Joseph Krist

Publisher

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The Muni Credit News is taking the 4th of July off. The next issue will be the July 12 issue. In the meantime, enjoy the nation’s 245th birthday. __________________________________________________________________

STATES TRY TO LEAD ON INFRASTRUCTURE

It has been somewhat disheartening to see that any changes to transportation funding at the federal level will not involve gas taxes or vehicle mileage taxes. This despite a general consensus that some revenues based on usage of roads makes sense. This despite a growing receptivity to if not acceptance of the concept of mileage based fees across party lines. That reflects the consideration of new road funding measures in many state legislatures.

The Pennsylvania Transportation Revenue Options Commission is charged with providing Gov. Tom Wolf with short-term and long-term recommendations by Aug. 1 to address an ongoing funding crisis resulting from a reduction in gas tax revenue and an increased use of electric vehicles. So far, several potential sources have been identified. They include a gas tax increase but also a vehicle mileage tax.

Illinois will see its gas tax go up by one half cent per gallon. In Oregon, a 4-cent increase in the state’s 30-cent fuel tax rate took effect Jan. 1, 2018. That legislation called for additional, 2-cent increases were to follow every two years through 2024. That would produce a gas tax of  40 cents.

The move by states comes as the federal infrastructure legislation begins the long process of approval. The bipartisan negotiating group in the Senate has produced an eight-year, $1.2 trillion infrastructure investment “framework” on June 24 that includes roughly $579 billion in new funding for roads, broadband internet, electric utilities, and other “traditional” infrastructure projects.

That $579 billion in new funding includes $110 billion for roads, bridges, and other major projects, $48.5 billion for public transit, and $66 billion for passenger and freight rail. It also includes $16.3 billion for ports and waterways, $25 billion for airports, as well as $15 billion for electric vehicle infrastructure along with electrified buses and ferries.

The plan comes with a list of “payfors” to cover the cost of the plan. Here’s where the concern comes in. Early in the process, gas tax increases and the imposition of vehicle mileage taxes were taken off the table. So now the potential sources of funding do not look particularly solid. The list includes: redirecting unused unemployment insurance relief funds; repurposing unused relief funds from 2020 COVID-19 emergency relief legislation; allowing states to sell or purchase unused toll credits for infrastructure: extending expiring customs user fees; reinstating Superfund fees for chemicals; profits from 5G spectrum auctions: oil sales from the nation’s strategic petroleum reserve; public-private partnerships; private activity bonds, direct pay bonds, and asset recycling for infrastructure investment

The lack of real plans to generate new revenues to pay for such a plan is a concern. In many ways, the long list of potential funding are reminiscent of the 1980’s when tax cuts were always going to be funded from monies generated through reducing fraud, waste, and abuse in federal programs. The resulting deficits put paid to that idea.

RURAL POWER AND CLIMATE CHANGE

Tri State Generation is a cooperative of 45 members, including 42 electric distribution cooperatives and public power districts in four states that together provide power to more than a million electricity consumers across nearly 200,000 square miles of the West. It participates in or owns 7 coal units in four states and 6 oil or gas fired units in two states. This puts Tri State at the center of the climate debate.

As participating co-ops plan for the future, they face enormous pressure to reduce fossil fuel reliance and divest fossil fueled generating capacity. Tri-State last January proposed a strategy to move its members toward a cheaper, cleaner power mix by shuttering some of its coal-fired power plants and replacing the power with renewable energy resources, but members were still concerned about high prices. Seven member c0-ops are actively considering leaving Tri State.

As part of that decision making process, member co-ops need accurate pricing information in order to properly analyze the cost of withdrawal. The Federal Energy Regulatory Commission was asked to review Tri State’s pricing when the utility came under FERC regulatory processes. The utilities have complained for years that Tri State did not provide information to utilities seeking to alter their status for electric purchases.

That process yielded a decision that found that  “It is basically impossible for Tri-State’s members to make a reasoned assessment as to whether to terminate their membership in Tri-State.” Tri-State, which came under FERC jurisdiction in 2019, filed a rate schedule with the commission by which member exit fees could be calculated last April. But it has yet to give any of its members an exit price, despite members requesting such a calculation since November.

The issue comes down to whether or not the individual utilities can strike more favorable prices for renewably sourced power outside of the efforts by Tri State. The FERC order finds the G&T’s tariff and bylaws are unjust and unreasonable in that they do not give its members a clear and transparent way to determine the cost of exiting its service.

Because such a calculation relies on proprietary information, and Tri-State hasn’t provided any of its members with a calculation, those cooperatives have no way to determine what the financial impact of their exit will be. The lack of clear and transparent exit provisions has allowed Tri-State to impose substantial barriers for its utility members in evaluating whether to remain in Tri-State.”

Given the near 100% reliance on fossil fuels especially coal, it is understandable that Tri State make every effort to postpone the inevitable in terms of its generation mix. At the same time, Tri State’s apparent ability (and willingness) to withhold financial information from its membership raises some serious governance concerns.

MIAMI GOES ALL IN ON BITCOIN

Someone had to go first and it looks like the City of Miami is the leading candidate. The current mayor is a big bitcoin booster. Now he is putting out a welcome mat for bitcoin miners who are being driven out of China. The demands on the electric grid from bitcoin mining are behind the move. The Mayor is highlighting the more favorable pricing scheme for electricity in the city relative to the rest of the country, primarily as the result of nuclear power.

What miners care about most is finding the cheapest source of power out there to drive up their profit margins. The mayor is also considering a mix of other incentives, like enterprise zones specifically for crypto mining. The mayor has been trying to make bitcoin mainstream by advocating for policies that would enable city employees to be paid and residents to pay their taxes in the cryptocurrency. The city itself is considering holding it as an asset on their balance sheet. 

The plans raise a host of questions. Given the Miami’s vulnerability to climate change and sea level change, how realistic is it to attract consumers of large amounts of power. Power generation is such a major source of carbon pollution and one could argue that pushing high energy consumption businesses which don’t produce anything may not make sense. Especially when the city experiences “dry day” flooding on a regular basis.

Add to that the ongoing debate over a proposed seawall to protect the City from rising ocean levels. The initial plan got a rough reception as it included thirteen-foot-high floodwalls could line part of Miami’s waterfront including some very high priced real estate, under a proposed Army Corps of Engineers plan. The plan also comes with a $4.6 billion estimated cost. It would be designed to protect the City from coastal flooding and storm surge during tropical storms and hurricanes.  It would not address the “dry day” flooding issue.

The Corps of Engineers plan calls for storm surge gates to be installed on three waterways that open onto Biscayne Bay, a series of pumps and floodwalls along Miami’s waterfront, and one section of 36 foot high seawall in Biscayne Bay. The plan also calls for elevating and flood-proofing thousands of homes, businesses and public buildings in vulnerable neighborhoods.

The concentration on cryptocurrencies, the huge capital needs related to climate change facing Miami, and the risk of rising sea levels are all potential drags on the City’s credit. It’s not clear that crypto is the key to the City’s future.

NEW YORK STATE

It is one more step on the road to recovery for post-pandemic New York. Moody’s has affirmed the Aa2 rating on the State of New York’s general obligation (GO), personal income tax revenue and sales tax revenue bonds while revising the outlook on the ratings to positive from stable. For those with concerns about two potential sources of pressure – the MTA and a damaged commercial real estate environment – Moody’s specifically noted that the rating and outlook reflect “risks associated with the Metropolitan Transit Authority, a component unit of the state, and uncertainties regarding recovery of the office-intensive New York City metropolitan area, which is the key driver of the state’s economy.”

COAL AND PROPERTY VALUES

It is estimated that Campbell County WY produces just under 50% of the coal produced nationwide. This has made the County extremely reliant on all sectors of the fossil fuel industry for revenues for government. As production declines nationwide and efforts to curtail or eliminate fossil fuel use continue, localities fear the economic consequences of mine and power plant closures. Recent data from Campbell County, WY illustrates the point.

The County reported a  decrease in assessed valuations in 2021 versus 2020 valuations. The county’s assessed valuation — or its taxable value — for 2021 is about $3.4 billion. That is a decrease of about $850 million, or 20%, from 2020, when it was $4.24 billion. Fossil fuel properties – especially the large open pit mining operations which predominate in the county – are at the heart of the decline.

Coal, oil and gas together made up $2,465,592,453, or 72.7% of the total. Those are taxed at 100% of their value, while residential properties are taxed at 9.5%. In 2020, those three made up $3.29 billion, or 77.6% of the total. The year before, their total was $3.53 billion, or 79%. It has been seventeen years since valuations have been this low.

In southwestern Virginia’s coal belt, Wise County is experiencing significant revenue pressures. Declining production has negatively impacted the County’s receipts from severance taxes. In 2010, Wise County planned for $4.4 million in severance revenue. By 2015, the annual severance tax collection had dropped to $1.25 million. In 2018 and 2019, only $700,000 in tax was collected each year. In 2020, overall severance tax collection had dropped to $588,750.

That leaves the County scrambling to maintain its rods which it needs for the surviving mining operations. The hitch is that these heavy trucks produce a higher than average level of wear and tear on the roads but the numbers show you why that’s a problem. State law sets various priorities for spending coal severance revenue: economic development through the Virginia Coalfield Development Authority, allocations for water projects in the region, gravel funds for localities, special road project requests from counties. After those allocations are set each year, the remainder gets allocated for secondary road maintenance.

It’s illustrative of the problems facing communities dependent upon extractive industries. The big fear for local government is the loss of tax revenue from reduced values and then the economic impact in general. These numbers from Wyoming are a good example of the economic hurdles to be overcome in the road to a carbon free environment.

NUCLEAR STAKES IN ILLINOIS

With the fate of legislative action on a plan to reform the state’s electric generation industry still up in the air, the operator of the nuclear generators in Byron, IL are proceeding with the regulatory process for closing them in the fall. The ongoing standoff over the bill reflects many of the issues we see in the Wyoming story. Here the economic issues stem from the impact on payrolls and employment as much as the direct impact on property values.

The Byron plants employ some 725 people. Utility jobs are the second highest average paying jobs in the County at over $70,000 a year. That is well above the local, state, and national median. So the source of fear for employees is obvious. The plants produce a payroll of some $50-55 million. Using a conservative multiplier factor, that represents a substantial overall economic impact. In its the plants home county, Exelon (plant owner and operator) is the largest property taxpayer by a factor of four over the next largest.  

CLIMATE AND MASSACHUSETTS

The latest decision in one of the many pieces of litigation filed by states and cities against the fossil fuel industry followed an emerging pattern. A plaintiff sues in state court and the defendant company moves to have the case moved to what it perceives as a friendlier venue. recently, the City of Baltimore successfully argued before the U.S. Supreme Court that a state court was the proper venue for its case.

Now, a Massachusetts state judge has rejected Exxon Mobil Corp’s  bid to dismiss a lawsuit by state Attorney General Maura Healey accusing the oil company of misleading consumers and investors about its role in climate change. The court determined that Exxon failed to show that the October 2019 lawsuit was meant to silence its views on climate change, including those Healey and her constituents might dispute.

Exxon’s recent experience has yielded different results depending on the jurisdiction. In December 2019, a New York state judge dismissed a lawsuit by that state’s Attorney General Letitia James accusing Exxon of defrauding investors by hiding the true cost of climate change regulation.

In the meantime, the Bay State’s largest municipal utility agency, the Massachusetts Municipal Wholesale Electric Company, finds itself in the middle of the climate debate. MMWEC has proposed a 55 MW peaking generating facility. The rub is that it is intended to run on oil or gas.

The debate over the climate benefits of natural gas is unfolding throughout the country. MMWEC is trying to fend off opposition by emphasizing the peaking nature of the plant. MMWEC says that the facility will only run about 239 hours per year and produce fewer emissions than 94 percent of similar resources in the region. Opponents want no fossil fueled generation while MMWEC insists their goal is to ultimately convert the plant to hydrogen fueling.

MMWEC does admit that such a conversion would be a long way down the road. Proponents cite the “unreliability” of renewable power and refer to the California and Texas  experiences with grid failures in support of the plant.

HIGH SPEED RAIL SLOWS DOWN

The Brightline West high speed rail line between Las Vegas, Nev., and Victorville, Calif., will wait until 2022 to attempt a private activity bonds. The consortium behind the project blames the impact of the pandemic on the delay. Brightline was awarded $200 million in private activity bonds in Nevada and $600 million in California in 2020 and a sale was attempted in November 2020. It postponed the sale because of market conditions.

This is the second delay in the project’s timetable. Originally, the bonds would have allowed construction to begin in 4Q 2020. The project then announced a 2Q 2021 start date and has now delayed the start until after a successful bond sale.

On the East Coast, high speed rail hit a speed bump when the City of Baltimore advised that it was opposed to a proposed maglev train project to connect the city with Washington, D.C. The city recommended a “No Build Alternative” for the proposed project in a May 14 letter to the Federal Railroad Administration in response to the project’s draft environmental impact statement.  The City cited equity and environmental issues.

The train is designed to shorten the trip between Baltimore and Washington to 15 minutes. Eventually, the hope is to expand to New York, creating an hour-long trip between the nation’s capital and its most populated city.

JEA

The last few years have been tumultuous ones for the Jacksonville Electric Authority. Litigation challenging power purchase agreements for output from the expanded Plant Votgle nuclear facility were seen by some as a weakening of commitment to timely payment of debt. An effort to privatize the Authority was undertaken only to crash and burn over issues of conflicts of interest and the potential enrichment of JEA management. It produced a federal investigation.

Now those issues which weighed heavily on its ratings appear to be behind JEA and we have a full year of operations under the pandemic to evaluate. Moody’s recently did an announced a positive outlook for JEA’s A2 rating. It cited  the approval during 2019 of a settlement agreement by the JEA Board, the City of Jacksonville and the Board of Municipal Electric Authority of Georgia (MEAG Power) . “The settlement agreement is credit positive as it effectively eliminates the significant credit negative overhang which called into question JEA’s willingness to abide by the take-or-pay “hell or high water” terms governing the Project J PPA with MEAG Power.”

The issue of the privatization attempt is seen as driving the positive steps taken to address some of JEA’s governance related challenges. “The positive outlook primarily reflects the elimination of litigation risk following the fully executed settlement and the likelihood that JEA’s fundamentally sound financial profile can prevail to balance JEA’s several remaining credit challenges. Some of these challenges include further progress on governance owing to large scale senior management level transitions and a complete changeover at the board level.”

TEXAS POWER FALLOUT CONTINUES

Another report is out casting doubt on the industry narrative that the late February Texas power crisis was the result of too much reliance on renewables. A study published in Energy Research and Social Science points to a more likely source. Their review shows that “Texas failed to sufficiently winterize its electricity and gas systems after 2011, and the feedback between failures in the two systems made the situation worse. At its depth, gas production declined by nearly 50%, which lowered pressure in the pipelines, making it harder for power plants fueled by natural gas to operate. 

Texas gets most of its electricity from natural gas (46% in 2020), with smaller shares provided by wind and coal (23 and 18% respectively), followed by nuclear (11%), solar (2%), and marginal contributions from hydroelectric and biomass, according to data from the grid manager ERCOT. The impacts of the cold on the natural gas infrastructure make that dependence a concern.

The most prominent municipal credit caught in the middle of the situation is the City of San Antonio electric system. CPS is in the midst of litigation in an effort to reduce the financial impact on its customers and rate base as the result of the massive spike in gas prices. Now, the utility’s legal team has resigned over policy differences with the utility CEO and the outside legal team hired to review legal options.

The dispute appears to be over tactics and strategy issues connected with the litigation. Recently, upper management was restructured at the utility. The changes led to a new management team. When those changes were announced, we had concerns about the potential implications for CPS’ role in dealing with electricity supply in the face of climate change.

We wonder how the utility can develop an effective plan to deal with climate change and grid reliability when its new Chief Power, Sustainability, & Business Development Officer (CPSBDO) is on the board of the American Gas Association. That would seem to create at best a bad look given the controversial nature of the role of natural gas in the climate change debate. Exactly how objective can a board member of an industry’s leading advocacy group?

If you are an ESG investor, the situation has to raise some serious governance issues.

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

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ILLINOIS POWER AND THE LOOMING BATTLE OF CLIMATE CHANGE

A framework for addressing the realities of climate change and electric power generation in Illinois had begun to take shape before the Legislature failed to enact laws to support it by the scheduled May 31 adjournment date. It did remain viable and the hope was that passage would occur in special session.

The failure to get a bill passed was blamed on a lack of consensus between proponents of closing nuclear and coal generation without provisions for the economic impact on host locations. Labor vs. environmentalists or as one legislator put it “The caucus made it very clear that we don’t want to vote for something that puts us in the middle of a fight between friends.” 

The battle in Illinois is one which has repeated itself in various forms throughout the 2021 legislative season. Obviously, the utilities have been at the front of the lobbying line (to their detriment in Illinois and Ohio). those activities have led to one Speaker retirement and one Speaker expulsion. But their partner has been unions representing utility workers. The potential economic impact of generation closures has become a powerful factor slowing the move to renewable generation.

While most attention outside has focused on the nuclear subsidies, the sticking point appears to be the fate of two municipal coal generation plants. The failed legislation would have allowed the prairie States plant to operate through the life of bonds issued for its construction but some municipal power purchasers have longer term debt outstanding. As for the nukes, Exelon has threatened to shut down its Byron and Dresden nuclear plants if the state doesn’t offer more help. 

The governor’s most recent proposal would force the average residential ComEd customer an estimated 80 cents per month to subsidize those two plants facing potential closure, along with Exelon’s Braidwood plant. The three plants would receive the subsidies for five years.

PUERTO RICO

The last thing Puerto Rico needed was the explosion and fire at one of PREPA’s generating facilities. The event which occurred over the weekend left some 1 million customers without power. The fire was devastating enough but the concern has been heightened by the news that the utility had been the victim of a cyber attack. Luma Energy LLC said a distributed denial-of-service attack targeted its customer portal, Mi Luma, as well as its mobile app, shutting out customers trying to access their accounts or report outages.

The outage and cyber attack have all occurred within the first  15 days of Luma Energy taking over the operation of the system. Already unpopular with customers and employees, the effective privatization of PREPA could not have started with a worse set of circumstances. The blackout and a poor customer response are combining to support continued efforts by customers and the utility workers union to scotch the deal with Luma.

Digging below the headlines, the problems seem to be rooted in a poor call center and issues with the utility’s website and mobile app. PREPA’s Governing Board President acknowledged, however, that LUMA’S response in addressing outages has been quick in most cases, according to case complexity.

As the island deals with the physical aspects of the power system, bankruptcy proceedings continue. The latest Omnibus Hearing for the Puerto Rico bankruptcy occurred this week. The Puerto Rico Oversight Board tried to have the successor suit to a February 2015 lawsuit electric ratepayers filed against PREPA thrown out. The 2015 suit was stayed after the board put PREPA into bankruptcy in May 2017. That suit charges that fuel vendors  had conspired to provide PREPA low-quality, cheap fuel while charging prices associated with much higher quality fuel. Those costs, as is the case with most utilities were passed through to customers.

PUBLIC POWER MOVES A STEP CLOSER IN MAINE

The increasing pressure on legislators regarding climate change were a major characteristic of the current legislative sessions. Among those efforts, are those which would increase the roles of locally controlled public power agencies in the place of investor owned utilities. For the latest iteration of that process, we look to the Pine Tree State.

The Maine legislature has moved legislation forward which would allow Maine voters to vote on an initiative authorizing the creation of Pine Tree Power. If voters approve the bill, the new Pine Tree Power Company would have until 2024 to negotiate a transition with CMP and Versant Power, whose infrastructure would cost between $5 billion and $13.5 billion to buy out. It would be financed by borrowing against future revenues. The seven elected board members each would represent five of Maine’s 35 state Senate districts.

And it would likely be financed through the municipal bond market. Once again the availability of cheaper financing via tax exempt bonds will be a key determinant of the plan’s viability. It comes as the delivery and development of renewable power sources in Maine have become a contentious issue. The debate is unfolding as long term fishing interests and sea turbine generation plans have collided. A project to deliver hydropower from Quebec via a new transmission line has pitted the interests of consumers, labor, and environmentalists against each other.

While the Legislature acted, it is believed that the Governor will veto the bill. That may just be delaying the inevitable.

MUNIS FINANCE FLINT WATER SETTLEMENT

The State of Michigan is getting ready to issue some $600 million of bonds to pay for its share of a settlement covering the State’s responsibility in the Flint water crisis. The Michigan Strategic Fund will be the  issuer for the taxable limited obligation revenue bonds on behalf of  the Flint Water Advocacy Fund Project. This entity was set up by the State to manage the settlement and its funds distribution process. The Strategic Fund will issue the debt and loan the proceeds to the Project.

The monies will finance recovery awards for children and adults exposed to contaminated drinking water. The bonds will amortize over a 35 year term. repayment will come from monies appropriated annually by the State Legislature. With the market where it is on an absolute basis, it is a good time for such an issue to come to market. Michigan like so many other states has benefitted from the stimulus and that has brought Michigan positive ratings outlooks.

For credits in need of flexibility, the time may be now to access the market. Even if rates adjust upward to reflect inflation concerns,  there still remains a window for restructurings, refundings, and for items like the Michigan bonds. Judgment bonds, which these effectively are, have long been a feature of our market. In this case, some may wish additional yield to reflect the annual appropriation component of the security. In reality, we see no real likelihood that a substantial and frequent issuer like Michigan would not follow through on the appropriation requirement.

SOUTH CAROLINA PUBLIC SERVICE AUTHORITY

The South Carolina legislature has at least for now decided the fate of the state electric utility. Santee Cooper has been under the gun since the cancellation of the Sumner nuclear plant expansion. The creation of what is effectively a stranded asset saddling the rate base eroded what had been a long standing supportive relationship between utility management and the State.

It has been nearly 4 years since the project was abandoned. In the interim, the Legislature has considered maintenance of the status quo in terms of its management and ownership as well as the sale of the utility to an investor owned utility. The goal was to minimize as much as possible the rate impact on consumers from the need to fund the stranded asset.

With the failure of the effort to sell the utility in the current environment, the Legislature turned to reform of the utility’s governance and management. Legislation passed in the current session by veto proof majorities in both houses of the legislature provides for removal of nine of the ten current board members. They were part of the decision process by which Santee Cooper participated in the Sumner expansion.

The legislation provides for more active state regulation. It allows them to review the utility’s future plans to generate power and their forecasts for power, and to require public hearings and a watchdog to question utility executives about rate increases. It also restricts severance packages for any executives who lose their jobs.

There remains a significant level of support for selling Santee Cooper. The Governor supports a sale. His position – “South Carolina no longer has a need to provide, and never had the legal obligation to own, a state-owned utility, and the political process does not include the private-sector expertise nor the means necessary to effectively oversee Santee Cooper’s operations.” 

THE SUPREME COURT AND MUNIS

The U.S. Supreme Court ruled 7-2 Thursday that Republican states led by Texas lack standing to challenge the Affordable Care Act, the latest win for President Barack Obama’s signature health law in the nation’s top court. Standing provides a way for so many pieces of litigation to be handled without dealing with the underlying issue of the litigation.

It has become pretty clear that the ACA is surviving largely because the Chief Justice wants it to. Nonetheless, it is a positive for state and hospital credits that the law is being upheld. 

In climate related litigation, Oakland and San Francisco sued BP, Chevron, ConocoPhillips, Exxon Mobil and Royal Dutch Shell in 2017 alleging fossil fuels qualified as a public nuisance under California law by damaging the coastal cities through the effects of rising global temperatures. The oil companies have been responding to suits like the one in question which are typically filed in state courts.

The oil companies believe that they will receive more favorable treatment if litigation like this is heard in federal rather than state courts. This week the Supreme Court reviewed an appeal of a Ninth Circuit decision which would keep the suits in state court. This week the Court upheld a May 2020 ruling by the Ninth Circuit rejecting the oil companies’ claim that the San Francisco and Oakland case belonged in federal court.

1070.6

That number is the level of Lake Mead this week in feet above sea level. It is the lowest level the lake has been at since it was filled. The white ring around the edges of the lake have grown to 143 feet. It serves as a symbol of the water crisis facing the western U.S. Lake Oroville in California threatened to breach the Oroville Dam in 2017. Now the lake level is becoming too low to support hydroelectric operations. The lower water levels have serious implications for some of the market’s best known credits.

The Metropolitan Water District of Southern California is an agency at the center of the western water debate. The District has obtained and delivered water from the Colorado River since the 1930s when the Hoover Dam was completed. The District maintains the Colorado river aqueduct which transits water some 242 miles to southern California. Over the last nearly 20 years, the District has managed its allotments of water which have declined as upstream demands on water from Arizona and Colorado  have reduced supplies available to the District.

Now the effects of the long term drought impacting the West are coming home to roost. Metropolitan has been experiencing lower deliveries of water since the turn of the century.

NUTMEG AND CANNABIS

The Northeast continues to move towards legal cannabis throughout all but New Hampshire. Connecticut is about to legalize recreational cannabis legislatively. The issue has been held up by equity concerns. Initial drafts of the legislation contained requirements that would have allowed those with prior marijuana convictions to get preference when applying for licenses to grow or sell legal marijuana. The bill now includes a preference for those who come from low-income communities defined by census tracts.

Connecticut residents will be allowed to purchase or possess up to 1.5 ounces of marijuana beginning July 1. The state would set up a regulatory framework and approve licenses to be ready to sell retail marijuana products by May 2022. Like NY, legalization in Connecticut required legislative action. Only six states have legislated legalization.

The politics have followed public opinion. In April, a Pew Research Center survey found 60 percent of U.S. adults say marijuana should be permissible for recreational purposes, and another 31 percent said pot should be allowed for medical purposes only. Just 8 percent said marijuana should not be legal at all.

CHICAGO PUBLIC SCHOOLS

As we go to press, legislation awaits the signature of the Governor of Illinois overhauling the governance structure of the Chicago Public Schools. Currently, the seven-member board that is fully appointed by the Mayor. The union representing the system’s teachers has long sought an elected school board. The union and prior Mayor Rahm Emmanuel had a tense relationship and the union then backed the loser in the most recent mayoral election.

Now, the legislation awaiting signature would transfer mayoral control of the Chicago Public Schools to a fully-elected school board by 2027. The move would be phased with a new 21 member board created. Initially in 2025. At that time, the board would be comprised of 10 elected members and 11 appointed by the mayor. A fully-elected board would result in 2027. 

The bill does not account for the fact that the city of Chicago provides $500 million annually to CPS. This has raised concerns on the part of many who are concerned that the City will be less willing to continue to shift resources away from its own troubled direct credit if it does not have a role of the new board. The legislation calls for the board to conduct an independent financial review of the district and City’s fiscal relationship.

Any review must consider the Chicago board’s ability to operate with the financial resources available as an independent unit of local government. The review will to go the state board of education before the first elections in 2024 and recommendations over potential legislative changes needed will go to lawmakers. 

While some details will be addressed in implementing legislation, the package as it stands now raises a number of concerns. It seems impractical to have a board reliant on the City without any role for the City in the governance of the board. The proposed legislation does not fix the problems with the Chicago schools. It does likely make it easier for the City’s teachers union to wield power. What it does not do is to address the troubled finances of CPS.

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

________________________________________________________________

COAL AND MUNICIPALS NOW IN THE SPOTLIGHT

The Illinois legislature has been considering a package of legislative items to deal with climate change and the need for clean energy. Much of the discussion has revolved around the fate of two privately owned and operated nuclear generating plants. Efforts to gain state subsidies and keep the plants open has been at the center of that debate. Those efforts have revealed corruption and illegality.

Now an effort to address the clean energy needs of Illinois has run into a significant hurdle. The Prairies States Generating Campus began generating power nine years ago this month. It was considered a state of the art plant and was advertised as the industry’s answer to the demand for cleaner electric generation. located adjacent to a coal mine it was supposed to make the case for clean and economical coal generation.

Prairie State has ironically been the single biggest source of carbon dioxide emissions in Illinois. It emitted some 12.7 million metric tons of carbon dioxide equivalent in 2019, according to the most recent federal data. The plant ranks ninth in the country for carbon dioxide releases. So the pressure to limit the plant’s operations is intense.

Pending energy legislation in Springfield would include an expansion of subsidies for nuclear plants, more funding for renewable energy projects and a shorter timeframe for climate targets that would include a phase-out of coal power by 2035. That would force the closure of Prairie States long before its expected useful life and before the retirement of some of the municipal bond debt issued to finance the plant.

The municipal owners  are American Municipal Power (23.26 percent), Illinois Municipal Electric Agency (15.17 percent), Indiana Municipal Power Agency (12.64), Missouri Joint Municipal Electric Utility Commission (12.33 percent). American Municipal Power  is the wholesale power provider to some 135 local municipal distribution systems in OH, PA, MI, KY, VA, WV, MD, and DE. It owns 23.26% of the capacity at Prairie States. If legislation ultimately requires closing the plant, AMP would be owning stranded assets with another 13 years to amortize the bonds. Illinois Municipal Energy Agency acts as wholesale supplier to municipal utilities throughout the state as do its counterparts in Indiana and Missouri. Even the state capitol Springfield faces stranded debt costs.

That’s what has created a hurdle in the legislature. Those costs associated with the stranded assets would be passed through to the customers of the local distribution utility. So while the environmental argument makes clear sense, the local utilities see themselves being held responsible for the debt problem without real input into the decision trail.

POWER MARKET REALITIES

Investors in municipal utility credits continue to deal with the uncertainty and changes resulting from a dynamic market for electricity. PJM, the regional grid operator which supplies power to 65 million people in thirteen states held a new capacity auction. This mechanism allows power generators to offer power to the grid based on cost.  That process unfolded just as the abovementioned energy debate in Illinois unfolds.

While the Legislature is considering subsidies for nuclear plants, Exelon announced that three nukes it owns all failed to sell their power at the PJM auction. Over a three year period, the price at which PJM purchased power dropped 64% from $140/MW-day to $50.  Exelon warned that even two nuclear plants that successfully bid to provide power in the PJM auction remain in danger of “premature retirement.” “unfavorable market rules that favor (carbon) emitting generation.”

MARYLAND P3 TAKES FIRST STEP

The board for the Maryland Department of Transportation approved what is essentially a design contract for its I-270 (see Feb. 1 MCN) expansion project. As we noted earlier, the experience with the Purple Line P3 impacted the process for the new project. The approval begins a 30-day public review period by the state comptroller, treasurer and the legislature’s budget committees before the Board of Public Works is expected to vote in mid-July.

The process has already faced bumps in the road with a failed initial bid process. That process generated one bid which was rejected based on what the State saw as unrealistic numbers. Now the contracts are awarded to Transurban and Macquarie, established players in the P3 space. Transurban operates more than 50 miles of toll lanes in the region already.

The contract would be limited to the two companies doing preliminary design at their own expense which gives them the right of first refusal on a broader contract to build the lanes and keep most of the toll revenue over 50 years.  The predevelopment contract the state would have to reimburse the private team up to $50 million of its predevelopment costs if the project gets canceled.

There had to be flexibility built into the deal. The proposed expansion aspects of the project are drawing opposition and pressure over many of the same issues which plagued the Purple Line. The State will manage the permitting process which is yet to be completed. The project has also been scaled back in response to some of those very concerns. A proposed expansion of the eastern I-270 loop has been shelved. Studies have shown that widening that segment would affect more public parkland, homes and the Walter Reed National Military Medical Center.

MORE BAD NEWS FOR MEAG

This week Georgia Power made an announcement that testing at the first unit of the Votgle nuclear plant expansion was underway in support of an expected November 1 start date. For a project that could use some good news, the announcement was positive. Now however, the state regulatory body (the PSC) in Georgia has announced a somewhat different take on the projects status.

In testimony from independent monitors and state regulators, it was noted that “many of the problems encountered by SNC (Southern Nuclear Company)  should have been resolved long before” the current testing. The first of the new reactors are not likely be in operation until at least the summer of 2022, and the project’s total costs are likely to rise at least another $2 billion.

The second reactor is unlikely to be up and running until at least June 2023. Independent monitors and PSC staff recently testified as to project issues, including work that didn’t meet design plans; construction that wasn’t completed before testing began; known problems that weren’t timely addressed, such as failure to upgrade software; and concrete that contained voids among other issues.

OIL AND STATE BUDGETS

As the economy reopens and demand for fuel increases, we can see the beneficial impact of the recovering economy. While production of oil and gas is increasing, the increase in  drilling activity has been inconsistent. So while states like Texas and North Dakota see production remaining below pre-pandemic levels, there have been positive exceptions to that trend.

When New Mexico was planning for its fiscal 2022 budget, the state’s consensus forecast in February projected $43 a barrel average oil price. In reality, the average price is now trending at $49 per barrel. A $1 increase in the per-barrel price of oil translates into an estimated $23 million impact on the state’s general fund. The state is expected to produce about 390 million barrels in the new fiscal year. That is an increase of 20 million barrels over levels projected in February. Each additional million barrels of oil generates about $3 million for the general fund.

The state government had projected to draw a little over $1 billion from reserves to cover the budget for fiscal year 2022. Now, that requirement is some $350 million lower. In addition, the state also expects to receive nearly $133 million more in its Tax Stabilization Reserve from excess oil and gas taxes. That is driven by both prices and production. The excess has also come as federal leasing activity for oil and gas development has been halted.

ILLINOIS PENSION PROGRESS

It’s one issuer and one pension plan but recent legislation passed by the Illinois legislature is designed to get the Chicago Park District on the road to a fully funded pension plan. The statutory changes laid out in House Bill 0417 call for the use of an actuarially based payment. Currently, a formula to determine payment levels based on a multiplier of employee contributions. The phase in of the higher actuarially required annual contribution will occur over three years. Full funding of the ARC is required in 2024. The goal is to achieve 100% funding by 2055.

The District’s pension fund held $821 million of unfunded liabilities at a 29.9% funded ratio for fiscal 2019 and under its current course would exhaust all assets in 2027 if all future assumptions are met and no additional contributions are made. An initial supplemental payment to the fund of $140 million immediately improves the balance sheet. The change in funding also accompanies the imposition of a new tier of pension beneficiaries.

For employees hired after January 1, 2022, the plan raises their annual contribution to 9% of their salary from 7%. Employees in the new tier three can claim full benefits two years earlier, at 65, and existing tier two employees can opt into the new tier, trading higher contributions for a lower retirement age. The legislation also allows the use of any available funds for pension contributions as the current system required the proceeds of specifically levied taxes. The additional flexibility will ease the pain of higher contribution levels. The bill gives the district $250 million in borrowing authority that will not count against its bonding limits which are based on its tax collections.

The borrowing would be limited to $75 million annually of the authorization to cover payouts in the event of a negative cash situation that could occur based on negative investment results. In the end, the legislation represents a meaningful attempt to deal with those elements currently pressuring the District’s ratings. The  lack of a plan to address a huge and growing unfunded liability has been a major downward pressure on the ratings of the District and all of the major borrowers who share the same City tax base.

INVESTMENT POLICIES MOVE WITH THE TIMES

Legislative Document 99 passed the Maine state legislature this week. It directs the Maine Public Employee Retirement System to divest $1.3 billion from fossil fuel companies by January 1, 2026. It also requires the state treasury to divest by the same date. Both will have to provide annual reports to the legislature’s Appropriations and Financial Affairs Committee until the funds are fully divested.

Activists for a variety of causes have been after major state pension fund investors to divest from a variety of businesses in support of a variety of goals. The process to actually achieve the goals legislatively have historically fallen short.

The law in Maine makes it the first state to actually codify into state law requirements for divestiture by state agencies and funds to actually have to do so for a specific sector.

THE EMERGING CONFLICTS FROM THE CLIMATE CHANGE BATTLE

It is becoming more apparent that the obstacles to achieving a renewable energy future are not technological. They are rooted in social science issues like economics and politics. As those elements gain greater strength, a clear clash of interests is emerging which serves as a much greater obstacle. The budget and legislative cycle has laid bare those conflicts. Deservedly or not, the effort to address climate change will impact many issuers and raise real regulatory and financial issues with the potential to severely impact their economies.

We see it in the debate over the state level subsides for nuclear power. Their greatest advocate may be union labor at those plants. It’s the same issue for closing mines, drill rigs, and generation plants. The biggest objections are nearly always based on jobs and tax revenues. So far the dream of something like the Green New Deal looks increasingly distant. The absolute level of technology needed to provide for a renewably based economy and overall transportation system has in reality barely been developed.

This limits the ability of government providers to identify and fund the needed public infrastructure to support such a world. Filling that void is a host of legislative actions shifting the regulatory landscape including local zoning actions. In some cases, preemption has been used to shift the power to the state by prohibiting local regulation and zoning in an effort to thwart the development of renewable generation in a top down approach. In other cases, local zoning powers have been reinforced in an effort to thwart renewable

Environmentalists have come down on many sides of many fences. Farmers are thwarted from selling or leasing to solar operators due to aesthetic concerns (the view). Transmission expansions or upgrades are slowed over land issues even if they convey sources like hydro. Land use requirements like required setbacks from streets and certain facilities (schools, hospitals) are imposed impacting project economics.

The issue of equity is an additional hurdle. The legacy issues stemming from the location of certain facilities relative to concentrations of poorer communities will serve as a brake on repurposing of some sites which might otherwise be well positioned. It will likely raise costs by limiting locations which can then generate additional capital needs (roads, sewers). And it is not just generating facilities. Projects to expand or relocate highways (I-270 in MD and the I-81 relocation in NYS) are being driven by equity issues.

The point is that advocates for the rapid implementation of a high level of technologically connected hard infrastructure are likely under estimate the length of time it will take until that brave new world is underway. Now my view may be influenced that there’s a crew outside my house replacing standard wood telephone poles with new ones. No technology upgrade there! And the broadband will still be inadequate.

PRIVATE INSURANCE AND HOSPITALS

The pandemic threw a huge wrench into the financial works at many hospitals. Utilization plummeted as the result of COVID 19 as patients were afraid to leave their homes and certainly afraid to do so to go to a hospital. others were concerned that they had lost their medical insurance as the result of cuts and/or layoffs. Many simply delayed contact with the system, resulting in more serious illness and emergency care.

Recently, United Healthcare announced that beginning July 1 it had planned to scrutinize the medical records of its customers’ visits to emergency departments to determine if it should cover those hospital bills.  Anthem, another large insurer that operates for-profit Blue Cross plans, undertook a similar process several years ago that led to a political backlash and a federal lawsuit from emergency room physicians claiming it violated federal protections for patients seeking emergency care. 

Now United Healthcare has decided to delay its program until the declaration of a national health emergency related to COVID 19 is declared over. If United still goes ahead with the change later on, the policy would apply to millions of people in United’s fully insured plans in 35 states, including New York, Ohio, Texas and Washington. People covered through an employer that is self-insured or enrolled in a Medicare Advantage plan or Medicaid would not be affected. The policy would exempt care for children under 2 years old.

For those institutions which have weathered the COVID 19 financial storm, the policy was bad news. For many of the institutions, ratings pressure has decreased but that reflects an assumption that more normal utilization patterns would emerge. The industry saw this effort as one which would discourage utilization especially for things like heart attacks. A recent study in Health Affairs by researchers from the M.I.T. Sloan School of Management, working with Boston Emergency Medical Services, found evidence of an increase in heart attacks that had occurred out of the hospital, particularly in low-income neighborhoods.

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

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GATEWAY TUNNEL REVIVAL

The need for major capital investment in the rail infrastructure supporting the New York metropolitan area has been clear for a long time. The Gateway Tunnel project is designed to address issues arising from the age of the existing rail tunnel infrastructure (over 100 years). The damage from Superstorm Sandy accelerated the interest in the project. A funding source had been identified – there had been a general agreement that the federal government would cover half the cost of building the tunnels, with New York and New Jersey sharing the other half. 

Then politics intervened with then Gov. Christie refusing to provide New Jersey’s share and that allowed the Trump Administration to get its hands on it. They used the environmental approval process to stall the project. Another hurdle was the disagreement over whether any funds borrowed – not granted – from the federal government by the states and used to fund their state share counted as part of a state’s share of the overall project. In the meantime, the need continued and the cost remained subject to increase over time to its current price of $11.6 billion.

Now, the proposed infrastructure package could easily provide the federal share of funding.  The Biden Administration will allow the states to borrow from the federal government if they choose and it will count as part of their share of the costs. The U.S. Department of Transportation will no longer sit on the environmental approvals needed for the project. So now it can move forward.

INTERNATIONAL STUDENTS

The Muni Credit News has been talking about the impact of tightened immigration rules under the Trump Administration from its beginning. We have documented the role of international students in the financial welfare of the universities they attend as well as the overall economic benefit these students generate through consumer spending and real estate. As full fare paying customers they have become a reliable source of income to these institutions.

Now that universities are planning for full reopenings in the fall, these institutions are looking to the Biden Administration to dismantle the obstacles raised against international students attendance at U.S. institutions of higher education. It comes as Moody’s has opined that the limits on international students is having long term negative impacts of the finances of colleges with substantial international cohorts. We’re glad to see Moody’s come to that view but it has been apparent for some time that this was a credit concern.

College students and academics from China, Iran, Brazil, South Africa, the Schengen Area of the European Union, the United Kingdom and Ireland have been added to the State Department’s list of national interest exceptions to the Covid-19 travel restrictions, which allows them to come to the United States despite travel restrictions . But there are still issues with the need to obtain visas from consulates around the world which under the best of times have limited ability to process requests.

A couple of data points highlight the problem. At University of California at Berkeley, 13 % of students are from overseas. Carnegie Mellon University, finds 18%  students are from overseas. Nearly 1.1 million students from abroad attended college in the U.S. in the 2019-2020 academic year, according to the Institute of International Education.

At the same time pressure is being placed on the Administration to support immigration, another side of the college enrollment issue emerges. California is the latest state to consider limits on non-resident admissions to the UC system. The UC regents in 2017 capped nonresident enrollment at 18% systemwide under legislative pressure, with a higher share grandfathered in for UCLA, Berkeley, San Diego and Irvine. Now the demand from California residents is skyrocketing.

A bill is under consideration which would reduce the proportion of nonresident incoming freshmen to 10% from the current systemwide average of 19% over the next decade beginning in 2022 and compensate UC for the lost income from higher out-of-state tuition. Ironically, this would highlight the importance of international students as that demand has shown to be price inelastic.

The issue of access to state residents who have in large part financed the UC system through taxes is a long standing one. When the state’s finances were damaged by the Great Recession, reduced aid to UC led to tuition increases. The bill’s sponsors claim that it would ultimately allow nearly 4,600 more California students to secure freshmen seats each year, with the biggest gains expected at UCLA, UC Berkeley and UC San Diego. Those schools see non-resident shares as high as 25%.

MUSIC STOPS ON THE CAROUSEL

One clear victim of the pandemic was brick and mortar retail. It has raised concerns about municipal bonds whose source of repayment is payments made by projects like shopping and entertainment malls. The restrictions on public activities which limited or prevented patronage increased the pressure on a couple of the larger projects as they either started out (the American Dream project in New Jersey) or which were already under some financial strain.

The best example of the latter is the Carousel Center in Syracuse, NY. The project had a rocky financial history before the pandemic. The project originally thought that it would attract the same number of  visitors as Las Vegas does in a year. That was dubious prospect at best given the realities of weather and more geographically limited appeal. The limits of the pandemic exacerbated existing shortfalls in demand and revenues. This left much less available to cover PILOT payments (payments in lieu of taxes) on bonds issued to finance a portion of construction.

The project has undertaken a number of efforts to restructure its obligations which have involved deadline extensions among other steps to prevent foreclosures. The troubled finances of the project have led to steady downgrades to its outstanding ratings. Now it has been announced that Carousel Center Company L.P. has hired a restructuring agent and counsel and is actively engaging its lenders, including some PILOT bondholders and the PILOT bond trustee, with an unknown restructuring proposal. 

This led Moody’s to downgrade the rating on the outstanding debt secured by PILOT payments to Caa1. Moody’s points out that because of lower valuations for shopping malls, including the Carousel Center, there is a higher likelihood that the PILOT bonds could be impaired should a debt restructuring, distressed exchange transaction or a bankruptcy filing. It references the fact that “in extreme cases like a bankruptcy, the PILOT bondholders could be impaired if the PILOT agreement is rejected or if some unforeseen action occurred in that proceeding as there is no legal precedent for what will happen to the PILOT bonds in a bankruptcy. For example, the property tax generation potential of the legacy Carousel Center is arguably lower than the PILOT payments given the below 60% occupancy rates now compared to above 80% before the pandemic.”

The rapid decline in occupancy in the legacy Carousel Center portion of the Destiny USA mall has also reduced the publicly reported asset’s value that is materially lower than the PILOT bonds and the subordinate CMBS loans outstanding. One deadline occurred this week. A major concern for the municipal bond holders is that they have little control over events which could trigger actions detrimental to the bondholders.

The project relies on some old models with its reliance on big box and major retailer anchor tenants. Many of these entities have been under financial pressure even before the pandemic and now are facing significant closures. Best Buy, Michaels, Lord & Taylor, and Abercrombie are all recent departees from the project.

While the pandemic may have been foreseeable, the concept behind the mall was always suspect. The projected patronage numbers provided strained credulity even back in 2007 when the PILOT bonds were issued by the Syracuse Industrial Development Agency. It took a high level of optimism to believe in any project drawing nearly 40 million people to Syracuse for the mall. While I may have been prejudiced from having gone to school in Syracuse, the likelihood that those levels of patronage could be achieved struck me as extremely unlikely.

Now, Moody’s takes the view that “there is significant uncertainty as to whether the Carousel Center can reach previous occupancy levels above 80% given the currently low level and difficult market for new retail tenants. With below 60% occupancy levels, the mall’s market position has also weakened and with the loss of several anchors and large box stores, the overall impact is larger than losing the smaller in-line tenants. 

FREE FARES – TWO APPROACHES

Over recent years a significant movement has emerged to support the subsidy, reduction, or elimination of fares on public transit. It is one of many issues encompassed in the “progressive” movement. Now, two of California’s major cities are about to take clearly different paths on that issue.

In San Francisco, the Board of Supervisors  (City Council) had voted to implement an experiment this summer under which fares on Muni would have been free for all riders between July 1 and Sept. 30. The agency would have still collected voluntary fares for people who still wanted to pay. 

The system hoped to use the experiment to generate data on ridership patterns and demand to determine where such a program would generate the most benefit. $12.5 million in city funds that would have supported the three-month pilot. Now the Mayor has indicated she will veto the plan. The argument against the plan reflects the financial damage done by the pandemic. Ridership on Muni trains and buses is at about 30% of pre-pandemic levels, while services are at about 70% of what they were before shelter-in-place.

Los Angeles County’s Metropolitan Transportation Authority’s board approved a 23-month fareless transit pilot program. The program would begin in August and initially be offered to K-12 and community college students. In January 2022, the pilot will expand to include “qualifying low-income residents” (annual income is less than $35,000). Metro officials estimate rider fares account for 13% of the agency’s operating costs, and roughly one-third of those costs go toward expenses related to fare collection, such as fare enforcement, accounting and fare box maintenance. 

The different plans reflect the complexity around issues like transit funding. These systems are increasingly seen as being at the center of the debate over “economic justice”. There will likely be more debates like this going forward as the recovery from the pandemic emerges in a likely inconsistent manner.

BIDEN TAX PROPOSALS DISAPPOINT MUNIS

Handicapping legislation is often difficult. The proposed changes to the tax code in support of infrastructure financing released this week by the Biden Administration are a good case in point. Whether it was the debate over the 2017 tax cuts or the many times when an infrastructure week actually looked possible, two items were considered to be no brainers. One was an expansion of the ability to issue private activity bonds and the revival of advance refunding capability.

So it has puzzled many that neither of those two changes were included in the Green Book published by the U.S. Treasury which details proposed tax code changes. Advance refunding has broad bipartisan support. It’s value was made clear even in its absence as the low interest rate environment was able to provide significant flexibility to issuers. Imagine the savings which could have been realized through tax exempt refundings.

As for private activity bonds (PABs), they too are favored on a bipartisan basis. The arguments in recent times have been more about purposes and volume caps than they have been about the use of tax exempt financing for private businesses. For certain projects, the most efficient subsidy could very well be PABs. In other cases, there are legitimate arguments to be made against project subsidies.

Some less obvious items were proposed. Qualified School Infrastructure Bonds were part of the American Recovery and Reinvestment Act enacted in February 2009. They would be issued as taxable debt and would receive interest subsidies similar to the Build America Bonds (BABs) which were issued under the ARRA and then subject to annually declining subsidy payments. Bonds could be issued over three years from 2022 through 2024 with annual total issuance limits of $16.7 billion.

PUERTO RICO ELECTRIC

Luma Energy, took over the transmission and distribution operations of the Puerto Rico Electric Power Authority under the 15 year contract awarded in the aftermath of the hurricanes of 2017 and the ongoing financial restructuring. Luma is required to manage the process of upgrading the battered system. The primary source of funding will money coming from the U.S. Federal Emergency Management Agency.

The company has pledged to reduce power interruptions by 30%, the length of outages by 40% and cut workplace accidents by 50%.  It is a significant undertaking complicated by a militant workers union and a hostile political environment which has made ratemaking exceptionally difficult. 20 unions representing thousands of Puerto Rican workers ranging from teachers to truck drivers announced on the start date of the contract that they would go on strike if the Luma contract is not rescinded.

The system needs to be upgraded. PREPA’s power generation units average 45 years old. The latest fiscal plan approved by the federal board foresees Luma spending some $3.85 billion through fiscal year 2024 to revamp the grid’s transmission and distribution system.

The transition of the utility may not be politically popular but the reality is that the existing PREPA structure was  not up to the job of maintaining and operating the system. We have advocated a privatization of PREPA since the hurricanes ravaged the island. We believe that a private operator was better positioned to run the utility given the weakness and politization of PREPA management. A private operator is better positioned to implement alternatives in generation and transmission than would be the case under the existing PREPA structure.

Nonetheless, the Puerto Rico Senate has filed litigation challenging the validity of the contract with Luma Energy. Some things don’t change.

STATE LEGISLATORS TRY TO BLOCK OUT THE SUN

Renewable energy has been at the center of debate in a number of state legislatures as the politics of energy, the environment, and economics collide. A number of legislative actions involved with the electric grid send some very mixed messages. In Indiana, a bill to establish state level zoning standards for renewable power projects was defeated. Sounds like a good thing for local control advocates but not good for solar arrays and windmills. Local zoning boards want to retain their control both for and against these projects.

Ohio over the last year has tried and failed to subsidize nuclear generation. The effort led to a huge corruption scandal. Now, The Ohio Senate passed legislation which would require renewable energy developers — before filing a separate application with the state Power Siting Board that currently exists in law — to hold a public hearing with advance notice to local officials. County commissions could then pass resolutions to ban wind or solar projects outright or limit them to certain “energy development districts” in the county.

So this law merely extends requirements like this which exist for current fossil fuel generation right? Apparently not. The law looks much more like an impediment to solar and wind development. Its sponsor admitted as much in the local press. He believes that fossil fuels like natural gas and coal are more necessary for the reliability of the grid than wind and solar.

CYBER RISK APPEARS AGAIN

It was hospitals in the fall. Over the winter it was a municipal water system. Now a series of transit agencies are the targets. This week’s announcement of the hacking of the MTA in New York brought more light to the subject. The positive is that the MTA was apparently able to contain the impact and that operations were not affected. It was also positive to see the agency was able to hold the cost of recovery to a very manageable number and did not pay a ransom.

What we take away from the situation is that disclosure on the topic remains a very thorny issue. Given the nature of the hack and the relatively low cost associated with the recovery from it, in practical terms it might not be seen as a material event for investor purposes. At the same time it shouldn’t take press inquiries to generate an announcement that had the potential to be material.

It’s another reason for the investor community to come up with and demand clear disclosure standards for an ever changing municipal bond environment.

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.