Joseph Krist

Publisher

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WHY REEDY CREEK MATTERS

The effort on the part of Florida Governor Ron DeSantis to punish Disney becomes more embarrassing by the day. This week, the Governor’s office admitted that there is no plan to actually implement on a practical basis the dissolution of the Reedy Creek Improvement District. There needs to be a resolution of the emerging conflict between the goals of the Governor and the Legislature and state law.

Disney points out that “Pursuant to the requirements and limitations of Florida’s Uniform Special District Accountability Act, which provides, among other things, that unless otherwise provided by law, the dissolution of a special district government shall transfer title to all of its property to the local general purpose government, which shall also assume all indebtedness of the preexisting special district.”  That would be mostly Orange County and some to Osceola County. That is something the counties do not support. DeSantis’ office released a statement Friday saying it does not expect any tax increases for any residents from this new law. Without additional implementing legislation, the details of any transfer are unknown.

What is clear is that the concept of non-impairment whereby an entity like a state covenants not to take any actions which would impair the ability of another debt issuer to meet its obligations is now subject to question in Florida. It is a view shared by Fitch Rating’s which said that Florida’s move to dismantle Reedy Creek “heightens bondholder uncertainty” and if the state doesn’t find a way to resolve the debt issue it “could alter our view of Florida’s commitment to preserve bondholder rights and weaken our view of the operating environment for Florida governments.”

ILLINOIS

Two years ago, Illinois was the only state to borrow from the Federal Reserve Bank’s Municipal Liquidity Facility. Now, with the recovery from the pandemic underway the State’s financial position is much improved from that time. Between better than expected revenues and a windfall of aid from the Federal government, the State’s fiscal position is clearly sounder. This set of circumstances has manifested itself in a rating upgrade from Moody’s.

Moody’s Investors Service has upgraded the issuer rating of the State of Illinois to Baa1 from Baa2. This change supports the following upgrades: to Baa1 from Baa2 the rating on the state’s outstanding general obligation bonds, to Baa1 from Baa2 the rating on the state’s outstanding Build Illinois sales tax bonds. Moody’s has affirmed the Baa3 rating on outstanding Metropolitan Pier & Exposition Authority bonds that are partially paid with state appropriations. The outlook is stable. The upgrade reflects continued progress towards paying down accounts payable. The state is also increasing pension contributions, indicating increased commitment to paying its single-largest long-term liability.

The stable outlook balances the financial progress being made by the state with the uncertainty of the present economic climate. The state’s lean financial reserves, and heavy long-term liability and fixed cost burdens make it more vulnerable than other states to a negative shift in the national or global economy, which presently limits the probability of further rating improvement.

UTAH AND ESG

The State of Utah is emerging as the lead dog in an effort to discourage the use of ESG factors in determining creditworthiness. In March of this year, the SEC proposed new disclosure requirements for securities issuers regarding climate factors and their exposure to them. This will include municipal bond issuers as well as corporations. As one might expect, the proposal has generated some strong responses.

The most recent example comes from the State of Utah. The State’s political establishment authored a letter to S&P signed by Gov. Spencer Cox, Treasurer Marlo Oaks, other state constitutional officeholders, legislative leaders, and Utah’s Congressional delegation, stated their objection to any ESG ratings, ESG credit indicators, or any other ESG scoring system that calls out ESG factors separate from, in addition to, or apart from traditional credit ratings. The State considers ESG issues to be non-financial and therefore of no consequence to investors. It implies that environmental concerns are a leftist plot against the fossil fuel industry.

Here is what the SEC proposes to be included in financial statements and other disclosure from issuers. They will be expected to address 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; how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; the registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes.

If the registrant has adopted a transition plan as part of its climate-related risk management strategy, a description of the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks; if the registrant uses scenario analysis to assess the resilience of its business strategy to climate-related risks, a description of the scenarios used, as well as the parameters, assumptions, analytical choices, and projected principal financial impacts; if a registrant uses an internal carbon price, information about the price and how it is set; 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 the financial estimates and assumptions used in the financial statements.

Some of the details will be harder for governmental issuers. Those items include the registrant’s direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2), separately disclosed, expressed both by disaggregated constituent greenhouse gases and in the aggregate, and in absolute terms, not including offsets, and in terms of intensity (per unit of economic value or production); indirect emissions from upstream and downstream activities in a registrant’s value chain (Scope 3), if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emission, in absolute terms, not including offsets, and in terms of intensity.

It is a lot for issuers to deal with and it is likely that the requirements will be modified. Nonetheless, the knee jerk ideological reaction in Utah is not realistic either. The State has had a hard time as proposals for “inland coal ports” and efforts to establish facilities in West Coast states for the export of coal have been rejected. The large Intermountain Power Agency is converting its massive coal generating facility in Utah. So, it is a tough time for coal in Utah.

In many ways, the effort to reject ESG considerations in the investment process is a case of closing the barn door after the horse has left. The Commission began efforts to provide investors with material information about environmental risks facing public companies in the 1970s and most recently provided related guidance in 2010. Over that time, ESG investing grew from a niche position and increasingly has become a major driver behind the investments of large institutional investors. In the case of fund groups, retail mutual fund investors are driving the demand for more ESG investment.

Ironically, the letter was released as Utah’s Intermountain Power Agency was issuing revenue bonds. And what are the proceeds being applied to? The new debt issued by Intermountain Power Agency (IPA) will finance the construction of a new 840 MW natural gas generator with up to 30% hydrogen burning capability power plant (the new Intermountain Power Project or new IPP) and a new natural gas pipeline connection. This is the first of three expected bond issuances for the new Intermountain Power Project with the others expected to close in 2023 and 2024 for a total estimated par amount of about $1.5 billion to $1.7 billion depending on market conditions.

The project received a big boost with the announcement this week by the US Department of Energy (DOE) that the proposed source of hydrogen for the plant would be the beneficiary of a loan guarantee for $500 million. DOE said the project would include “one of the largest deployments in the world” of electrolyzers, which can use wind and solar power to split hydrogen from water molecules, in a zero-emissions process.

REGULATION

Washington State is the first to establish regulations requiring builders to install electric heat pumps for space and water heating in most new commercial buildings and multifamily residences with four or more floors. The Washington State Building Code Council (SBCC) also sent several proposals requiring heat pumps in residential buildings to technical advisory groups for review. The SBCC is the entity which could ultimately regulate residential fossil fuel use. Cities do not have the authority to amend the state residential energy code, which covers single-family homes and multifamily buildings with up to three floors.

In California, Carlsbad is considering an ordinance that would require all-electric residential construction as part of the 2023 update of its Climate Action Plan. It would join 54 other governments in California which require water heaters, clothes dryers, space heaters and other appliances in all new construction to be electric instead of natural gas.

Tennessee has enacted legislation which would preempt lower levels of government from regulating oil and gas facilities especially pipelines. One source of power which the law would reserve to localities – regulation of solar energy projects. The legislation was driven by the Tennessee Chamber of Commerce and the Tennessee Fuel and Convenience Store Association supported the legislation.  It comes after community opposition in Memphis halted a pipeline development.

In the Midwest, carbon sequestration and capture proponents are pushing for legislation which would transfer the liability associated with carbon capture and storage to governments. Four states have passed laws over the last year that allow companies to transfer responsibility for carbon storage projects to state governments after the operations are shut down. The concerns over carbon capture liability parallel the situation facing states with abandoned oil and gas wells.

Supporters say the legislation establishes certainty for investors who may have concern with liability issues. Opponents fear that the liability shift from operator to government will encourage less stringent operating conditions and allow the industry to walk away from its damage. It is legitimate to ask if the technology is so safe, why is the industry so afraid of potential liability?

CANNABIS TAXES

The Institute on Taxation and Economic Policy has released a study of trends in the growth of revenues associated with legal recreational cannabis sales. The study focused on 11 states where cannabis sales have been in place for several years. In 2021, the 11 states that allowed legal sales within their borders raised nearly $3 billion in cannabis excise tax revenue, an increase of 33 percent compared to a year earlier. Seven of those states that allowed cannabis sales last year raised more revenue from cannabis excise taxes than from alcohol excise taxes and profits (in the case of state-run liquor stores). In total, cannabis revenues outperformed alcohol by 20 percent by this measure.

Michigan, Oregon, Alaska, and Maine still collect more taxes from cannabis than from alcohol. The relationship between the two sources can be influenced by the divergence in tax policies governing pot and alcohol which yield some surprising results. Colorado has the biggest proportional disparity. Yes, it’s the home of Coor’s but Colorado also has among the lowest alcohol tax rates in the nation at 2.7 cents per shot of liquor, 1.3 cents per glass of wine, or 1 cent per pint of beer. Those taxes raised a total of $53 million last year. Colorado’s cannabis taxes are levied at higher rates per serving (a 5-milligram edible might incur around 16 cents of state tax, for example) and raised $396 million. 

The growth remains consistent. It is enough that in more established jurisdictions, King Tobacco is no longer the source of the most “sin tax” collections. Cannabis revenue outperformed tobacco by 17 percent in Colorado and 44 percent in Washington State last year.  As rates of tobacco use continue to decline, it becomes more likely that cannabis will become the leading source of these excise taxes. 

NYC BUDGET

New York City Mayor Eric Adams presented New York City’s $99.7 billion Executive Budget for Fiscal Year 2023 (FY23). It projects increased revenues from the mayor’s first Financial Plan update in February. Revenues of $1.089 billion would provide additional monies for programs as well as increased deposits to the City’s general reserves and rainy day funds. The budget will undergo significant review and debate but, in the end a balanced package will result.

We are more interested in where the relative spending occurs and how it relates to the budget as a whole. The Plan submission shows that the City will spend more on pensions than it will on debt service. The City will spend $8.1 billion on public assistance including its share of Medicaid. That is 7.5% of the budget. Debt service is a manageable 6.1%. Personal income taxes project to some 22% of tax revenues. Federal and state transfers to the city comprise some one-quarter of proposed city spending.

FY 2023 is balanced but the ensuing years follow a fairly traditional pattern by showing expected budget gaps of $3.3 to $3.9 billion in fiscal years 24, 25, and 26.  One concern is the size and timing of projected gaps. The great influx of federal aid to states and localities effectively dries up after 2024.

DECARBONIZATION

The process of decarbonizing Colorado’s electricity grid continues to unfold. We have been following the ongoing saga of the tax-exempt borrower Tri-State Generation and its disputes with its members over their desire to decarbonize. This week, The Federal Energy Regulatory Commission (FERC) rejected United Power’s attempt to provide Tri-State Generation and Transmission Association with a non-binding, conditional withdrawal notice. FERC agreed with Tri-State’s position that conditional withdrawal notices are not permitted under the contract termination payment (CTP) tariff that the federal regulator accepted in November 2021.

While seen as a reprieve, other pressures could force Tri-State to decarbonize faster. The State’s other major investor-owned generator is moving in a different direction. Xcel Energy submits an electric resource plan every four years to regulators. It projects the amount of electricity the utility will need and the sources it will use. The latest iteration of the plan speeds up the timetable for the retirement of coal generation and the full termination of the last unit in Pueblo, Co. That plant has been often inoperable adding to the pressure to close.

If approved as is, Xcel projects it will meet more than 80% of its customers’ energy needs with renewable sources by 2030 and cut carbon dioxide emissions by at least 85% from 2005 levels by 2030. Pueblo County will receive 10 years of property tax payments to compensate for the earlier retirement of Comanche 3.

DROUGHT

The Metropolitan Water District of Southern California declared a water emergency. The declaration allows the District to impose usage restrictions. The first takes effect on June 1. It would restrict outdoor watering to one day a week in parts of three counties – Los Angeles, Ventura and San Bernardino. A population of 6 million is covered by the limits. The MWD’s board has never done this before. Cities and smaller water suppliers that get water from the MWD are required to start restricting outdoor watering to one day a week, or to find other ways to cut usage to a new monthly allocation limit.

The latest projections for water levels in Lake Powell show they may get as close to 11 feet away from the hydropower cutoff in less than a year, even with the new round of releases. The decline has been the subject of much concern. (See MCN 3/28/22) Now, four impacted Colorado River states have agreed to the release of 500,000 acre-feet of water from the Flaming Gorge Reservoir, located on Utah – Wyoming border.

This follows a proposal from the US Department of the Interior that would cut back on allocations to California, Arizona and Nevada. The water would instead support the retention of some 480,000 more acre-feet of water in Lake Powell. The two moves could support hydrogeneration at the Glen Canyon Dam. Snowpack in the Colorado River basin is largely near or below average. Water storage in the Colorado River reservoirs is at a historic low with Lake Powell at 25% capacity, and Lake Mead at approximately 35% capacity. Releasing less water from Lake Powell has the potential to reduce Lake Mead by about another seven feet in elevation.

The Southern Nevada Water Authority draws its supply from Lake Mead. The Authority was scheduled to turn on a low lake level pumping station to a full operational status instead of its current testing status. Designed to draw water from the lake bottom, this pumping facility would be unaffected by the decline in water levels. SNVA has three intakes. One is now above the water line, the second is close to its required line.

NET METERING VETO IN FLORIDA

Florida Governor DeSantis has gotten plenty of publicity for his efforts to punish Disney for opposing legislation. Now the Governor has delivered an unexpected veto of legislation backed by Florida’s largest investor-owned utility. The Governor vetoed legislation which would have sharply reduced the benefits to customers of installing rooftop solar.

Was it a policy issue that drove the veto or was it a short-term political consideration? “Given that the United States is experiencing its worst inflation in 40 years and that consumers have seen steep increases in the price of gas and groceries, as well as escalating bills, the state of Florida should not contribute to the financial crunch that our citizens are experiencing.” The initial bill would have eliminated net metering. It was amended to instead call for solar panel owners to get a decreasing rate over time until 2029, when no more subsidies would be allowed. Solar panel owners also would have been grandfathered in under the bill for 20 years.

BUDGET TRENDS

While non-financial issues are getting much attention during the budget season, a number of trends in terms of taxes and gas prices are emerging. New York enacted its budget with gas tax reductions beginning July 1. Connecticut will enact a $24 billion state budget that features nearly $600 million in tax cuts, including up to $750 later this year for families with kids, and an extended gasoline tax holiday running through Dec. 1. More than half of the nearly $600 million in tax relief in the plan is guaranteed for just one year.

In Virginia, Gov. Glenn Youngkin’s proposed three-month gas tax suspension did not make it out of committee.  The plan would have taken 26 cents off each gallon for consumers – and cost the state about $437 million. The debate over the issue came in the wake of the end of a one-month gas tax holiday in Maryland.

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

GOVERNANCE, FLORIDA, AND DISNEY

As we go to press, Florida Governor DeSantis is expected to sign into law legislation to effectively end the existence of the Reedy Creek Improvement District. The move is in response to Disney’s public position on what has become known as the Don’t Say Gay law in Florida. Reedy Creek is the special district created in the late 1960’s to support the development of what became Disney World. It issues debt for infrastructure development in the District and repays the debt from special assessments paid by Disney.

If Gov. Ron DeSantis signs the bill into law, the Reedy Creek special district would be dissolved effective June 1, 2023. The majority of the District is in Orange County with the remainder located within adjoining Osceola County. Dissolving the district would mean Reedy Creek employees and infrastructure would be absorbed by the counties, which would then become responsible for all municipal services as well as the debt issued by Reedy Creek.

Currently, Disney pays taxes to both counties as well as the Reedy Creek district. Florida law dictates that special districts created by the legislature can only be dissolved with a majority vote of the district’s landowners. For Reedy Creek, that’s the Walt Disney Company. It all has the makings of an extended litigation process as the counties, Disney, bondholders, and bond insurers all face uncertainty as the details of the law emerge.

The District issues debt backed by utility revenues and it issues debt payable from ad valorem taxes. The utility debt is rated in the low AA category. The ad valorem tax debt is rated A. It is not clear what the rating impact of a dissolution would be as it would be reliant on non-related county ratings.

The governance issue is pretty clear. Regardless of one’s view of the law, the Governor and the Legislature are taking governance down to the level of fourth grade class elections. Disney is the largest employer of Florida residents in the state. It is not expected that Disney would vote to end the current arrangement unless there was a financial benefit to the company. So, in the end, is the legislation just ultimately a piece of performance art?

THE NUMBERS DON’T LIE

A couple of weeks ago we discussed the issues surrounding efforts by individual electric cooperatives to move their demand to new sources of power from new providers. Those coops were customers of Tri-State Generation and Transmission. This large cooperative wholesaler is battling efforts by members to end their status as distribution customers while remaining transmission customers. Now, one of the original coops to successfully move its demand to another supplier has provided real financial benefit from leaving.

In 2016, the Kit Carson cooperative in New Mexico reached agreement on a price that would allow Kit Carson to end its power purchases from Tri-State as its wholesale supplier. Now that any debt obligations associated with the buyout are maturing this year, the lowered debt service and lower purchased power costs are reducing its revenue needs. Now, Kit Carson is projecting that in late summer or early fall, customers could see decreases of up to 20 to 25% in their monthly bills.

The circumstances are not going to be the same everywhere – after all this is the utility serving Taos. Two industrial scale solar projects are run by the coop and they employ large scale batteries for storage. It’s no surprise that support for those projects would cause problems for a still fossil based generator like Tri-State.

P3 PROGRESS

The private consortium managing Maryland’s Purple Line project has signed a $2.3 billion contract with a new construction team. The total cost of the project is now $3.4 billion, an increase of $1.46 billion from the last estimate. The initial budget was $1.9 billion. The construction contract is between the Purple Line Transit Partners (PLTP), the private concessionaire led by infrastructure investor Meridiam and the construction group led by the U.S. subsidiaries of Spanish construction firms Dragados and OHL. 

The consortium’s new financing includes a $1.76 billion low-interest federal loan, which has grown from the original $875 million loan, $643 million in private activity bonds issued to PLTP and $293 million of its own equity. To finance the increased construction costs, the state will pay back those costs with higher monthly payments — averaging about $255 million annually — over the 30-year contract term. 

MIXED SIGNALS ON NEW YORK STATE

Moody’s announced that it has upgraded New York State’s general obligation rating to Aa1. It cited “a significant increase in resources combined with agile financial management that has resulted in balanced or nearly budgets projected through the state’s five-year financial plan. Recognizing its need for a financial buffer to counter the volatility inherent in the state’s economic and revenue structure, it has channeled some of those resources into expanded reserves, reductions in certain outstanding liabilities, such as postponed pension contributions, and risk reduction, such as termination of outstanding interest rate swaps. These actions point to the role of strong governance in triggering the upgrade.”

We note that the reference to strong governance came in the same week that the newly appointed lieutenant governor had to resign after being indicted. We also note that the significant increase in resources comes from federal aid and that pandemic related financial assistance is only expected to last through fiscal 2024. The politics of the budget process which saw increased social service spending build into the budget to offset political opposition to the subsidy the state will provide for the Buffalo Bills stadium.

We also note that the economic situation, especially in the State’s economic driver New York City remains uncertain. It is increasingly apparent that New York’s central business district will not return to pre-pandemic normal. Office attendance will not be 100% and the businesses which rely on office workers will have a slower road to recovery. The recent incident on the subway will not help that. Added to that is the potential impact of the expected congestion fee which is likely to be imposed .in 2023. The outlook for the City’s economy remains uncertain so given the role of the City in the State’s economy we do not see a stable situation.

HOLD THE SALT

The legal effort to overturn the changes to the tax laws in 2017 which capped the amount of state and local taxes one could deduct from their calculation of adjusted gross income has quietly dies. The U.S. Supreme Court declined to hear an appeal from four states of a decision which upheld the limits. New York, Connecticut, Maryland and New Jersey brought a legal challenge in 2018 which argued “a deduction for all or a significant portion of state and local taxes is constitutionally required because it reflects structural principles of federalism embedded in the Constitution.”

CARBON CAPTURE ECONOMICS

In an initial filing to the Wyoming Public Service Commission, PacificCorp estimated that Adding carbon-capture systems to existing coal-fired power plants in Wyoming could cost the average residential ratepayer an additional $100 per month. The retrofit costs alone were between $400 million and over $1 billion

according to PacifiCorp.

Legislation passed in 2020 requires regulated utilities to determine how much CO2 capture can be applied to existing coal plants and still justify the costs to ratepayers.  Statutes enacted to support the goals of the legislation allow a utility to forego installing CCUS on a coal plant if it can prove to the Commission it is not viable for ratepayers. 

PacifiCorp is asking the Wyoming PSC to approve a 0.5% surcharge to all its Wyoming customers to pay for studies of the issue of carbon capture. The surcharge would initially generate some $3 million but ultimately that number is expected to grow to $15 million annually. That money would be applied to the costs of retrofitting coal plants.

CO-OP CHALLENGES FAIL

We have focused much attention on the efforts by local distribution cooperatives to buyout their requirement to purchase power from generation and transmission coops primarily from the western US distributor Tri-State Generation. While the most visible situation of its kind, the issues facing Tr-State are not unique. This has led other distribution coops to see if they can better meet their supply needs at lower costs from renewable rather than fossil fueled sources. It has also led to litigation.

The latest example is the Central Electric Power Cooperative in South Carolina. The Palmetto State has been dealing with the issues associated with the South Carolina Public Service Authority and its ill-fated participation in the Sumner Nuclear plant expansion. Those issues have created pressure for SCPSA and its partners to lower rates and increase renewables. The rate impact of Santee Cooper’s missteps continues to trickle down to retail customers.

Central is Santee Cooper’s largest customer. So, the effort by a local distribution coop to get out of its requirements to buy its power from Central was a potential issue for SCPSA.  Marlboro Electric, headquartered in Bennettsville, South Carolina has a contract with Central which expires at the end of 2058. Marlboro argued that Central’s failure to provide it with fair and equitable terms to exit the supply contract was a breach of the wholesale power contract and the wholesale cooperative’s bylaws. Marlboro Electric claimed the alleged breach allowed it to end its contractual obligations.

Unlike the situation with Tri—State, the wholesale power contract executed with Central does not have clear provisions regarding withdrawal from contract requirements.  Tri-State customers are arguing over the cost formula for withdrawal. In the South Carolina case, the judge ruled that “The WPC unambiguously requires ‘mutual agreement’ for termination prior to December 31, 2058, and the bylaws unambiguously require Marlboro to meet ‘all contractual obligations’ to Central, including coming to a ‘mutual agreement’ for early termination of the WPC, to withdraw from the cooperative.” 

The decision is a short-term positive for generation and transmission cooperatives but in the long run will just raise customer dissatisfaction. That will maintain pressure on wholesalers from their distribution customers.

PUERTO RICO LOSS IN SUPREME COURT

The US Supreme Court in an 8-1 ruling found that the decision by Congress decades ago to exclude Puerto Rico from the Supplemental Security Income (SSI) program did not violate a U.S. Constitution mandate that laws apply equally to everyone. The decision strikes a blow against efforts to increase federal support for Puerto Rican residents. The federal government estimated that a ruling in favor of providing the benefits would have had an annual cost of $2 billion.

It is estimated that some 300,00 Puerto Rican residents would qualify for the benefits. The case stemmed from efforts by recipients to continue to receive benefits in Puerto Rico which they originally qualified for as residents of the states. Congress decided not to include Puerto Rico when it enacted the SSI program in 1972. Puerto Ricans are eligible for a different government program, called Aid to the Aged, Blind and Disabled. The federal government’s central argument was that the congressional decision to exclude Puerto Rico was rational based on the fact that Puerto Ricans do not pay many federal taxes, including income tax.

LOCAL FOSSIL FUEL REGULATION

While a number of states have undertaken legislative efforts to preempt local regulation of the use of fossil fuels, one state is taking a different approach. This week, Vermont enacted legislation which authorizes the City of Burlington to impose carbon fees and “alternative compliance payments” on both commercial and residential property owners.  A charter change ballot item passed with 64 percent of votes .

The state law was needed to allow Burlington to follow through on its plan. The use of carbon taxes rather than bans provides an interesting alternative strategy for fighting the preemption phenomenon. It is less a revenue generator than it is an example of the “nudge theory” which uses regulation and financial incentives to motivate desired changes in behavior. It has already been suggested that revenues generated could be used to help less well off residents finance and fund energy upgrades to their properties.

THE PRICE OF ENVIRONMENTALISM

Legislation gas been introduced in the NYS Legislature which would prevent companies that received an approved rate plan dating back to 2021 from increasing rates for four years. Companies that have not increased rates would have their rates frozen for two years. The legislation is in response to rising utility bills which are blamed on higher natural gas prices.

What is not being said so loudly is that the closure of the Indian Point nuclear plant created a loss of some 2,000 megawatts of power which needed to be replaced while the development of hydropower resources (in Canada) takes place. The required transmission infrastructure to deliver that power has yet to be developed. Until that happens, the need to fill that power capacity gap will often be satisfied by natural gas power.

The situation is another example of a phenomenon which has plagued progressives for years. The goals of environmentalists are quite laudable and the end results are nearly always greeted with widespread support. The problem comes when the cost of all of these environmental improvements is tallied. Whether it is replacing fossil fueled or nuclear generation, burying transmission lines, or breaching hydroelectric dams, the true economic costs seem to always be underestimated.

The fact is that the closure of Indian Point was going to likely increase prices as utilities transitioned to newly developed power sources. That is a detail that closure proponents never seemed to fully deal with.  It is what leads to legislative proposals like this one which seek to insulate consumers from the choices they make.

In California, the trust which was established to fund payments to victims of wildfires sparked by equipment issues at assets owned by PG&E may be running out of money. The financial impact of wildfires on PG&E has caused the value of PG&E equity to fall. This has impacted the investment results at the Trust which had a healthy chunk of PG&E stock as the source of funding for payments. A private sector result for a private sector problem.

Now it may become a public sector problem. The Trust is trying to make the case for why the State of California should lend the Trust $1.5 billion to fund payments. The State set up the independently-run Fire Victim Trust with $6.75 billion in cash and 477 million shares of PG&E stock. The stock can be sold to fund payments. For the victims to receive the full $13.5 billion it was agreed that they were entitled to, the trust must sell its shares for about $14.15 a share. The trust’s remaining 377.7 million shares were worth about $4.6 billion based on Tuesday’s market price. That would leave the trust about $1 billion short.

Some 20% of the shares have been sold but they have been sold at $12.09 and $12.04 a share. That is more than a two-dollar shortfall relative to the required average sale price. The Fire Victim Trust has paid out nearly $3.4 billion in claims so far. The idea of the loan is that it would fund payments without forcing the sale of more PG&E stock. The hope is based on the idea that PG&E will be able to begin paying dividends on its equity shares. That is projected to occur sometime in later 2023. The hope is that the resumption of the dividend will have appositive impact on the price of the stock and enable to Trust to meet its payout requirements and repay the loan to the State.

It is a problem despite the enactment of legislation in 2019 created an insurance pool that utilities could use to finance the payment of claims from large wildfires. The pool is funded by ratepayers and company shareholders; PG&E has said it plans to file the first claim, for $150 million, to cover a portion of the damages from last year’s Dixie Fire. The AB 1054 pool is limited to wildfires that occur in 2019 or later. That means that the victims pressing for payments for pre-2019 fires find themselves ineligible for payments.

PANDEMIC FUNDS SUPPORT STATE LARGESSE

It has become clear that the high level of assistance to the states from the federal government has created a real dilemma for state budget makers. It has been interesting to see that the real difference between the red and blue states is how this unexpected windfall is used. In New York State it generated all kinds of spending increases and a new stadium for the Buffalo Bills. In the redder states – taxes were cut as pandemic aid funded expenses. Then there are some examples that do not fit the template.

In Missouri, legislation has begun to move through the process which would see the State of Missouri pay its full share of public school transportation costs for the first time in two decades. The approved FY 2023 budget would be the State’s largest ever at $46 billion. The school spending is a way to provide aid to local districts as transit funding uses a different formula than basic school aid. This increases the number of districts receiving new aid. The theory is that money not spent on transit can remain in the instructional budgets of the local schools.   

Here’s where Missouri diverges. The spending increase for schools, along with a $500 million one-time payment to the state’s pension system represent real departures from prior budget processes.

TRANSIT TEST VOTE IN TAMPA

Hillsborough County, FL commissioners voted in favor of putting an additional 1% sales tax on the November ballot.  Now, the county’s voters will need to approve the tax in order for it to be effective. If the ballot does not approve the tax, it cannot be voted on again until 2024. Voters agreed to an almost identical proposal in 2018. That vote was overturned in the courts on a technicality by opponents of the tax. The new referendum language is designed to address the technical issues.

The vote is being driven by the Infrastructure and Jobs Act. The incremental new revenue is meant to support funding which would enable the County to address federal requirements requiring matching funds. A County commissioned report estimates the county could qualify for up to $229 million in federal grant funding. Given support for the concept in 2018, a vote in favor could be expected. The timing reflects fears from tax advocates that a 2024 approval would come to late in the competition for grants. The program will exist for a maximum of five years without reauthorization and funding.

The vote becomes a test as it will provide a reasonable window into the actual level of public support for infrastructure funding. The pandemic clearly did economic damage regardless of macroeconomic data. The change in office attendance and different demands on transit will have a yet to be understood effect. It is one to keep an eye on.

POSITIVE SIGNS FOR BORDER CREDITS

The recovery from limits on cross-border travel which diminished the value and volume of freight traffic at the northern and southern US borders continues. The US Department of Transportation reports that freight shipped across the U.S. borders with Canada and Mexico by all modes of transportation was valued at $112.5 billion in February 2022, down 1.1% from January 2022 ($113.7B) but up 17.3% from February 2021 ($95.86B) and up17.2% from pre-pandemic February 2020 ($95.95B).

Freight between the U.S. and Canada totaled $56.2B in February 2022, up 18.6% from February 2021 ($47.4B). Freight between the U.S. and Mexico totaled $56.3B, up 16% from February 2021 ($48.5B). Also in February 2022, trucks moved $69.2 billion of freight, up 16.3% compared to February 2021 ($59.5B), and railways moved $15.3 billion of freight, up 19.0% from February 2021 ($12.8B).

Our other primary take from this data is the need for transit planners, especially those for all forms of ground transportation, to acknowledge the role of trucks in moving goods and materials throughout the continent. Truck Freight had a value of $69.2 billion (61.5% of all transborder freight). U.S.-Canada truck freight was valued at $29.7 billion (52.8% of all northern border freight). On the Mexican border, Truck Freight was valued at$39.5 billion (70.2% of all southern border freight). That number will show how impractical Gov. Greg Abbot’s effort at state border inspections was (if it was not just a stunt).

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

Joseph Krist

Publisher

This year we see the effective convergence of holidays of three major faiths – Easter, Passover, and Ramadan. With so much to celebrate, we think that we could all use some time to rest and reflect. So, the Muni Credit News will take a week off. Our next edition will be April 25.

TIS THE SEASON

This year the relative financial cushion provided by the federal government to the states has made the budget process on its own less contentious than it has in the past. That is not to say that the process is smooth just that the outstanding budget debates are about policy not revenue levels. The various state budget debates seem to be moving along the same political lines as other issues.

New York represents one perspective. The unexpectedly favorable revenue influx reflects the fact that for the first time in decades the state received more federal money than its residents paid in federal taxes. That has framed the NYS budget debate in terms of what new services could be provided. In other states, the effort is being directed towards financing tax cuts. In either case, the fact that some three quarters of governorships are up for election in 2022 is driving the debates.

The latest example is Virginia. The Republican Governor wants to double the standard deduction on personal income taxes and eliminate state and local taxes on groceries. The Democratic state senate wants to eliminate the 1.5 percent portion of the grocery tax levied by the state but leave in place a 1 percent levy that goes to localities.

NEW YORK STATE BUDGET

One week late, New York State has a fiscal 2023 budget. It is a record setter at $220 billion. One year after the sky was falling fiscally, the budget speeds up the timing of tax cuts for the middle class. It also includes another record – the largest public subsidy for a stadium. The $600 million to be applied to a new stadium for the Buffalo Bills is due to be funded with monies from the State’s settlement with the Seneca tribe and its casino operation (January 31, 2022 MCN).  

As is always the case with the NYS budget process, a number of policy issues were addressed. They include significant increased spending for child care – $7 billion dollar investment over four years that will help subsidize child care for families who earn up to $83,000 for a family of four. It also funds some $350 million for increased childcare salaries. It does not include a statewide ban on new natural gas hookups. A tax break for the development of “affordable” housing in NYC was not renewed or replaced. Mayoral control of the NYC school system was not extended.

The budget would also allow the licensing of three casinos in New York City. It will likely expand the operations of two existing gaming facilities on the edge of the City. A third license is thought to go to a Manhattan location. Each new license is expected to generate $500 million.

A couple of provisions highlight the fact that this is an election year in NYS. A gas tax holiday from June through the end of 2022 was included. The sale of individual alcoholic drinks to go by restaurants and bars was renewed for three years. A higher minimum wage for home care workers is effectively funded by the State which reimburses many of those costs.

We view the budget as credit neutral in the short-term. The issue is whether the long-term spending trends baked in to this budget will be sustainable in the long run. Two items of interest to New York City remain – transit funding and public housing funding. The huge capital backlogs facing those two sectors represented by the MTA and the NYC Housing Authority still face daunting funding challenges for the nearly $100 billion of capital investment needs the two agencies have identified.

Let the election process begin!!

HOSPITAL MERGER

Colorado-based SCL Health, which operates eight hospitals and dozens of clinics across three states has received an opinion from the Colorado Attorney General that its proposed merger with Intermountain Healthcare does not violate Colorado law. The resulting entity will operate under the Intermountain name. SCL has about 16,000 employees and owns four hospitals in Colorado while Intermountain has about 42,000 employees and operates 25 hospitals, along with a number of clinics, in Utah, Idaho and Nevada.

Intermountain Health comes into the deal with a AA+ rating. It is likely that the merged entity will reinforce the benefits of size and consolidation.  The biggest public concern about the merger revolves around perceived improved pricing power at the merged entity. A 2020 report by the Rand Corp. found that SCL’s hospitals charge patients 187% of Medicare prices, on average. That was below the national average of 247%. The report found that Intermountain’s prices were 271% of Medicare’s.

The attorney general’s office did not evaluate whether the merger will raise prices at SCL’s hospitals in Colorado. It did opine that the merger would not change the charitable purpose of SCL Health and it would also not cause a “material amount of hospital assets” to leave the state.

The credit implications are clouded by the fact that Neither SCL Health nor Intermountain agreed, upon completion of the Merger, to assume any liability for or otherwise guarantee the debt of the other party.

BELIEFS VS. BALANCE SHEETS

Another side of the consolidation wave in the healthcare sector is playing out in southern California. In 2013, the California Attorney General’s Office approved the affiliation of then-St. Joseph Health System (now Providence) with Hoag Memorial Hospital Presbyterian (Hoag) in Orange County. In 2020, Hoag filed a lawsuit to terminate the affiliation as it was prohibiting the provision of abortion services. The settlement will allow Hoag to become an independent entity, and as part of the agreement, Hoag has committed to expand reproductive health services in Orange County. 

Now the fiscal impact of the disaffiliation is being felt at Providence. Moody’s downgraded the Providence credit to A1. Specifically, it cited the disaffiliation. PSJH disaffiliated with Hoag effective January 31, 2022, and the result was to reduce unrestricted cash and investments by $2.9 billion (23% of PSJH’s total), reduce debt by $573 million (just 8% of PSJH’s total), and reduce operating cashflow (proforma 2021) by $303 million (43% of PSJH’s total in 2021; in 2019 and 2020 the average was more typical at 14.5%). The reduced financial position in at least the short run is the price paid for the restrictions on services resulting from religious sponsorship.

PSJH remains a strong credit with a very large revenue base of over $25 billion; leading market share in all of its markets; The loss of financial flexibility during a very difficult operating environment generally does increase the vulnerability to factors such as significant and persistent operating pressures, variable utilization, and weaker liquidity (excluding Medicare advance payments and deferred payroll tax), pressure from payers, exposure to labor unions, material competition in many markets, the reliance on temporary labor, and persistent underperformance in certain markets.

SOUTHWEST CANNABIS

On April 1, New Mexico became the latest state to implement a retail system for recreational marijuana. Anyone 21 and older can purchase up to 2 ounces (57 grams) of marijuana or comparable amounts of vapes and edibles. New Mexico is the18th state, including neighboring Arizona and Colorado as well as the entire West coast, that have legalized pot for recreational use. That means that the US side of the Mexican border from San Diego to El Paso now includes legal recreational markets.

The entrance of New Mexico now positions a fully legal market on the Texas border. Unlike many other states, local governments can’t ban cannabis businesses entirely, though they can restrict locations and hours. Local governments will receive a minority share of the state’s 12% excise tax on recreational marijuana sales, along with a share of additional sales taxes.

The emergence of the market could put Texas back in the spotlight over the issue of marijuana. The lone Star State has long been an outlier in terms of its enforcement of marijuana laws.  

EMINENT DOMAIN

We’ve commented on the issue of eminent domain as it pertains to Iowa and its role in proposed regional carbon transmission pipeline developments. Under legislation passed by the Iowa House and is in front of the Iowa Senate, the Iowa Utilities Board could not schedule a hearing before Feb. 1 in which a carbon sequestration company is requesting the right to use eminent domain for a project. The proposed moratorium would take effect as soon as the bill becomes law.  The hope is that negotiations can be concluded in the open time window the legislation would establish.

In Iowa’s immediate neighbor to its south Missouri, the proposed transmission line is dealing with the same issues. A Senate panel was scheduled this week to hear testimony on a House bill which seeks to halt the Great Basin Express power line, which would carry wind energy from Kansas across Missouri and Illinois before hooking into a power grid in Indiana that serves eastern states.

While this process is playing out the private line developers have moved ahead with land acquisition. It claims that it has now completed voluntary right-of-way acquisition on 71% of the route in Missouri and Kansas. It has filed 12 eminent domain proceedings. Grain Belt Express said it is paying landowners 110% of the market value of the land and $18,000 for every transmission structure sited on their property. Iowa’s Agriculture Secretary has said he would “much rather” see the companies strike voluntary deals with landowners and the Iowa Utilities Board should be careful in considering private property rights before granting eminent domain for land seizures.

It is a process which will continue to play out as the nation’s transmission system is realigned to reflect the realities of how and where power can be most effectively produced. There is a consensus which supports the view that significant new transmission capacity must be developed to satisfy an “all electric” world. Transmission is at the center of disputes over the pace of individual solar development, the scale of industrial solar, and siting of windmills.

POPULATION PANIC

Interim data from the U.S. Census is showing that large cities experienced significant population declines in 2021. Combined with the emerging resistance to full time office attendance, such declines can be a real concern. Given the inherent flaws in the information used to allow Census Bureau models to estimate annual population changes the data may reflect temporary realities. We know from the pandemic experience that many of the moves were not necessarily permanent. Nonetheless, things like voter registrations, tax submissions, and mail changes did serve to contribute to the decline measurement.

The other side of the coin is that as the nation and its hot spots emerge from the pandemic that certain data looks positive. Rents in places like NYC are up significantly even before all restrictions were removed. One issue is that many of the renters who left often decamped to already owned second homes. In some cases, the pandemic merely accelerated some plans to move by families.

One other aspect of the urban population decline is the impact of more restrictive immigration policies over the recent 6-10 years. The reality is that large urban centers provide a relatively “safer” environment for many immigrants – legal and illegal. We also know that the population of largely legal immigrants was intentionally undercounted under the Trump Administration. That means that the data is essentially unreliable.

What would be of more concern are the actual socio-economic characteristics of the permanent departees. We know that the lower end of the economic spectrum took the biggest illness hit in places like NY, LA, Chicago. That may account for new data showing large numbers of sustained absences from the public school systems in L.A. (250,000) and New York (375,000). That would support a guess that many poorer people left dangerous jobs (like healthcare) and moved elsewhere

BANKS, FOSSIL FUELS, AND LEGISLATION

Texas has been most prominent in using litigation and legislation in an effort to punish those who believe in a future without fossil fuels. The State and its local governments are now restricted from allowing financial institutions which will not provide financing to the fossil fuel industry from participating in things like underwriting their securities.

While that process has attracted the majority of the market’s attention, another effort to achieve a similar aim advanced in West Virginia. The legislature recently enacted a law which directs the State Treasurer to publish a list of financial institutions engaged in boycotts of energy companies; publicly post the list and submit the list to certain public officials.

It authorizes the Treasurer to exclude financial institutions on the list from the selection process for state banking contracts; to refuse to enter into a banking contract with a financial institution on the list; to require, as a term of a banking contract, an agreement by the financial institution not to engage in a boycott of energy companies; limiting liability for actions taken in compliance with the new article; and exempting the Investment Management Board from the new article.

GAS TAX POLITICS

This week, legislation which would have suspended Michigan’s 27-cent-per-gallon tax on fuel for six months was vetoed by Governor Whitmer.

Interestingly, the bill would not have suspended the tax until 2023. The nonpartisan Senate Fiscal Agency estimated that the average driver in Michigan would save about $75 over six months had the bill been signed into law based on driving habits from 2019. This tax is in addition to the retail sales tax (6%) also imposed on fuel.

The Governor supports suspension of the 6% retail sales tax on gasoline. Legislative opposition is based on a belief that the sales tax suspension would cause the amount of savings to fluctuate with the price of gas, whereas suspending the state’s gas tax would be a constant 27-cent-per-gallon savings.

An opposite tack is being taken by Virginia’s Governor. Governor Glenn Youngkin has sent legislation to the General Assembly to suspend Virginia’s gas tax for three months. The Motor Vehicle Fuels tax (26.2 cents per gallon of gasoline and 27 cents for diesel) would be suspended in May, June and July before being phased back slowly in August and September. The annual adjustment to the gas tax would also be capped at no more than two percent per year.

New research by the American Road & Transportation Builders Association found that state-level fuel tax “holidays” do not necessarily result in significantly lower diesel and gasoline retail pump prices, nor deliver “big savings” to motorists. The association examined 177 changes in state-level gasoline tax rates in 34 states between 2013 and 2021 and found that, on average, motorists received just 18 percent of an any increase or decrease in the retail price of gasoline in the two weeks after a change took effect.

TRI-STATE TRANSMISSION IN ANOTHER FIGHT

A small electric distribution co-op is at the center of a dispute with the New Mexico city it serves. Socorro is a town of some 9,000 in eastern New Mexico. It gets its electricity from the Socorro Electric Cooperative under a franchise agreement which ends in 2024. The City has long disputed Socorro Co-op’s ratemaking methods which have been the subject of a state Public Regulation Commission review. That review orders Socorro to restructure its electric rates. 

That restructuring would require Socorro to lower rates to larger commercial and industrial customers while raising rates for residential and small commercial users. This led the City Council to offer a proposal to buy out the co-op. That was rejected by the co-op. Now, the City is planning to terminate the co-op’s franchise in 2024. The City contends that it would be able to better and more cheaply serve its needs through a municipal electric distribution utility.

That determination reflects negotiations which the City says can allow it to provide power to more customers at lower cost. These savings are based on negotiations with third-party power providers who could supply wholesale electricity through such renewable resources as solar generation at nearly 50% lower cost than the co-op. Where does the Socorro Co-op get its power? Tri-State Generation and Transmission. The City points out that Socorro pays 8.5 cents per megawatt hour to Tri-State, but the City can get “greener” wholesale power for just 4.5 cents.

PORT FEES AND THE ENVIRONMENT

The Ports of Long Beach and Los Angeles find themselves in the middle of any number of contentious situations. Many of them are tied to the perceived environmental impact of the ports and of the vehicles which service them. For years the ports have been under pressure to streamline and reconfigure operations to try to reduce the pollution coming from trucks transporting freight from the ports. The latest effort began this week.

The two ports began to charge a Clean Truck Fund Rate fee on cargo using the port which is not transported on zero-emission vehicles. Cargo that is not being transported on zero-emission vehicles is subject to the tariff, which is $10 per 20-foot-equivalent unit—the standard measurement for shipped cargo—and $20 for every container that is larger than that.

The fee is charged to the companies that own the shipments. The ports expect to generate $90 million in the first 12 months from these fees. The revenues will be used to fund purchases of emission-free trucks. Natural gas-powered trucks that emit low amounts of nitrogen oxides—also known as low NOx trucks—are exempted from the fee.

Each of the ports will levy slightly different fees.  For the Port of Long Beach, exemptions will last until either Dec. 31, 2034 or Dec. 31, 2037, depending on when the vehicle was purchased and registered with the Port Drayage Truck Registry. The Port of Los Angeles will sunset its exemption on Dec. 31, 2027.

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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NYS BUDGET

The New York State fiscal year begins on April 1 and the Legislature is supposed to have approved a budget for the Governor to sign. Nevertheless, New York State has historically adopted a flexible approach to the budget deadlines as policy disagreements have often held up final budget resolution. One might have hoped that the wave of money that has been received by the State from federal pandemic relief funding would have lowered the tension.

This however, is New York and this year several policy issues are causing the State to miss its budget deadline as we go to press. None of the particular points of contention – gambling in NYC, the Bills Stadium (see our next section), bail reform, and mayoral control of the NYC school system – raise short-term credit concerns. In most cases, the Legislature is looking to spend more than the Governor on certain issues and there are real disagreements over the price tag for them.

There are concerns that in many states, the temptation will be to fund expanded spending and services which are affordable under present conditions. The question is where the funding will come from in the long-term when federal spending is reduced. While the particular issues in the New York process are specific to the State, the unfolding process is reflective of many debates underway in many state legislators. Whether it’s tax cuts or spending, the sustainability of underlying revenue assumptions will remain a key credit factor.

BILLS STADIUM TOUCHDOWN

State Senator Sean Ryan, a Democrat from Buffalo – “Subsidies for sport stadiums are a bitter pill. Nobody is happy about doing this, but this is the best deal we could expect under the circumstances.”

The Buffalo Bills are approaching the finish line of their efforts to get a new stadium largely funded with public money. New York State announced that it had reached a deal with the Buffalo Bills to use $850 million in public funds to help the team build a $1.4 billion stadium — the largest taxpayer contribution ever for a pro football facility. The deal calls for the state to finance $600 million of the construction costs. Erie County, the location of the existing facility and the new one is expected to finance $250 million. The remainder would be financed through a $200 million loan from the N.F.L. that was approved on Monday, plus $350 million from the team’s owners.

The state would own the stadium and lease it to the Bills under a 30-year commitment from the team to play in the new stadium. The timing is fortuitous. The state is comparatively awash in money (for now) and the deal is being brought for legislative approval four days before the start of the fiscal year. That will limit scrutiny and deal making in the budget process. The state funding would have to be approved as a part of the budget.

We think that the comments of State Senator Ryan pretty much sum up the deal. There was much criticism of the redevelopment plan which came to be known as the Buffalo billion undertaken under the Cuomo administration. That program was intended to reinvigorate downtown Buffalo and redevelop its waterfront. It ended in scandal and criminal convictions.

While those issues are not expected to impact this project, the proposed expenditures would make more sense if the stadium was part of downtown Buffalo’s redevelopment. The location of these facilities in the suburbs is a throwback to the mentality of the sixties and seventies which saw many stadiums located in suburbs.

A downtown location would make the largest expenditure of public money for any NFL stadium in the country more logical. In this case, building at the existing site just looks like an out and out subsidy to the owner.

This transaction comes just as some other aging stadium projects receive more attention. In Kansas City, the ownership of the Royals of MLB is actively discussing the replacement of their current stadium at the Truman Sports Complex in MO. That project is expected to be undertaken downtown in keeping with the trend that emerged during the 1990-2010 era of stadium replacements in downtowns. “The Chiefs and the Royals are under contract until at least (January) 2031.”

Given that the Chiefs of the NFL play in 50-year-old Arrowhead Stadium, they too are looking at a replacement. Being the sole facility at the Truman Sports Complex does seem to have much attraction to Chiefs’ ownership. In their case, they have broached the idea of locating on the Kansas side of Kansas City. That could set up an interstate competition of incentives. “Kansas City has proudly hosted the Chiefs since the early 1960s. We look forward to working with the Chiefs, our state of Missouri partners, and local officials to ensure the Chiefs remain home in Kansas City and Missouri for generations to come.” – Kansas City mayor Quinton Lucas 

It is easy to forget that NY Mayor Bloomberg wanted to build a stadium ultimately to house the Jets of the NFL in Manhattan. It was only after that idea was rejected that the current stadium in the NJ Meadowlands was built with essentially private financing. That is not likely the case in KC.

SOUTHEAST POWER

South Carolina Public Service Authority (Santee Cooper) may have extracted themselves from the Sumner nuclear debacle, the bill for it continues accrue. The state-owned utility can’t increase rates until 2025 under a rate freeze approved by the General Assembly when the Sumner expansion was abandoned. Now, the recent increases in gas and coal prices have put the utility in the position of having to carry increased costs at the same time it is legally restricted from raising revenues.

Santee Cooper must now find some $100 million of expense reductions to stay within the constraints of a limited revenue base. Officials suggested taking $30 million from operating and maintenance and $70 million from capital projects. That has negative implications for both current operations and future rate increase needs.  It comes as the utility faces $130 million in increased fuel costs.

Moody’s Investors Service has upgraded JEA, FL – Electric Enterprise (JEA) ratings as follows: the senior lien electric system revenue bonds to A1 from A2; subordinate lien electric system revenue bonds to A2 from A3, St. Johns River Power Park System (SJRPP) revenue bonds to A1 from A2, Bulk Power Supply System revenue bonds (Plant Scherer revenue bonds) to A1 from A2. JEA has been through a lot as it challenged the take or pay contract it entered with MEAG for a share of the expanded Votgle nuclear plant. JEA has also revamped the membership of its Board of Directors. These changes all occurred after the ill-fated attempt by some in local government to privatize the electric system.

Now a new board is seen as a credit positive factor. The litigation over the power purchase contracts has been resolved. This means that JEA’s most significant credit challenge is related to its indirect exposure to nuclear construction risk at the Plant Vogtle project through its 20-year Project J Power Purchase Agreement (PPA) with MEAG Power and the impact to the construction budget and the schedule owing to the multiple delays in construction completion which could now extend into Q-1 2023 and Q-4 2023 for Vogtle Units 3 and 4, respectively. There is some cushion in JEA’s relative rate position versus other utilities. JEA has plans to raise its rates by about 1.5% annually beginning in 2022 through 2026 to manage the increasing obligations under the Project J PPA.  

This improvement in JEA’s rating laid the groundwork for another utility upgrade. Moody’s Investors Service has upgraded Municipal Electric Authority of Georgia Plant Vogtle Units 3&4 Project J Bonds to A3 from Baa1, affecting approximately $2.10 billion of outstanding rated debt. The rating outlook has been revised to stable from positive. The settlement of the JEA litigation challenge to the PPA and the perception that JEA’s willingness to pay were no longer in question, the threat to MEAG’s credit posed by the potentially invalid PPA have been eliminated.

TRI-STATE SAGA CONTINUES

The latest shot in the ongoing battle between Tri-State Generation and Transmission Cooperative comes in the form of a study for the Federal Energy Regulatory Commission. FERC is reviewing the effort by Tri-State’s largest customer – United Power- to exit from its power purchase agreements. Those agreements call for the payment of an exit fee which is designed to cover a proportional amount of the fixed costs incurred by Tri-State.

Tri-State has been fighting efforts by its members to exit their agreements for several years. Tri-State is a primarily coal reliant utility. That and a price scheme which has produced rates higher than those of competitors have lessened support for buying power from Tri-State. As a part of the exit process, Tri-State calculates a contract termination payment, or CTP. Tri-State tallied the portion of the overall debt a cooperative is responsible for based on its revenues, plus the cost of all the electricity it would have bought between now and the end of the contract in 2050.

The distribution utilities do not contest some financial obligation to Tri-State for leaving. They do believe that Tri-State’s calculations generate fee estimates that are meant to make exit so punitive that the members will stay with Tri-State. That may change in light of the fact that the FERC study found that in the case of the largest local distribution coop which gets its power from Tri-State, the proposed exit fee of $1.6 billion was much higher than would be needed to pay off the distribution utilities share of Tri-State’s debt service requirements.

Two cooperatives — the Kit Carson Electric Cooperative, in Taos, New Mexico, and the Delta-Montrose Electric Association, in Delta — have already left. They paid exit fees. Kit Carson paid a $37 million exit fee in 2019 and DMEA paid $136.5 million in 2020.  The exit fees for both were about double their annual billings, not eight times annual billings as Tri-State is seeking from United Power. The risk to Tri-State is clear.

When S&P lowered Tri-State’s rating to BBB+ and revised its outlook to negative from stable, they were clear about the concerns the proposed withdrawals create. “We revised the outlook to negative to reflect our view that the utility faces more pronounced governance exposures following the initiation by three of Tri-State’s members of the two-year notice period for withdrawing from the utility… We believe the utility faces significant governance risks. Over more than a decade, three CEOs have struggled to placate members that are expressing dissatisfaction with the level of rates and the utility’s carbon intensity. The notices of intent to withdraw compound these risks.”

UBER CONTINUES ITS NEW COURSE

Fresh off its landmark agreement with New York City’s yellow taxis, Uber is seeking a similar arrangement in the City of San Francisco. This coming week, the San Francisco Municipal Transportation Agency will decide whether to approve a pilot program involving Uber and Flywheel, which operates an app used by hundreds of taxi drivers in San Francisco across several taxi companies to accept rides. Pending final approval by the city’s director of transportation, service could begin in early May.

The upfront cost that Uber charges customers to get a taxi through its app will not be required to be the same as a metered taxi ride.  This has raised some opposition from existing taxi drivers who will face the potential downward pressure on fares. The plan comes at a time when San Francisco has seen real declines in the number of taxis on its streets. Pre-pandemic there were some 1300. That number bottomed out at 400 during the pandemic and is now only slower recovering toa current level of 600.

We note that SF and NY also share something in common which may drive the need for these agreements. These two cities have the lowest rates of returns to the office among the largest US cities. They also are like many other large cities still dealing with pandemic-related population declines. In 2021, population declined in San Francisco by more than 6%; Boston’s Suffolk County 3%, with New York City and Washington, D.C., seeing drops of over 2%. Los Angeles County, Chicago’s Cook County, Miami-Dade County, Philadelphia, Milwaukee and Minneapolis were reduced by over 1%. That implies lower demand for these services that appears to be likely to be sustained.

VIRGIN ISLANDS

As we go to press, the US Virgin Islands was hopeful of completing the successful sale of some $920 million of securitized debt. The bonds would be secured by a pledge of Federal Excise Tax Revenues which are normally received by the USVI government. This transaction has created a sale of the USVI government’s right to these revenues to a special purpose corporation created for this purpose.

The Matching Fund Special Purpose Securitization Corporation will receive the federal excise tax collected on rum that historically supported Matching Fund Bonds. Debt secured by those funds will fund the redemption of all VI Public Finance Authority debt outstanding secured by matching fund revenues. This then creates a flow of funds which covers debt service and based on history will generate “residual” revenues which can then be applied by the USVI government to fund its pension funding requirements.

Rum taxes have financed government in the USVI since 1954 under the current arrangement so the revenue stream projected is based on a long history. All of the rum subject to the tax is sold in the U.S. minimizing the risks to distribution. The challenge was in insulating investors from ongoing financial stress for the USVI government. The asset sale structure helps to create an entity and revenue stream protected from any bankruptcy or similar action by the USVI government.

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.