Joseph Krist

Publisher

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WESTERN WATER

A wet December raised some hope that the long-standing drought in California might see some relief. Unfortunately, a very dry January quickly diminished that hope. Now, the drought in the West drags on. Water agencies that serve 27 million people and 750,000 acres (303,514 hectares) of farmland, have been informed that will get just 5% of what they’ve requested this year from state supplies beyond what’s needed for critical activities such as drinking and bathing. That’s down from the 15% allocation state officials had announced in January, after a wet December fueled hopes of a lessening drought. The January-March period will be the driest start to a California year at least a century. 

Lake Powell water levels dropped below 3,525 feet this week, or just 35 feet above the lowest level at which the dam can still generate hydropower. That is its lowest level since the lake filled after the federal government dammed the Colorado River at Glen Canyon in 1963. Lake Powell steadily filled with water before reaching full pool in 1980. Some 5 million customers in seven states — Arizona, Colorado, Nebraska, Nevada, New Mexico, Utah and Wyoming — buy power generated at Glen Canyon Dam.

The U.S. Bureau of Reclamation officials last summer took an unprecedented step and diverted water from reservoirs in Wyoming, New Mexico, Utah and Colorado in what they called “emergency releases” to replenish Lake Powell. In January, the agency also held back water scheduled to be released through the dam to prevent it from dipping even lower.

Even if the drought were to end and the lake could be fully refilled, the years of reduced flows have impacted storage capacity. Current storage capacity at full pool (3702.91 feet above NAVD 88) is 25,160,000 acre-feet. Compared to previously published estimates, this volume represents a 6.79 percent or 1,833,000-acre-foot decrease in storage capacity from 1963 to 2018 and a 4.00 percent or 1,049,000-acre-foot decrease from 1986 to 2018.

UBER’S NEW ARRANGEMENT

It was the stated goal of Uber to more than disrupt local transportation systems. We have written often about the issues arising from the “disruptive” playbook flaunting rules and laws followed by the transportation network companies (TNC). Prior to the pandemic, the competition against legacy transit modes (mass transit and taxis) put mass transit under enormous pressure. Once the pandemic hit, the demand for all sorts of public mass transit plummeted.

For a while, Uber was surviving essentially as a food delivery enterprise. Now with the recovery tentatively underway, oil prices have driven the costs for TNC drivers to levels which make the cruising around empty that some of those cars have to do uneconomical. While stepping away from driving might work for some drivers, the TNC business model relies on more not fewer drivers.

Now the disruption has shifted directions negatively impacting the TNC business model which relies on more not fewer fares. In NYC, Uber has announced that it has partnered with two taxi-centric tech companies to provide an app which would allow the city’s medallion taxi drivers provide rides. This marks the uniting of what were two groups with opposite interests.

The new Uber-taxi partnership in New York did not require the approval of the city’s Taxi and Limousine Commission, which oversees the taxi industry. Passengers can still wave down yellow taxis in the street or order them through two taxi apps, Curb and Arro, which offer upfront pricing like with Uber rides.

The benefit for Uber is that it integrates a competitor without directly limiting that competitor. It gives Uber more access to drivers and they do get a fee for every ride ordered through the app.

GAS TAXES

Maryland became the first state to enact an actual gas tax holiday. Maryland’s gas tax of 36 cents per gallon is now suspended for 30 days for both regular and diesel. A driver of a vehicle with a 12-gallon tank could save about $4.32 a fill-up. The legislation does not mandate that retailers reduce their prices by 36 cents. The state estimates it would lose about $94 million in revenue under the 30-day suspension.

Gov. Brian Kemp signed a law suspending Georgia’s motor fuel tax through the end of May. The measure would also abate Georgia’s taxes on aviation gasoline, liquefied petroleum gas and other fuels including compressed natural gas. Suspending collections could cost the state up to $400 million. The Governor expects to use part of the roughly $1.25 billion in leftover surplus from the last budget year.

A 2020 report from the American Road & Transportation Builders Association that analyzed 113 state gas tax changes enacted over several years found that only about one-third of the value of previous gas tax cuts or tax increases were passed on to consumers.

PANDEMIC IMPACT ON NYC SCHOOL FUNDING

The Mayor’s Preliminary 2023 Budget includes $30.7 billion in 2023 for the Department of Education (DOE), $1.3 billion less than the amount budgeted in the current year. The city’s traditional public schools experienced an unusually large decline of almost 38,000 students between the 2019-2020 and 2020-2021 school years, the largest decline in a decade, with an additional decline projected from 2020-2021 to 2021-2022. much of the enrollment loss experienced by traditional public schools last year occurred within the youngest cohort of students.

The DOE’s portion of the city’s Program to Eliminate the Gap (PEG) is $557 million of savings. The largest is a $375 million reduction in spending that stems— according to city budget documents—from a reduction in authorized headcount following enrollment declines at many schools. The savings result from a reduction in the number of city-funded positions allocated within the DOE’s general education instruction budget that are currently vacant. A portion of the headcount reduction resulting from the PEG is offset, however, by the reallocation of federal Covid relief funds from other areas of the DOE budget. Those funds will not be available after fiscal 2024.

CLIMATE, DISCLOSURE, AND THE SEC

The Securities and Exchange Commission proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions.

The proposed rule changes would require a registrant to disclose information about (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

MEMPHIS AT THE CENTER OF CLIMATE DEBATE

The Tennessee Valley Authority (TVA) supplies Memphis and Shelby County with all of its electricity. Recently, TVA announced plans to replace coal fired generation with natural gas fueled plants. The decision seemed to fly in the face of the current Administration’s goal of reducing and eliminating fossil fuel fired generation. The decision comes as Memphis Light, Gas, and Water is evaluating whether to remain as customers of TVA of to pursue other options.

MGLW is not without options. MLGW has received 27 bids from the private sector on its electricity supply.  TVA has also appointed an officer to be located in Memphis to try to keep MLGW as a customer. Multiple studies, including a detailed one from an MLGW consultant, have shown the opportunity for substantial annual savings of more than $100 million if the city moves away from TVA.

Is it important to TVA? The Authority is offering funds for weatherization and the offer of purchasing MLGW’s power transmission system for about $400 million. It offers to move more than 100 employees into Memphis as part of a new regional headquarters and spend tens of millions on home weatherization and reducing energy burdens. It is estimated that some $1 billion of TVA revenues could be lost if Memphis leaves.

Memphis has also been at the center of a significant pipeline dispute. The pipeline would have connected the Valero oil refinery in south Memphis to Byhalia, Mississippi. Part of the pipeline would have passed through low-income Black neighborhoods in south Memphis, and there were fears the pipeline would contaminate the Memphis sand aquifer, where the city gets its drinking water if it leaked. Strong local opposition led to the project being abandoned by its sponsor.

Now, the Tennessee legislature is considering preemption legislation which would effectively limit local regulation and permitting of utility infrastructure. This puts Memphis at the center of issue like environmental equity and justice, climate change, and economic justice. No matter how the issues are decided, the results could have ratings impact. In August, 2020 Moody’s maintained its solid Aa2 rating on the electric system debt.

It noted that its long-term power supply contracts were a positive credit factor. “Challenges confronting the utility, however, include the below average socioeconomic profile within its service territory, uncertainty around its relationship with TVA moving forward and system reliability. That was before the issue of the TVA contract had really moved forward and before this winter’s storm which crippled the City’s transmission and distribution system for over a week. Now those concerns are real and the system’s ratings could take a hit.

PREPA RATE INCREASE

The Puerto Rico Electric Power Authority and LUMA Energy, which operates the transmission and distribution of PREPA’s electricity to the island, are currently seeking an increase of 4.265 cents per kilowatt-hour from the Puerto Rico Energy Bureau for the April through June quarter. This would amount to a 16.6% increase in rates. Gov. Pedro Pierluisi withdrew his government from PREPA deal that had been reached in May 2019 earlier this month, arguing it was too generous to bondholders and would increase rates too much.

It is not as if the spike in oil prices will make the already difficult effort to reach a settlement of the restructuring of PREPA’s debt any easier. Any such settlement will result in higher rates. It may be that the deal which the Governor rejected may be the best that could be obtained. Here is where the failure to reimagine Puerto Rico’s electric grid leaves the system vulnerable to fossil fuel price risk. The continued orientation towards a centralized generation and transmission system vs. the development of microgrids and more localized generation (primarily renewable) maintains that vulnerability.

PORTS

This week, Moody’s reaffirmed its positive outlook for the port sector. After a difficult period, attributable largely to pandemic factors, ports have begun to return to more levels of activity. Some have raised concerns about the impact of the war in Ukraine. Moody’s notes that the US and Russia have little direct waterborne trade. Russia accounted for less than 2% of all trade at US ports in 2021 as measured by value, according to the US Census Bureau.

Any impact is more likely to be seen on East Coast ports. Container trade between the US and Europe represents about 15% of total container volume for US ports.  One quarter of this trade is handled at the Port Authority of New York and New Jersey.

The cruise industry, having only recently begun to recover from the coronavirus pandemic, now faces pressure from a combination of higher fuel costs and weakened booking trends during this time of uncertainty. Bookings are strong for the second half of 2022. Cruise accounts for less than 10% of revenue for the US ports sector overall. Florida is an outlier in that regard. It is estimated that cruise ships are an important source of demand (25%-70% of revenue) for a handful ports in Florida and on the Gulf Coast.

POWER AUTHORITY DEBT FOR TRANSMISSION

Moody’s Investors Service has assigned an A2 rating to New York State Power Authority’s $569 million Green SFP Transmission Project Revenue Bonds. This is the initial financing for the two projects secured away from the NY Power Authority’s general credit. the repayment of SFP Transmission’s debt obligations derived solely from and secured by a pledge of revenue earned by the specific transmission projects’ assets.

Proceeds from the bond offering will be used to fund capital expenditures related to two transmission projects currently under construction, the Central East Energy Connect Transmission Project (CEEC) and the Smart Path Reliability Transmission Project (Smart Path).

CEEC is designed to increase electric transmission from Central to Eastern New York. It is approximately 36% complete (anticipated commercial operations in late 2023) and ownership is split between NYPA (37.5%) and an unaffiliated third-party (62.5%). The project will be managed by NYPA’s senior partner. NYPA is the sole owner of Smart Path and will manage that construction.

Smart Path involves rebuilding transmission lines that extend approximately 86 miles from the St. Lawrence Power Project’s Robert Moses Power Dam Switchyard to the Town of Croghan, Lewis County, NY and consists of 6 separate segments, 3 of which have been completed (about 64% complete) with full operation anticipated in mid-2023.

According to NYPA’s General Resolution, separately financed projects such as the ones under SFP Transmission will not receive any support from NYPA’s general credit, must be self-supported by pledged revenues, and pay for its own costs of operations. Moreover, there will be no cross default between the two entities.

MUNIS AND BIOFUEL

Cascade County, Montana is moving forward with the process of approving the issuance of $550 million of tax-exempt municipal bonds which would finance the construction of a renewable fuels refinery capable of processing renewable feedstocks into sustainable alternatives. The project would be adjacent to an existing oil refinery.

The renewable manufacturing refinery will be processing soybean oil feedstock into renewable diesel fuels. The company estimated that construction would begin in the fall of 2021 and the project would be completed by the end of 2022. The proposed project would have a production capacity of about 15,000 barrels of biodiesel daily.

The bonds would provide project finance and would be secured under loan agreements between the issuer and Montana renewables.

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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REGULATION

Arizona lawmakers are advancing legislation backed by utilities to shift the regulatory duty governing the regulation of the disposal of toxic ash produced by coal-fired power plants from the U.S. Environmental Protection Agency to the Arizona Department of Environmental Quality. Proponents say that the legislation would require that the state’s rules be as strict as those of the EPA. So why the change from federal to state regulation?

The state regulatory history suggests that the utilities believe that they would have an easier time with state regulators given the history of wastewater regulation in the state. Environmental advocates cite that history in opposition to this bill. The state is seen as supportive of coal fired generation. It comes as efforts continue on the part of investor-owned utilities to stifle the installation of residential solar.

The move comes at the same time that the U.S. Environmental Protection Agency is proposing a plan that would restrict smokestack emissions from power plants and other industrial sources that burden downwind areas with smog-causing pollution. This would likely burden the four remaining coal fired generating plants still operating in Arizona. The EPA proposal would affect power plants starting next year and industrial sources in 2026. The plan would cover boilers used in chemical, petroleum, coal and paper plants; cement kilns; iron and steel mills; glass manufacturers; and engines used in natural gas pipelines.

Obviously, the impact of renewed and strengthened environmental regulation will impact unevenly on a geographic basis. The newly proposed rules would apply in varying degrees to 26 states, located mainly in the East and Midwest but also hopscotching to include Wyoming, Utah, Nevada and California, none of which was covered by the last major “cross-state” pollution rule issued more than a decade ago and updated six years ago.

The folks at Inside Climate News have put together a great chart showing where the coal demand comes from to generate power.

PREPA FIGHTS THE FUTURE

When Hurricane Maria destroyed much of Puerto Rico’s electric distribution and generation system, we saw the situation as a huge opportunity. We discussed the suitability of the island to derive power from renewable generation and the view that microgrids would go a long way towards addressing the twin issues of supply and reliable distribution. That view gained traction over the next 18 months and culminated in the enactment of Act 17 in 2019.

That law requires that 100% of the territory’s electricity come from renewable sources by 2050. The legislation also sets ambitious benchmarks along the way, including 40% renewable energy by 2025 and 60% by 2040. In February, the Biden Administration and the Commonwealth reached an agreement that would provide some $12 billion in Federal recovery and grid modernization funds.

Then reality hit. The management of PREPA showed itself again to be an agent of obstruction. Just a couple of weeks after the agreement was announced PREPA’s executive director, testified that “To say that in three years there will be 40 percent of energy production in a stable, commercial manner and in compliance with all the requirements in service, I really don’t see it viable.” PREPA’s executive director, said he expects Puerto Rico to obtain one quarter of its total electricity from solar, wind and hydroelectric by 2025. The territory currently generates just 3 % of its total power from renewables, according to the U.S. Energy Information Administration.

The Puerto Rico Energy Bureau in 2020 ordered PREPA to procure contracts for at least 3.5 gigawatts of renewable energy development and 1.5 gigawatts of battery storage by 2025. PREPA is more than a year behind schedule on the procurement process. Some two-thirds of the required contracts have yet to be fulfilled. This in the face of A 2021 study by the Institute for Energy Economics and Financial Analysis which found that rooftop solar could reasonably generate 75% of all of Puerto Rico’s electricity within 15 years.

SALT RIVER PROJECT AND NATURAL GAS

The Salt River Project finds itself in the middle of yet another debate about how to best serve its continually growing service area. SRP has already gained notoriety as an opponent of net metering as it hopes to stave off the impact of rooftop solar in its sundrenched service area. Now, it finds itself in the middle of the debate over whether natural gas can be a viable bridge to renewable generation and the concept of environmental justice or equity.

SRP currently operates a 12-turbine gas fired generation facility in Pinal County, AZ. It hopes to be approved to expand the plant with the addition of some 16 new turbines. The Arizona Corporation Commission (ACC) is the regulatory body reviewing SRP’s application. The Arizona Power Plant and Transmission Line Siting Committee recommended that the ACC approve the application.

Now the project needs the final ACC approval and SRP is implying that without this expansion the utility will face reliability issues as soon as the summer of 2024. SRP says that it must have an approval by the end of this month. The host community believes that the approval process is being rushed to avoid opposition.

SRP has made it hard to believe in recent years that it is committed to lower or eliminate its use of fossil fuels. Its insistence that gas is necessary in combination with its clear efforts to hobble solar on anything other than an industrial scale place make SRP one of the more obstructionist utilities. It is something that environmental or green investors should take notice of.

MONEY FOR NOTHING

Energy Harbor will exit the fossil business through a sale or deactivation of its W.H. Sammis Power Station in Stratton, OH and its Pleasants Power Station in Willow Island, West Virginia in 2023. These plants represent 3,074 megawatts (MW) of generating capacity. Energy Harbor already closed four of the Sammis plant’s seven units in 2020. It blamed impending federal wastewater regulations for those closures.

The Sammis plant was scheduled for closure this year until the infamous HB6 bill was passed. The bill was designed to support nuclear generation. It was however, cited as a reason to keep the coal-fired plant open. Energy Harbor could use the savings from the nuclear subsidies in the bill to keep other generation on line. The nuclear bailout was repealed last year after federal authorities charged ex-Ohio House Speaker Larry Householder and five others with using $60 million in FirstEnergy bribe money to secure the passage of the HB6.

HB6 was not repealed in its entirety. Ohio residents still pay surcharges to support the Ohio plant but also one in Indiana. Now, proposed regulatory changes at the EPA may make the two plants uneconomical. In January, the U.S. Environmental Protection Agency proposed denying requests by the two plants to continue using unlined surface ponds to hold coal ash.

The irony is that a lot of many was spent and careers destroyed by the lobbying effort to get the aid for the two plants. The ex-Ohio House Speaker, along with a former Ohio Republican Party chair, will go to trial next January. Three other defendants have pleaded guilty, and one committed suicide.

OIL AND ALASKA

The recent surge in oil prices has led revenue forecasters to increase their estimates of oil-related revenues expected to be realized in the fiscal year 2023 beginning in July. The relatively low prices of oil in recent years have pressured the State’s budget, This has led to significant expenditure cuts to basic services and reduced Permanent Fund payments to residents.

Now, forecasters at the Alaska Department of Revenue have raised the state’s two-year forecast of oil revenue by $3.6 billion. In the current fiscal year, which ends June 30, state revenue is expected to be $6.95 billion, an increase of $1.2 billion from the state’s prior estimate. In Fiscal Year 2023, which starts July 1, the new forecast is for $8.33 billion, up $2.4 billion from a forecast in December. 

Last spring, the Alaska Legislature approved a $5.3 billion budget. Now it is up to the Legislature to decide how much they can rely on the revised estimate. The Revenue department estimates oil prices at $101 per barrel, an increase of $30 from December. The Legislature is moving towards an $80 per barrel figure. At $80 per barrel, the state would collect about $6.7 billion in FY23.

PREEMPTION

In 2021, St. Louis County passed an ordinance requiring new buildings to include electric vehicle charging and for charging to be installed at existing buildings in the case of renovations or changes of use. The city of St. Louis passed similar legislation early last year with more details and exemptions for some types of businesses. Brentwood, a city in St. Louis County, requires all new or renovated homes to include electrical infrastructure for charging. 

Now legislation is being offered in the Missouri legislature that would, like so many similar efforts in other states, seek to preempt local regulation. The bill would prohibit cities from passing building codes requiring businesses to install chargers unless the municipalities pay. The St. Louis law required that newly-built or renovated residential, apartment and commercial buildings be “EV Ready,” meaning that they have the necessary electrical capacity and other infrastructure to easily install an EV charger.

Parking lots with more than 50 spaces would have to provide chargers on 2% of them, and 5% of the spots would need to be EV ready. By 2025, 10% would have to be EV ready. The legislation requires that businesses with smaller parking lots have one or two spaces that are EV ready or have a charger installed depending on their size. 

NUCLEAR

The Nuclear Regulatory Commission (NRC) informed Florida Power & Light Co. (FPL) that its two Turkey Point nuclear reactors must go through a full environmental review before the agency will allow them to run for an additional 20 years. The NRC originally signed off on the extension in late 2019, using what’s known as a generic environmental study. NRC will not issue any further licenses for subsequent renewal terms until the NRC staff … has completed an adequate National Environmental Policy Act (NEPA) review for each application,” 

The reactors had to be able to quantitatively demonstrate numerous performance metrics to show that the plant’s structural and protective integrity could withstand an additional 20 years of operations. The NEPA review will evaluate impacts on the environment including the potential impact on groundwater supplies.

The Nebraska Public Power District (NPPD) and Entergy jointly announced that they would end their near two-decade operating agreement at Cooper Nuclear Station. Entergy was contracted by NPPD to help the District address operating problems at the plant. It was some 20 years ago that federal regulators had given Cooper the lowest grade a nuclear plant can have while remaining open. NPPD now owns 100% of capacity and has the sole operating responsibility.

EMINENT DOMAIN FIGHT CONTINUES

A second effort to legislate regulations on the use of eminent domain to obtain right of way for pipelines in Iowa is underway. A bill has been offered which would states that the Iowa Utilities Board shall not grant any requests for eminent domain and that a pipeline company shall not seek or exercise any eminent domain rights until March 1, 2023. The bills are designed to try to stimulate negotiations between one project sponsor and landowners.

Summit Carbon Solutions has proposed a pipeline which would cross 680 miles of Iowa land across 29 counties. There are potentially 15,000 Iowa landowners in the pipeline’s path. Negotiations have secured easements on more than 100 miles of the proposed route in Iowa, and that agreements on another 70 miles are in the final stages.

The threat of eminent domain has been cited as an obstacle to negotiations. Without the threat of its use, eminent domain becomes less valuable as leverage for the entities building the pipelines. This typically forces them to spend more than they wanted to acquire rights of way.  The case is being made that the pipeline will increase the value of corn through ethanol enough to offset any negative impacts from the pipeline. But if the ethanol is for fossil fuel applications….?

ZONING

Connecticut will take a crack at the issue of zoning and its impacts on housing, transportation, and jobs. A new zoning bill would allow denser housing development around Connecticut’s train stations, with goals of making housing more affordable and providing easier access to transportation. House Bill 5429, backed by advocacy group Desegregate Connecticut, would require towns to allow housing with at least 15 units per acre within a half mile of a passenger, commuter rail or bus rapid transit station. At least 10% of the units would have to be designated as affordable.

If enacted, the law would take effect on October 1. It would significantly streamline the approval process by allowing developers to avoid the public hearing process to build in those areas. It fast tracks the decisions process on permit applications by requiring that they must be issued within 65 days of submission. Certain types of land are exempt from the requirement, including wetlands, steep slopes and areas necessary for protecting drinking water.

A 2017 law, 8-30j, requires towns to develop affordable housing plans every five years. The first is due in July. The politics of the bill quickly became clear. Less prosperous towns like New Haven and others see support for the bill. Communities like Greenwich and Westport are seen as opposing the bill over worries about property values. It’s not a new development. It is even predictable.

BERKELEY HOUSING – NEVER MIND

It only took eleven days for the CA legislature to enact the repeal of certain provisions of the California Environmental Quality Act (CEQA) after a court decision upholding requirements that housing proposed to serve the UC Berkeley campus would have had to meet was handed down. The University announced that it would have to rescind admissions to the campus by some 2,600 because of a lack of student housing. The proposed project was designed to address that.

The California Legislature voted unanimously to change the law, sending a bill to Governor Newsom, who quickly signed it. The decision had put the University squarely in the middle of a conflict between the need to offer more places at the school to improve access with limits on their ability to develop housing for those students.

The law Newsom signed is narrowly tailored to fix the specific problem at UC Berkeley. It did however, shine a spotlight on the impacts of the use of the environmental law to halt all sorts of projects. The issues cited by the opponents of the housing project focused on things like traffic and rents rather than on traditional “environmental” concerns. There is now at least some debate over whether the scope of the CEQA could or should be narrowed.

GAS TAX HOLIDAYS

The wide range of potential solutions to the spike in gasoline prices reveals a complete lack of consistency and highlights the political nature of the proposals. Massachusetts just rejected a gas tax holiday over the threat it posed to bond covenant compliance. New York’s pending budget would suspend gas taxes from May 1, 2022 through the end of the year.

The Maryland legislature is considering altering current law that started in 2013 which mandates the increase of gas taxes annually based on inflation as measured by the Consumer Price Index. The current inflation rate is 7.48%. Republican state lawmakers are pushing legislation to repeal that provision, or at least pause it for two years. The Georgia legislature is considering a suspension of its state’s gas tax for two months.

It is a topic of short-term value. The real answer would be to replace fuel taxes with mileage-based fees and drive demand away from fossil fuels. It’s a completely political answer to a question which needs a more nuanced response.

SEC FRAUD CHARGE

The Securities and Exchange Commission charged the Crosby Independent School District (Crosby ISD) in Texas and its former Chief Financial Officer with misleading investors in the sale of $20 million of municipal bonds in order to pay its outstanding construction liabilities and fund new capital projects. The SEC also charged Crosby’s auditor with improper professional conduct in connection with the audit of the school district’s 2017 fiscal year financial statements. The complaint charges that the District failed to report $11.7 million in payroll and construction liabilities and falsely reported having $5.4 million in general fund reserves in its audited 2017 fiscal year financial statements.

The Commission charges that the District knowingly included the false and misleading financial statements in the offering documents used to raise $20 million through the sale of municipal bonds in January 2018. In August of 2018, seven months after the offering, Crosby ISD disclosed that it was experiencing significant financial issues, including that it had a negative general fund balance. The following month, ratings agencies downgraded Crosby ISD’s bonds. 

As is often the case in situations like this, Crosby ISD agreed to settle the SEC’s charges by consenting, without admitting or denying any findings, to the entry of an order finding that it violated the antifraud provisions. The CFO greed to pay a $30,000 penalty and not participate in any future municipal securities offerings. The auditor agreed to be suspended from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after 3 years. They also agreed to not serve as the engagement manager, engagement partner, or engagement quality control reviewer in connection with any audit expected to be posted in the MSRB’s Electronic Municipal Market Access system until reinstated by the SEC.

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

PUERTO RICO BEGINS THE JOURNEY BACK

Puerto Rico is poised to undertake the first debt sale as part of its ongoing debt restructuring this week. The GO deal next week poses an interesting opportunity. I look at where the old debt was held and ask myself how many of those holders will be able to buy the new bonds. Do the insurers want to go through this again? Do investors have faith in the government without some supervision? Do you believe that the politics of the Commonwealth will change on a sustained basis? Will PR be able to make the kind of timely disclosure going forward? Will as many individuals who owned PR debt as retail buyers be willing to do so again?

It’s still a distressed situation so that will effectively keep many of the old buyers out of the deal. It would be surprising to see the level of retail ownership that existed prior to the default if only because the vehicles for retail ownership (bond insurance and bond funds) will face limits on their participation.

If the sale is considered a success, it would weigh positively on the PREPA restructuring but the PREPA debt remains in its own category as opposed to tax backed debt.

As for whether I would want to invest, there is no way to go longer than 10 years. I don’t believe that the government is committed to real fiscal reform and the resistance to oversight will continue. This is a credit for speculators and hedge fund type investors. At a price, they will be there. It’s time for mom and pop to move on.

PREPA RESTRUCTURING HITS A ROADBLOCK

The Governor of Puerto Rico and AAFAF’s executive director announced that the government of Puerto Rico has exercised its rights to terminate the restructuring agreement (RSA). The Governor characterized the Commonwealth’s objective as “conversations with all stakeholders to achieve a restructuring agreement that can be implemented.” The Ad Hoc Group asked the Court to appoint a nonjudicial mediator. The group hopes to retool the RSA to be able to be implemented without legislative action by the Commonwealth. It proposed that this specific creditor group be allowed to negotiate with PREPA.

The Court denied the Ad Hoc Group’s Motion insofar as it seeks an order requiring the Oversight Board to participate in, and PREPA to provide unlimited financing for, mediation focused on the interests of a particular subset of creditors under the provision of an RSA that AAFAF has purportedly terminated. The Court noted that “the RSA termination announcement presents the risk of a major setback in progress toward readjustment of PREPA’s liabilities.” Nonetheless, the effort to restrict the group of negotiating creditors raised issues of equity.

Overhanging all of this are deadlines looming in the fourth quarter of 2022. To address those deadlines, the Court ordered that the Oversight Board shall promptly meet and confer with AAFAF, the Ad Hoc Group, and all other major stakeholders and interested parties whose collaboration it believes is necessary to construct a viable basis for a plan of adjustment, to consider whether a consensual mediation arrangement can be entered into promptly to resolve key plan-related issues.

The Oversight Board shall file, by May 2, 2022, a proposed plan of adjustment, disclosure statement, and proposed deadlines in connection with consideration of the disclosure statement, plan-related discovery, solicitation and tabulation of votes, objection period in connection with the confirmation hearing, and proposed confirmation hearing schedule for the PREPA Title III case; or a detailed term sheet for a plan of adjustment or a proposed schedule for the litigation of significant disputed issues in PREPA’s Title III case, or a declaration and memorandum of law showing cause as to why the court should not consider dismissal of PREPA’s Title III case for failure to demonstrate that a confirmable plan of adjustment can be formulated and filed within a time period consistent with the best interests of PREPA, the parties-in-interest and the people of Puerto Rico.

It is not a surprise that the resolution of PREPA’s debt issues would be the most contentious. Only when an RSA can be completed and implemented will the real impacts of a restructured entity become clear. For now, the lack of a resolution holds off the worst fears of management and the workers for at least a little while. The Legislature needs to step up and be part of the solution.

PIPELINES

The Texas Supreme Court heard arguments in a case to determine whether a company has eminent domain authority to build a pipeline across private land to carry a product other than crude petroleum. In this case the substance is polymer-grade propylene (PGP). The issues are whether the pipeline would be a public use as required by the constitution, whether the pipeline company has statutory authority to condemn the property, and finally if the property is condemned, how it should be valued.

The dispute is as much economic as anything else. This not an environmental fight. The landowners have a history of successfully selling easements. Much of the argument centered on valuation issues. That said, it may be decided on non-economic issues by the court with a decision in favor of the landowners seen as a major weapon against eminent domain.

These cases are unfolding as the Tennessee legislature is considering bills which would limit the ability of localities to regulate the location of pipelines within their boundaries.

SOLAR BACKLASH

The effort to impose what are effectively economic penalties for customers who wish to install solar panels to generate energy. The ability of solar owners to sell excess power they produce to the legacy utilities which serve their area under so-called net metering arrangements have been crucial to development in the industry. A number of utilities across the country have made varying efforts to use economic disincentives to discourage or eliminate net metering even in sun drenched states like Arizona and Florida.

Now in Florida, legislation has been passed which would limit and then eliminate net metering. The legislation requires that solar customers pay all fixed costs of having access to transmission lines and back-up energy generation as determined by the Public Service Commission. Florida businesses and homeowners will have until December 2028 to install rooftop solar and receive any financial credit for selling excess energy back to their electric utilities

Starting in 2029, the PSC will impose new rules for how much solar users will be paid when they sell excess energy back to the grid, and how many fees they are charged to stay connected to the grid. That may require additional legislation as the newly passed legislation establishes no standard to guide that decision.

MUNICIPAL UTILITY PRICES

One of the arguments in favor of municipal utilities is their cost of service-based business model rather than a model designed to generate returns for investors. The theory is that the only “profits” a municipal utility would generate would be to fund necessary operation reserves and meet debt service covenants. According to the January 2022 totals released by the Florida Municipal Electric Association, the average residential bill for 1,000 kWh for a municipal utility in the state is $120.67.

The investor-owned utilities are unsurprisingly at the top of the list. Florida Power and Light Northwest and Duke Energy have average bills approaching $200. There is one exception to the rule – Gainesville, FL Regional Utilities. GRU average bills were some $154. That makes this municipal utility the third most expensive – public or IOU. This comes in the wake of a leadership shakeup at GRU which saw the general manager lose his position and the elimination of the chief operating officer position.

P3 FUNDING

Maryland’s troubled Purple Line project was approved for a $1.7 billion Transportation Infrastructure Finance and Innovation Act (TIFIA) loan through the Build America Bureau. The project had previously been approved for a $874.6 million TIFIA loan in 2016; this loan replaces and restructures the previous loan. The funding announcement follows the settlement of contractor issues for this major P3 project. The project also received an additional $106 million in funding through the American Rescue Plan to keep the project alive through the pandemic and the resolution of the contractor issues.

U.S. Department of Transportation also announced that the Build America Bureau provided a $1.05 billion low interest loan to Capital Beltway Express, LLC to refinance an existing loan for the Capital Beltway express lanes and construction of a northern extension called the 495 NEXT Project. This P3 project will extend the existing express lanes by 2.5 miles from the Dulles Access Road to the George Washington Memorial Parkway near the state line. 

The Bipartisan Infrastructure Law, signed by President Biden in November 2021, expanded project eligibility for the TIFIA credit program and extends maturity of the loans, giving borrowers additional flexibility. 

In Pennsylvania, PennDOT announced that Bridging Pennsylvania Partners (BPP) was selected as the Apparent Best Value Proposer to administer the Major Bridge Public-Private Partnership (P3) initiative to repair or replace up to nine bridges across the state. The Major Bridge P3 Initiative is designed to raise revenue through tolling on nine bridges located on Interstate highways throughout the Commonwealth. The department and BPP will now enter into a pre-development agreement to finalize the design and packaging of the bridges to be built, financed, and maintained.

CYBER SECURITY LEGISLATION

On 1 March, the US Senate passed legislation requiring critical infrastructure owners to report relevant cyberattacks to federal agencies. The proposed legislation would require that critical infrastructure owners and operators disclose a major cybersecurity incident to the Department of Homeland Security’s Cybersecurity and Infrastructure Agency within 72 hours and any ransomware payments to Cybersecurity and Infrastructure Security Agency (CISA) within 24 hours.

The legislation comes as utilities are considered to be vulnerable to possible Russian cyber-attacks in connection with its invasion of Ukraine. There is no one particular standard which governs what a cyber-attack target is required to disclose or to whom such disclosures must be made. One goal of the legislation is to provide a standard to address the inconsistency which flows from the lack of one. The thought is that a standard will encourage more fulsome and timely disclosure of events.

DETROIT CLIMBS BACK

Moody’s Investors Service has upgraded the rating on the City of Detroit, MI’s general obligation unlimited tax (GOULT) bonds to Ba2 from Ba3. The outlook remains positive. The city has about $2 billion of debt outstanding. The upgrade and maintained outlook reflect the real progress the City has made in terms of maintaining fiscal balance. It also follows the defeat last summer of a voter initiative which would have forced the city to incur hundreds of millions of expenses without a source of revenues to fund them.

The upgrade action acknowledges the structural weaknesses in the City’s credit – weak property tax wealth, volatile revenue structure, limited revenue raising flexibility and, the city’s significant leverage from debt and pensions. Pension costs remain the one area over which the City has little control. Moody’s lays out a view of what would drive another upgrade – robust revenue growth that makes rising fixed costs easier to accommodate; strengthening of full value per capita, median family income and population trends; accumulation of additional resources in an irrevocable trust to reduce budgetary risk of rising pension costs.

FRAUD, LOSSES, AND DISCLOSURE

The Fresno Bee reported that the city of Fresno lost about $400,000 in 2020 after falling victim to an electronic phishing scam.  The fraud involved the use of fake invoices which a city employee mistook for a real one and paid it.  There were two such payments. The issue isn’t one of fiscal solvency or short-term budget stress. After all, it’s $600K out of a $1.4 billion budget.

It does raise an issue for investors concerned with governance. The prior administration had been aware of the problem but chose not to disclose it either internally or to the public.  A new mayor was informed by the press.  Here’s the rub. The City reported the fraud to federal authorities but not to its City Council or its investors. It was put in the middle of its obligations to disclose material financial information and comply with requests from law enforcement. When the case was turned over from investigators at the Fresno Police Department to the Federal Bureau of Investigations, FBI officials asked investigators from the City of Fresno to keep the information from being disclosed to the public.

Now, the information was leaked to the press anyway.  More concerning are the comments of the mayor regarding other potential municipal victims.  FBI officials told Fresno City officials that the scam targeted “several municipalities across the United States who were victims” including one that lost twice the amount as that of Fresno.

AIR INDUSTRY CONTINUES TO RECOVER

U.S. airline industry (passenger and cargo airlines combined) employment increased to 733,491 workers in January 2022, 3,411 (0.47%) more workers than in December 2021 (730,080) and 16,848 (2.25%) fewer than in pre-pandemic January 2020 (750,339). The January 2022 figure is the highest industry headcount since the start of the COVID-19 pandemic. U.S. scheduled-service passenger airlines employed 450,065 workers in January or 61% of the industry-wide total. Passenger airlines added 5,285 employees in January for a ninth consecutive month of job growth dating back to May 2021. 

The January industry-wide numbers include 625,753 full-time and 107,738 part-time workers for a total of 679,622 FTEs, an increase from December of 3,765 FTEs (0.56%). January’s total number of FTEs remains just 1.71% below pre-pandemic January 2020’s 691,457 FTEs. U.S. cargo airlines employed 253,262 FTEs in January, up 478 FTEs (0.19%) from December. U.S. cargo airlines have increased FTEs by 18,048 (7.67%) since pre-pandemic January 2020.

ENVIRONMENTAL TAX IN PORTLAND

Measure 26-201 was approved by Portland, OR voters in 2018. Voters approved the tax to create the Portland Clean Energy Fund in 2018 as an ambitious way to tackle climate change and social inequities. It created a 1 percent gross receipts tax within the city limit. The tax would apply to retailers with more than $1 billion in national sales and $500,000 in Portland-specific sales. It would also include large service-based firms, including retail banking services. Supporters estimated the tax would raise approximately $30 million a year. City officials expected revenues of $44 million to $61 million annually. Businesses said it would raise far more than that.

It turns out that the businesses were right. This week, an audit from the City of Portland showed that at the end of the last fiscal year, the tax had generated more than $185 million since its inception.  Actual revenues were $63 million in Fiscal Year 2019-20 and $116 million in Fiscal Year 2020-21. That’s great from the point of view of a “social” investor.  From a governance standpoint, the situation has raised issues. The Portland City Auditor’s Office found the program has still out not finalized methods to track, measure and report its performance, as required by the 2018 ballot measure that created it.

The program had made progress with some elements, but othe­­­rs were not yet fully implemented or needed direction from City Council. The program did not report on whether its activities by grant category were consistent with target proportions in the legislation. The presentation of the recommended grants to Council used descriptions that were a mix of funding category and grant type. 

It is a weakness of several prominent efforts to devote public funding to efforts backed by limited notions of what constitutes accountability and transparency. The Thrive NY program led by former Mayor DeBlasio’s wife faced withering criticism over its lack of accountability and transparency. It is not the first time that Portland has been satisfied with less than adequate disclosure. It has in the past made the case that better disclosure is a choice between better information or public safety. For ESG investors, this stuff should matter.

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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OPIOID SETTLEMENT

The effort to recover some of the costs of the opioid epidemic has been settled.  The nation’s three largest drug distributors and a major pharmaceutical manufacturer announced a settlement in the litigation against the companies by states and localities across the country. The total cost to the companies: $26 billion.

The settlement will require Janssen, Johnson & Johnson’s pharmaceutical division to pay $5 billion. That payment will be broken into annual payments over nine years. McKesson, Cardinal Health and AmerisourceBergen, the distributors, will pay a combined $21 billion over 18 years. The settlement requires that at least 85 percent of the payments will be dedicated to addiction treatment and prevention services.

While the settlement is the second largest multi-state settlement to be reached, it did not turn into the next tobacco deal. The settlement announcement does indicate that it was approved by at least 90 percent of those governments eligible to participate, and 46 of 49 eligible states for the distributors and 45 for Johnson & Johnson. This settlement comes as additional litigation is either settled or moves closer to settlement.

An agreement arrived at earlier this year produced a tentative settlement with Native American tribes. It will not produce a substantial windfall for any of the tribes. The 574 federally recognized tribes could receive $665 million in payouts over nine years.  There could be more money available from the ongoing Purdue Pharma bankruptcy proceedings. That litigation, focused on the Sackler family, continues. The Sacklers recently increased their dollar offer in negotiations but may plaintiffs remain unsatisfied.

Washington, Oklahoma and Alabama are not participating. Oklahoma’s Supreme Court overturned a lower court’s $465 million verdict that concluded that Johnson & Johnson’s opioid marketing created a public nuisance in the state. Other court efforts have generated a mixed bag of rulings which may lead ultimately to U.S. Supreme Court review. These three states obviously believe that they can do better even though the experience to date might indicate otherwise.

That strategy may be vindicated by the announcement that a reworked settlement between the Sackler family which owned Purdue Pharma and the states had been agreed. That settlement came in the wake of the rejection of Purdue Pharma’s bankruptcy plan in December. The District of Columbia and nine states — California, Connecticut, Delaware, Maryland, New Hampshire, Oregon, Rhode Island, Vermont and Washington had rejected that earlier plan. Mediation talks between that group of plaintiffs and the Sacklers led the family to increase its proposed share of the settlement by $1 billion.

By holding out and conducting their own negotiations, the hold out states did generate increased payout to the states. At the same time, the Sacklers will pay out the new $1 billion over 18 years versus the nine-year timeframe established in the prior rejected settlement. It is well below what many thought would be the required payout and there is a fixed timeframe for payments. The hope that opioids would become the new tobacco in terms of supporting debt issuance will not be realized.

TRANSIT FUNDING

The federal Urban Mass Transportation Act of 1964 was enacted to develop and revitalize the country’s public transportation systems.  This Act, in part, allows state and local transportation authorities to obtain federal grants.  Urban mass transportation authorities created pursuant to this section receive federal grants administered by the Federal Transit Administration.  Receipt of these federal grants requires certification from the United States Department of Labor. 

Now to ensure that public transit agencies in West Virginia are able to continue to receive federal grants, House Bill 4331 has been introduced. The bill tweaks existing state law to make clear that labor unions are recognized by these agencies. To preserve this source of federal funds for urban mass transportation authorities, only for urban mass transportation authority employees whose public authority employer is a recipient of federal funds, the term “deductions,” as used under Chapter 21, Article 5, shall include amounts for union, labor organization, or club dues or fees.

NEW JERSEY UPGRADE

New Jersey continues its journey out of the credit wilderness as it reaps the benefits of federal funding and a recovering economy. This week Moody’s said it has upgraded New Jersey’s general obligation and Garden State Preservation Trust, NJ bonds to A2 from A3, and the state’s related subject-to-appropriation bond ratings also by one notch, to A3 from Baa1 for bonds financing essential-purpose projects and to Baa1 from Baa2 for bonds financing less-essential projects. What is essential? The essential-purpose appropriation financings include bonds issued by the New Jersey Transportation Trust Fund Authority and school construction bonds issued by the state’s Economic Development Authority. Less essential debt is issued by the New Jersey Sports & Exposition Authority. 

Much agency issued debt also benefitted from the State’s upgrade. The program ratings for the state’s aid intercept enhancement programs – the New Jersey Qualified School Bond Program and the New Jersey Municipal Qualified Bond Program -were upgraded to A3 from Baa1. The Liberty State Park Project Bonds issued by the New Jersey Economic Development Authority were affirmed at Baa1. Federal Highway Reimbursement Revenue bonds (GARVEEs) issued by the New Jersey Transportation Trust Fund Authority were raised to A3 from Baa1. The ratings on the bonds issued by the South Jersey Port Corporation were affirmed at Baa1.

The vast majority of the State’s debt is paid from monies that are subject to annual appropriation. That reliance on that mechanism, rather than the use of general obligation debt, has always been seen as a strong source of support for the view that failure to appropriate would be an act of fiscal suicide on the part of the Stater. It would undue all of the benefits of better pension funding which will still be a long term drag on the State’s ratings. The reversal of the trend of inaction during the Christie administration regarding pension funding and its role in the steady declines in the State’s ratings has clearly boosted the outlook for the State.

NYC BUDGET

The NYC Independent Budget Office has released its analysis of the proposed budget for FY 2023 recently offered by Mayor Eric Adams. It is the analysis of the economy that we find most informative. It highlights the benefits as well as the costs of the City’s dependence upon Wall Street and the many associated businesses that benefit from the economic activity the FIRE sector generates for NYC.

The first example concerns wages and personal Income. The city’s recovery in terms of aggregate wages and salaries has been much more robust than its recovery in total employment. The sectors experiencing the slowest recovery, and for which IBO projects employment will not have recovered by the end of 2026, have some of the city’s lowest average wages, while the sectors that are projected to recover the most rapidly have some of the highest average wages.

The leisure and hospitality sector and retail trade sector, for example—which lost the most jobs and are projected to have the slowest expected recovery—have average annual salaries of $54,700 and $57,300 respectively. Conversely, the information and professional services sectors, which have recovered much more quickly, have some of the city’s highest average annual wages, $144,500 and $181,300, respectively.

A second example is that of real estate. After a sharp decline in 2020 in the wake of the onset of the pandemic, real estate sales in New York City rebounded strongly in 2021. The total value of taxable sales rose 81.5% to $111.3 billion compared with 2020, with residential sales up 88.7 %, and commercial sales increasing 71.2 %. Residential sales were $68.1 billion, far exceeding the previous record of $55.4 billion set in 2017. That does not mitigate longer term concerns. the future of the commercial real estate market remains uncertain.

While many observers expect an increase in the number of workers returning to the office as 2022 progresses, the total demand for office space, particularly in “non-trophy” buildings, is likely to remain soft, and the continuing shift to online shopping will weaken the market for retail space. Retail spaces may face the most uncertainty. Storefront vacancies are the most visible sign of the impact of the pandemic. The role of the individually owned small retail business in the employment of non-college graduates in large cities cannot be overstated. The recovery of these sorts of businesses will be a key to resolving issues of unemployment especially at the lower range of the pay scale.

We recently documented the Mayor’s plan to eliminate projected budget gaps through headcount management. That would represent a real reversal from the DeBlasio years. IBO estimates that nearly half of the $5.4 billion in total savings proposed in the Mayor’s Plan to Eliminate the Gap (PEG) for the current fiscal year through fiscal year 2026 are achieved through headcount reductions ($2.5 billion). Headcount reductions of between 3,500 and 6,000 are projected annually. The primary method? Most of the positions proposed for elimination are vacant.

And there are the usual tricks. The reductions occur only with vacant positions, ones that agencies have budgeted for—but do not actually have staffed. In fiscal year 2023, nearly 1,800 of the city-funded positions eliminated in the PEG at DOE are restored with federal funds, with approximately 900 vacancies eliminated in the PEG in fiscal year 2024 restored with federal funds. The expiration of federal Covid-19 relief funds occurs in 2025.

The Preliminary Budget includes a budgeted full-time headcount for fiscal year 2022 of 306,291, a level similar to what it was prior to the onset of the pandemic. In fiscal year 2026, the final year of the Adams Administration’s current financial plan, full-time budgeted headcount drops below 298,000. This would be the lowest budgeted headcount since calendar year 2017.

REGULATION

In North Dakota, the Board of University and School Lands, better known as the Land Board, has been appealing to the North Dakota Supreme Court in a case with issues surrounding royalties from the development of state-owned minerals.  Those issues include deductions oil and gas companies removed from royalties to account for transportation and processing costs. The Land Board has for several years sought to collect those deductions following a favorable Supreme Court ruling in 2019 in a case involving oil producer.

House Bill 1080 was enacted last year. The law limited the length of time for which the state in the future could seek to collect unpaid royalties at seven years. That created a cutoff date of August 2013 that would apply to the money the state is seeking to recover from dozens of companies. Now, the Board has decided not to pursue collections from prior to that date. The Department of Trust Lands has estimated the state is owed $69 million in royalties from production before that date. 

NO TOLLS ON THE OHIO

Kentucky and Ohio plan to seek $2 billion in federal funds to help pay for the overhaul of the Brent Spence Bridge corridor near Cincinnati without using tolls. The money would come from the federal infrastructure bill that Congress passed last year which includes $17.5 billion in national grants for large projects like this project. It would retrofit the Brent Spence Bridge, which carries Interstates 71 and 75 between Covington, Kentucky, and Cincinnati, a nearby companion bridge, and work on approach roads on both sides of the Ohio River.

Unlike another major bridge project – the Ohio River Bridges Project, the Kentucky-Indiana bridges built in Louisville – this one will not use tolls. That would clash with the stated intent of the USDOT to encourage the role of user fees, aka tolls. The Kentucky General Assembly banned tolls on interstate crossings between Kentucky and Ohio in 2016. This will clash with the stated goals of encouraging public/private partnerships in the finance and execution of large transit infrastructure projects.

DETROIT

Michigan law requires that the City of Detroit to hold independent revenue conferences in September and February each fiscal year to set the total amount available to be budgeted for the next four years.  The latest forecast predicts a faster recovery for Detroit than the State overall. Resident employment will recover to pre-pandemic levels by the end of 2022. Meanwhile, jobs at establishments within the city boundaries will recover by early 2023. The City’s economy continues to grow through 2026 with blue-collar jobs leading the way. 

Recurring City revenues are forecasted to exceed pre-pandemic levels in the current fiscal year ending June 30, primarily due to stronger income tax collections and the implementation of internet gaming and sports betting last year. The City presented FY2022 General Fund recurring revenues projected at $1.087 billion for the current fiscal year ending June 30, up $23.8 million (2.2%) from the previous estimate in September 2021. General Fund recurring revenues for FY2023, which begins July 1, are now forecasted at $1.147 billion, an increase of $60 million (5.5%) over the revised FY2022 estimates. General Fund revenue forecasts for FY2024 through FY2026 show continued, but modest, revenue growth of around 2% per year on average.  

AIRPORTS

The data is on regarding airport volumes in 2021.  The volume of flights operated in 2021 (6.2 million), although more than 2020, was 78.1% of the volume of flights operated in pre-pandemic 2019 (7.9 million). In 2021, the 10 marketing carriers reported 6.3 million scheduled flights, 78.0% of the 8.1 million scheduled in 2019.  In December 2021, the 10 marketing network carriers reported 580,238 scheduled domestic flights, 13,773 (2.4 %) of which were canceled. In pre-pandemic December 2019, the same airlines reported 679,941 scheduled domestic flights.

At the same time, the industry is applying heavy pressure in light of the new guidance issued by the Centers for Disease Control and Prevention that relaxes many COVID-era policies – including indoor mask wearing. The U.S. Travel Association, the American Hotel and Lodging Association, Airlines for America and the U.S. Chamber of Commerce are appealing to the White House Coronavirus Response Coordinator to replace pandemic-era travel advisories, requirements and restrictions with endemic-focused policies.  

BEIGE BOOK

The Federal Reserve issued its latest view of the economy as the nation moves towards treating COVID 19 as an endemic rather than a pandemic. Several themes were consistent across all regions. Transportation costs (fuel), labor shortages, higher costs, and higher wages were noted across the board. Steady increases in prices are supported by demand. As retail activity increases and inflation remains high, the resulting rise in prices will contribute to higher sales tax revenues.

For NYC, the Fed reported that New York City’s residential rental market has picked up steam in recent weeks, as vacancy rates have continued to edge down and rents have accelerated. Rents have fully rebounded across much of the city. Commercial real estate markets were mixed but, on balance, slightly stronger. Office markets were mostly steady, with both office availability rates and market rents essentially flat throughout most of the District.

ELECTRIFICATION REALITIES

The effort to promote electrification of homes has run into some of the realities of the costs of electrification. Residents who lost homes in the Marshall Fire already faced issues in terms of costs and insurance to replace their lost homes. Many were confronted with the reality that replacing their homes and complying with new electrification requirements left many of the 1,000 impacted homeowners facing costs well in excess of the replacement values included in their homeowner’s policies.

One of the two communities most affected by the fire was Louisville in Boulder County. The Louisville City Council voted this week to direct city staff members to draw up potential changes in its building codes in the wake of the Marshall Fire for future vote. The changes would roll back building codes to the 2018 codes in place well before the fire for those whose homes were lost in the blaze, possible with a three-year time limit. In that process, the city gathered estimates of the costs of meeting the updated codes over what was in place prior to October with the 2018 codes. It found the extra cost for the construction of an average 2,800 square foot home was about $20,000.

The situation focuses attention on the cost of “green” building. As is the case with so many environmental issues, proponents often underestimate the cost to individuals of environmental regulation. It is one thing to require corporations to incur the extra costs, it is proving to be another to get support for imposing costs on individuals.

BERKELEY HOUSING DISPUTE AND COLLEGE ADMISSIONS

After the impacts of the pandemic on the demand for public universities unsurprisingly increased demand, it raised demand for housing as well. To address such increased demand at the University of California, UC proposed construction of additional residential facilities adjacent to its campus in Berkeley. This would have facilitated a student population of 45,000.

Now a local group with a long history of opposing university expansion of its physical plant has stymied the plans in court. The California Environmental Quality Act requires state and local agencies to study the environmental impact of construction projects before approving them. The group has obtained rulings in a suit under the CEQA which say that the existing environmental study is inadequate. UC recently asked for a stay of the initial lower court rulings on the matter while it is under appeal. The request was denied.

The real problem? UC Berkeley plans to begin mailing admissions offers on March 23. The university has said that it would limit those offers to 15,900 applicants if a stay was denied, down from its original allotment of 21,000 admissions offers for the next academic year. It occurs just as California has dedicated funding to expand enrollment by 5,000 full-time students at University of California schools and 10,000 full-time students at the California State University System.  

Pending legislation would exempt certain campus housing developments from the California Environmental Quality Act.  The shortage of housing in California especially “affordable” housing can be blamed on many factors. It is disappointing for advocates of smarter less impactful housing development to be stymied by opposition from the areas which would benefit the most. The university will try to reduce the number of new students it turns away, through encouragement of online enrollment and for some incoming students to delay enrollment until January 2023. California residents and transfer students from within the California Community College system will be prioritized for fall in-person undergraduate enrollment.

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.