Joseph Krist

Publisher

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THOUGHTS FOR A NEW YEAR

This is our last issue for 2021. We will return with our January 10 issue.

As we look out towards the horizon, we have more than a few things which occur to us. This is not going to be a set of predictions but rather things which we will be focusing attention on to see what they indicate for the longer term. Clearly, 2022 will be a very political year as all of the potentially controversial and complicated issues will get a lot of attention as the political battle for control in Washington and across statehouses across the country unfolds.

That said, we focus on the more munibond centric issues which await. In New York State, the issue of pandemic response is rearing its head as we go to press. The Governor is facing an emerging challenge in the rise of the omicron variant. Many of the sectors most vulnerable to the pandemic were also important economic supports. The closure of some businesses and institutions and reinstatement of masking requirements comes at a difficult time.

The shift to a new mayoral administration in New York City in the midst of a potential pandemic reemergence creates unwanted uncertainty. The new mayor already faced challenges but now the potential negative impact of the pandemic creates even more pressure on an untested administration. For both Governor and Mayor, time is a real issue. The Governor’s proposed budget is due in mid-January and the first fiscal update from the new Mayor is due around the same time.

This all comes at a time of huge uncertainty for the City of New York. On my most recent visit this week to the City, it was a true sign of life and hope to see the theater marquees and other attractions lit up and operating. Now, some of those lights will dim again and some of the optimism which they reflected will ebb as well. It bodes poorly for the many spaces which remain vacant throughout Manhattan.

The pandemic also challenges the issue of congestion pricing scheduled to begin in 2022 for the central business district of Manhattan. The idea is ostensibly twofold – one the reduction of congestion and its use of fossil fuels and two a way to raise money for mass transit. Here’s the rub. If mass transit is permanently impacted by post pandemic employment realities, the punitive impact on private transit use is increased thereby diminishing support for the concept.

All you have to do is try to drive through Manhattan and you can see the many impacts of poor policy on congestion which go way beyond the number of cars.

The empty Ubers, the double-parked commercial vehicles, the lack of a viable policy for commercial vehicle needs, the issue of outdoor “temporary” restaurant spaces on public streets and sidewalks all contribute to congestion. All will be there even with emission free electric vehicles.  

In California, the more things change the more they remain the same. At year end we see the state proposing to effectively raise the cost of solar power. This while trying to decide whether fire, rain, snow or the lack thereof can be managed. The decision as to whether or not to reconsider the announced closure of the state’s last operating nuclear generating plant in 2025 will have major implications for the national energy debate.

Public transit faces more issues than ever. Primary among them is funding under the realities of the pandemic and its long-term impact on patronage both in terms of number of passengers as well as timing and patterns of that utilization. Just maintaining existing infrastructure is a great challenge. Funding it in an environment of lower demand and lower tolerance for increasing fares and tolls will be difficult at best. All of this against a growing back drop of reduced or subsidized fare programs across the country.

The ESG investment sector will have lots to think about. It remains a concern that there remains so much unsettled about the definition of what ESG investing truly means, what new disclosure pressures and requirements are needed to bring more clarity to the issue of what exactly is meant by ESG as an investment principle. Too much of the answer to those questions is obscured by the “black box” nature of the many and diverse methods of evaluating projects and investments. This merely sustains the view that the ESG tag is currently much more of a marketing tool or a political tool. “Greenwashing” is a real problem.

If it is a valid investment category, a much narrower set of definitions and standards must be adopted, disclosure standards must be promulgated, and methodologies for evaluation and valuation must be developed and articulated. The “black box” approach is not serving the sector well.

In the interim, we are beginning to see rating actions based on social factors. Moody’s lowered its outlook to negative from stable on bonds from North Idaho College. North Idaho College is a community college with its main campus located in Coeur d’Alene, ID, It serves 4500 students from a five-county region. The outlook reflects “governance credibility and board structure risks. These risks are highlighted by board dysfunction, with a small group of publicly elected board members and significant turnover at key senior leadership positions. Disputes between board members and with college leaders have been public, including the dismissal of the college’s former president and complaints against the actions of the board.”

That is about as clear as it is going to get. It is the type of action which should get the attention of ESG investors. The fights have drawn extra attention. The state accreditation body is conducting a review of the College and the management issues.

TEMPLE UNIVERSITY HOSPITAL

Temple University Hospital System is the largest Medicaid provider in the Commonwealth of Pennsylvania. It serves as the essential facility of last resort in Philadelphia. Over the years, the level of service provided, impoverished demand base, and continuing challenges to Medicaid funding have always pressured the system’s finances. This has caused its ratings to hover broadly over the investment grade/non-investment grade boundary. Given the impact of the pandemic on its core source of demand, one might have feared for the system’s financial well-being.

That is not the case. This week, Moody’s announced that it upgraded Temple University Health System’s (PA) revenue bond rating to Baa3 from Ba1. In conjunction with the rating improvement, the outlook has been revised to positive from stable. In spite of the headwinds that the system generally faces, growth in cash reserves and better than budgeted operating performance were achieved for two consecutive years. That in the midst of the pandemic. There was also a helpful asset transfer – the recent sale of Health Partners Plan, Inc. (HPP), added some $300 million to TUHS’ balance sheet after FYE 2021. That sort of improvement moved the ratings metrics favorably generating a strong case for an upgrade.

Going forward, the outlook change reflects Moody’s view that the results are sustainable. It also anticipates that regardless of the upcoming 2022 political environment in 2022 (the Governor’s race and a major US Senate race), the current funding position of the system in the overall Medicaid funding structure in Pennsylvania will remain essentially status quo.  

MUNIS AND SOLAR

Municipal electric utilities are right in the middle of the ongoing energy debates. They face all of the pressures on an operating basis that their investor-owned counterparts face. One of the states where the debate is unfolding across all provider sectors is Colorado. Recently, we have seen the investor-owned sector and the rural coop sector face challenges to their dependence on fossil fueled (primarily coal) generation. Utilities are increasing efforts to change supply relationships and withdraw from existing power supply relationships.

Now one Colorado municipal electric utility is taking its own steps in the drive to renewable energy. Platte River Power Authority this week issued a request for proposals (RFP) to obtain up to 250 megawatts (MW) of new photovoltaic solar generating capacity that could begin producing noncarbon energy by 2025. Platte River’s needs to replace power currently obtained by direct ownership interests in Craig Unit 1 and Unit 2. These are coal fired units. Unit 1 is scheduled to go offline in 2025 and Unit 2 is scheduled to do so in 2028.

The plan did force Platte River to be proactive in the potential redevelopment of the site. Its situation reflects one of the issues facing other utilities – that of the link between generation infrastructure and transmission infrastructure. Platte River may not be the largest or primary owner of the Craig generation plants but one of its two transmission lines initiates at the plant. Developers are encouraged to consider proposing projects that could interconnect with Platte River’s transmission system directly. That is designed to encourage a solar facility to locate near the Craig site.

Within each project proposed, developers are encouraged to include a battery energy storage component capable of providing 100% of the project’s nameplate capacity for at least four hours and be dispatchable by Platte River when needed. By using the existing transmission infrastructure, some of the coal decommissioning impact would be mitigated and the site maintained as a useful piece of the clean energy infrastructure. The issue will reappear across the electric utility spectrum.

NATURAL GAS REGULATION

New York City is poised to be the largest locality to enact its own ban on the use of natural gas in any new construction. Developers in New York City will have to install electric heat pumps and electric kitchen ranges in newly constructed buildings. The regulation will require buildings up to seven stories tall to be all-electric by 2023 and larger buildings to do so by 2027. The bill would not affect existing buildings.

The announcement comes as the gas industry continues its efforts to drive preemption legislation at the state level. The industry is positioning the question as one of choice – like helmet laws for motorcyclists, vaccinations and as a concern of the elderly and low- income individuals. The industry also hopes that fears of requirements to end the use of all natural gas appliances (not a part of any of the 50-odd local gas bans) will drive opposition.

MTA FARE INNOVATION

The Metropolitan Transportation Authority announced that beginning March 1, it will operate a pilot program to test a series of temporary promotional changes to fare structures for New York City Transit, the Long Island Rail Road and Metro-North Railroad. The Authority already has a plan – ‘City Ticket’ – which offers a reduced, flat fare for commuter rail travel within New York City on weekends.

The new plan would expand to cover all weekday off-peak trains at a fare of $5. This is a $2.75 or 35 percent discount from the LIRR’s current weekday fare between eastern Queens and Brooklyn, which is $7.75. The plan will be available to users of the Authority’s OMNY program. OMNY is the One Metro New York contactless fare payment system used on public transit in New York City and the surrounding area. OMNY users would be charged the standard $2.75 pay-per-ride fare for their first 12 trips starting every Monday. Any further trips through the following Sunday would be free of charge.

It is a positive factor to see the MTA using the realities of the pandemic and its impact on utilization to take a flexible approach to its fare system. With NYC lagging behind the nation in terms of returns to offices and use of mass transit, flexibility will be the characteristic of successful operators in the mass transit space.

TRI STATE GENERATION FACES A NEW DEPARTURE

United Power, the largest electric cooperative in the Tri-State Generation and Transmission Association filed notice of its intent to withdraw from the association, effective January 2024, with the Federal Energy Regulatory Commission. The FERC oversees Tri-State. Two other members have left and eight others are actively evaluating leaving as well. Tri State depends on coal as the primary fuel source for its generation and this has become an increasingly contentious issue between Tri State and its member co-ops.

As has been the case when confronted with a request to leave by a customer, Tri State seeks to extract a huge financial compensation from the departing utility. In this case, United estimates that the appropriate charge would be up to $300 million. Tri State thinks that the number should be closer to $1.5 billion. It will be left to the federal Energy Regulatory Commission (FERC) to decide which is the valid number.

The coal component of the dispute is real. United Power, for example, already has 84 megawatts of renewable generation on its system, including 46 megawatts of utility-scale solar. It is home to a 4-megawatt battery storage project, the largest in Colorado, and has more than 6,800 rooftop solar systems. As is the case with all of Tri State’s customers, United must obtain 95% of its needs from Tri State. As for the price of departure, two already departed small utilities paid a total of $174 million to Tri State. United is 20% of Tri State’s demand.

SMALL COLLEGES CONTINUE UNDER PRESSURE

Hartwick College is a small, tuition dependent private liberal arts and sciences college in Oneonta, NY with fall 2021 enrollment of 1,151 full-time equivalent students and fiscal 2021 operating revenue of about $44 million. A trend of declining enrollments is exacerbated by the weakening demographic outlook which colleges are beginning to confront. Hartwick’s current fiscal 2022 budget projects that the college will have a fifth consecutive year of negative cash flow from operations and further unrestricted liquidity declines. The College is undertaking a fundraising campaign but it will have to make a serious investment in recruitment to arrest the long-term trends.

If the pandemic turns out to have a serious impact on operations in the next few months, the position of already challenged institutions will continue to weaken. It is a class of credits in the education space worth watching. The weakening demographics are real and will impact many institutions to different degrees.

LEGAL CHALLENGE TO TOLL INCREASE

On January1, a $1 toll increase is scheduled to take effect on the seven Bay area bridges under the control of the Metropolitan Transportation Commission. The $1 hike is the second part of a three-series toll increase by 2025 authorized under Regional Measure 3, or RM3 as passed by voters in 2017. Despite the voter approval and the collections under the first of the planned increases, legal challenges have forced the funds collected to be placed in escrow.

That lawsuit will have the same impact on the funds collected under the next toll increase. Howard Jarvis Taxpayers Association filed the suit alleging the bridge toll may be considered a “tax,” which would be in violation of Prop. 26. Government taxes require a two-thirds majority vote in the Senate, and the related legislation only received a 54% majority. The same argument is being made in a case against a sanitation fee levied in Oakland which awaits final adjudication in the California Supreme Court.

In the meantime, substantial funding for mass transit remains in limbo. Projects at BART which do not receive any outside funding cannot be undertaken. It is ironic that an organization would sue to overturn a vote of the people in the name ostensibly of protecting those same people.

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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PENSION REFORM HURDLES

Over the last decade, the issue of public employee pensions has been a bigger and bigger issue in any discussion of municipal credit. A significant number of state and local credits have seen credit pressures from lower rates of return which were occurring coincident with higher levels of retirements. The increasing role of pension funding in the rating process has also focused attention. In many cases, the pension funding debate has brought to light the various hurdles which exist that pension reform a much more difficult task.

The latest example involves transit agencies in California. The California Public Employees’ Pension Reform Act of 2013 (PEPRA) requires a public retirement system, as defined, to modify its plan or plans to comply with the act and, among other provisions, establishes new retirement formulas that may not be exceeded by a public employer offering a defined benefit pension plan for employees first hired on or after January 1, 2013. Employee unions have challenged the law based on their view that the California law conflicts with federal law resulting in an illegal reduction in pension benefits.

At the time of the bill enactment in to law, the transit unions were the most vociferous opponents. They pressed the federal government to intervene in support of the workers. Section 12(c) of the Urban Mass Transportation Act of 1964 requires that the U.S. Secretary of Labor certify that fair and equitable arrangements are in place to protect provisions that may be necessary for the preservation of rights, privileges, and benefits (including continuation of pension rights and benefits) under existing collective bargaining agreements or otherwise and the continuation of collective bargaining rights, While the dispute between the State and the federal government continued, then Gov. Brown signed a bill which exempted the transit agencies from the California legislation while it negotiated with the feds. Ultimately, the U.S. Labor Department withdrew its objections to the law and certified that California transit agencies were in compliance.

That did not stop the transit worker unions. They challenged the changes once again in 2019 and they were turned down by the Labor Department. Now, in the aftermath of the pandemic and the resulting infrastructure funding, the unions challenged the California pension law again. This time the Labor department is headed by a union member for the first time and now the union viewpoint is prevailing.

The policy change – reversing two previous reviews under administrations of both parties – now threatens the funding from the infrastructure bill for some 15 transit agencies. They are the Alameda-Contra Costa Transit District, Golden Gate Bridge Highway and Transportation District, Los Angeles County Metropolitan Transportation Authority, Riverside Transit Agency, San Francisco Bay Area Rapid Transit District, San Joaquin Regional Transit District, the San Mateo County Transit District and the Santa Clara Valley Transportation Authority. The State’s governor and congressional delegation are all petitioning the Department to review its decision. Without a change, over $11 billion of anticipated funding could be held back.

It is a real credit negative for these agencies. Many are already operating at reduced levels and many are only now beginning to reimpose fares. It is a policy allegedly designed to protect the working man but, in this case if it leads to service cutbacks and job reductions, exactly how is the working man helped by this?

GAS TAX

The State of Wyoming has gotten lots of attention given its role as a primary.  source of coal for the electric generation industry. It also has significant wind “resources” and is seen as a potential wind power center. Given the importance of coal to the state’s economy in recent years, it has been out front in its efforts to slow the efforts to reduce or eliminate fossil fuel use. It has tended to shun efforts to raise the cost of fossil fueled resources whether they are fuel specific taxes or overall carbon taxes.

Nonetheless, the Wyoming Legislature’s Transportation, Highways and Military Affairs committee advanced a bill to the full Legislature that would raise the gas tax by 5 cents a gallon starting July 2022, another 5 cents starting July 2023, and another 5 cents starting July 2024. Currently the gas tax in Wyoming is 24 cents per gallon. Currently, Wyoming’s gas tax is lower than that of all of its immediate neighbors with the exception of Colorado.

The timing of the proposal is interesting. The State expects to receive some $2 billion of federal money as the result of the recently passed infrastructure legislation that is broadly specified as being for roads. The effective injection of $200 million annually for ten years still does not fully address existing shortfalls in fuel tax funding in Wyoming. If nothing else, the legislation forced agencies to update and improve their capital plans which likely found an excess of potential projects relative to existing and new federal resources.

UNION HURDLES TO ELECTRIFICATION

Toyota became the latest auto manufacturer to announce plans for factories to support electric car development and assembly. It will open a factory to make batteries outside of Greensboro, NC in 2025. The investment will be some $1.2 billion and create 1,700 jobs. The decision follows that of other competitors and it shares in common with them a location in a right to work state.

It comes as the Senate debates provisions in the Build Back Better bill which would tie subsidies to purchasers of electric cars to the issue of whether or not those cars are produced by union workers. The issue has become a real sticking point and creates potential conflicts for liberal and/or progressive legislators. The debate puts domestic, traditionally union producers in line with their union employees but the subsidy limit could limit demand for the vehicles. That would make climate goals harder to achieve by making the cars less affordable.

MUNI UTILITIES AND THE ENVIRONMENT

Sea Light is the municipal electric system owned and operate by the City of Seattle. It finds itself in the middle of the conflict between the carbon-free nature of hydroelectric power versus the interests of other environmental concerns. In the Pacific Northwest, the issue of the impact of hydroelectric dams on fish migration has received much recent attention. One proposal would call for the breaching of four dams in eastern Washington.

Sea Light faces a different issue. The utility owns three dams on the Skagit River for which their operating permits expire in 2025.  The facilities generate about 20% of its power needs. Now, the city is seeking to have the facilities relicensed for 30 to 50 years. That process will require studies to be undertaken in 2022 and 2023 to develop the application for a new license. The application is required to be filed two years before the expiration, by law. The Federal Energy Regulatory Commission then will consider the application.

Sea Light has agreed to examine fish passage at the dams and it has agreed to assess decommissioning and removal of the dams — and to repeat the assessment during the life of the new license, to respond to changing environmental conditions, technology and customer demand. That may not be enough to satisfy tribal interests who are suing to have the dams removed and are even challenging the green status of hydroelectric power because of its impact on fish.

The review of the dams in Washington comes as California debates the planned closure of the Diablo Canyon nuclear plant in 2025. The planned closure has resulted in some unexpected advocacy alliances. A recent study out of Stanford and MIT found that if Diablo Canyon was kept operating through 2045, it could reduce the state’s reliance on natural gas, save up to $21 billion in power system costs and save 90,000 acres of land use from energy production.

A Colorado municipal utility is in a position to expand its resources through the use of green energy. The Arkansas River Power Authority serves six municipalities by distributing power generated or purchased at wholesale. For two decades, a private utility has provided the bulk of its power. Now, in a move that the Authority says will result in lower costs and rates, it will obtain its power from a non-legacy provider.

The Authority hopes to reduce its carbon footprint and respond to customer desires for clean energy. It also believes that it can maintain or even lower its retail rates as the result of the new power contract. It currently owns back-up generators as well as some wind generation directly. The power purchase agreement gives the Authority increased access to renewable power than would have been the case with its legacy provider, Xcel Energy.

Burlington, VT voters approved authorization for a $20 million Net Zero Energy Revenue Bond for Burlington Electric Department. 70% of voters supported the ballot item. The Department’s Green Stimulus incentives are designed to encourage residents to switch from fossil fuel-burning cars and furnaces to electric vehicles (EVs) and cold-climate heat pumps. Bond also will fund grid updates for reliability, technology systems to better serve customers, and new EV charging stations. These bonds will be paid from electric revenues.

At the same time, those same voters did not support tax-backed GO debt for traditional infrastructure. A $40 million bond authorization needed a very high 75% supermajority but the results saw approval at an insufficient 57%. The fact that the proposal got a clear majority may not necessarily mean that there is a preference for green improvements versus traditional improvements. The 75% vote requirement was a significant impediment to approval. The user pays aspect of a revenue bond financing may have made that more attractive as well.  

PRE-PAID ENERGY MOVES TO RENEWABLES

The municipal bond market has long dealt with gas prepayment bonds. These complex transactions have found an audience especially with institutional investors. As the practice became more and more accepted, it is not a surprise that the financing technique is being used to facilitate the changes occurring in the retail electric distribution space.

The California Community Choice Financing Authority (CCCFA) recently sold some $2 billion of bonds to finance activities on behalf of community choice aggregators. The two Clean Energy Project Revenue Bonds, issued on the behalf of East Bay Community Energy (EBCE), MCE, and Silicon Valley Clean Energy (SVEC) prepay for the purchase of over 450 megawatts of clean electricity. The power is secured under long-term purchase agreements with generators.

Who are the aggregators and who do they serve?  EBCE operates a Community Choice Energy program for Alameda County and fourteen incorporated cities, serving more than 1.7 million residential and commercial customers. MCE is a load-serving entity supporting a 1,200 MW peak load. MCE provides electricity service and innovative programs to more than 540,000 customer accounts and more than one million residents and businesses in 37 member communities across four Bay Area counties: Contra Costa, Marin, Napa, and Solano. SVEC serves more than 270,000 residential and commercial customers in 13 Santa Clara County jurisdictions. 

Like the gas deals, the ultimate credit rests upon the ability of the energy supplier to perform. Like the gas deals, the energy trading subsidiary of a major investment banking institution (Morgan Stanley in this case). The variety of transactions underlying the credit are similar to gas deals as in commodity swap providers, energy suppliers, e.g. This structure places the bank at the center of the key issues supporting the credit. For this reason, the rating on the bonds reflects Morgan Stanley’s current ratings.  

GOVERNANCE ISSUES FOR MUNI UTILITIES

As the sector of ESG investing continues to expand and evolve, governance issues should likely be getting more attention. While the assessment and valuation of governance factors in the ESG equation continues to evolve, we are surprised that the utility sector may be the one sector in the muni market which is seeing concerning situations regarding governance.

We have seen the aborted effort in Jacksonville to privatize that City’s electric system in a scheme which sought to enrich utility management. Questions about the management of the South Carolina Public Service Authority and its decision to participate in the Plant Votgle expansion still create significant credit uncertainty for that agency. Now, we see that the nation’s largest municipal utility faces governance issues as well.

Former LADWP general manager David Wright admitted to using his influence to persuade officials to award lucrative projects to companies he secretly planned to work for following his retirement. From a pure credit standpoint, the financial impact of these actions on DWP is minimal.

The level of situations like these, combined with the recent events at investor-owned utilities, tells you all you need to know about the current state of the utility industry. With power generation being such a key component of strategies to deal with the changing climate, management and governance are more important than they have ever been.

NORTH DAKOTA’S LEGACY FUND

In the past, we have questioned the approach of some states (in particular, Pennsylvania) took towards generating income and wealth from the oil and gas industries. This is especially true in connection with fracking derived fuels and newer fields in general such as the Bakken Field in North Dakota. Recently, the State of North Dakota saw its lending and credit support activities through the Legacy Fund receive a positive outlook from Moody’s.

In 2009, the Legislative Assembly passed House Concurrent Resolution No. 3054, which placed the question of creating the Legacy Fund on the 2010 general election ballot.  North Dakota voters approved the measure. Thirty percent of total revenue derived from taxes on oil and gas production or extraction must be transferred by the state treasurer to a special fund in the state treasury known as the legacy fund. The legislative assembly may transfer funds from any source into the legacy fund and such transfers become part of the principal of the legacy fund. The principal and earnings of the legacy fund could not be expended until after June 30, 2017. 

The first constitutionally mandated transfer of Legacy Fund earnings to the General Fund occurred in July of 2019.  The total amount transferred for the 2017-2019 Biennium was $455,263,216. The Legacy Fund corpus is currently $8.3 billion and in the 2019-21 biennium, $872 million of earnings were transferred to the General Fund.  

Legacy Fund Infrastructure Program bonds finance various capital programs around the state, including the Fargo) flood diversion project, water-related and energy conservation projects through the Resources Trust Fund, local government loans for infrastructure projects through the Infrastructure Revolving Loan Fund, state bridge and highway projects through the Highway Fund, and a new Agriculture Projects Development Center at North Dakota State University.

Legislation was enacted this year which calls for Legacy Fund earnings to be transferred to the Legacy Earning Fund in the General Fund. The legislation provides for the distribution of amounts transferred to the General Fund and specifies that earnings equivalent to 7% of the 5-year average market value of the Legacy Fund. Of those funds, the first $150 million are allocated to the Legacy Sinking and Interest Fund for debt service payments on bonds issued under the program.

ILLINOIS RECOVERY LIFTS UNIVERSITY CREDITS

Moody’s Investors Service has upgraded the University of Illinois (U of I) issuer rating to Aa3 from A1. The upgrade “reflects continued favorable operating performance, further balance sheet growth, and strong enrollment despite operating volatility caused by the pandemic. These organic improvements were supplemented by significant federal pandemic support and strong investment returns.”

In the end, what seems to have driven the move was Moody’s view of the State of Illinois’ (Baa2/stable) own improved fiscal and financial position, supporting Moody’s expectations of continued steady and on-time operating support to the university, whose dependance upon the state in terms of operating funds is about 30%.

While that is great for the flagship institution, the State’s improved fiscal outlook was cited when Moody’s upgraded the financially troubled North East Illinois University to Ba2. NEIU is a regional comprehensive public university with multiple campuses in the Chicago metropolitan area. It is designated by the US Department of Education as a Hispanic-Serving Institution. Fall 2020 full-time equivalent student enrollment was 4,672 students.

That niche status can cut both ways. If the served population is economically vulnerable, the demand for the school can vary widely. The State’s financial crisis coincided with sustained and persistent full-time equivalent enrollment losses, with enrollment declining by more than 40% over the past decade. Nevertheless, the State’s improved outlook reduced funding uncertainty for the school which gets 50% of its funding from direct state aid.

FUNDING THE POLICE

The question of policing in the City of Oakland seems to have ever changing answers. In 2014, local voters approved Measure Z which enacted a parcel tax on property which was to be dedicated to funding police. Measure Z requires the city to maintain at least 678 sworn officers in order to collect the revenue. The measure allows a grace period for taking steps to hire more officers and lets the council legislate an exemption.

Now, the City finds itself short of that requirement (albeit by 8 positions). The police department is budgeted for 737 sworn positions. So, the City Council has voted to increase funding to support recruitment and training of new officers. This is a trend that is playing out across the country as local government tries to balance the many issues surrounding the subject of policing.

Now that crime rates are rising to levels not seen in a decade, we expect that the movement to “defund” the police will not be one that is popularly supported.

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

________________________________________________________________

TRANSPORT AT THE BALLOT BOX

The American Road & Transportation Builders Association reported on the results of elections and transit funding issues. voters in 17 states approved 89 percent or 244 of 275 the state and local transportation investment initiatives during the November 2 elections. The Association estimates those measures should generate $6.9 billion in one-time and recurring revenue. In Ohio, voters approved 89 percent of 140 county, city, and town-focused transportation infrastructure measures on November 2; the most of any state. Voters in 34 Texas localities approved 44 measures— primarily local sales taxes and bonds— to generate $1.6 billion for city, town, and county transportation improvements.

Texas voters also approved a statewide proposal that will permit counties to use bonds to fund transportation infrastructure projects in underdeveloped areas. Counties would repay those bonds via increased property tax revenues – authority that is currently only granted to incorporated cities, towns, and other taxing units. in Georgia, nine out of 11 counties approved a one percent Transportation Special Purpose Local Option Sales Tax, which will collectively generate $870 million in new or renewed revenue for the next five years.

TRANSIT’S SLOW RECOVERY

The Los Angeles County Metropolitan Transportation Authority announced it will resume charging bus fares starting Jan. 10, 2022. The price of a daily, weekly, or monthly ticket will be reinstated at a 50% discount to the pre-pandemic cost. The discounts will also benefit riders enrolled in the existing low-income assistance program. The new fare plan will provide an ultimate 2/3 discount to the pre-pandemic fare.

The LAMTA suspended front door boarding on its buses in March 2020 at the outset of the COVID-19 pandemic. It also relaxed rules requiring riders to use the farebox and electronic payment. The idea was to speed the entry/exit process to reduce contact. Vaccination rates and a masking requirement are cited as a basis for the changes. That takes care of the ridership angle.

The other problem hindering full recoveries for public transit providers continues to be that of staffing. Earlier this fall we noted ferry service cutbacks in Washington State due to staff shortages. Now, the metro system in St. Louis, MO is reducing service for the same reason. That bus system is short some 150 workers or 7% of their normal workforce. While the shortage is primarily for operators, the reminder are skilled trade positions which are all competitive employment markets right now.

Transit agencies across the country are having to offer signing bonuses and/or higher wage rates to attract workers. NJ Transit is offering $6,000 to bus drivers; Houston has offered bus drivers and light rail operators incentives up to $4,000 while mechanics have been offered up to $8,000. The New York MTA still has vacancies for more than 600 train operators, train conductors and bus drivers. 

WATER RIGHTS AND THE SUPREME COURT

In 2014, Mississippi sued Tennessee for allegedly “stealing” its groundwater by allowing a Memphis water utility company to pump from the Middle Claiborne Aquifer, which sits below the Mississippi-Tennessee border. Mississippi argued that it had owned that water since it entered the United States in 1817, and sought $615 million in damages from Tennessee. After losing appeals, Mississippi had its case argued before the U.S. Supreme Court.

The Court unanimously ruled against Mississippi when it determined that the legal doctrine of “equitable apportionment”—which has long been used to determine what states get control of interstate surface water—also applies to groundwater. Mississippi contended that it has sovereign ownership of all groundwater beneath its surface, so equitable apportionment ought not apply. We see things differently.” 

Now, Mississippi and Tennessee can use the Middle Claiborne Aquifer. If the states wish for a formal agreement on the size of each state’s share of the water, then they must turn to the courts to go through an “equitable apportionment” process.

OPIOID LITIGATION TAKES A DIFFERENT TURN

When a jury hears a product liability case, the likelihood of a finding against a defendant for a larger than expected amount of money is often a result. The latest example of this phenomenon is the most recent piece of opioid litigation to reach a verdict. The case was brought by two Ohio counties against pharmacies – CVS, Walgreen, and Walmart. It claimed that the pharmacies had no done enough to question prescriptions written for opioid medications. That failure is alleged to have created a public nuisance which the defendants were required to mitigate.

It follows two recent decisions in Oklahoma and California that specifically addressed this issue. Those cases were heard by judges who then rendered their verdicts. In those cases, the courts found that the pharmacies were only filling legally issued prescriptions for FDA approved drugs. Consequently, the California judge and the Oklahoma Supreme Court found that the pharmacies were not responsible for creating a public nuisance.

Now, in one of the first such trials to be heard by a jury, a verdict against the pharmacies has been handed down. The jury had to find that the oversupply of prescription pills and subsequent illegal diversion had created a public nuisance in each county. It also had to find that the problem continued even though the plaintiffs acknowledged that the number of opioids being distributed had declined. The public nuisance law in Ohio requires that the nuisance remain ongoing. The argument to the jury was that the decline in opioid sales had directly led to the abuse of heroin and fentanyl.

It is not surprising that a jury would be swayed by these arguments. It also means that it becomes more likely that with different outcomes being achieved in these cases that a long string of appeals will follow. There to be several aspects of the case which would support an appeal and once the case moves to a higher court where juror misconduct and dramatic displays (both occurred in this case) are not center stage that the verdict will be overturned if not substantially reduced.

MEET ME IN ST. LOUIS

The litigation which resulted from the move of the NFL’s St. Louis Rams to Los Angeles has been settled. That is not a surprising outcome given the potential for a trial to force the league and its owners to effectively “open the books”. What is surprising is the amount – $790 million. That is the size of the award which will be divided between and among the City of St. Louis, the County of St. Louis, and the Regional Convention Center Authority.

The gross amount of the award will be reduced by the lawyer’s share – a minimum of $276 million before expenses. It still, in combination with pandemic funding from the federal government, is an additional shot in the arm to the region’s governments.

SOUTH DAKOTA CANNABIS

The South Dakota Supreme Court ruled that Amendment A, a proposal to legalize recreational marijuana was not valid. The Court was responding to a lawsuit filed in the name of state law enforcement employees so that the state’s Governor could press her opposition to legalized marijuana. The Court found that the proposal did not hew to requirements that a ballot initiative cover only one topic.

The court concluded in the declaratory judgment action that Amendment A was submitted to the voters in violation of the single subject requirement in the South Dakota Constitution Article XXIII, § 1 and that it separately violated Article XXIII, § 2 because it was a constitutional revision that should have been submitted to the voters through a constitutional convention.

The Court seized on the idea that medical marijuana, recreational marijuana, and hemp were three separate issues. The idea is to eliminate confusion. Whether there was confusion isn’t clear but the results were. Amendment A was approved by a majority vote, with 225,260 “Yes” votes (54.2%) and 190,477 “No” votes (45.8%).

IT’S THE WATER

With all of the focus on fossil fuels especially coal for power generation, it is easy to lose sight of the fact that water plays such a significant role in the process. The location of so many plants adjacent to bodies of water reflects that. Now the part water plays in that process may be leading to the end of coal. Recently, we have seen regulators in two states deny rate increase requirements tied to the costs of compliance with federal regulation covering discharges of water from generation plants.

The rules reverse efforts in the Trump Administration to revive the coal industry through regulatory reductions. The new wastewater rule requires power plants to clean coal ash and toxic heavy metals such as mercury, arsenic and selenium from plant wastewater before it is dumped into streams and rivers. According to the Environmental Protection Agency, the rule is expected to affect 75 coal-fired power plants nationwide.

The owners of those plants were required to meet an October deadline to tell their state regulators how they planned to comply, with options that included upgrading their pollution-control equipment or retiring their coal-fired generating units by 2028. That is what is driving the recent spate of announcements from regulated IOU producers. EPA estimates that the rule will reduce the discharge of pollutants into the nation’s waterways by about 386 million pounds annually. It has been estimated that the cost to plant operators, collectively, will be nearly $200 million per year to implement.

SMALL NUCLEAR MOVES FORWARD

One of the issues we believe will move more and more to the forefront of the energy and climate debate is that of small scale modular nuclear reactors. There are three efforts underway with one seeming to be ahead of the others. The U.S. Department of Energy (DOE) announced a Finding of No Significant Impact (FONSI) following the Final Environmental Assessment for a proposal to construct the Microreactor Applications Research Validation & Evaluation (MARVEL) project microreactor.

The proposed thermal microreactor will have a power level of less than 100 kilowatts of electricity using High-Assay, Low-Enriched Uranium (HALEU). The initial goal is to establish a facility which will be capable of testing power applications such as load-following electricity demand to complement intermittent renewable energy sources such as wind and solar. It will also test the use of nuclear energy for water purification, hydrogen production, and heat for chemical processing.

This development comes as other micro and modular reactor efforts are moving through the regulatory process. The hope is that the smaller size will mitigate many construction risks which historically have wrecked the finances of many plants. Another hope is that small nuclear can be seen as an environmentally friendly choice as a source of intermittent peaking power.

MANAGING THE UTILITY TRANSITION

Pueblo County, CO has given its approval to an agreement with Public Service Company of Colorado, an operating subsidiary of Xcel Energy, which calls for the early closure of the Comanche 3 coal-fired power plant by Dec. 31, 2034, six years earlier than anticipated. The company will keep the workforce employed through that date. It will have reduced operations to reduce emissions. Public Service believes it will reach emission reductions of 87%. That is in excess of state requirements calling for a 75% reduction.

Xcel also agreed to pay Pueblo County a “community assistance payment” equal to current property taxes. It is estimated that the payments will amount to approximately $25 million annually from 2035 to 2040. Comanche 1 closes in 2023 and Comanche 2 closes in 2025. The workforce will be just less than 90 workers until Comanche 3 closes in 2034, she said. 

Now, the county has a decade to shift its tax base to reflect the closures and to develop its economy and job base independent of the power generation facilities.

AIRPORTS AND THE PANDEMIC

The Thanksgiving weekend saw the air travel industry receive two pieces of news which could not have more opposite implications. The first is the highest level of travel through the nation’s airports experienced this year. It reflected what was perceived as an improving health environment for travel. Although not at levels seen pre-pandemic, it was clear that American’s were steadily embracing the idea of a “return to normal”.

On the other hand, the omicron virus emergence raises the spectre of a negative impact on economic activity. It seems pretty clear that another widespread economic shutdown in not politically viable, we are already seeing signs of travel limitations. The confirmation of the first case in the U.S. (in California) this week will raise pressure to impose restrictions. This will potentially put pressure to put some travel limits in place even as the Christmas travel season looms.

This puts the spotlight back on airport facilities which rely on people using them and not freight. On example is a central car rental facility. The State of Hawaii opened a 4500-car central facility at the Honolulu Airport this week on December 1. As a stand alone facility, it relies on facility lease payments from rental car companies but also on a Customer Facility Fee which is based on how many car rentals occur.

In the Hawaii case, the ultimate obligation to fund debt service rests with the rental companies. Nevertheless, those companies cannot be expected to maintain the same pre-pandemic presence at the airport if travel is permanently limited.

WHAT IS NOT IN THE BILL

It is not surprising that much of the attention being paid to the infrastructure legislation has to do with its climate related provisions or the lack thereof. The bill is clearly being subjected to analysis which reflects the interests of those parties. Hence, we have heard much about what is in the bill to deal with climate issues as well as what is not. If one listens to the rhetoric, all the coal plants should be shut down today, internal combustion engines should be eliminated, and a variety of other sources of carbon emissions limited or eliminated.

So, climate advocates got some really useful stuff in the bill, right? Well, that is a matter for debate. One example has to do with power for electric cars. One would think that with range anxiety being one of the most if not the most important factor (along with the cost of the vehicles) slowing the adoption of electric cars, that addressing the issue would be an important concern. Alas, that is not the case.

The $1.2 trillion infrastructure bill signed this month by President Biden earmarks $7.5 billion for public EV charging stations. This obviously a key component of any plan to support EVs. At the same time, residential charging will be as important if not more so to drive adoption of EVs. So, there’s funding for that in the bill, right? Unfortunately, there is no funding for residential charging infrastructure.

The International Council on Clean Transportation estimates that in order to increase EV usage from 1.8 million in 2020 to 25.8 million in 2030, the United States will need 2.4 million non-home chargers — about 11 times the current number. Residential chargers, single- and multi-family, would have to climb at an even faster rate, from 1.5 million today to nearly 17 million by the decade’s end, to support the larger EV sales goal. The same study showed that 81 percent of current U.S. EV owners charge their vehicles at their homes, and 73 percent of owners use the cars to commute to work. Yet, the bill contains no public funding incentives for individuals.

The result is that financial support for EV charging at the residential level is expected to come from the distribution utilities. They will be happy to do that as long as they get regulatory support from their state regulators. That means that one way or another, the electric customer will have to pay for that infrastructure if the “subsidy” from the utility is simply recovered in rates. That puts municipal utilities in the center of this issue.

A TALE OF TWO PORTS

The focus on supply change issues especially at the major ports in California could easily lead investors to assume that all ports are moving in lock step as the economy recovers and utilization of ports increases. The huge backlog of containers at the Ports of Long Beach and Los Angeles as well as delays for truckers are well documented. While the threat of fees for delayed movement of containers did some good to address the problem at Long Beach/Los Angeles, those delays are impacting other ports as well.

The Port of Oakland said containerized import volume last month was down 14% from October 2020 levels, while exports were down 27%. The number of ships was down 43% from the previous year. Oakland attributes the decline to “crippling delays” at Southern California ports, forcing companies to divert ships to bypass Oakland and travel directly to Asia. The largest impact has been on U.S. exporters. “Producers who ship goods out of Oakland have been stymied by scarce vessel space,” according to Port of Oakland officials.

IS THIS THE FUTURE OF DEVELOPMENT?

An agreement has been reached which may finally allow the development of a nearly 20,000 residential development in north Los Angeles County. the Tejon Ranch Co. and an environmental group announced that litigation against the proposed 6,700 acre project will be withdrawn. In exchange for the end to the litigation, Tejon Ranch agreed to the installation of nearly 30,000 electric vehicle chargers at residences and commercial businesses in the development. Natural gas connections will not be allowed.

It follows a path established by another L.A. County development – the Newhall Ranch – which reached agreements with environmental interests to facilitate its 21,000 unit development. That agreement included 10,000 solar installations and electric vehicle recharging stations in every home, plus more in the surrounding community.

It would be surprising if this sort of arrangement does not become fairly standard. Preemption legislation may prevent blanket bans on natural gas hookups by localities but the localities can still use the zoning and permitting processes to achieve climate goals. There is no reason why natural gas hookups cannot be addressed through mutual agreements like the ones in L.A. County.

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