.

________________________________________________________________

CALIFORNIA

The news this week that California’s population had declined has been taken by a variety of interests as a sign that their views have been vindicated. Among them are that the State’s politics and taxes are driving people away. It is a long running debate that likely will not go away soon.

The decrease was very small – 0.46% — a decline in 2020 of 182,083 Californians. Most of the loss appeared to occur in the second half of 2020, during the worst of the pandemic. For the first time in its 170-year history, California will lose a congressional seat, with the new population numbers from the 2020 census trimming its delegation in the House to 52 members. The State estimates that more than half of that drop — roughly 100,000 people — was the result of federal policies that blocked international immigration and global lockdowns imposed to curb the pandemic, including restrictions on H-1B and other visas during the last year of the Trump administration.

The immigration impact is real. Enrollment of international students in the state, for example, declined last year by 29%. The Public Policy Institute of California analyzed 2020 census data and found that 4.9 million people moved into California from other parts of the country, while 6.1 million Californians left. It is likely driven by the State’s ongoing struggle to expand the development of affordable housing. The lack of immigration definitely influences the numbers as the historic source of replacement residents for those who leave has been essentially shut off.

The PPIC study showed that those who move in are “more likely to be working age, to be employed, and to earn high wages — and are less likely to be in poverty — than those who move away.”  Another issue is the impact of the pandemic. California’s overall death rate by 19% in 2020. Some 51,000 more lives were claimed last year than would have been normally, according to the state’s estimate.

Now, the Governor has released his May update to his proposed budget. Since his initial proposal in January, California received significant aid through the stimulus passed in the first quarter. Like so many other states, its fiscal position and outlook are much better than expected. The governor puts the surplus at $75.7 billion. Under the governor’s proposal households earning up to $75,000 in adjusted gross income will be able to receive $600 direct payments if they did not receive a payment in the first round this year. The governor puts the surplus at $75.7 billion.

The Governor also hopes for $5 billion to double rental assistance to get 100% of back rent paid for those who have fallen behind, along with as much as $2 billion in direct payments to pay down utility bills. The plans come in the midst of the effort to recall Governor Newsom. It is a good time for the governor to have money to spend.

CYBER ATTACK ONLY A MATTER OF TIME FOR MUNI UTILITIES

It involves a private provider but the news that Colonial Pipeline it had shut down its 5,500 miles of pipeline,  as part of its effort to recover from a cyber attack is troubling for any utility operator. The pipeline carries 45%  percent of the East Coast’s refined gasoline and jet fuel supplies. The pipeline transports 2.5 million barrels each day, taking refined gasoline, diesel fuel and jet fuel from the Gulf Coast up to New York Harbor and New York’s major airports. 

The pipeline connects Houston and the Port of New York and New Jersey and also provides jet fuel to most of the major airports, including in Atlanta and Washington, D.C. The U.S. Department of Transportation has declared a state of emergency in the 17 East Coast states it supplies in an attempt to avoid fuel shortages. Now Colonial has admitted that it paid $5 million in ransom as it ramps its facilities back up to capacity.

Increasingly, we see that ransomware is paying off for the criminals. As it becomes clear that ransoms are being paid, we expect to see additional attacks. It is  reminder of how important a credit factor the cybersecurity should be. It is also a reminder that the tough talk about not paying ransoms is just that – talk. It will stay that way until investors demand real answers as to an issuers cybersecurity strategy.

MUNICIPAL UTILITY COAL EXPOSURE

We have frequently commented on the decline of coal and the increasing pace of closures of coal fired generation across the country. Given the heavy environmental orientation of the Biden Administration, the ownership and operation of coal generation is increasingly problematic. Not only is it a credit issue but as ESG investing continues to grow, it has the potential to be a cost issue.

Some of those investors will want to shun utilities with continuing coal generation exposure on their balance sheets. Fortunately, the number of municipal system owned and operated coal plants is not that large. The agencies include Nebraska PPD and Omaha PPD, CPS of San Antonio, Sikeston, MO, and Muscatine, IA. Another credit in that category is Illinois Municipal Power through its exposure to the Prairie States mine mouth generation plant. IMPA is merely an owner but not an operator.

Operators won’t be able to ignore reality for long. For the first time since records began in 1949, coal was neither the nation’s largest nor second-largest source of electricity.  For the first time since records began in 1949, coal was neither the nation’s largest nor second-largest source of electricity. Utilities ran their coal plants far less in 2020 than a decade earlier, with utilization rates dropping to just 40 % from 63% in 2011. At the same time, utilities retired a significant number of their coal plants, dropping the nationwide capacity from 317 gigawatts in 2011 to 223 gigawatts in 2020.

Shipments to power providers dropped 22% from 2019 to 2020. The 428 million short tons the industry received last year marked the lowest shipment level since the U.S. Energy Information Administration began publishing such data in 2007.

BLOWIN’ IN THE WIND

The Biden administration approved construction of The Vineyard Wind project off the coast of Massachusetts. The 84 turbine project would be the largest offshore wind project permitted off the US. The turbines will be able to generate 800-megawatts of electricity. The next largest such projects are rated at 30 and 12 megawatts.

This project could also create a bit of a template for other offshore wind projects. A consistent source of opposition to these projects comes from fishing interests which fear the impact of these constructions to their fishing grounds. Vineyard Wind promised compensation funds for lost revenue for fishing interests in Rhode Island and Massachusetts of $25.4 million, which could lessen the impacts.

Commercial fisherman are center stage in a fight against submerged turbine technology off the coast of Maine. Governor Janet Mills seemingly tried to appease fishermen’s concerns by putting forward a bill that would place a 10-year moratorium on wind development in state waters. In response the fisherman are getting behind a bill which would prohibit state officials from permitting or approving offshore wind projects along the coast.  The bill would not stop wind farms in federal waters in the Gulf of Maine.  

PROVIDENCE PENSION BONDS

It will require state legislative approval but the City of Providence is looking for authorization to issue up to $700 million of pension obligation bonds. It is another BBB issuer looking to borrow its way out of problems. The City only reported $52 million of GO debt when it issued bonds in January of this year. That works out to $296.97 per capita. The pension debt alone would be $3931 per capita. So the pension plan and approved debt if issued would put per capita debt at over $4000 or some 14 times the existing per capita debt burden.

We find it interesting that the finance staff of the City are recent appointees to a second term administration and that this idea is being floated now. Is it a plan that needed the right audience? The plan may indeed provide a way out for a city facing significant tax assessment litigation and that is already making its actuarially required contribution. One can see how it makes sense to the City but it is also a big bright distress signal. If you go down the list of prior pension borrowers, it seems to be the beginning for the ride down the credit rabbit hole.

New Jersey, Illinois, Detroit were all pension bond issuers and all of those issues were followed by ratings declines. What recent municipal bankruptcies show is that pension bond investors increasingly find themselves facing bigger haircuts in restructurings. Providence is assuming 25 year money at 4%. The question is will this be enough to entice investors in a clearly weakened asset class?

GAS TAXES

They may not be a part of the Biden Administration infrastructure proposal but increases in gas taxes are not being excluded from state plans to fund infrastructure. The Missouri Legislature approved the first gas tax increase in Missouri in nearly 25 years.  The plan will increase the tax by 2.5 cents per gallon annually over five years, starting October 1.  Currently, Missouri has the third-lowest gas tax, 17-cents, in the country, behind Alaska and Hawaii. By 2025, the gas tax would be 29.5 cents.

One feature helped to get it through. The legislation comes with a 100 percent rebate for Missourians, as long as they keep their receipts for an entire year. Drivers would apply for the rebate once a year. Even with that carve out, proponents estimated that the increase would be able to generate $500 million a year once fully in place. The legislation also includes an increase in annual fees for electric vehicles raising it 20 percent over a five-year period. 

In Washington, the Governor vetoed a bill which would have banned the sale or registration of new gas vehicles of model year 2030 or later in the state of Washington. Vehicles prior to model year 2030 would not have been affected. An amendment to the bill tied this goal to the implementation of a road usage fee in Washington state. It stated that the guidelines would not take effect until 75% of cars in Washington were covered by a road usage fee.

Washington is one of these states that has added an electric vehicle fee – an extra $150 registration fee per year. The Governor wants the ban on new registrations to be separated from the issue of vehicle mileage taxes. It is surprising given the Governor’s well known stances on the environment. Transportation makes up 45% of Washington state’s emissions, the largest sector. Recently, the Governor supported a 2035 date for the end of internal combustion powered cars.   

DETROIT

The City of Detroit operates under the terms of a City Charter which is approved by a vote of the people. The charter was last revised in 2012. It establishes the ground rules for government operations, details the roles of the executive and legislative branch, enables the election process and mandates the departments, programs and services the city must provide. Now, as the City moves forward after its emergence from bankruptcy anew element of uncertainty has been introduced to the outlook for the City’s credit.

The Detroit Charter Revision Commission (DFRC) was impaneled in 2018 by Detroit voters to address quality-of-life issues, such as water access, affordable transit, affordable housing and responsible contracting. That commission has recommended a series of changes to the charter which would increase and redirect spending.

The governor, in an April 30 letter to the commission, concluded provisions of the revised charter could spur another financial crisis and send Detroit back into active oversight of the Financial Review Commission, which was installed as one of the conditions of its bankruptcy.  The charter commission faces a choice. It could make changes to address Governor Whitmer’s objections and then resubmit a modified plan for her approval.  The commission also could opt to submit the proposed charter to city voters for approval notwithstanding Whitmer’s objections.

An analysis from Detroit’s chief financial officer warned that the proposed charter changes would cost the city $850 million annually due to spending requirements on infrastructure investments, contracts, transportation, salaries, transportation, and information technology. 

That would likely throw the issue into the courts. The August primary will be the final election to take place during the Detroit Charter Commission’s term.  The attorney general’s review concluded that the proposed charter includes provisions that are inconsistent with requirements of the Home Rule City Act and other applicable state and federal laws.  If approved, the charter would go into effect in 2022.

PUERTO RICO

The Puerto Rico Oversight Board approved its proposed Puerto Rico General Fund budget for fiscal year 2022. The proposed $10.1 billion budget for government operations increased slightly from the previous year’s budget. It allocates 72% of funding to education, public safety, health, economic development and pension payments. The board said the budget “fully funds the public employees’ pension through the Paygo system that replaced the insolvent pension trust. The budget also includes Medicaid funds for which the U.S. Congress has not yet extended incremental funding to ensure the continuation of much needed healthcare programs.” 

As the budget process unfolds, the Restructuring Support Agreement (RSA) which would restructure the debt of the PR Electric Power Authority (PREPA) continues to be the subject of several motions in US Bankruptcy Court. Filings by the Authority and the Oversight Board were notable for their support for the RSA. It has not been clear that this was the case. As this process unfolds, legislative actions are being introduced which would effectively cripple the ability of PREPA and the Oversight Board to move forward on PREPA’s much needed reform.

It is likely that much of what the legislature could try to do to implode the RSA would not withstand court scrutiny. Nonetheless, the continuing resistance and obstruction to efforts to create an efficient, resilient, and reliable electric utility are troubling.

DETAILS AND THE AMERICAN RECOVERY PLAN

The American Rescue Plan Act of 2021 will provide $350 billion in emergency funding for state, local, territorial, and Tribal governments.  The U.S. Treasury has released detailed guidelines for how governments can spend the money.

Recipients can use funds to: Support public health expenditures, including funding COVID-19 mitigation efforts, medical expenses, behavioral healthcare, mental health and substance misuse treatment and certain public health and safety personnel responding to the crisis; rehire public sector workers, providing aid to households facing food, housing or other financial insecurity, offering small business assistance, and extending support for industries hardest hit by the crisis.  Governments can also fund premium pay for essential workers; and, improving access to clean drinking water, supporting vital wastewater and stormwater infrastructure, and expanding access to broadband internet. 

The State of Illinois has raised one issue. It was a borrower under the Fed’s Municipal Liquidity Facility. It would like to pay the Fed back and use some of the funds to be distributed under the ARPA. As they stand, the Treasury guidance does not include that purpose as a permissible expense.

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.

Joseph Krist

Publisher

________________________________________________________________

GREEN POLITICS

In our April 19 edition we highlighted the plan’s by Columbus, Ohio’s electric utility to move to a 100% renewable generation base for its customers beginning this June. It was a way to undertake a policy through sale of a service to customers who want it through the utility. This was accomplished in response to a voter initiative.

Now a long time green power advocate has obtained a ruling from the Ohio Supreme Court against the City of Columbus. The ruling covers the City’s refusal to certify an ballot initiative which called for the city to redirect $87 million — almost one-tenth of its general fund budget — to a private organization for “clean energy programming.” The order requires city council “to find the petition sufficient and proceed with the process for an initiated ordinance,” as outlined in city code. The court ordered the city to either adopt the proposed ordinance or place it on the next general election ballot, as the city code requires.

The initiative would require that $57 million of the total be given to a private organization to assist residents in purchasing electricity generated from wind, solar, fuel cell, geothermal or hydropower producers. Distributions of public dollars through private organizations have a long history of issues including transparency and accountability. It would be troubling if this initiative would pass from both a budgetary point of view but also a governance standpoint.

As this process unfolds, the City has contacted residents and customers asking them if they wish to stop the city from automatically enrolling them in the City utility’s new green-energy aggregation program. That plan would lock in for one year an electricity-generation rate of 5.499 cents per kilowatt hour. That rate is almost 10% higher than the 5.03 cents per kWh that Columbus’ AEP Ohio customers currently pay on the “Generation Services (Supply)” line item portion of their electric bills. That default AEP rate is not fixed for one year. In fact, it expires at the end of May. The City’s program starts June 1. The AEP Ohio default price has changed six times between the start of 2020 and April 2021, ranging between low of 4.64 cents per kWh last July to a high of 5.42 cents per kWh in January 2020.

SUTTER HEALTH

This week, Moody’s reaffirmed its negative outlook on the A1 rating for debt issued by Sutter Health. The Northern California system is in the process of finalizing a $575 million settlement of a class action lawsuit. The resolution of that case, while costly, did stand to reduce pressure on the credit. Now however, a second significant class action suit against the system is beginning to move forward with certification of the class. 

The latest class action lawsuit claims Sutter violated antitrust and unfair competition laws, which caused certain individuals and employers in certain parts of Northern California to overpay for health insurance premiums for health insurance purchased from Aetna, Anthem Blue Cross, Blue Shield of California, Health Net or United HealthCare (together, the “Health Plans”) from January 1, 2011 to the present. Sutter denies that it has done anything wrong or that its conduct caused any increase in the price of premiums that individuals and employers paid for health insurance from those Health Plans. 

The case moves as the system reports weak 2020 financial results. In maintaining the negative outlook Moody’s cited an already high cost structure and the fact that Sutter Health’s nursing union contracts are expiring this summer. The potential for costs increasing faster than revenues is a real risk and we believe that this would generate a downgrade.

REOPENING QUICKLY BENEFITS SOME RATINGS

It makes sense that we see ratings respond to the increasing level of economic activity. Places like Disneyland reopened after 419 days, many businesses will be permitted to fully operate in the New York metropolitan area beginning in the middle of the month. Outdoor facilities are well positioned as operators of indoor facilities approach reopening cautiously. Broadway shows will resume until after Labor Day.

As more people get vaccinated, facilities like airports and ancillary credits (parking, rental cars) are moving quickly to financial improvement as passenger volumes grow.  1.63 million passengers went through TSA screening at airports across the nation on Sunday, May 2, the highest number since March 2020, despite it still being about 35 percent lower than pre-pandemic levels.

As hospitality businesses reopen, the flow of taxes generated by these entities will recover and coverage levels for revenue bonds they secure are quickly improving. Those more dependent on outdoor facilities will show that improvement more quickly than those for indoor facilities. Holders of debt payable from tribal gaming operations will benefit as we see capacity restrictions relaxed. The Seminole Tribe saw the negative outlook on its Baa2 rated revenue bonds lifted to stable.  

THEY LOVE NEW YORK

Over the years, there has been a consistent story line that says that New York State’s fiscal and public policies drive residents to leave. That view was revived in this year’s NYS budget process. The issue came up as the Legislature debated whether or not to raise taxes on the high end of the income scale. Opponents as expected claimed that taxes were high enough and would continue to drive residents to states with lower or no income taxes.

Now the results of the 2020 Census are available and surprise, surprise New York State saw its population increase over 2010 levels. This has been lost on many as the emphasis has been on the loss of one seat in the House of Representatives for New York State. While important, Census figures are used to distribute from more than 300 federal programs, including unemployment insurance, job training grants and the Special Supplemental Nutrition Program for Women, Infants and Children. It has been important to get the count right.

The unexpected results have raised questions about how a ten year data trend could be reversed. It comes down to the fact that the trend was based on annual population estimates derived from computer models. The estimates program showing New York losing population started with the 2010 census and updated those figures annually based on births, deaths and the movement of residents in and out of the state. The estimates showed New York gaining less population from immigration and losing more residents to other states as the decade unfolded.

Those estimates are based on a national file of addresses. If an address is not on file then no count of residents at that address occur. It’s been a problem for some time. The Census did start a program in 2000 that would enable localities to update the address data base. It turns out that NYC was one of the more aggressive localities in terms of its efforts to get more addresses in the data base.

In New York City, the process of finding and entering missing addresses began in 2016, and by the time the census was conducted for 2020, there were 122,000 additional housing units on the list of households to be counted.  The State managed to get another 80,000 addresses into the data base. New York’s master address list grew by 693,000 statewide, and after invalid addresses and vacant units were filtered out, the census counted population in 446,000 additional housing units compared with 2010.

NYC AND OPEB

With the pandemic and its current impacts on government fiscal positions, it has been easy to overlook issues which occupied attention in the pre-pandemic era. One of those issues is that of OPEB (Other Than Pension Employment Obligations) and their role as a future credit drag. These benefits are primarily for medical care. One example of the potential impact is the City of New York.

Most New York City employees become eligible for city-paid health benefits for the years from their retirement to when they become eligible for Medicare after 10 years of service. In addition, the city pays their Medicare Part B premium once they move onto Medicare. In fiscal year 2020, the city spent $2.7 billion on health insurance and Part B premiums and other Medicare supplements for retired city employees and their families.

According to the City Comptroller’s annual report, future retiree health benefits currently represent a $109.5 billion unfunded liability to the city. This liability has more than doubled over the fifteen fiscal years since 2005. Retiree health benefits could be d through collective bargaining or state and local law, depending on the particular benefit. The City’s Independent Budget Office (IBO) has suggested one way to deal with the issue is to link the OPEB benefit to residency.

IBO estimates that 34 percent of retired city employees who faced a residency requirement while they worked for the city now reside outside of New York City and the six counties that satisfy residency requirements for active employees as of December 2020,. This figure excludes those who retired from the Department of Education, city university system, public housing authority, and NYC Transit, and a number of other smaller agencies who did not face a residency requirement when working for the city. The linkage of benefit to residency would only cover retirees who had been required to live in the city or in the six suburban New York counties as a condition of employment. They are primarily the uniformed services.

The idea for linking benefits to residency reflects the fact that retirees residing outside the New York City area tend to have been retired for longer than their counterparts residing in the area, and are therefore more likely to have shifted from a city-sponsored health insurance plan to Medicare. As retirees shift to Medicare, the costs of their city-sponsored health insurance plans ends, but the city still offers some less costly benefits such as Medicare wraparound services and reimbursements for Medicare Part B premiums. Retirees would need to continue to meet the residency requirements for active employees to qualify for pre-Medicare health insurance coverage supplemental Medicare benefits once they shift to Medicare if a residency requirement be adopted.

According to the IBO,  non-Medicare retiree health premiums cost the city about $9,000 per individual, and $23,000 per covered family In 2020. The combined costs of Medicare Part B and SeniorCare were approximately $4,000 per individual and $8,000 per family. Assuming that roughly the same number of retirees continue to maintain their primary residence outside of the city and its surrounding counties, eliminating pre-Medicare coverage for nonresident city retirees would save the city $202 million annually; if the Medicare supplemental coverage were also eliminated for nonresidents, total savings would reach $416 million.

WHERE THE CHARGERS ARE

We saw some data this week that shows where electric vehicle charging infrastructure is being installed in the U.S. It should be no surprise that the leader is California with just under 37,000 chargers installed. New York has the next highest number of chargers at nearly 6,500. Texas and Florida are next. As of March 2021, there are 25 states that have at least 1,000 non-residential electric vehicle (EV) charging units (public and private).

Oklahoma had the highest share of DC fast chargers, accounting for 64% of the 1,044 non-residential chargers in the state. The availability of charging infrastructure has long been recognized as a major catalyst in the drive to electrify vehicles. a study published in the journal Nature Energy by the University of California Davis included a survey of electric car buyers in California which indicated that 20% of respondent buyers had gone back to gas vehicles. The reason most cited by far – availability of charging infrastructure.

TEXAS POWER CRISIS WAKE

The weather may have warmed up but the after effects of the February cold snap linger on. CPS Energy, the municipal electric utility serving San Antonio obtained a temporary restraining order against the state grid operator ERCOT. CPS Energy sought the order to keep it from being forced into default and to prevent ERCOT from seizing collateral payments.

The judge specifically cited attempts by ERCOT to charge its losses across viable utilities — those that haven’t sought bankruptcy protection. ERCOT is now seeking to recover $47 billion in electricity charges and $6 million associated with a software error by attempting to seize money it held as collateral to secure participating utilities charges. Already the largest electric co-op in Texas has declared Chapter 11.

The issue is based on the fact that the system’s independent monitor, believes that ERCOT could have lowered prices sooner than it did. In addition to the monitor, the state’s influential lieutenant governor and its attorney general support the view that prices could have been lowered sooner. As it stands, CPS has gone on record as being willing to pay their share but on a more manageable timeline. That puts the customer base at risk and risks hampering economic competitiveness of the revenue base.

CHICAGO

It continues to defy common sense when you come across situations like the one we find in Chicago. In the aftermath of the Detroit and Puerto Rico bankruptcies, many investors focused on Chicago as a potential source of major credit risk. The City has long known that it has credit problems rooted in pension underfunding and a lack of political will. So it is disturbing to see how poorly informed the major decision makers have been regarding the City’s fiscal position on a regular or timely basis.

The Chicago City Council’s Finance Committee this past week endorsed a proposed ordinance, which would require the city’s Department of Finance and the Office of Budget and Management to provide monthly reports on city revenue collections. Both departments would be required under the ordinance to publish monthly reports on their websites detailing “total collections for each revenue category” from the previous month. The reports must include the difference between anticipated corporate fund revenues and actual collections and show how monthly collections in each tax and fee category compare to the same month the year before.

If the information has indeed been lacking as the City deals with its ongoing credit issues, it’s just another weight pulling the City’s credit perception down. It is also a case study of why disclosure continues to be the major issue plaguing our market.

On a positive note, McCormick Place has not hosted an event since March 6, 2019. The 230 cancelled events translate into a loss of $234 million in local and state taxes and $3 billion in economic activity from the 3.4 million attendees. The operator, the Metropolitan Pier and Exposition Authority, reports a $58 million operating loss for fiscal 2021. Tax collections so far are just $35.6 million, down 73% from last year. The Authority will continue to need to restructure its debt to align revenue requirements with expected near term revenue pressures. McCormick Place hosts its first event in mid-July.

THE STATE OF STATE INFORMATION TECHNOLOGY

Now that we are entering the reopening phase of the U.S. economy, it is easy to forget some of the issues which arose at this time last year. As individuals were forced out of work and school due to the pandemic, computers became the primary interface with the world. Quickly it became apparent that the technology capabilities of the public sector had not come close to keeping up with the state of the art.

For those of us with the experience of having to use some of these systems, it really was not surprising that government websites crashed under the strain of thousands if not millions of initial jobless claims, efforts to purchase health insurance through state marketplaces, and the volume of normal transactions which would often have been accomplished through in person contacts.

Now, with governments in far better shape fiscally than many expected one would think that the experience of the pandemic should create support for investment in system upgrades. Whether expectations are realistic or not, the last year has shown the importance of upgrading government IT systems. As the nation moves forward technologically, it will be important for government to be able to instill confidence in its capability to handle technology. Many of the things being proposed to deal with technological change in sectors like transportation will require the existence of and confidence in robust public sector technology capabilities.

It is pretty clear from the last 12 months that government IT systems remain dated and inadequate. In addition to the maddening service delays which result, aging systems run and maintained by government IT staff are also more vulnerable to cyber attack.

FOXCONN AND WISCONSIN

When it was announced four years ago, many thought the deal between the State of Wisconsin and the manufacturer Foxconn was a bad one. Offered as a way to reemploy factory workers from declining industries, the deal was subject to a lot of suspicion. Foxconn had already established a record of an inability to follow through on its promises.

Since then, the problems at the plant site are well documented. The original contract with nearly $4 billion in state and local tax incentives was struck in 2017 by then-Gov. Scott Walker. The planned factory was supposed to employ 13,000.  Foxconn continually scaled back its plans for the site and failed to meet hiring requirements which were part of the deal. The state told Foxconn last year that it would not award it tax credits because the company had made substantial changes in its manufacturing plans and was out of compliance with the tax credit agreement. Foxconn employed 281 people in 2019 in Wisconsin.

Foxconn promised to locate its North American headquarters in Milwaukee and hire 500 employees, something which has not happened. It also promised to open “innovation centers” in Green Bay, Eau Claire, Racine and Madison that would employ up to 200 people each. Buildings were purchased, but the company did not move forward with its plans. In 2018, Foxconn said it planned to invest $100 million in engineering and innovation research at the University of Wisconsin-Madison but, the research center and off-campus location have not been established.

The deal  reduces Foxconn’s maximum tax breaks in the state to $80 million and significantly reduces the amount of jobs and capital investment Foxconn is required to make. Moody’s has concluded Foxconn won’t bring an influx of new workers or residents to Racine County. The separate development agreement between Foxconn, Mount Pleasant and Racine County remains unchanged. Local governments expect special assessments and revenue generated by Foxconn’s projects will cover the costs. Foxconn must make these minimum tax payments regardless of the project’s completion. 

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.