Joseph Krist

Publisher

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GOOGLE AND NEW YORK CITY

We see a number of positive factors in the announcement that Google is going to purchase for $2.1 billion an existing building to add to its office space in New York. Google already leases 1.2 million square feet in the building. Ownership represents the kind of statement that cities are looking for in the post-pandemic environment. This is especially true for New York City. Google also announced plans to increase staff by 2,000 on top if the 12,000 corporate employees it already employs in Manhattan.

Google notes that the purchase does not alter plans to delay full office returns until the first quarter of 2022. At the same time, Google reiterated that “As Google moves toward a more flexible hybrid approach to work, coming together in person to collaborate and build community will remain an important part of our future.”  The purchase will close by the first quarter of 2022 and the site is expected to open by mid-2023. The building will be part of a five building “campus” comprised of other owned buildings.

The move does not appear the result of tax breaks so the gradual expansion of Google in the City has drawn much less opposition than did the plan to subsidize Amazon’s proposed Queens campus.  It is an important step in the City’s recovery process. The timing works well as part of the larger recovery process currently underway in the City. We now have a major business real estate investment, the reopening of Broadway and numerous other cultural and entertainment venues. Restrictions on international visitors are being relaxed. All of these are important factors in assessing the outlook for the NYC economy going forward.

NATURAL GAS LOSES IN MICHIGAN

While recent legislative debates have increased attention on the potential role of nuclear as a source of “green” energy, natural gas has been in the spotlight as utilities explore the feasibility of using it as a bridge to the end of fossil fuel use to generate electricity. Utilities are seeking to use natural gas (as a clean alternative to coal) for incremental growth in generating resources. Environment and climate change are challenging the notion that natural gas is actually a clean alternative.

The situation has been coming up as utilities seek to replace legacy fossil fuel powered generating capacity while increasing the resilience and diversity of their generating resources. For coal centric utilities, the move to green energy has been frought with concerns with cost, reliability, and the need to rapidly decarbonize. This has led utilities, including many smaller ones, to look into the use of natural gas (as opposed to coal or oil) to meet local energy demand while also satisfying the environmental concerns of its customers.

Those efforts have led to mixed results. The latest example is the Grand Haven, MI municipal electric utility. Plans for a $27 million power plant in Grand Haven have been dropped by the Board of Light and Power, which cited community opposition as the reason. The plant would have been financed through a $45 million bond issue. It was intended to replace a coal fired plant which closed in 2020.

The move highlights the complexity of issues confronting utility managers as they operate in a non- fossil fuel environment. Grand Haven is unique in that in additional to traditional uses of the power and steam produced by a generating plant, the city uses power from generating sources it owns to heat its sidewalks to remove snow. Now it will have to find resources to fund snow removal by more traditional means.

We see Grand Haven as an example of the environment facing municipal utility operators as they try to adapt to consumer demands and environmental regulation realities. Municipal utilities, given their status as government entities are, on a practical basis often more accountable to their local customer bases than the managements of investor-owned utilities. The Grand Haven general manager summed it up well – “We’re a community-owned utility. If the community doesn’t want us to do something, we don’t want to do it.”

KEYSTONE STATE P3 MOVES FORWARD

The Commonwealth of Pennsylvania decided to take a public-private partnership approach to the rehabilitation of eight major bridge crossings throughout the state. Now it is moving forward with that process pursuant to authorizing legislation. Act 88 of 2012, the state’s transportation P3 law, allows PennDOT and other state agencies, transportation authorities and commissions to partner with private companies to participate in delivering, maintaining and financing transportation-related projects. The law created the seven-member Public Private Transportation Partnership Board, appointed to examine and approve potential public-private transportation projects.

Upon board approval, the department or appropriate transportation agency can advertise a competitive RFP and enter into a contract with a company to completely or partially deliver the transportation-related service or project. The plan for the eight bridges was approved in November, 2020. Now, the state’s Public-Private Transportation Partnership Office announced that three teams will be invited to submit proposals.

The teams include some of the usual suspects in the large P3 universe. Each of the groups includes one of three established participants – Macquarie Infrastructure Developments; Kiewit; and Cintra Infrastructures SE. The firms have all participated in a variety of P3 projects across the country.

HOUSING IN CALIFORNIA

Two pieces of legislation designed to increase the production and availability of “affordable’ housing in California have been enacted. SB 9 authorizes a local agency to impose zoning and design requirements unless those standards would have the effect of physically precluding the construction of up to 2 units or physically precluding either of the 2 units from being at least 800 square feet in floor area, prohibiting the imposition of setback requirements under certain circumstances, and setting maximum setback requirements under all other circumstances.

The law limits how much an existing structure can be demolished to affect the development of existing units. The idea is to supplement existing housing rather than the outright removal and replacement of existing single family to facilitate development. That will limit the amounts of new units produced and addresses existing homeowner concerns.

SB 10 would, notwithstanding any local restrictions on adopting zoning ordinances, authorize a local government to adopt an ordinance to zone any parcel for up to 10 units of residential density per parcel, at a height specified in the ordinance, if the parcel is located in a transit-rich area or an urban infill site. It is a follow up to a previous legislative effort to facilitate and encourage more dense multifamily housing development around transit facilities. Areas around BART stations are a good example.

Those efforts were portrayed as engines of gentrification. We disagree. Housing is at the center of concerns which many have about the sustainability of a California without an economic middle. It is widely recognized that outmigration is fueled in large part by the cost of housing. As median single family home values are at the million-dollar level, the ability to sustain a middle-class life is significantly impacted.

INFRASTRUCTURE BILL DEBATE HIGHLIGHTS CLIMATE/JOB CLASH

As Congress debates and attempts to legislate the proposed $3.5 trillion infrastructure bill, concerns have been expressed about the ability of the economy as currently structured to facilitate many of the proposed programs and facilities. Specifically, there are real worries based on current conditions that there will be an insufficiency of skilled trades workers. This is true for both legacy type infrastructure projects as well as the emerging clean energy industry jobs.

On the green side comes one example from California. The California Solar and Storage Association asked the Superior Court of California in San Francisco to overturn a new requirement that installers be “certified electricians.” The industry employs 35,000 in California.

One of the subplots to the green energy debate is the issue of how much skill in the sense of true skilled tradesmen (electricians) is needed for both individual and commercial solar installations. The question is one of how much skill does it take to put the pieces of the erector set together versus what it takes to connect the system up and get it working.

The industry believes that the vast majority of the work is construction rather than electrical. This means that one or two certified electricians might be all that is needed to safely and correctly connect and get the system operating. The California requirement would likely require many more electricians. This then raises issues of equity in that the use of certified electricians will likely require the use of unionized electricians. Historically, skilled trade unions have been slow to deal with diversity and training of minorities.

INFRASTRUCTURE BILL AND THE TAX EXEMPTION

Don’t look now but the tax-exempt status of municipal bonds is again under attack. Much of the industry’s focus has been on items like advance refunding capability and private activity and direct pay bonds. All of these have garnered support in the market as well as Congress.   At the same time, the debate over the ultimate size of the pending reconciliation bill has renewed focus on how the plan would be paid for.

This has led to some on the progressive side of things to target tax exempt income. The proposed 3% high income surcharge is included in the budget reconciliation bill now being debated by Congress. The provision would impose a tax equal to 3% of a taxpayer’s modified AGI in excess of $5 million, or $2.5 million for a married individual filing separately. The legislation defines MAGI as adjusted gross income reduced by any deduction allowed for investment interest, which does not include tax-exempt income.

Proponents of this provision insist the tax-exempt municipal bond income would not be considered to be included in calculating modified adjusted gross income. As it stands, the language of the proposal does not make this crystal clear.  So far, comments on the provision rely on staff and outside attorney interpretations to support the view that the limit does not apply to municipal bond income. The proof will be in the details.

STATE RATINGS CONTINUE POSITIVE STREAK

As states continue to return to the market for general obligation debt, the positive impact of the first stimulus bill of 2021 continues to be reflected in the ratings of state GO debt. The latest beneficiaries were two states whose tourism-based economies absorbed significant hits as the result of pandemic induced shutdowns.

Nevada saw its rating outlook from Fitch revised to stable from negative. Given the crushing impact of the pandemic on Las Vegas, this is an impressive turn. Hawaii. S&P took a similar action for general obligation debt from Hawaii.

HYDROPOWER UNDER PRESSURE

There could probably not be a worse time for hydroelectric resources to be unable to generate their maximum amount of electricity. The debate over climate change and the vicious ongoing drought have put hydroelectric facilities under the microscope. Many see hydro as an important component of the effort to deal with climate change while others see dams as major environmental problems due to their impact on fish.

Now, the ongoing drought is casting a new light on hydroelectric facilities. The US Energy Information Agency has released its latest Short Term Energy Outlook (STEO) and the news about hydro is not good. EIA forecast that electricity generation from U.S. hydropower plants will be 14% lower in 2021 than it was in 2020. The dry conditions have reduced reservoir storage levels in some Columbia River Basin states.

According to the U.S. Department of Agriculture’s National Water and Climate Center (NWCC), reservoir storage in Montana and Washington is at or above average. However, as of the end of August 2021, reservoir storage in Oregon measured 17% of capacity, less than half its historical average capacity of 47%. Idaho reported reservoir storage at 34% of capacity, lower than its historical average capacity of 51%.

California contains 13% of the United States’ hydropower capacity; in 2020, hydropower plants in California produced 7% of the country’s hydropower generation. The reservoir at Lake Oroville, the second-largest reservoir in California, hit a historic low of 35% in August 2021, prompting the Edward Hyatt Power Plant to go offline for the first time since 1967. So far this year, hydropower generation in California has been on the lower end of its 10-year range.

The latest STEO expects hydropower generation in the Northwest electricity region, which includes the Columbia River Basin and parts of other Rocky Mountain states, to total 120 billion kWh in 2021, a 12% decline from 2020. We expect hydropower generation in the California electricity region to be 49% lower in 2021 than in 2020, at 8.5 billion kWh.

EQUITY AND TRANSIT

Minneapolis was at the center of the events which have continued to propel race issues to the front of almost any debate on public policy issues. One of the issues which continues to receive attention is the issue of equity. These issues touch on zoning policies, housing and education policies, and the availability of jobs. One of the early sectors to see the impact of this debate is transportation.

Much of the focus has been on how and where infrastructure is funded and constructed. This has put the location of roads and highways at the front of that debate. One segment of that debate is around the funding of mass transit. One of the early progressive targets has been the fare-based system of funding mass transit. This has led to the adoption of a variety of programs in cities across the country which seek to lower or eliminate fares for the lowest income passengers on those systems.

Now, after enacting zoning changes and developing a police reform program on the City ballot this November, the issue of assistance to low-income public transit patrons is back in the news in Minneapolis. It seems that 600,000 metro Minnesotans are currently eligible for a program initiated in 2015 which provides for reduced fares for income qualified riders.  So how frustrating is that only less than 5% of eligible riders are signed up for the program. It’s an example of even the best-intentioned programs like this in the end rely on individuals being motivated enough to participate.

WATER

Indian Wells Valley Groundwater Authority was established after legislation was enacted in 2014 to manage groundwater supplies. The law was a reaction to the results of prior droughts which led to large scale pumping of water sourced in aquifers. The Sustainable Groundwater Management Act (SGMA) was designed to protect the most overdrawn groundwater basins, often in rural regions, by requiring plans to balance the amounts of water being pumped from, and recharged into, aquifers by 2040.  Indian Wells is a groundwater management agency (GMA).

In its role as a GMA, Indian Wells plans to significantly raise the fees it charges to local systems which use groundwater. The increases – $2,100 per acre foot of water – would be especially meaningful for large industrial customers. One of them, Searles Valley Minerals, is the only U.S.-based company to produce a critical ingredient for the pharmaceutical glass used in COVID-19 vaccine vials. SVM also provides some water supplies to the unincorporated rural community of Trona (pop. 1,900). 

So far, the two large industrial customers are refusing to pay the higher charges leading to threats of cutoffs in the water supply. A lot of the pressure comes from the fact that Indian Wells Valley is home to the Navy’s largest single landholding in the world, the Naval Air Weapons Station China Lake, covering 1.1 million acres. The Navy was instrumental in the creation of the Groundwater Authority and has maintained tight controls on water demand which could impact the naval facility. Now, the drought is severely pressuring local supplies.

The rate increases are the subject of litigation. One proposed alternative would raise fees and reduce water usage to the authority’s preferred target, but over the two-decade period set up by the law.  Any decision on such litigation could be precedent setting so it should be of interest to all water investors.

SEC ENFORCEMENT

Recent testimony by the head of the Securities and Exchange Commission (SEC) indicated that the municipal bond market was expected to undergo closer scrutiny from the Commission. Even before those expanded efforts bear fruit, the SEC is already active in this area.

The Securities and Exchange Commission charged a San Diego County school district, Sweetwater Union High School District, and its former Chief Financial Officer, with misleading investors who purchased $28 million in municipal bonds. The District and the CFO are alleged to have provided investors with misleading budget projections that indicated the district could cover its costs and would end the fiscal year with a general fund balance of approximately $19.5 million, when in reality the district was engaged in significant deficit spending and on track to a negative $7.2 million ending fund balance. 

The SEC order issued upon settlement of the case indicates that the CFO managed the bond offering for the district and was aware of reports showing that the projections were untenable and contradicted by known actual expenses. Nevertheless, the District and the CFO included the projections in the April 2018 bonds’ offering documents and also provided them to a credit rating agency that rated the district, while omitting that the projections were contradicted by internal reports and did not account for actual expenses. Additionally, the complaint alleges that the CFO signed multiple certifications falsely attesting to the accuracy and completeness of the information included in the offering documents.

This is the fifth announcement of this kind regarding school district issuers since March of 2019.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

The spread of the Delta variant of corona virus has once again put the pandemic at the center of many current debates. We examine several sectors to see how the latest virus-related events are impacting several sectors and issuers. We also note that the argument over vaccine and other health regulations has run into an unanticipated hurdle. Proponents of vaccine requirements will have to overcome legislation and subsequent court decisions which support religious exemptions especially in regard to employment. Those decisions and laws actually make it harder to impose vaccine requirements in the face of claims of limits on religious freedom.

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COVID AND HOSPITALS

Hospitals throughout the pandemic were heavily impacted financially by the pandemic. The unanticipated costs of supplies associated with the pandemic and the loss of revenue associated with elective procedures was highly negative to bottom lines. The initial aid package delivered by Congress enabled many institutions to weather the revenue impact and maintain their credit ratings. The hope was that with the advent of vaccines that the pandemic’s impacts could be lessened and more regular operations would support hospital finances.

The reality has been that the rollout of the vaccine and the reluctance of too many to be vaccinated have led to the situation which prevails today. The rise of more difficult cases has once again strained hospital resources. One unanticipated factor has been the reluctance of healthcare professionals to be vaccinated. In combination with the general issue of a labor pool that is slow to return to the pre-pandemic status quo. When you add in burnout from the pandemic, hospitals are under real pressure.

All of this occurs against the backdrop of the revenue impacts on hospitals as the result of COVID.  Alvarez & Marsal is a consulting firm that specializes in turnarounds in the healthcare field as well as other sectors. They have released research about the impact of the pandemic on hospital revenues. Their data covering the 25 largest not for profit hospital systems showed Net Patient Revenue plunged almost 20 percent from the fourth quarter of 2019 to the second quarter of 2020 as the country locked down. The infusion of federal CARES Act funding enabled revenue to recover at the end of the 2020 calendar year to a drop of just 3 percent from 2019 to 2020.

Operating income declined 11 percent from 2019 to 2020. Discharges decreased 18 percent (4th quarter 2019 to 2nd quarter 2020) and 9 percent year to year (2019 to 2020). Patient Days dropped 13 percent (4th quarter 2019 to 2nd quarter 2020) and 4 percent year to year (2019 to 2020). Length of Stay increased 7 percent (4th quarter 2019 to 2nd quarter 2020) and 6 percent year to year (2019 to 2020). Surgeries fell 36 percent (4th quarter 2019 to 2nd quarter 2020) and 11 percent year to year (2019 to 2020). Emergency Room visits declined 31 percent (4th quarter 2019 to 2nd quarter 2020) and 17 percent year to year (2019 to 2020).

How do hospitals cope? The latest example is the Henry Ford Health System in Detroit. It recently announced the temporary closure of some 120 beds across its system due to the inability to meet state staffing requirements. For a large system like Henry Ford, this represents less than 10% of beds. At smaller facilities, the impact of that number of closures would be significant. It’s not expected to be a serious credit factor at the larger institutions. Once again, the view that bigger is better in healthcare is validated.

COVID MANAGEMENT

From the start of the pandemic, mass transit agencies in general and the MTA in particular have been at the center of efforts to maintain ridership and finances. In New York, this week marked the return to the office for City employees. While there are many concerns regarding the details of the New York City plan (capacity limits, mask requirements, testing for the unvaccinated), one of the major concerns on all sides of the issue has to do with concerns over returning to mass transit.

It is not currently mandatory for MTA employees to get vaccinated, but the authority will begin requiring weekly COVID-19 tests on Oct. 12 for those who do not have proof of vaccination. The agency says that more than 70 percent of MTA employees have received at least one dose of the coronavirus vaccine. Lower rates of vaccination are seen among employees for transit divisions, like trains and buses.

MTA has provided a $500,000 death benefit to its nearly 68,000 employees since last year to vaccinated employees who die from COVID-19. That benefit is being extended through the end of the year. A total of 171 MTA employees have died of COVID-19–related causes since the beginning of the pandemic. Only three MTA employees have died of COVID-19–related causes since June, when the policy was implemented.

The extension of the benefit period through year end is part of the effort to encourage the recalcitrant to get vaccinated. That effort will support efforts to return more private sector employees to an office setting.

COVID LABOR SHORTAGES

Many sectors of the economy are reporting labor shortages, The number of help wanted signs on a wide variety of businesses is significant. It isn’t just private businesses which are seeing the pressure from labor shortages. One area of emerging pressure is an apparent shortage of school bus drivers. Between personal vaccination resistance and the lack of availability of vaccines for many school age children, the situation is not a total surprise. Add to that the uncertainty created by efforts in some states to preempt mask requirements and it is clearly a problem.

It is not clear who will pay the costs of replacing school district workers. In Massachusetts, the governor is committing some 90 National Guard troops to drive school busses due to driver shortages in Chelsea, Lawrence, Lowell, and Lynn. A total of 250 Guard have been activated for the purpose of aiding in addressing a driver shortage throughout the Commonwealth. In Delaware, a charter school in Wilmington, Del., has resorted to offering parents $700 to not use the school bus system to get their kids to and from school.

A more extreme situation confronted Pittsburgh, PA. It postponed the opening of its schools by two weeks. The school district was short 426 drivers (229 CDL and 207 non-CDL), resulting in a seat gap for approximately 10,996 City of Pittsburgh students. A combination of hiring and limits of the availability of buses vs. the option to walk is being used to address the shortage. Pittsburgh also offered to “reimburse” families who transport their children on their own.

COVID LEGISLATION

A review by Kaiser Health News found that 26 states pushed through laws that permanently weaken government authority to protect public health. Some of the more egregious examples are Arkansas (mask ban), Idaho (county officials allowed to override public health orders), and Kansas and Tennessee where school boards, rather than health officials, have the power to close schools.

In at least 16 states, legislators have limited the power of public health officials to order mask mandates, or quarantines or isolation. In some cases, they gave themselves or local elected politicians the authority to prevent the spread of infectious disease. At least 17 states passed laws banning COVID-19 vaccine mandates or passports, or made it easier to get around vaccine requirements. At least nine states have new laws banning or limiting mask mandates. Executive orders or a court ruling limit mask requirements in five more.

The Arkansas law has been stayed by the courts for now. Troubling is the view expressed by the bill’s sponsor who said “It’s time to take the power away from the so-called experts, whose ideas have been woefully inadequate.” The bill was based on a template from the conservative anti-government group the American Legislative Exchange Council (ALEC). ALEC is behind any number of laws designed to achieve conservative goals in state legislatures. The move to limit the powers of local health officials has led to at least 303 public health leaders who have retired, resigned or been fired since the pandemic began.

For ESG investors, these changes should raise flags. When it comes to public health, these issues raise questions about how the potential impact of these changes reduce the ability of officials to deal with crises in real time. That should put issuers operating under those constraints to compare unfavorably with other issuers when it comes to ESG investment measurement.

COVID AND GOVERNMENT EMPLOYMENT

The number of noneducation state and local jobs, which make up about half of the public sector and include workers in areas ranging from city parks and city halls to police forces and correctional facilities, is down by more than 400,000 since the pandemic struck, according to the latest federal Labor Department estimates for August as cited by the Pew Foundation. Private employment is up 3.4% since December, though still not fully recovered from its losses since the pandemic struck earlier in 2020.

The greatest reductions since the pandemic began have been in local governments. As of August, local public payrolls were down 5.3% from pre-pandemic totals, more than 350,000 jobs, excluding education positions.  State government employment—also excluding education—has declined slowly every month this year, with the total down 2.1% from pre-pandemic levels, or about 57,000 jobs.

The research shows that multiple factors are holding down employment. Temporary layoffs have not been fully offset by rehires as in person services are still slow to come back. Budget pressures that led to hiring freezes or furloughs earlier in the pandemic remain in place in some jurisdictions. The “great rethink’ among many workers which is slowing a return to private sector jobs is also hitting government. More workers are leaving government, including retirements. There were fewer noneducation workers in state and local government than in July 2019 except in Rhode Island, South Dakota, Texas, and West Virginia.

One caveat to the numbers. Employment in industries operating in facilities owned by government also include employment at state and/or tribally owned facilities. The best example is tribal owned casinos. Pew notes that Labor Department estimates show that there were nearly 23% fewer workers in state and local government-owned amusement, gambling, and recreation facilities in March compared with a year earlier while fire protection jobs were essentially unchanged.

ILLINOIS CLEAN ENERGY PLAN ENACTED

Exelon plans to refuel its Byron and Dresden nuclear plants ‘as a result of the action taken by the Illinois legislature to enact a comprehensive energy bill.’ The Byron plant was slated for defueling and closure beginning this past week. The Dresden plant was to be taken offline in November.

The municipal credit angle is clear. As we detailed last week, the measure would set a target for the Prairie State Generating Station — one of the top industrial sources of carbon pollution in the U.S. — and Springfield’s city-owned plant to reduce climate-damaging emissions by 45% by 2035 and completely by 2045. If they miss the 2035 target, the plants would get an additional three years but could be forced to shut down generating units if necessary to achieve the 45% reduction.

The takeaway from the battle over energy in Illinois is that it highlighted the issues which impact the debate – nuclear vs, no nukes; the loss of employment and tax base, and the uncertainty as to the actual costs of an energy transition. Over the past half century of the environmental debate, the inability of advocates to estimate the real costs of the contemplated changes have always caused skepticism.

In the case of the Illinois plan, the official estimate of the initial costs—an average electricity bill increase of $3.55 per household per month—is likely to be less than the true costs. Isn’t it always? Already, flaws in the law are being cited. One example is the plan to offer rebates of up to $4000 to support electric vehicle sales. The law does not address the fact that existing programs to provide rebates are funded from eight counties in and around Chicago. Absent additional legislation, only residents of those counties would benefit from the rebate.

CHICAGO – FUNDING THE POLICE

The fact that Chicago’s problems with violent crime have become a national issue and the power of local political interests remains intense does not lessen the impact of the announced contract agreement between the City and its police force. Keep in mind that the agreement occurred in the post- George Floyd environment and in the wake of several incidents of questionable police involved shootings.

In this environment, the City has announced a new contract that gives them a 20% pay raise over eight years, more than half of it retroactive. The agreement was still police friendly on other issues. The city did not get the requirement it sought compelling officers to disclose secondary employment or hours worked at those second jobs. It also did not cap those moonlighting hours.

The agreement creates the need for the city to find $377.6 million for four years of back pay. Retroactive paychecks will range from $18,000 to $36,000, depending on seniority and retroactive overtime pay that will add as much as 20% to that amount; and back duty availability pay that means up to $7,600 per officer.

We view the agreement as credit negative for the City. The issue is as much based in concerns about management as it is on the size of the raise. The Mayor has been dealing from a position of weakness in terms of her relationship with the police. But she inherited the lack of a contract from former Mayor Rahm Emmanuel.

How it is dealt with is another issue. The City’s 2021 budget (the fiscal year is the calendar year) set aside just $103.3 million for back paychecks. The city plans to cover the rest by refinancing $1 billion in existing debt to generate $232 million in savings. The city still must find an additional $325 million to cover future costs of the contract. 

The hope was that the negotiations in the face of the pandemic and fiscal realities would create real change in the police department. Here’s how it impacts individual officers. The contract calls for rank-and-file CPD officers to receive a 10.5% retroactive pay raise and 9.5% more through January 2025. The city has also agreed to increase so-called “duty availability pay” to $950 per quarter and the annual uniform allowance to $1,950.

Duty availability pay will be offered “retroactively” from July 2017 to all officers whose probation period has ended after 18 months. Going forward, that pay will be available after 18 months, instead of 42. Rank-and-file police officers will be asked to absorb half of the increase in health care contributions imposed on police sergeants and Chicago firefighters and paramedics. The second half of that increase will be postponed until July 1, 2022 to allow members to retire under the current levels: 2.2% at age 55, or 0% for those 60 and over.

The failure to seize the opportunity reflects the Mayor’s relatively weak position. The details defer much of the difficult work in addressing long term issues with the police (pensions, increasing costs of managing litigation) to future negotiations. For the Mayor, the most important feature of the deal is its length. It guarantees labor peace until after the 2023 mayoral election.

LADWP

The Los Angeles City Council voted to have the Department of Water and Power transition to 100% renewable energy by 2035. That is ten years sooner than was envisioned just three years ago. In March of this year, the LA100 study was released. The study was conducted by the U.S. Department of Energy’s National Renewable Energy Laboratory in partnership with LADWP and USC. It found that the DWP — the nation’s largest municipal utility — can reach the city’s goal by 2045 or sooner if it rapidly deploys wind and solar power, electrical storage and other technologies.

The LA100 study showed that the transition to 100% will cost between $57B to $87B.  The Council estimated that the clean energy transition could create 9,500 jobs. As of calendar year 2019, renewable energy constituted 34% of the overall mix and 51% of the total power generated at LADWP was free of carbon.

ST. LOUIS FOOTBALL LITIGATION

The lawsuit filed in 2017 in state court in Missouri claims the NFL broke the league’s relocation rules by allowing the Rams to leave St. Louis after the 2015 season, and misled the public about its intention of staying here. The plaintiffs claimed the Rams’ departure cost the city millions in amusement, ticket and earnings tax revenue. The suit alleges breach of contract, fraud, illegal enrichment and interference in business by the Rams and the NFL, causing significant public financial loss.

The plaintiffs in the case are the St. Louis Regional Convention and Sports Complex Authority (RSA), the public entity that owns the Dome and in 2015 and 2016 spent $18 million on a failed plan to keep the Rams in St. Louis with a Mississippi riverfront stadium, and the city of St. Louis and St. Louis County. The RSA gets its funding from the city, county and state of Missouri.

Absent a settlement, a trial is scheduled for January in the midst of the NFL’s playoffs.  St. Louis is seeking $1 billion or more through the litigation. The total return to the plaintiffs will be smaller as they have agreed to pay their attorneys 35% of any award.

NORTH CAROLINA LOCAL GOVERNMENT COMMISSION

One of the longstanding sources of support for the Tar Heel State’s local government credits has been the Commission. The existence of the Commission and the powers it has have long been cited for the State’s generally positive local government credit profile. While the State does not directly support local credits, the Commission has established a perception that it is a key factor in preventing defaults.

Some 1,100 municipalities, counties, boards of education, public hospitals, utility districts, mental health agencies, housing authorities, universities, airport authorities and other public authorities are subject to the Commission’s oversight. Established in response to the negative impacts of the Great depression on local North Carolina credits, the Commission approves debt issuance and reviews the financial operations of issuers. Recently, evidence of the Commission’s positive role came in the announcement that 38 municipalities had been released from its Unit Assistance List. This reflects the strengthened condition of those issuers.

The State is not taking things for granted. SB 314 was passed by the General Assembly and signed into law last month.  The new law provides for a legal process for the voluntary or involuntary dissolution of a distressed governmental unit that is no longer viable. It also gives the LGC the authority to mandate specialized training for officials in a unit of local government exhibiting fiscal distress.

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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NEW YORK PENSIONS

Throughout all of the years when the State of New York’s credit was on its way down, one area which remained a positive was the management of the State’s various pension funds. It has been a reflection of regular funding, good investment management, and flexibility in terms of the structure of the pension fund obligations.

Over recent years, the issue of how to effectively lower pension benefits and funding requirements in states with significant unfunded pension obligations has been a continuing problem. One way is to introduce different tiers of pension beneficiaries based on date of hire. It is a slow path but a steady one and it has proven out.  New York has had several tiers of pension categories which clearly establishes a precedent.

Another issue has been the debate over how realistic the discount rates being applied were when pension funds estimated their unfunded liabilities. The higher the assumed return to the fund the better off the fund would be so long as the annual actuarially required contribution (ARC) from current funds was made. These assumed rates of return were kept high even in the face of poor investment performance. It allowed legislators to reduce annual ARC requirements and avoid tax increases.

Eventually, one has to pay the piper and the pension funds have been no exception. Slowly, assumed rates of return have been lowered. There has still been concern that in many states the assumptions remain too high. Here once again, NYS finds itself in a leading position. The State Comptroller and pension fund overseer has announced that the long-term assumed rate of return on the Fund’s investments will be lowered from 6.8% to 5.9%.

In 2010, he decreased the rate from 8% to 7.5%, in 2015 to 7% and in 2019 to 6.8%. The median assumed rate of return among state public pension funds is 7.0% as of August 2021, according to the National Association of State Retirement Administrators. This comes as the State was able to report a funding ratio of 99.3%.

MEET ME IN ST. LOUIS

The City of St. Louis has always suffered economically in comparison with its surrounding St. Louis County. The trend of migration from the City to the County in the post WWII era accelerated in the late 1960’s. The resulting damage to the City’s tax base and economic base has been a drag on its credit for years. The existence of the City and County as two distinct governments created tensions between the two governments which have interfered with sound regional infrastructure development and the provision of many services.

At the same time, the City’s financial management was weak and its fiscal position and ratings continued to decline. The result was a decline to a Baa2 rating for general obligation bonds and a Baa3 lease appropriation rating. Now, the City has benefitted from the strong pre-pandemic economy and reported consecutive years of current budget surplus. Add $ 498 million of federal funding through the American Rescue Plan Act (ARPA) to the mix and the outlook improves.

And so, it is as Moody’s upgraded the City of St. Louis, MO’s general obligation unlimited tax (GOULT) debt rating to A3 from Baa1. Appropriation debt is now rated Baa2. The balanced current operations along with the aid provides a more stable base to support the credit. The city has remained the center of employment in its region and it does have a tax structure which captures revenues from commuters through economically sensitive activity taxes such as earnings, payroll, and sales tax revenue. This is a real factor in offsetting the less favorable economics and demographics of the City. Thus, the positive fiscal result.

NYC AND ELECTRIC VEHICLE CHARGING INFRASRUCTURE

The City of New York will pilot the installation of public vehicle chargers for electric vehicles. They will be provided at newly reserved curbsides beginning in Manhattan. They are designed to charge a vehicle in under one hour up to at least 80% capacity. Charging will cost of 35 cents per kilowatt-hour. 

Press reports indicate an expectation that the DOT will also announce plans to expand its network of curbside charging stations from the current 24 stations — each with two plugs — to 10,000 by 2030. However, those chargers will be of the slower “Level Two” variety. The initial 24 stations are part of a pilot program to install 100 curbside chargers by next month. The installations are part of a four-year “demonstration”. 

It is the sort of investment if cities are serious about their curb management from both business and transportation perspectives. Reservations of curbsides for these vehicles as well as reservation of curb for deliveries are two ways localities can take a forward leaning approach to vehicle management. Larger cities are in a unique position to take advantage of their effective ownership of their streets including curb space. It is a way to drive results and not just policies.

WEST VIRGINIA COAL UPDATE

We have regularly discussed the role of regulation in the process of decarbonizing the electric power grid. In particular, discussed the role out of state regulators play in the regulation of the operation of coal fired generating units which supply power to those states. Recently, we focused on regulatory actions in Virginia and Kentucky which could impact the operations of coal fired generation in West Virginia. Decisions in those two states limiting the amounts which could be charged to customers in those two states have made an earlier closing date for coal assets more likely.

Now, Appalachian Power and Wheeling Power petitioned the West Virginia Public Service Commission to approve making West Virginia customers responsible for $48 million annually to cover wastewater compliance work to keep the John Amos, Mountaineer and Mitchell coal-fired generating plants in Putnam, Mason and Marshall counties federally compliant with federal effluent limitation guidelines. The companies are asking West Virginia customers to shoulder all of the cost burden for these planned upgrades required to keep the plants compliant with wastewater discharge guidelines. Not making the wastewater treatment upgrades would require that the plants shutter in 2028.

ENERGY AND ASSESSMENTS

The vulnerability of reliance on extractive energy industries has been made clear. What policy changes could not accomplish in terms of the production of fossil fuels, the pandemic and its impact on oil demand did. One example of the potential impact of a changing energy environment occurs in Colorado.

Colorado is better known for its relationship with fossil fuels through mining. There are areas which produce oil. One of them is Weld County. This northern Colorado county produces an estimated 90% of the oil extracted in the state. The County has gone through the declines in production associated with the pandemic which reduce unemployment and support tax revenues. Now that process has impacted the County through a reduction in assessed valuations for oil and gas properties.

Weld County its all-time oil production peak at nearly 170 million barrels in 2019. Production dropped to just under 150 million barrels out of the ground in 2020. According to production data kept by the Colorado Oil and Gas Conservation Commission, this year’s yield is on pace to fall an additional 30 million barrels. The County saw an unprecedented $2.7 billion reduction to its assessed property valuation last year, a nearly 18% decline from 2019. This resulted in property tax revenue declines of $45 million. 

The County is not unprepared. It has $100 million in a general contingency fund, another $100 million in its public works reserve fund and $36 million in a reserve account for county buildings. This should aid in the transition from extraction Colorado’s oil and gas sector is taxed at a property assessment rate of 87.5%, three times what commercial property is taxed at and more than 12 times the rate for homes.

At the local level, the reliance on large taxpayers is not without risk. The Platte Valley School District relies on oil production facilities for an estimated 95% of revenues. The assessed property value in the school district last year went down even more sharply — 34% — than the county as a whole.  That could have implications for the County tax base going forward. Much of the population increase in the County is suburban sprawl from Denver, fueled by lower housing costs and property taxes. Those lower residential taxes reflect the revenue derived from energy extraction.

NYS AND ELECTRIC VEHICLES

One of the questions we asked when Andrew Cuomo resigned was what does the change in governor in New York mean for a variety of policies – criminal justice, the economy, the state’s role in economic development, the environment? This week we received our first indication of where policy might be going under a Hochul administration.

The new Governor has signed legislation that will require all passenger vehicles sold in the state to be emission-free by 2035. Hochul signed an order instructing the state Department of Environmental Conservation (DEC) to develop a regulation cutting the pollution emitted by trucks. A simultaneous executive order calls for the state Department of Environmental Conservation (DEC) to develop a regulation cutting the pollution emitted by trucks. The goal is to eliminate emissions from medium- and heavy-duty vehicles by 2045.

The actions make New York State the second, after California, to enact limitations on sales of internal combustion powered vehicles.

CLIMATE LITIGATION

Hoboken, NJ will have its lawsuit against fossil fuel producers heard in state, rather than federal, court. Hoboken sued oil and gas companies in 2020, charging climate change-related violations both of state common law and New Jersey’s Consumer Fraud Act. The city joined several others in pursuing legal remedies to address climate change issues.

The companies petitioned to move the case to federal court which is seen as a friendlier venue for these suits. The judge ruled that Hoboken’s lawsuit is not subject to “complete preemption” under the Clean Air Act or the Outer Continental Shelf Lands Act and that no federal officer is implicated in the city’s suit.  At the same time, he cautioned the city that “federal law may ultimately block Plaintiff’s claims through ordinary preemption.” 

That issue will have to be decided in state court. The defendants are likely to appeal the matter to the U.S. Court of Appeals for the 3rd Circuit.

VEHICLE MILEAGE TAXES

In California, the legislature recently extended a road usage charge pilot program until Jan. 1, 2027.  The debate spotlighted the usual suspects in terms of the arguments made and the pitting of rural versus urban interests. Rural voters and their representatives complain that the mileage tax would penalize then because of their need to travel relatively large distances as part of their day-to-day life.

That argument ignores the reality that under the current scheme, electric car drivers get all of the benefit of infrastructure while only gas-powered drivers pay those costs through taxes. If your car gets 20 mpg and you take a 60-mile trip, you use three gallons of gas which generates an average of 27.9 cents per gallon. So that trip cost (in terms of a tax) 84 cents. A 1.4 cent per mile mileage tax would generate the same level of revenue for the same trip.

The logical conclusion is that vehicle mileage fee proponents have done a bad job of addressing this concern. Take Pennsylvania where initial estimates of what a vehicle mileage fee would be are around 8 cents per mile.  That simply is not going to fly with long distance drivers. It then generates opposition to the concept rather than the price. The actual amount of the fee is not the big hurdle but it gets in the way of acceptance of the concept. It also comes as very mixed signals come out of Washington.

On the one hand, are the climate deniers and fossil fuel defenders who oppose any change. There is however, some bipartisan support for vehicle mileage fees in Congress and the Transportation Secretary has spoken very favorably about the VMT concept. Nevertheless, the proposed $3.5 trillion infrastructure package originating in the House does not include a VMT.

MUNICIPAL UTILITY IN MICHIGAN

The State of Michigan has not seen the creation of a municipal electric utility since 1912. Reliability issues, especially in the recent past have led many to question the ability of investor owned, profit based electric utilities to properly invest in grid resilience and reliability. It is an issue which has gained heightened attention in the aftermath of winter storms in Texas and the current disaster in Louisiana. We expect that this trend will continue.

The latest municipality to deal with these issues is the City of Ann Arbor, Michigan. The City Council voted unanimously, to ask the city’s Energy Commission to make a recommendation by Dec. 31 on whether the city should undertake a feasibility study to explore alternatives to the current situation which relies on DTE Energy. The hope by proponents of municipal power is that the process could lead to recommendations for the formation of a municipal utility.

Such an action would have to be approved by the City’s voters. State approval is not needed. In the City, the Energy Commission is expected to make recommendations to the City and then a feasibility study would be undertaken. Supporters of a municipal utility hope that the process leads to a ballot initiative in November, 2022.

PURPLE LINE P3

Maryland’s Purple Line has been a poster child for what could go wrong with a public-private partnership. The project was supposed to be completed by the Spring of 2022 but litigation and other construction delays destroyed that timetable. Eventually, the private partner pulled out of the project threatening its viability and completion.

The State of Maryland stepped into the process designing new partnership agreements dealing with many of the issues which disrupted the project. The net result is that the State would have to accept more of the financial costs of delays associated with approvals and litigation. Now, the Maryland Transit Administration, said the agency and private team managing the project expect to have a new contractor selected in December and a new construction contract finalized by Feb. 17. 

The hope is that this process could allow substantial construction to resume in the Spring or early Summer of 2022. A new construction contract previously had been scheduled to be finalized this month but, construction teams bidding on the project asked for more time to submit proposals. The timing change because it would modify a $250 million Purple Line legal settlement approved in December.

MDOT has been able to fund some work over the past year, including moving utility lines and manufacturing light-rail vehicles and some of the system’s electrical components.

PRIVATE HIGH SPEED RAIL

We always notice that high speed rail developers highlight the “private” nature of their projects and the lack of reliance on grants for funding. The effort is designed to make the projects look like products of an all private approach to funding. In the end though, these projects all seem to rely on some form of cost subsidy from a government funding source.

The latest example is the Texas Central, a proposed high speed line between Dallas and Houston. Texas Central has publicly stated that construction is projected to begin at the end of 2021 or beginning of 2022. Now, it appears that the start of construction hinges on the inclusion of federal lending in the infrastructure bill currently being written in the House.

The cost of the project is estimated at $24 billion. Financing commitments from private lenders cover about half of that amount. The remainder would be financed by federal loans to the project. That funding would be cheaper than private funding. Texas Central estimates that the fare for the train would be $150 based on comparisons with current airfares.

Land acquisition remains a hurdle for the project. 40-percent of the land required for the train has already been secured.  The remainder is planned to be acquired after financing is in place. The only sure section of the project is to be an initial test phase. Once financing is secured, the first 50-miles of track will be built from Dallas to the south so engineers can conduct tests. 

ILLINOIS POWER

A 100% clean energy sector by 2050 is the goal of legislation in Illinois which was under consideration as we go to press. The plan would lead to the closure of private, for-profit coal powered plants that generate more than 25 megawatts of electric generating units by 2030, and it would close down municipally-owned coal-fired power plants and natural gas power plants by a deadline of 2045. The proposal includes $694 million in taxpayer funds for Exelon to prop up its carbon-free nuclear power plants in Byron, Dresden, and Braidwood. 

Governor Pritzker’s office said the current version of the Senate bill would still allow the municipally-owned Prairie State and Springfield City, Water, Light, and Power coal-fired plants to “continue polluting for 24 years with no restrictions.” The measure would set a target for the Prairie State Generating Station — one of the top industrial sources of carbon pollution in the U.S. — and Springfield’s city-owned plant to reduce climate-damaging emissions by 45% by 2035 and completely by 2045. If they miss the 2035 target, the plants would get an additional three years but could be forced to shut down generating units if necessary to achieve the 45% reduction.

The pressure to protect the public power owners of the Prairie State Generating plant was intense. After all, municipal purchasers of the plant’s output are spread across three adjoining states to Illinois. The significance of the target date of 2045 for public power operators is that essentially all of the debt of the various agencies and municipalities which has been issued to finance Prairie State by that time. There is however, no guaranty that future legislatures will not enact legislation which could shorten that time frame. Should that be the case, some of the borrowers would find themselves paying for stranded assets. 

Prairie State emits 12.7 million tons of carbon dioxide per year, the most of any generating plant in the state.  The two IOU owned nuclear facilities are cited for their lack of carbon emissions and their role as employers of over 20,000.

CARBON FREE BUT…

The Illinois debate reflects many facets of the national energy debate. Obvious existing carbon free generation – nuclear and hydroelectric – are under pressure on other environmental grounds. While debates continue around the country – nuclear in Illinois and hydro in the Pacific northwest – the impact of drought on the debate complicates it.

The drought has significantly reduced the total amount of carbon free power for the West and Southwest. Hoover Dam’s normal capacity is 2,074 MW. Currently it is limited to 1,567 MW. The dam requires a power pool minimum elevation of 950 feet to produce power (with an expected capacity of 650 MW), Lake Mead’s elevation as of Aug. 31 was 1,067.96. feet. USBR’s California hydropower reservoir water levels are expected to remain above power pool minimums throughout the remainder of 2021, including at the 663-MW Shasta power plant at Shasta Dam and the 162-MW Folsom plant at Folsom Dam. Against this backdrop, there is growing support in the Northwest for removing dams in the name of species preservation.

The nuclear issue comes down to dollars and cents. New York and New Jersey subsidize their nuclear generators. A move to do so in Ohio has resulted in a significant criminal scandal. The energy industry has been at the center of scandal in Illinois. Nuclear generation has threatened municipal utilities in South Carolina and Florida. This has created a huge hurdle to overcome the carbon free nature of nuclear generation.

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