Joseph Krist

Publisher                                                                                                     

INFRASTRUCTURE PACKAGE ARRIVES

The President and the bipartisan group announced agreement on the details of a plan for investment in our infrastructure, which will be taken up in the Senate for consideration. In total, the deal includes $550 billion in new federal investment. The Bipartisan Infrastructure Deal will invest $110 billion of new funds for roads, bridges, and major projects, and reauthorize the surface transportation program for the next five years. The bill includes a total of $40 billion of new funding for bridge repair, replacement, and rehabilitation.

The deal invests $39 billion of new investment to modernize transit, and improve accessibility for the elderly and people with disabilities, in addition to continuing the existing transit programs for five years as part of surface transportation reauthorization.  This is the largest Federal investment in public transit in history, and devotes a larger share of funds from surface transportation reauthorization to transit in the history of the programs. Nonetheless, it represents a reduction of $10 billion from the original White House proposal for mass transit. The deal invests $66 billion in rail to eliminate the Amtrak maintenance backlog, modernize the Northeast Corridor, and bring world-class rail service to areas outside the northeast and mid-Atlantic. 

The bill invests $7.5 billion to build out a national network of EV chargers. The bill invests $17 billion in port infrastructure and $25 billion in airports to address repair and maintenance backlogs, reduce congestion and emissions near ports and airports, and drive electrification and other low-carbon technologies. $55 billion will be dedicated to replace all of the nation’s lead pipes and service lines. The deal’s $73 billion investment is meant to upgrade and expand the transmission grid and invests in demonstration projects and research hubs for next generation technologies like advanced nuclear reactors, carbon capture, and clean hydrogen.

The proposal has something for every region whether it be resiliency, grid expansion, mass transit, rail, rural broadband funding. This what legislation looks like. We expect to hear lots of complaints that the bill doesn’t satisfy everyone’s needs fast enough. There is something for cities as well as rural areas and funding for things like lead pipe remediation has numerous benefits in terms of freeing up local resources for other pressing issues.

The funding side may be more problematic. Negotiators agreed to repurpose more than $250 billion from previous Covid relief legislation, including $50 billion from expanded unemployment benefits that have been canceled. It also proposes to recoup $50 billion in fraudulently paid unemployment benefits during the pandemic. Increased IRS enforcement did not make the cut. It is the Democratic version of Reagan’s fraud, waste, and abuse.

Two major hurdles remain. The bill needs five more Republicans beyond the members of the negotiating group. But the Democratic side presents a hurdle of its own. Speaker Nancy Pelosi of California has said she will not take up the bipartisan infrastructure bill in the House until the $3.5 trillion “human infrastructure” package — expected to pour billions into programs to address climate change, health care, child care and education — passes the Senate.

PUERTO RICO

The Puerto Rico Aqueduct and Sewer Authority (PRASA) is in the midst of a marketing effort to facilitate a restructuring of the outstanding debt of PRASA. It has announced the sale of some $1.7 billion of debt. The proceeds will finance the purchase of outstanding debt carrying coupons ranging from 5.125% to 6%. That debt matures as soon as 2024 and as far out as 2047.

The new bonds will be backed by a net rather than the former gross revenue pledge.  That’s a distinction that practically speaking gets you a better spot on line in a bankruptcy but you need to cover expenses which generate revenue. A net pledge is certainly a standard security.

Bonds not tendered will remain outstanding. Bonds can be tendered for purchase as well as for exchange. 

On other fronts, Puerto Rico’s Financial Oversight and Management Board (FOMB) announced Tuesday that it had filed a sixth amended commonwealth Plan of Adjustment (POA) that reflects new agreements with bond insurers Ambac Financial Group and Financial Guaranty Insurance Company (FGIC). The deals settle both insurers’ asserted callback claims against the government of Puerto Rico and debts issued by the Puerto Rico Infrastructure Financing Authority (PRIFA).

PRIFA bondholders will receive $260 million in cash, including restriction fees and consummation costs. In addition, the agreement includes a contingent value instrument based on potential outperformance of Puerto Rico’s 5.5% sales and use tax relative to projections in the 2020 certified fiscal plan and Puerto Rico’s general fund rum tax collections relative to projections in the 2021 certified fiscal plan.

PORT REBOUND CONTINUES

The recovery of the economy is being reflected in the level of port activities seen in the first half of 2021. The Port of Los Angeles, the nation’s busiest facility, reported a 26.7% year-over-year increase in June, processing 876,430 20-foot-equivalent units compared with 691,475 the previous year. Long Beach reported a 20.3% year-over-year increase, handling 724,297 TEUs compared with 602,180 in 2020.

The Port of Oakland processed 222,483 containers in June, which is almost identical to the numbers posted in April and May. The 2021 figure is up 43.3% year-over-year. Six months into 2021, the port is up 11.4% compared with 2020. Port facilities in Seattle; Tacoma, Wash.; Alaska and Hawaii, saw volume jump 19.9% year-over-year to 344,280 containers compared with 287,036 in the year-earlier period.

The Port of Virginia notched a 33.5% year-over-year increase in volume, moving 281,346 TEUs, compared with 210,669 in June 2020. Officials said June marked the 10th consecutive month of record-breaking volumes, which pushed Port of Virginia’s fiscal 2021 number to a record 3.2 million containers. Since fiscal 2019, volume is up more than 25%.  The Port of Savannah in Georgia saw a 32% year-over-year increase, moving 446,815 containers in June. In 2020, the port processed 338,287.

The Port of Charleston saw a 40% year-over-year volume increase in June, moving 231,758 TEUs compared with 156,494. In fiscal 2021, ending June 30, Charleston handled 2.55 million TEUs, a 9.6% increase from fiscal 2020. With five automobile, truck and military vehicle plants in South Carolina, the port handles tens of thousands of vehicles each year. The port said roll-on, roll-off cargo increased nearly 61% compared with 2020, moving 23,096 vehicles.

Along the Gulf of Mexico, Port Houston reported a 39% year-over-year increase, handling 292,627 containers in June compared with 210,932 in 2020. Through the first six months, the port is running 13% ahead of last year’s rate.

MTA

It has become clear from the return of less than a quarter of the pre pandemic office staff to the office, that recovery in NYC especially Manhattan will take some time. That has had a real impact on operations of the MTA in particular, the subways. With staffing shortages limiting the number of trains, wait times are up. Crime on the subways has also heightened concerns about long wait times. It’s a vicious cycle.

One thing which the MTA can do on its own is raise fares. An increase had been anticipated and the plan was to raise subway fares by 4%. Now that demand for the subway remains depressed, MTA has decided to hold fares steady through year end. To some degree, things are beyond its control in terms of whether workers are required to return to offices.

For bondholders, it is a non-event. That fact of the matter is that the anticipated 2021 revenue from a fare increase was only about $17 million.  MTA has received $4 billion of federal pandemic aid so far, and expects to receive the remaining $10.5 billion through a multiyear reimbursement process that will cover its operating losses.

The transit agency has raised fares every other year since 2009. 

THE OTHER GOVERNOR FACING RECALL

Don’t look now but another governor is facing the potential of a recall election. The Alaska Supreme Court ruled that a campaign to recall Republican Gov. Mike Dunleavy may proceed. The Court found that the effort contains legally sufficient grounds to bring forth the matter to voters. The recall’s supporters specifically cited allegations that the governor violated the state Constitution by using his budget veto to punish judges for abortion-rights rulings, and that he used government funds for political purposes. 

The ruling does not indicate anything about the validity of any charges against the Governor. It specifically leaves it up to the judgment of potential signers of a recall petition to make that determination. The Governor has been a lightning rod as he imposed a strong view that spending needed to be cut. He sought to preserve the State’s annual Permanent Fund payment to state citizens even at the cost of substantial cuts to the State’s University and ferry systems.  

With the long-term decline in demand for oil, Alaska has faced steadily more difficult choices as Permanent Fund revenues slow and diminish. Like many other ideologically driven officials, the Governor has had a difficult relationship with the State legislature. Many saw the cuts to the university system as politically driven. Anger at that and cuts to the State ferry system which significantly increased inconvenience for already isolated coastal communities.

ZONING REFORM

Zoning regulations have come under increasing scrutiny in recent years. Advocates for affordable housing development have seized on single family zoning regulations especially as a major hurdle to increases in the affordable jousting stock. In California, housing is among the hottest of hot button issues. Previous attempts to expand housing availability in the state, like SB 50, have been beaten back. Opponents argue that such changes would lead to gentrification instead of expanded low income housing opportunities.

Now, Senate Bill 9, designed to allow up to four homes on most single-family lots and spur the construction of badly needed new housing has passed in the State Senate. It is expected to be taken up in the Assembly Appropriations Committee by Aug. 27. If approved, it would go to a final vote in the Assembly. Opposition comes from both local governments and private interests.

Looming behind all of these efforts across the country is the increasing g role of real estate developers and investors in the conversion of single family homes to rental rather than ownership status. Many opponents of the bill fear gentrification but also fear the development of more and more properties for rental purposes. The development of this sort of housing does nothing to solve the affordability gap which has arisen from the increasing number of housing units offered for rental rather than sale.

Housing advocates fear that an increasing number of housing units will be offered for rental rather than sale. They also argue that developers are likely to target Black and Latino communities in areas where land is cheaper, and demolish houses to build high-cost rentals that would limit the ability of people of color to build wealth.

UNIVERSITY SYSTEM OF CALIFORNIA TUITION AND VACCINATION

The University of California announced that COVID-19 vaccinations will be required before the fall term begins for all students, faculty and others, becoming the nation’s largest public university system to mandate the vaccines even though they don’t have full federal approval. The University of Vermont also announced it will require vaccines regardless of when approval occurs. They join eleven other state university systems poised to require vaccination. Several other states (including the state and city systems in NY) will require vaccinations upon full FDA approval of vaccines.

It is hard to know whether vaccine requirements will make an institution more or less attractive from a competitive standpoint. In states where the public system is not mandating vaccination, we note that many of the best-known private institutions in those states are. All of the Ivies are requiring vaccination as well as their major competitors.

There is no surprise as to where requirements lag. North Carolina, Tennessee, Texas, Utah, West Virginia, and Wisconsin are among the laggards. Ohio is apparently waiting for vaccination approval before it decides what to do at the Ohio state system. Ohio is one of the states where the politics of the pandemic have been problematic.

Our view is that vaccination requirements will be more of an attraction than a detriment to the institutions requiring them. In a first legal test of such a requirement, eight student plaintiffs had argued that requiring the vaccine violated their right to bodily integrity and autonomy, and that the coronavirus vaccines have only emergency use authorization from the Food and Drug Administration, and should not be considered as part of the normal range of vaccinations schools require. 

A conservative group of anti-vaccine doctors is bankrolling the litigation. They vow to go to the U.S. Supreme court if necessary.

While the vaccination requirement was rolled out, the University of California Regents, citing the need for financial stability and more grant aid, approved a tuition increase of 4.2% for incoming freshmen in the fall of 2022. The 4.2% increase in tuition and fees — $534 added to the current annual level of $12,570 — will apply only to incoming undergraduates entering in fall 2022 and stay flat for up to six years for them. Successive undergraduate classes would get a similar deal.

The regents’ action marked UC’s second tuition increase since 2011. It comes as the University admits its most “diverse” class ever but also one with significant affordability concerns.

MISSOURI MEDICAID EXPANSION

The Missouri Supreme Court unanimously upheld an expansion of Medicaid that had been secured via a ballot initiative. That could mean an additional 275,000 people will have access to it. Opponents of expansion in “red” states realize that ballot initiatives usually need legislative action to fund the program.  So, GOP legislators in those states refuse to enact enabling legislation. The Missouri court ruled that expansion was legal in that it did not require the legislature to appropriate money specifically for new patients under expansion. Since the state funded Medicaid for FY 2022, the legislature will have to appropriate funding or else provider payments might not be made.

The absurdity of the situation – a voter supported policy that someone else pays 90% of – is clear. Medicaid expansion itself ordinarily sees the federal government pays 90 percent of the cost of extending Medicaid to non-senior adults who earn up to 138 percent of the poverty line.  Because, MO was slow to expand, it will perversely benefit from provisions in the stimulus which provide for extra funding through the American Recovery Plan for states which expanded Medicaid during the pandemic.

PENNSYLVANIA AND FRACKING ROYALTIES

The Commonwealth of Pennsylvania Department of Conservation and Natural Resources’ Oil and Gas Fund — derived from natural gas drilling on state forest land — to the state’s general fund to help balance the annual budget. The ruling came in a case brought by the PA Environmental Defense Foundation which hoped that the Supreme Court would overturn a lower court decision which allowed the diversion of more than $110 million from the Oil and Gas Fund between 2017 and 2019, to pay operating expenses rather than using it for conservation purposes.

The decision does not however require the funds to be transferred back to the Oil and Gas Fund. The decision found the Commonwealth Court’s 2020 ruling was at odds with its own 2017 ruling on the same issue, when foundation members challenged the transfer of $594 million from the fund between 2008-16. Foundation officials argued that “all funds from the oil and gas leases, including the royalties, bonus and rental payments, are part of the public trust, and must be used to conserve and maintain the public natural resources, including our state forest.”

From our standpoint, the management of the fiscal potential of fracking has been poor. We see tremendous resistance to things like severance taxes and other charges which can be easily linked to the activities of the natural gas industry. For a long time, the evolution of the fracking industry and its taxation in Pennsylvania will be viewed as a substantial missed opportunity.

IS CARBON CAPTURE COMING TO THE MUNI MARKET?

The San Juan coal fired generating plant in New Mexico was one of the nation’s largest. It’s role in climate change was undisputed. So, it was a big deal when the plant was scheduled for closure in response to the market realities facing fossil fueled generation. That decision by Public Service of New Mexico, the plant operator, was accompanied by news that a private merchant generator wanted to take over the plant and use it as a showcase for carbon capture technology.

The technology is controversial and has never been implemented at industrial scale. In that way, it resembles any number of “new technology” projects which have made their way to the municipal bond market over the years, often without success. Medium density fiberboard, manure to methane, and paper deinking come to mind.

Farmington’s city-owned utility currently holds a 5% stake in San Juan. It will become the nominal owner when the other co-owners depart on June 30, 2022. And under the private generator Enchant’s agreement with Farmington, the city will then turn the facility over to Enchant to be operated as a merchant power plant. One that was able to run on coal but not emit carbon dioxide into the atmosphere.

So, it caught our eye that the private generator, Enchant, updated the progress being made on carbon capture installation and operation. When it announced the carbon capture plan in 2019, Enchant said it would begin construction on plant conversion by 2021 and start operating it with carbon capture in place by January 2023. Now those dates have been delayed until year-end 2024 to have carbon capture partially operational at San Juan, and mid-2025 for it to be fully functioning.

Enchant executives previously said they would use private investment to convert San Juan, the company is now seeking nearly $1 billion in low-interest loans from the U.S. Department of Energy and other federal entities to help fund the project. That’s where our interest as a muni market participant comes in. The ownership of the utility by a municipal entity leaves a door open for a project like this to seek tax exempt financing if federal financing is not available or sufficient.

RANSOMWARE BANS

The increasing frequency of hacking attacks on governmental entities has spawned a variety of responses.  The increasing number of ransomware attacks and a lack of information on how and for how much ransoms are paid have focused state legislators’ attention on the subject.  The payment of ransoms by primarily private sector players has raised concerns that the practice will continue to expand and include government payors. As is often the case, proposed legislation does not take a particularly deft approach. Suffice to say, the legislative sledgehammers are out. Well intentioned but likely off the mark.

Three states—New York, North Carolina and Pennsylvania—are considering legislation that would ban state and local government agencies from paying ransom if they’re attacked by cybercriminals. A similar bill in Texas died in committee earlier this year. The sponsors seem to believe that making it illegal to pay ransom will make it unattractive to hackers to attack systems as it would serve as a stop on negotiations.  As one sponsor put it “We’re saying we cannot negotiate with you. It’s not legal for us to pay anything. You need to stay away from North Carolina.”

At least there is some money -$15 million – in the North Carolina bill to fund local government efforts at improving system security. The need for funding remediation highlights one weakness that plagues many local government systems. That is the issue of outdated systems. In many cases, a combination of old technology and software combines with really poor system management to create vulnerabilities. They will exist without serious funding increases.

The issue may not be just with government data. Weak local governmental security practices still create environments which are attractive to criminals. Many local government systems hold a significant amount of citizen data – birthdates, addresses, social security numbers – which can still provide opportunities for criminal profit. And many of the services provided by government deal with life and death situations which require rapid reinstatement of systems.

The Pennsylvania legislation attempts a bit more subtle approach. In Pennsylvania, legislators are considering a broader ransomware bill that would make possessing, using or transferring ransomware a criminal offense, ranging from a first-degree misdemeanor to a first-degree felony, depending on the ransom amount.

Leave it to New York to take a more clumsy approach. One of two pending bills would ban ransom payments by businesses and health care entities as well as government agencies. It also would require agencies to report ransomware attacks to the state. Would it be effective? Even its sponsor thinks not. “We decided to introduce the bill like a blunt instrument to force this discussion. Granted, I understand this is probably not the way to go about it. How do we tell private businesses what to do?” “But we need to do something. If we continue to just stand back and do nothing, that’s not a solution.”

In many cases, local governments do not use well established security procedures which have been standard best practices in the private sector.  Remote access requirements which arose during the pandemic highlighted major flaws. A 2019 study by researchers at the University of Maryland, Baltimore County found that local governments “on average, they practice cybersecurity poorly.” And it is that flaw which is often at the root of local cybersecurity issues.

The rising concern with cybersecurity for governments has not been accompanied by standardization of practices or by sufficient funding of cybersecurity efforts at the local level. Stronger access procedures especially for remote workers and the availability of funding for remediation costs are the most logical step. Merely banning ransom payments on its own is not an answer. The FBI testified this week that “It would be our opinion that if we ban ransom payments, now you are putting U.S. companies in a position to face yet another extortion, which is being blackmailed for paying the ransom and not sharing that with authorities… It’s our opinion that banning ransomware payments is not the road to go down.” 

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 our issue is devoted totally to developments in the electric utility sector. As the smoke from the western fires blew east, it served as a reminder to all of the dominant role of climate change in the current political debate.

We highlight a number of situations illustrative of the many challenges that climate change and its management present to producers, distributors, and investors in the utility industry. As is always the case, municipal providers and issuers will be at the center of those debates. Every level of government – state, federal, local – is involved in them.

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MULTI STATE REGULATION AND CLIMATE CHANGE

The Kentucky Public Service Commission issued an order Thursday rejecting Kentucky Power’s request for a certificate to implement and recover costs for federally required environmental upgrades at the Mitchell plant near Moundsville, WV that would keep the plant operational for another 19 years. Instead, the commission approved completing only enough environmental upgrades to keep the plant federally compliant and operating through 2028. Kentucky Power had contended that making the necessary environmental upgrades to keep the 50-year-old Mitchell facility operational through 2040 was the most economical option, noting that the company will have a substantial capacity shortfall if Mitchell is retired in 2028.

The total estimated cost of allowing Mitchell to operate through 2040 was $133.5 million. The total estimated cost of allowing only implementation of and cost recovery for complying with rules regulating handling and disposal of coal combustion residual materials was $35.1 million, excluding the cost of capacity that Kentucky Power will need to obtain once Mitchell is retired. Kentucky Power and Wheeling Power each own 50% interest in Mitchell.

And that complicates the process of closing coal plants with joint owners and different regulatory jurisdictions having oversight of those owners. Add in the fact that Kentucky Power and the West Virginia owners presented differing viewpoints as to the potential overall financial impact of closing Mitchell in 2028 vs. 2040. Appalachian Power and Wheeling Power said in their December filing with the West Virginia Public Service Commission that performing only the coal combustion residual compliance work at Mitchell and retiring the plant in 2028 has “comparable costs and benefits” to making the additional wastewater compliance investment to allow the plant to operate beyond 2028.

It is not a cost-free decision as to the plant’s future. There were 214 people employed at the Mitchell plant that were compensated a combined $26.8 million in wages in 2020, according to Appalachian Power and Wheeling Power.

GROWING PAINS OF AN ELECTRIC FUTURE

We came across stories recently about what can best be described as growing pains experienced by one mass transit system as it attempted to add all electric buses to the vehicle mix. We found one that puts a municipal transit agency right in the center of the issue.

SEPTA is the mass transit provider for Philadelphia and its surrounding metropolitan area. In 2016, it announced that it would purchase a fleet of 25 electric buses. The goal was to gradually add to the electric fleet with the intention of replacing all 1500 of SEPTA’s buses with electric vehicles. The first of the buses went into service in 2019. They cost some $1 million each so it was a substantial investment even with federal aid. So, it is all the more troubling that those 25 buses no longer operate but may turn out to be a major impediment to the development of all electric public transit fleets.

Proterra is the nation’s largest manufacturer of electric buses. More than 100 public transit customers throughout the U.S. and Canada have purchased Proterra buses. So, it is a problem when a system like Philadelphia reports structural issues with the buses. It turns out that the problem may not be manufacturer specific. The problem in Philadelphia is that the issues include cracked chassis and other defects, some discovered before operation.

Proterra buses were also taken out of service in Duluth, Minnesota, after officials realized that hilly routes and heaters were draining batteries too quickly. Proterra buses were also taken out of service in Duluth, Minnesota, after officials realized that hilly routes and heaters were draining batteries too quickly. It would seem to be a quality and warranty issue specific to the manufacturer.

But wait, a battery fleet from Chinese manufacturer BYD was taken out of service in Indianapolis for upgrades due to range issues, while officials in Albuquerque, New Mexico, returned 15 BYD buses for similar reasons.  BYD is the manufacturer in House Minority Leader McCarthy’s district.  The issue seems to be more related to the weight of electric vehicles. The battery technology used is quite heavy, so manufacturers naturally seek to reduce the weight of vehicles through the use of plastics and the like.  Logic says that cracking should not be a surprise.

The pandemic and its impact on the demand for mass transit has already left many systems in a vulnerable financial position. Now as the politics of climate change get more intense, transit agencies see themselves in the position of having to accept some level of operating risk as electric vehicles develop. That risk translates into potentially significant financial risk if capital investments in rolling stock do not satisfy service requirements. It’s just one more hurdle for mass transit providers to overcome.

GREEN NEW DEAL AND JOBS

One of the primary issues impacting the debate over how to best address climate change is the issue of economic displacement. The closure of older existing power plants always causes disruptions to local economies and workers. It is one of the main arguments that supporters of the status quo in terms of the environment cite when explaining opposition to the transition to cleaner energy. Proponents of the Green New Deal always claim that it will provide “good-paying” union jobs to replace those lost at existing generation facilities.

Unfortunately, initial indications are that this will simply not be the case. An electricity plant powered by fossil fuels usually requires hundreds of electricians, pipe fitters, millwrights and boilermakers who typically earn more than $100,000 a year in wages and benefits when they are unionized. So far at least, those jobs do not have comparable replacement roles for workers on renewable generation facilities. This is especially true for solar installations. It takes far more people to operate a coal-powered electricity plant than it takes to operate a wind farm. Many solar farms often make do without a single worker on site.

A NY Times article illustrated one example. In 2023, a coal- and gas-powered plant operated by Consumers Energy in Michigan, is scheduled to shut down. The plant’s 130 maintenance and operations workers, who are represented by the Utility Workers Union of America and whose wages begin around $40 an hour plus benefits, are guaranteed jobs at the same wage within 60 miles. The utility, Consumers Energy, concedes that it doesn’t have nearly enough renewable energy jobs to absorb all the workers.

The staffing industry says that about two-thirds of the roughly 250 workers employed on a typical utility-scale solar project are lower-skilled. They can make $20 an hour. That’s a far cry from $60 an hour at a union site.  It is a significant obstacle to generating political support for the Green New Deal. And it is typical of how the environmental movement has constantly understated the true overall costs of the changes it wants. It’s not just about the price of power to the customer. There are also issues associated with worker displacement. When all of those costs are included in the analysis, the economics of the Green New Deal are much less appealing.

That may account for why the Times chose to publish its article on a Saturday, the traditional landing date for bad news.  An announcement this week from the Department of Commerce’s Economic Development Administration (EDA) highlights a Coal Communities Commitment, which allocates $300 million in American Rescue Plan funds to coal communities. This investment will ensure that they have the resources to recover from the pandemic and will help create new jobs and opportunities, including through the development or expansion of a new industry sector.

The U.S. DOE reports that Electric Power Generation declined by 63,300 jobs from 2019 to 2020 for a total of 833,600 jobs. Not all types of generation declined. Wind added 2,000 jobs, an increase of 1.8%. Solar, which includes both Concentrating Solar Power and Photovoltaics, shed the most jobs, declining by 28,700. The largest year over year percent decline was in coal, which decreased 10%, or 8,300 jobs.  

Employing 937,700 workers in 2020, the Fuels sector declined 211,200 jobs from 2019. This 18% loss was the highest out of any of the five categories. Job losses were concentrated in oil and gas, with oil declining by 121,300 and gas decreasing 66,000. Job losses in biofuels were the lowest, ranging from 1,000 for Woody Biomass to 1,400 for Corn Ethanol.  

NUCLEAR

Earlier this year we commented on a proposal for the development of “modular” nuclear generating units. The Carbon-Free Power Project was to build 12 interconnected miniature nuclear reactor modules in Idaho to produce a total of 600 megawatts. It would be the first small modular reactor in the United States. The plan was to have the plant owned largely by members of the Utah Associated Municipal Power Agency.

The initial plan was not supported by all of the UAMPS members even though it would provide carbon free power to replace coal fired power. So, the project’s sponsors went back to the drawing board. “After a lot of due diligence and discussions with members, it was decided a 6-module plant producing 462 MW would be just the right size for (Utah Associated Municipal Power Systems) members and outside utilities that want to join,” according to UAMPS.

The reactor is planned to be built on the DOE’s 890-square mile desert site west of Idaho Falls at Idaho National Laboratory. The plant is expected to be running by 2029. Initially, the plan did not have unanimous support from all of the UAMPS members. The downsizing reflected a more reasonable assessment of the level of financial risk with which the project would be viewed. Right now, 28 UAMPS participants have committed to a total of 103 MW. 

Downsizing the project reduces the project’s costs and the amount of power it can produce, overall. The energy cost that project partners will pay rose from $55 per megawatt-hour to $58 per megawatt-hour. And the amount of power each of the six modules can produce has risen from 50 to 77 MW. The project is currently working toward submitting an application to the NRC in 2024 to build and operate the reactor. Even project proponents are concerned about the lack of commitments for more project capacity however.

UNDERGROUNDING TRANSMISSION

There are many costs to be considered when you look at the cost of grid resiliency investments by electric systems. One of them is the cost of undergrounding transmission lines. The demand for these actions is best reflected in the ongoing saga of California wildfires. One major transmission network has been under threat from the massive Oregon fire. Now, one of the newest California fires may be able to claim PG&E transmission lines as its source.

As a state report assigning that blame came out, the company announced a plan to bury at least some of its transmission infrastructure. Today, PG&E maintains more than 25,000 miles of overhead distribution power lines in the highest fire-threat areas (Tier 2, Tier 3 and Zone 1)—which is more than 30% of its total distribution overhead system. Now it has announced a multi-year effort to underground approximately 10,000 miles of power lines. Based on underground power line proposals that PG&E has previously submitted to state regulators, the project could cost about $4 million per mile

About 18 percent of the country’s electric distribution lines are buried, including those for nearly all new residential and commercial developments, according to the Edison Electric Institute. As one might expect, most of the negative reaction to the plan reflects a desire to see ratepayers unaffected by the cost of these investments. It’s hard to argue against wildfire mitigation but as is the case with so many aspects of climate change, it has to be paid for. The expectation of some ratepayer impact is not unreasonable.

The significant public ownership of much of the electric grid in the NorCal and Northwest regions is where municipal debt exposure to fire is. Joint action transmission issuers as well as the many Oregon/Washington public utility districts can be exposed as well.

TRI-STATE GENERATION

Last month (6/28) we outlined issues facing the large rural electric provider Tri-State Generation Co-op. Now, the story moves to its next phase. As we discussed $136.5 million prior, Tri-State was under pressure to provide estimates of projected “exit fees” for Tri-State participants who wished to leave the Co-op. Now, Tri-State has provided this information to two such participants and the reaction has been negative.

Tri-State said that its exit fees are based on the higher number of two calculations: the exiting cooperative’s share of the utility’s debt, or the present value of all the electricity Tri-State would have sold the co-op to 2050, minus any sales of the departing member’s share of the association’s electricity in wholesale markets. Tri-State’s total debt at the end of 2020 was $3.3 billion, according to a federal filing. 

The resulting numbers for United Power and Durango-based La Plata Electric Association — were $1.5 billion and $449 million. In contrast, two other members who left Tri-State – the Kit Carson Electric Cooperative, in Taos, New Mexico, which left in 2019 and paid fees of $37 million and the Delta-Montrose Electric Association in 2020 which paid $136.5 million. Should those fees stand, local co-op participants could see their financial standing quite negatively impacted.

OHIO CORRUPTION AND THE ELECTRIC INDUSTRY

Over the recent months, we’ve followed the ongoing fallout from the nuclear power industry’s efforts to derail clean energy policies and legislation in the State of Ohio. The House Speaker has been indicted, aides have taken pleas, and utilities have faced charges. Now,  FirstEnergy agreed to a $230 million penalty for bribing former House Speaker Larry Householder and former Public Utilities Commission of Ohio chairman Sam Randazzo.

FirstEnergy and its affiliated companies had hoped to see passed a $1 billion bailout for two FirstEnergy Solutions-owned nuclear plants, secure money for FirstEnergy Corp. through a decoupling Between 2017 and March 2020, FirstEnergy Corp. and FirstEnergy Solutions, now called Energy Harbor, donated $59 million to Generation Now, a dark money group controlled by Householder. The $230 million fine will be split 50-50 between federal and state government. Ohio’s $115 million will go toward a program that helps Ohioans pay their utility bills.

And in spite of the guilty pleas from the bribe payer, the Speaker still insists that the payments were legal campaign donations. In the meantime, renewable development took a hit when Ohio became a bit of an outlier in terms of preemption. A new law says county governments can pass resolutions to ban large wind and solar developments, or say that certain parts of their counties are off-limits to wind and solar projects. Developers need to give county governments at least 90 days’ notice before filing an application with the state regulator, the Ohio Power Siting Board, so that county officials have time to review the plan and take action before the state board begins its review.

This follows enactment earlier this year of a law which bans local governments from restricting the use of natural gas. Local governments already are barred by the state from taking actions that would limit oil and gas production.

MMWEC

The Massachusetts Municipal Wholesale Electric Company (MMWEC) plans to build a 55-megawatt natural gas-powered peaking generation plant in Peabody, MA at the site of an existing plant. That 20 MW facility will be closed and replaced by the 55 MW plant. The decision to retire the older, less efficient plant was made after hearing the concerns of ratepayers and analyzing new census data which shows an increase in the number of “environmental justice areas” surrounding the plant.

Local residents had cited health concerns as well as what are broadly characterized as equity or economic justice issues. Originally, the new plant would operate as well as the older plant. Recently, the old plant’s owner Peabody Municipal Utility reviewed 2020 census data showing the number of at-risk communities living in the areas surrounding the industrial park. The decision to not operate the old plant followed quickly thereafter.

It is just one example of the range of potential obstacles facing developers of new generation in the current political environment. In urban areas, economic justice and equity issues will drive opposition. In rural areas, concerns about aesthetics and land usage will drive opposition. The road to clean energy remains bumpy.

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

Recently we sat down with the Daily Bond Buyer and discussed some current trends I see in municipal credit. It’s available at https://www.bondbuyer.com/podcast/unexpected-turns .

MISSOURI SHOWS US A GAS TAX

Missouri Gov. Mike Parson has signed into law raising the state’s gas tax, The law will gradually raise the state’s 17-cent-a-gallon gas tax to 29.5 cents over five years. The first 2.5 cent increase is slated to take effect in October, which will bring the gas tax to 19.5 cents. Once fully implemented, the gas tax hike could generate more than $500 million annually for state, county and city roads. The Missouri Department of Transportation estimated that the state faces a $745 million annual funding gap for roads and bridges.

Now opponents to the increase are working to get a refund if they keep track of their receipts. to force the issue to a vote by the people. Since voters approved a constitutional amendment in 1996 requiring all tax increases over a certain amount to go to a statewide vote, not a single general tax increase has passed. The expectation is that if the proposed initiative gathered enough signatures, it could be on the ballot in 2022. This despite provisions in the law allowing residents to get a refund if they keep track of their receipts.

That provision makes it likely that the tax will not generate sufficient funds to close the existing gap between what the state needs for transportation and what the net proceeds of the proposed tax would generate after refunds. It shows how hard it is to raise gas taxes.

CRYING WOLF?

There has been nothing but lamentation and fiscal gnashing of teeth in the oil and gas producing states since the Biden Administration announced that it was suspending the acceptance for consideration applications for leases of Federal land for oil and gas exploration and production operations. While the spigot of new leasing applications has been turned off, that doesn’t mean that new leases are not being approved.

Approvals for companies to drill for oil and gas on U.S. public lands are on pace this year to reach their highest level since George W. Bush was president. The Interior Department approved about 2,500 permits to drill on public and tribal lands in the first six months of the year, according to an Associated Press analysis of government data.  Some 2100 of those approvals came after January 20.

New Mexico and Wyoming have been leading the steady opposition to the lease suspension. Nonetheless, New Mexico and Wyoming had the largest number of approvals. This news comes as gasoline prices have steadily increased since the reopening of the economy. This increases the likelihood of some increased production and that at least some of the approvals will result in new drilling. Drilling on public lands and waters is estimated to account for about a quarter of U.S. oil production.

The continued growth in oil/gas leasing comes as more evidence of the decline of Wyoming coal comes in. The Energy Information Administration (EIA) on Wednesday said U.S. coal production fell in 2020 to its lowest level since 1965. U.S. coal production totaled 535 million short tons (MMst) in 2020, a 24% decrease from the 706 MMst mined in 2019. Coal production in Wyoming, where more coal is produced than in any other state, was 21% lower in 2020 than it was in 2019, while the second-largest producer West Virginia experienced an annual decline of 28%. U.S. coal-fired generation fell 20% year-on-year and exports were 26% lower in 2020 than in 2019.

GARDEN STATE OUTLOOK

The trend of improved ratings on state general obligation credits continues. The latest beneficiary is the State of New Jersey. Moody’s affirmed the A3 rating on New Jersey’s outstanding general obligation debt, and revised the outlook to positive from stable. This ultimately benefits some $40 billion of state agency and local debt with a state backup. The State was able to weather the pandemic storm.

It applied much of the revenue windfall resulting from the stimulus to address longstanding credit weaknesses. Specifically, Moody’s cited the fact that “The state has responded to a brightening revenue and liquidity picture with several actions reflecting a recent commitment to addressing more aggressively its liability burdens, demonstrating improved fiscal governance and management. These actions include debt reduction and avoidance and acceleration of pension contributions.”

The budget included a $6.9 billion pension payment and a $3.7 billion debt defeasance fund to pay down obligations. These items were keys to the improved outlook. While the budget also included recurring expenses which were not totally offset by recurring revenues, the pension payment was the largest in 25 years and it reverses a trend of consistent underfunding under the Christie administration which contributed to some 11 negative rating actions during that administration.

MAINE PUBLIC UTILITY VETO

Gov. Janet Mills on Tuesday vetoed LD 1708, An Act to Create the Pine Tree Power Company. The bill aimed to create a nonprofit, consumer-owned utility that would take over Central Mainer Power and Versant Power. It was approved by the legislature but not with a veto proof majority. It comes as the utilities are perceived to provide significantly less reliable service since CMP was purchased by a foreign owner. (Full disclosure – the owner Avingrid is also my utility supplier. Maine, we feel your pain.)

And the Governor seems to agree. In her veto message, the governor called the recent performance of Maine’s utilities “abysmal” and said that “it may well be that the time has come for the people of the State of Maine to retake control over the [utilities’] assets.” 

There does seem to be a consensus in favorable of a decarbonized grid in Maine but it has not produced clear results. The effort to import hydroelectric power from Quebec requires a transmission line which has encountered significant opposition. The effort to develop off shore renewables has been strongly opposed by the state’s lobster industry.

It’s another good example of the clash of interests which arises from the effort to significantly alter the energy production, distribution, and consumption chain. It is that environment that means that unless the Legislature is able to override the governor’s veto by two-thirds supermajorities in both the House and the Senate, the question of consumer ownership of Maine’s two investor-owned utilities will not be on the November 2021 ballot. The Legislature will reconvene on July 19 to vote on the veto and on all other vetoes Mills has issued since July 1.

While the veto process plays out, it is of note that a law was enacted which requires the Governor’s Office of Policy Innovation and the Future to define “environmental justice,” “environmental justice populations,” “frontline communities” and other terms. Officials will also have to develop methods to incorporate equity into decision-making at the Public Utilities Commission, the Department of Environmental Protection and other state agencies.  These definitions would guide the development of future legislation.  It could provide a good starting point for the process of actually developing consensus about what the terms mean on a granular level.

Maine joins several other states in such an effort. It’s clear that economic and environmental justice mean different things to different people. Seven states have adopted definitions of “environmental justice” or related terms in state law. Several states have also implemented definitions as part of agency initiatives related to pollution reduction and toxic facility siting.

New Jersey passed an environmental justice law in September 2020. It requires the state’s Department of Environmental Protection to deny permits for new polluting facilities deemed to have a negative environmental or public health impact on overburdened communities. Notably, it requires the department to consider “cumulative impacts” when making its decision: factors outside the facility in question, such as other existing sources of pollution, that could collectively create a higher burden for the community.

VIRGIN ISLANDS

Well before the pandemic, the U.S. Virgin Islands was a very troubled credit. This while relying on tourism, rum, and oil production. Oil production reflected the presence of what in its day was the largest oil refinery in the western hemisphere. For years, it was operated by a consortium consisting of the Venezuelan state oil company and the Hess Oil Company. As the politics of Venezuela became more unstable and incompetent, the refinery fell on hard times. As the source of over 1100 jobs on St. Croix, the loss of those jobs was problematic.

The refinery filed for bankruptcy in 2015. The economic failings of the plant created operating issues for any subsequent buyer and/or operator. ArcLight Capital purchased the refinery out of bankruptcy in 2016 for $190 million​. The current owner, Limetree Bay Refining LLC is controlled by EIG Global Energy Partners, which said it became the “reluctant” owner of the troubled refining operation in April as part of a restructuring. They are even more reluctant now since the most recent effort to restart the refinery earlier this year was halted in May under EPA orders. The operation had resulted in significant pollution – air, water, and directly.

Now Limetree has filed for bankruptcy protection. In the absence of any interim funding, Limetree’s refinery operations are forecast to burn through nearly $7 million over the next three weeks. The refinery only had about $3.5 million in cash on hand when it filed its Chapter 11 petition. The plant employed roughly 400 people as of the date of the bankruptcy filing, most of whom were required to be U.S. Virgin Island residents.

Full operations have not occurred since 2012 but there remained a significant economic interest in having it operate as a source of both employment and revenues. With the U.S.V.I. already dealing with legacy budget and pension issues and a utility on the constant edge of insolvency, this just one more brick on its credit load.

COULD LITHIUM REVIVE THE SALTON SEA?

Much attention has been focused on the need to develop significant sources of lithium to supply the production of batteries. Batteries will be a key towards moving renewables to the center of the energy supply as the nation moves to decarbonization. The attention comes from the need to mine lithium and there are environmental concerns being raised in regard to environmental destruction and possible pollution associated with lithium extraction.

While those issues are hashed out through the political process, the need for lithium batteries continues to substantially increase. This has led to the development of other sources of lithium including the extraction of the mineral from brine. The issue has been one of availability of lithium and the extraction process is one way to address that.

That’s where the Salton Sea comes in. The body of water was an accidental creation. When irrigation canals from the Colorado River jumped their levees near the U.S./Mexico border in 1905 on the desert east of San Diego, millions of gallons of fresh water spilled into the Salton Trough, historically an arm of the Lower Colorado River Delta at the head of the Gulf of California. When the water finally stopped, it filled a trough 45 miles long, 17 miles wide, and 83 feet deep.

Over time, the lake became an inland resort. Then in the late 1970’s, continuing drought and the fact that the “sea” was not fed by any flowing waters (rainfall became the primary source of replenishment caused the Sea to begin to shrink. The lack of new water and increased temperatures badly impacted the native fish species. The reduced attraction of the Sea became a vicious circle leading to the abandonment of seaside communities and businesses.  The waters continued to recede and the exposed lake bed became a source of toxic dust impacting nearby communities.

Most of the lithium used for batteries today comes from either South America or Australia and it is processed in China.  It makes sense that it would be more economical to develop lithium sources in closer proximity to end user customers. That’s why GM has recently invested in one domestic provider of lithium derived from brine.

The Salton Sea region is unique in that some researchers estimate it contains enough lithium in the geothermal brines that it could supply a third of the world’s current lithium demand. The lithium also could be processed in tandem with developing geothermal power plants that could generate significant clean energy and local jobs. That has led to increased investment in the development of geothermal power in the Sea. Now, the demand for lithium has led to new development of facilities to extract lithium from brine in the waters.

The potential exists for such a project to be a source of jobs and tax revenues for Imperial County.  

PENNSYLVANIA ROAD FUNDING DEBATE CONTINUES

The latest party to weigh in on what the funding mechanisms should be for transportation, particularly roads, in Pennsylvania is the 42-member Transportation Revenue Options Commission. The Commission was created in March and charged with developing recommendations and changes environment.  Road funding has been an ongoing problem for the Commonwealth given opposition to higher gas taxes or tolls.

The recommendations are sure to be contentious. The proposal calls for changes in three phases: the first two years, the next two years and five years or longer, with the new or increased charges starting at various times because some of them would require approval by the General Assembly. The largest new revenue source and the most dramatic change would the enactment of a tax of 8.1 cents a mile for each mile a vehicle is driven. That move — which wouldn’t begin until the third phase and would require legislative approval and a pilot period to test a collection method — is projected to generate $8.9 billion a year.

Other fees: A fee of $1 for every package delivered by major companies like Amazon, FedEx and UPS, as well as local groceries and restaurants. No government is charging such a fee at this time. Transportation networks such as Uber and Lyft would be charged fees of $1.11 for each trip. Existing taxes and fees like the vehicle rental fee would increase by $3 to $5; vehicle registration would double to $76 for passenger vehicles initially, then be replaced by a fee based on the value of the vehicle; and aircraft registration and jet fuel taxes would increase.

All of this is designed to replace the existing $8.1 billion of revenue derived from taxing fuel and the existing fee infrastructure.

PR

U.S. District Court Judge Laura Taylor Swain issued a preliminary ruling rejecting creditor objections to the document filed by Puerto Rico’s Financial Oversight and Management Board (FOMB), but delaying a final approval until the fiscal panel and insurers conclude negotiations. The hearings analyzed whether the disclosure statement provides accurate information to creditors, retirees, public employees, contractors and other parties who will be affected by the POA, which would restructure approximately $35 billion in commonwealth debt and $50 billion in pension liabilities, and include an 8.5 percent cut to monthly retirement payments. 

The deal reduces the outstanding general obligation (GO) and Public Buildings Authority (PBA) debt as well as other claims by almost 80%, from $35 billion to $7.4 billion in new GO debt that would be issued by the commonwealth government. The government’s debt service would be $1.15 billion, or 8% of fiscal year 2020 own-source revenues. The rulings and agreements reached with bond insurers allow the process of approval of the Plan of Adjustment offered by the Commonwealth.

Judge Swain established a preliminary calendar for the Plan Of Adjustment discovery and confirmation process. A U.S. District Court Judge will oversee the discovery process lasting from Aug. 3 to Oct. 11, assuming the order for the disclosure statement is issued. The confirmation trial will commence on Nov. 8 and end on Nov. 23. That trial will include cross-examination of witnesses. The judge said that objections to the proposed confirmation order should be filed on Oct. 22, while the FOMB’s reply should be filed on Oct. 29. 

There still remains the possibility of additional delays. As outlined by Judge Swain “in order for there to be a practical possibility of holding confirmation hearings beginning in November, as proposed by the oversight board, discovery will need to begin immediately” and “Fulfilment of the oversight board’s request to begin confirmation hearings in November is dependent on the government entities’ cooperation in discovery… The court expects the oversight board and the Fiscal Agency & Financial Advisory Authority to fully respond to every request,”.

The continuing political opposition to parts of the Plan does cast a pall over the proceedings. The Governor and his party are doing everything they can to avoid having to agree to cuts to pension payments. There is still plenty of room for mischief.

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

________________________________________________________________

ILLINOIS UPGRADE

In perhaps the surest sign that state credits are coming out of the pandemic in much better than expected shape, Moody’s upgraded the State of Illinois’s general obligation (GO) rating to Baa2 from Baa3. In connection with this action, ratings on Build Illinois sales tax revenue bonds were upgraded to Baa2 from Baa3, and annual appropriation bonds issued by the Metropolitan Pier and Exposition Authority Ratings were upgraded to Baa3 from Ba1.

Total debt affected amounts to about $33 billion, including $27.7 billion of general obligation bonds, $3 billion of Metropolitan Pier and Exposition Authority bonds, and $1.9 billion of Build Illinois bonds. The outlook remains stable. The enacted fiscal 2022 budget for the state increases pension contributions, repays emergency Federal Reserve borrowings and keeps a backlog of bills in check with only constrained use of federal aid from the American Rescue Plan Act.

The Metropolitan Pier and Exposition Authority upgrade stems directly from the upgrade of the State.  The credit is supported by the state’s commitment to provide funds for debt service when pledged taxes on Chicago-area meals, hotel stays and other tourist activity is insufficient. That commitment was tested during the pandemic but the State did step up and assist the Authority to keep current on debt service.

Illinois nonetheless is far from being out of the woods. The failure of the income tax amendment in November was telling in terms of where the State’s politics are. The return to fiscal stability and strength remains a long way off.

SUMMER ELECTRIC OUTLOOK

The U.S. Energy Information Agency has made an assessment of regional electric reliability based on estimated demand and projected available generation capacity. The highest risk of electricity emergency is in California, which relies heavily on energy imports during normal peak summer demand and when solar generation declines in the late afternoon. Although California has gained new flexible resources to help meet demand when solar energy is unavailable, it is at high risk of an electricity emergency when above-normal demand is widespread in the west because the amount of resources available for electricity transfer to California may be limited.

The Electric Reliability Council of Texas (ERCOT) typically has one of the smallest anticipated reserve margins in the country, meaning it has relatively little unused electric generating capacity during times of peak electric load. ERCOT’s anticipated reserve margin increased from 12.9% last summer to 15.3% for this summer as a result of adding new wind, solar, and battery resources. Although ERCOT’s anticipated reserve margin is higher this summer, extreme summer heat could result in supply shortages that lead to an electricity emergency.

The Midcontinent Independent System Operator (MISO) and ISO-New England have sufficient resources to meet projected peak demand. However, if above-normal levels of electricity demand (which NERC calculates based on historical demand) occur in these regions, demand is likely to exceed capacity resources. In that case, additional transfers of electricity from surrounding areas will be needed to meet demand.

NEW YORK CITY

It looks like the next Mayor of New York will be Eric Adams. It is a big win for the city’s business community, especially the real estate industry given Mr. Adams long history with that sector. The win also is seen as a blow to those who support things like defunding the police. That issue was prominent in the campaign although the result argues that those arguments did not resonate. One thing that characterized the debate was a general lack of knowledge on the part of voters as to how much the City actually spends on criminal justice.

Now, we have some real data from the City’s Independent Budget Office (OMB) about how much is spent on criminal justice by the City. Spending by the agencies involved in the criminal justice system has grown from $5.1 billion in 2001 to $9.2 billion in 2020, an increase of 83 percent over two decades. When adjusted for inflation, though, the growth in spending is a far more modest 1.3 percent.  Funding from the city typically covers about 90 percent of the cost to support the system—$4.6 billion in city-generated funds in 2001 and $8.2 billion in 2020.  The police and correction departments have consistently absorbed most of the funds for the justice system. But over the past two decades, the two departments’ share of system spending has declined from 84 percent in 2001 to 79 percent in 2020.

Conversely, despite the decline in the number of arrests over that period, there has been no corresponding decline in the share of criminal justice spending on the offices of the District Attorneys or Special Narcotics Prosecutor.  A number of expenses such as pension and fringe benefits for criminal justice agency staff, as well as debt service and the cost of legal settlements are not part of the budgets of the individual agencies involved in the justice system. The city budget carries these expenditures centrally. When the “fully loaded” costs of the system are taken into account, projected spending totals $14.1 billion for 2021 (as of the 2021 Adopted Budget), compared with direct agency costs of $8.3 billion.

The largest agency in the system is the New York Police Department. The NYPD budget pays for all patrol and enforcement activity, as well as traffic enforcement, transit police, and school safety officers. The police budget increased by 43 percent from 2001 through 2013, from $3.4 billion to $4.9 billion, and by another 24 percent to just over $6 billion in 2020. In total, the budget grew by 77 percent from 2001 through 2020. Adjusted for inflation, police department spending over this period was largely flat, with spending about 2 percent less in 2020 than in 2001.

The Department of Correction (DOC) is the second largest agency within the criminal justice system. DOC oversees security and operations for jails on Rikers Island, as well as the city jails and court pens in each borough. In 2001, DOC’s budget was $835 million. It increased 31 percent, to $1.1 billion, in 2013 and another 19 percent, to $1.3 billion, in 2020. Over the entire 2001 through 2020 period, the DOC budget increased by 56 percent.

Spending did not keep pace with inflation, however, decreasing by 13 percent since 2001 in real terms. The budget for alternatives to incarceration and community programming increased 163 percent (46 percent with inflation), from $285 million in 2001 to $752 million in 2020. As a result, spending for this category has grown from 6 percent to 8 percent of the overall criminal justice system budget over the period.

PR

The Puerto Rico Oversight Board approved a $10.1 billion budget which was the product of collaboration by the governor, the legislature, and the Oversight Board. It represents the smoothest process of developing and approving the Commonwealth’s budget since the establishment of the Board. The fiscal 2021-2022 General Fund budget is $10.112 billion. The major expense categories are  $2.12 billion for health, $2.06 billion for pensions, $1.88 billion for education, $1.28 billion for the Department of Public Safety and Corrections, $416 million for economic development, and $371 million for the courts and the legislature.

The start of fiscal 2022 also saw the Board approve the operating and maintenance budget for the Puerto Rico Electric Power Authority of $3.13 billion, up from $3.06 billion in the previous fiscal year. The authority’s revenue is expected to be $3.1 billion, up from $2.9 billion. The approved budget for the Puerto Rico Aqueduct and Sewer Authority anticipates $1.03 billion of revenue in fiscal 2022, $43 million less than the previous fiscal year due to lower population and lower demand.  

The Highways and Transportation Authority budget calls for $681 million in operating and capital expenses in fiscal 2022, down from $862 million in fiscal 2021. Operating and capital revenues are projected to decline to $710 million from $862 million. No general fund transfers into the Authority are planned in the budget. That is a savings of some $250 million relative to the subsidy provided in FY 2021.

OPIOID SETTLEMENTS

Fifteen states have reached an agreement with Purdue Pharma, the maker of the prescription painkiller OxyContin.  The proposed settlement would provide some $4.5 billion from the family which owned Purdue Pharma an increase from the starting bid of $3 billion. The plaintiffs (including the states, some 3000 governmental plaintiffs) are also obtaining a significant amount of documents from the company. The negotiations were under the auspices of a bankruptcy court where Purdue Pharma’s bankruptcy filing occured.

The terms of the proposed settlement call for the Sacklers to pay $4.325 billion. Trustees appointed by a national opioid abatement fund would oversee Sackler charitable arts trusts worth at least $175 million. Those funds would go toward addressing the opioid crisis. The settlement is key to the company’s hopes of emerging from bankruptcy. Creditors have until the 14th of July to approve the deal. If sufficient approvals are achieved than the plan could be confirmed in the second week of August. That would make $500,000,000 immediately available to plaintiffs.

The plan doesn’t produce a windfall like the ones from the tobacco settlements. This means that any hoped for new securitization of payments will not be viable. There is less money and the payment period is only 9 years. There is no evergreen recurring annual payment after that time.

New York and Massachusetts were in the lead in terms of pursuing the documents from the company. The other joining states were Colorado, Hawaii, Idaho, Illinois, Iowa, Maine, Nevada, New Jersey, North Carolina, Pennsylvania, Virginia and Wisconsin. There are still states holding out from the settlement. Other litigation remains unresolved. Distributors are facing a bench trial in a West Virginia federal court and they and other manufacturers are being tried before a jury in a New York state court. 

WAYNE COUNTY UPGRADE

Wayne County, MI has certainly seen its share of fiscal difficulties especially when its major other governmental entity declared bankruptcy. The City of Detroit has been able to start its recovery process and get out from under state control. While that process unfolded, the County dealt with several fiscal issues as well. While the City’s credit faces some concerns resulting from proposed City Charter provisions, the County had slowly but steadily moved forward.

It’s reward? Moody’s has upgraded to A3 from Baa1 the issuer rating of Wayne County, MI. It also maintained a positive rating outlook. ” The upgrade of the issuer rating to A3 reflects the county’s material bolstering of operating fund balance and liquidity aided by restructuring of retiree benefits which greatly reduced the county’s annual fixed cost burden. Also considered is an expanding tax base, which creates some cushion against the state’s strict property tax caps that can result in revenue losses during time of tax base contraction.”

The historic risks which result from dependence on the auto industry continue. The County remains the economic center of Michigan even after the decline of auto manufacturing. Plans to build electric cars in Michigan will help as well.

CLIMATE WATCH

Missouri enacted legislation prohibiting local governments from banning natural gas hookups on newly-built buildings. A law to restrict local limits on natural gas and propane was enacted on Ohio. In Indiana, legislation making local zoning boards the arbiters of solar siting is designed to hinder solar development at the local level.

Preemption bills were introduced in 19 states this year –  Alabama, Arkansas, Colorado, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Mississippi, Missouri, North Carolina, Ohio, Pennsylvania, Texas, Utah, West Virginia, and Wyoming). Fifteen of these bills have been enacted into law or awaiting final signature from the state’s governor (AL, AR, FL, GA, IN, IA, KS, KY, MS, MO, OH, TX, UT, WV, WY). Four other laws went into effect last year (AZ, LA, OK, TN). 

The Ohio legislation was backed by the Ohio Oil and Gas Association and the Ohio Chemistry Technology Council, would block any city or county from issuing any law or zoning code that “limits, prohibits, or prevents” people and businesses from obtaining natural gas or propane service. The Florida legislation recently passed, preempts local governments from blocking or restricting the construction of “energy infrastructure,” including the production and distribution of electricity. Prior to the rule, the county commission was required to grant a special exception for a major utility on an agriculturally zoned property.

In Florida, the Sand Bluff solar project was to be connected to an existing Gainesville Regional Utilities substation in Alachua County and produce about 50 megawatts of electricity a day. Issues of racial and environmental justice were raised and they were enough to discourage approval. It is the last time a county level approval would be required under the new Florida legislation.

Maine enacted a law which would prohibit state and local governments from licensing or permitting the siting, construction or operation of wind turbines in the state territorial waters that extend three miles from shore. The ban would have no effect on activities in federal waters beyond the three mile limit. It’s another example of the conflict between labor and the environment coloring so many aspects of the effort to decarbonize.  In this case the law placates Maine’s lobstermen.

COSTS OF COAL EVEN AFTER ITS GONE

Appalachian Voices been an advocate for post-coal Appalachia as the region transitions from the mineral extraction industry. Recently, they studied the magnitude of the cost involved with reclaiming old abandoned mining sites. As more coal companies declare bankruptcy, fewer companies remain to take over mines, so the number of companies forfeiting reclamation bonds and deserting their cleanup responsibilities will only increase. In many states, the funds generated by bonding programs may fall short of the actual reclamation costs that are passed to state agencies and taxpayers.

Using state and federal reclamation data, the organization estimated the amount of outstanding reclamation at active SMCRA permits for seven Eastern coal mining states: Alabama, Tennessee, Virginia, Kentucky, West Virginia, Ohio, and Pennsylvania. The total estimated cost of outstanding reclamation is $7.5 to $9.8 billion dollars across all 7 states. Total available bonds across the seven eastern states amount to about $3.8 billion dollars.

Without federal funding, it’s likely that the states would foot the bill. The silver lining of the problem is that addressing the reclamation backlog could put a substantial number of people back to work. If the remaining 633,000 acres in need of reclamation were reclaimed, this would create between 23,000 and 45,000 job-years across the Eastern states. It is likely not a long term fix but it could lessen some of the issues resulting from the demise of coal.

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.