Joseph Krist

Publisher

This week we look at corruption as a governance issue, the CA drought increases restrictions; a bad week for fossil fuel in court; the house insurance mess in Florida; Tri-State Generation dragged in to the future; the SEC and climate change; pressures on college enrollments; and the latest moves to limit gas taxes.

The next issue of the Muni Credit News will be June 13. Enjoy the weekend. Make sure you take a minute between cold drinks to remember what Memorial Day is for. You would not be here without those we remember.

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GOVERNANCE

The mayor of Anaheim, CA resigned this week in the midst of a federal investigation of alleged corruption associated with an effort to sell Angels Stadium. The publicly owned facility would be sold to the owner of the Los Angeles Angels and in return he would be allowed to develop land around the stadium for an entertainment complex. The charges are that the Mayor was trying to leverage his approval and support for the project in exchange for campaign funding.

The situation highlights the increasing role of real estate development tied to the financing of new stadiums. It’s been clear that the overall economic impact has never lived up to the projections of stadium proponents. A logical political response would be to have these facilities privately funded. Private funding has helped to drive support from political establishments in the various locales. Tying real estate developments to stadium development allows supporters to feel that these projects are economic development schemes rather than subsidies for rich owners.

The proposed deal would allow the owner of the Angels to develop    homes, restaurants, hotels and shops. It has run into opposition as the result of state law which requires local government to prioritize the use of “surplus” lands for the development of housing. In an indication of how potentially lucrative the proposed deal would be for the developers, Anaheim and the state agreed to resolve the matter by having the city pay a $96 million fine. 

As these projects get bigger and more complex, the pressure on local officials only increases. At the same time, the increasing value of professional sports franchises continues to grow rapidly. The future of stadiums and arenas will be increasingly tied to real estate development. This will increase the pressure on local officials.

MORE DROUGHT IMPACTS

As the Colorado River system continues to dry up, the impacts of the drought in the West grow. This week, the State of California adopted emergency regulations to require local water agencies to reduce water use by up to 20 percent and prohibit any watering of ornamental lawns at businesses and other commercial properties. require local water agencies to reduce water use by up to 20 percent and prohibit any watering of ornamental lawns at businesses and other commercial properties. 

The rules sound draconian and conjure up visions of grassless lawns and yards and athletic facilities without grass. In reality, the rules ban anyone from irrigating ornamental lawns at commercial and industrial properties with potable water. Individual house yards, parks or sports fields are not subject to the limits yet. The rules do limit watering of decorative turf at businesses and in common areas of housing subdivisions.

The move comes as local regulations begin to take hold. The Metropolitan Water District of Southern California’s already has more restrictive limits on outdoor watering. The city of Healdsburg bans irrigating yards. Santa Clara County became the latest locality to announce fines of up to $10,000 for wasting water.

CLIMATE LITIGATION

The fossil fuel industry continues to have a tough time convincing state courts around the country to have cases brought against them for their lack of disclosure of the environmental risks of their businesses. The two most recent examples come from New England. The first is case brought by the Massachusetts attorney general which charges that Exxon Mobil lied about the climate crisis and covered up the fossil fuel industry’s role in worsening environmental devastation.

Exxon tried to follow the latest tactic from the industry playbook by arguing that their misrepresentations to the public and to investors are a protected form of free speech. The company also tried to have the litigation halted by what are known as anti-SLAPP laws. Originally, these laws were used to protect individuals from strategic lawsuits against public participation (SLAPPs) filed against those opposing the interests of companies and wealthy individuals. The court rejected this argument out of hand. It follows a March decision if federal court which requires Exxon to meet discovery requests.

It did not get any better down the road in Rhode Island.  A federal appeals court ruled that a lawsuit by Rhode Island against 21 fossil fuel companies, including Exxon, BP and Shell, can go ahead in state court. The decision follows a pattern of losses by the industry in federal appeals courts in Colorado, Maryland and California. In March, a Hawaii state court gave the go-ahead for a case to remain within its jurisdiction. 

A most recent effort to fight climate mitigation efforts fell short in the U.S. Supreme Court this week. The Supreme Court allowed the Biden administration to continue to take account of the costs of greenhouse gas emissions in regulatory actions. It rejected an emergency application from Louisiana and other Republican-led states filed with the court asking for an expedited review of its appeals of unfavorable lower court decisions. The states had hoped to block the use of a formula that assigns a monetary value to changes in emissions.

FLORIDA INSURANCE

The problem in the West may be too little water but the problems in Florida are arguably from too much. The recent years have seen casualty insurers take it on the chin serving that market. As storms become more intense and frequent – the NOAA estimates that there will be 7 serious hurricanes this season – the damages pile up and the costs to insurers continues to rise. The insurers are left with a choice between massive premium increases and exit from the market. More are choosing exit from the market. This has led to political pressure to find ways to provide coverage while holding down premium increases.

The Florida legislature previously established the state-run insurer of last resort, Citizens Property Insurance Corp. That entity has seen doubled in volume in the last 18 months to absorb newly uninsured homeowners. Its activities are funded through bonds issued by the State backed by assessments against program participants. This entity too faces a potential need to impose significant assessment increases. The potential increases coupled with high rate increases from private insurers led to a special session of the Florida legislature.

Much of the pressure on the primary insurers comes from the reinsurance sector. These providers are proving reluctant to take on more of the increasing costs of development in a climate challenged market. Without reinsurance, primary insurers are limited in terms of which properties they can insure at what customers would consider reasonable or affordable rates. That was the focus of legislators.

These concerns produced legislation to create a $2 billion reinsurance fund to be called Reinsurance to Assist Policyholders, or RAP. The bill would allow insurers to charge separate deductibles for roof damage of up to 2 percent of the home’s total insured value or 50 percent of the cost to replace the roof. Deductibles would not apply to a total loss of the structure, a loss caused by a hurricane or a tree fall, or a loss requiring repair of less than half of the roof.

The final bill came after a series of Democratic-sponsored amendments, including a one-year freeze on rate increases, a mandatory 5 percent reduction in premiums, requiring insurers to disclose the effects of climate change on their business, and breaking down their policy issues by race and sex was voted down.

REALITY COMES TO TRI-STATE GENERATION

The realities of climate change continue to impact the Colorado-based regional energy wholesaler cooperative Tri-State Generation, As we have documented, Tri-State is under enormous pressure from its member distribution co-ops to deliver cleaner energy. This drove efforts by the distributors to free themselves from power supply contracts with Tri-State. The resulting disputes have garnered headlines for the contentious nature of the negotiations.

Recently, three distributors were able to negotiate contracts which reduced but did not eliminate power supplied by Tr-State. Now, three additional distributors across three states in the Tr-State service area have negotiated agreements as well. Currently, utilities working with Tri-State may source only 5% of their energy from outside sources or solar power within the communities they serve. The partial requirements membership option would allow utilities to source up to 50% of their energy from outside sources, in addition to the community solar and other self-supply projects.

Tri-State’s largest customer United Power, which serves 900 square miles of Northern Colorado, filed a non-conditional notice of intent to withdraw from Tri-State with the Federal Energy Regulatory Commission April 29. The new notice changes the intended departure date from Jan. 1, 2024, to May 1, 2024.  It was United’s efforts to leave that generated much attention on Tri-State’s efforts to use huge withdrawal fees as a mechanism to retain customers.

The Federal Energy Regulatory Commission held a hearing earlier this month to determine an exit fee for United Power. Previous calculations indicated Tri-State could charge United Power up to $1.6 billion to leave. A judgment on new exit fees is expected by the end of the summer.

SEC ESG PROPOSALS

From our perspective, the increased emphasis from investors on environmental, social, and governance (ESG) based investing has been hampered by the lack of consensus about what exactly that means. This has generated opportunities for lots of confusion about what funds invest in, how they determine what constitutes ESG investing, and how effective ESG investing is.

The rating agencies are trying to fill the resulting void by trying to establish and measure various ESG metrics through their existing ratings infrastructures. Individual entities have been trying to tackle the problem for some time but with varying rates of success. As the process unfolds, questions have arisen about how to best judge which funds truly are ESG funds and which ones are really efforts at “green washing” by firms.

The SEC is being looked to as a source of guidance on the issue as it appears that a regulatory entity may be the most effective driver of change in this area. This week, the Commission proposed amendments to enhance and modernize the Investment Company Act “Names Rule”. The Names Rule currently requires registered investment companies whose names suggest a focus in a particular type of investment (among other areas) to adopt a policy to invest at least 80 percent of the value of their assets in those investments (an “80 percent investment policy”). The proposed amendments would enhance the rule’s protections by requiring more funds to adopt an 80 percent investment policy.

Specifically, the proposed amendments would extend the requirement to any fund name with terms suggesting that the fund focuses in investments that have (or whose issuers have) particular characteristics. This would include fund names with terms such as “growth” or “value” or terms indicating that the fund’s investment decisions incorporate one or more environmental, social, or governance factors. The amendments also would limit temporary departures from the 80 percent investment requirement and clarify the rule’s treatment of derivative investments.

This follows another proposal which would categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue. Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments.

Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts. Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.

COLLEGES UNDER PRESSURE

The National Student Clearinghouse Research Center has released its latest data on enrollments at U.S. colleges and universities. The data shows that some significant trends which began to emerge over the last few years continue to impact these institutions.

Total postsecondary enrollment, which includes both undergraduate and graduate students, fell a further 4.1 percent or 685,000 students in spring 2022 compared to spring 2021. This follows a 3.5 percent drop last spring, for a total two-year decline of 7.4 percent or nearly 1.3 million students since spring 2020. The declines this spring are also markedly steeper than they were last fall, when total postsecondary enrollment declined by 2.7 percent from the previous fall.

Undergraduate enrollment accounted for most of the decline, dropping 4.7 percent this spring or over 662,000 students from spring 2021. This is only slightly less than last spring’s 4.9 percent loss. As a result, the undergraduate student body is now 9.4 percent or nearly 1.4 million students smaller than before the pandemic.  Undergraduate enrollment is also falling more steeply this spring than it was in fall 2021 (-4.7% vs.3.1%).

The declines were seen more acutely at the public institutions both two and four year. The pandemic clearly impacted enrollments as much of the decline was seen in lower income student categories. This cohort was severely impacted by employment limits due to the pandemic. Many students simply could not afford even local community college tuition as family members were laid off or eliminated due to pandemic changes. At the same time, the focus on student loan debt forgiveness has raised real debates about the need for a four-year degree.

GAS TAX

The Maryland legislature will not take up proposals to limit or eliminate a scheduled rise in the state’s gas tax on July 1. Maryland already had a 30-day gas tax holiday. Now, estimates that the state would be giving up $200 million in new funding for roads, bridges and transit projects provided by the upcoming automatic increase. Each year the tax is adjusted statutorily to reflect inflation. The change will increase the tax from around 36 cents to about 43 cents per gallon.  

The issue is being complicated by election year politics in many of the states. Florida has scheduled a suspension of its tax for the month of October (25-cents per gallon) during the month before the November election. New York’s suspension begins June 1 through year-end.  Georgia will extend a gas tax suspension into the middle of July. That occurred after the Governor was renominated. Georgia has among the lowest average gas prices in the nation at about $4.13 for a gallon of regular compared with $4.60 nationwide, according to AAA. 

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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NET METERING UNDER ATTACK

Most of the attention given to the subject of efforts to reduce the economic attractiveness of solar power focused on the effort by Florida’s investor-owned utilities to limit net metering payments. While attention was focused there, efforts are underway in the sun-drenched but conservative South to limit the level of payments in several states.

The Mississippi Public Service Commission is considering rules that would expand subsidies for rooftop solar.  That is a reflection of pressure from solar owners who see that Mississippi reimburses them under a net metering program which pays less than any other for solar power. That may explain why only 586 Mississippi houses have solar roof panels. Legislation is being considered in North Carolina and California which would result in much lower net metering payments to solar owners.

It isn’t all bad news for solar proponents. The Arkansas Court of Appeals upheld Arkansas “net metering” rate structure, which provides for solar energy customers to receive the full retail rate for excess energy they return to the electric grid. The decision reversed the authority of utilities to impose a “grid charge” to net metering customers. It also clarified net metering requirements in a way that made it easier to both approve small solar systems and to aggregate smaller solar systems.

The court also found that the Public Service Commission (PSC) was beyond its statutory authority in regulating solar fields generating less than 1,000 kilowatts, and in setting specific standards for arrays between 1,000 and 5,000 kilowatts.

CITIES AND SOLAR POWER

BUDGET REVISIONS

Given their status as two of the market’s significant issuers, the revisions of their budgets each Spring always draws attention. The fact that governments all over the country appear to have underestimated revenues has shifted the usual attention on budgets from one of tight spending to an atmosphere of so much money sloshing around the legislative process. The money gusher has produced some startling turnarounds in the outlooks of California and Chicago.

California is dealing with an estimated $97 billion surplus. The surplus has led to all sorts of proposals for spending the money. They include checks to help drivers offset rising gas prices. The price tag of $11.5 billion could only be acceptable in these extraordinary times. One thing that will possibly deter excessively higher spending could be the stock market. 

The current volatility and declines in the equity markets are positioned to cause problems on both sides of the state revenue equation. In the states where capital gains are significant and the highest rate income taxpayers reside, revenues could take an unexpected hit. The longer the markets perform poorly, the greater the risk. The markets had been generating above expectation investment results for state pension funds. Shortfalls in returns could require higher annually required contribution levels.

Months ago, the City of Chicago offered the fact of a potential $867 million budget gap in 2023 if a new casino would not be approved for the City. Now, the City has updated data reflecting tax season driven receipts which indicates that the gap is much smaller – some $560 million smaller than the earlier estimate. One sector cited was the real estate market which produced revenues related to real estate transactions of some $201 million of better-than-expected revenues. The City now projects a year end balance of $250 million.

FLORIDA GOVERNANCE AND DISNEY

The latest chapter in the increasingly ridiculous story of Florida Governor Ron DeSantis’ effort to punish the Disney Corporation for politically opposing him unfolded this week. It was already clear that the legislation orchestrated by the Governor was not well conceived and that little if any planning had gone into the actual execution of a process to take over the District while assuring that the District’s debt would be paid.

Investors have already figured out that Disney already pays for the debt, as well as the operating costs of the District. So, it’s clear that the move is a stunt. That’s reflected in the fact that the enactment of legislation to effect this change will not occur until after the elections in November when the Legislature and Governor are on the ballot. 

There is that little issue of the non-impairment clause that accompanies many bond issues. The one that says that the State will not take any actions which would deny bondholders any remedies which might result. It’s not clear what benefit might accrue to bondholders as the result of a cheap political stunt but once you go down this route it can quickly become a rabbit hole.

These moves are akin to efforts like the one in Texas to “punish” potential underwriters associated with institutions which have taken a position that they will no bank the fossil fuel industry. At least Texas is following through by using the new stance to exclude a significant number of potential underwriters from participating in new issue transactions.

The governance issue is that since it’s government so politics have to be involved. But when they fly in the face of logic and clearly inevitable trends, it raises questions as to the real level of commitment to investors on the part of the political establishment.

DROUGHT ALL OVER

Much of the attention focused on the ongoing drought in the American West might make one feel that it is the only region with a problem. This week, it was announced that due to low runoff into the Missouri River basin, the U.S. Army Corps of Engineers predicts power production from the six main stem dams will be about 77% of normal this year. The hydropower is supplied to Montana, North and South Dakota and parts of Minnesota, Iowa and Nebraska. The distributor of that power is the federal Western Area Power Administration (WAPA). To make up the shortfall, WAPA needs to acquire access to additional sources.

That power will be more expensive and it will lead to costs rising for customers already under pressure from higher agricultural input costs, overall inflation, and higher fuel prices. It will likely focus even more attention on transmission issues. While closed legacy generation gets the most attention, transmission project proposals are garnering significant skepticism and outright opposition from landowners over the scale and location of those pieces of infrastructure.

At the more local level of the power distribution and supply chain, the need to upgrade existing connectivity to the overall transmission grid is obvious. One of the major barriers to the use of solar power is the inability of existing lines to absorb the new power. It’s more an issue for small commercial and municipal customers but it limits the climate impact of solar development.  

SUPERVISION IN CONNECTICUT

As is the case in many states, Connecticut has a program of oversight and remediation of the finances of local governments.  The Nutmeg State’s vehicle for this is the Municipality Accountability Review Board (MARB). The MARB is a state board that was established in 2017 for the purpose of providing technical, financial, and other assistance and related accountability for municipalities experiencing various levels of fiscal distress. Municipalities experiencing degrees of fiscal distress and in need of technical or other assistance may be designated into one of four tiers, which is based on several factors, including fund balance, bond rating, equalized mill rate, and levels of state aid.

The City of West Haven was referred to the MARB in December 2017 following the City’s issuance of approximately $17 million of deficit bonds. Based on Connecticut General Statutes, the issuance of deficit bonds by a municipality automatically results in its designation as a Tier III municipality and its referral to the MARB. The City had accumulated a large General Fund deficit, as well as deficits in the Allingtown Fire Fund and the Sewer Fund. The negative Fund Balances were largely the result of recurring operating deficits caused in part by unsustainable budget practices.

The City has a five year plan approved in 2018 but as the board notes since then, the City has revised and updated its 5-Year Plan three times. Under its Tier III status, the City received some $16 million of state funding which is largely the basis of the City’s somewhat more stabilized fiscal position. An additional factor is the City’s record over the years of erratic fiscal management.

The Board notes that severe fiscal distress, evidenced by a large General Fund deficit, led to the creation of a State oversight board in 1992. Shortly after restoring solvency to the City, the oversight board disbanded in 1995. After a period characterized by positive reserve levels, the City fell back into a deficit position in 2005 which continued until its designation as a Tier III municipality.

There are also issues associated with the City’s annual reporting and its manipulation of filled and unfilled positions to drive desired fiscal results for reporting purposes. It has had to restate results in prior years. And now the Board notes that the City’s plan was to rely on financial assistance in the form of MRF to stabilize its Fund Balance and to bide time until previously issued pension obligation bonds were retired in FY 2022. From that point forward, the City reasoned, a significant decline in required debt service payments would allow for significant and rapid increases in General Fund Balance without any additional financial assistance from the State.

The Recommended FY 2023 Budget that was recently submitted to the MARB does not direct the reduced debt service requirements to building Fund Balance. Rather, the Recommended FY 2023 Budget redirects those funds to operations resulting in minimal funding devoted to increasing fund balance. Thus, a key component of the City’s plan for amassing General Fund Balance appears to have been abandoned. The intervention is not a surprise.

PUERTO RICO

The Puerto Rico Oversight Board reported that efforts to restructure debt issued by the Puerto Rico Highways and Transportation Authority (HTA) are moving forward. 85% of the owners and insurers of the HTA 68 bond claims and more than 67% of the owners and insurers of the HTA 98 bond claims support the plan. The hope is that a disclosure document can be made available in June in support of a Plan confirmation hearing in August. The fact that the debt of the Authority was secured not just by tolls but also by taxes made for a more complicated resolution.. The kicker was always that the tax revenues could be “clawed back” by the government for general purposes.

The resolution of the general government’s restructuring was a necessary procedural issue for the HTA restructuring. It was through the resolution of the general government process that the issues associated with the “clawback “could be addressed. Once it was established how much was available to the HTA, a division of those assets could be made. This current hearing and the procedures which will occur over the summer are a necessary mechanical element to the resolution the restructuring. 

While the HTA moves forward, the Electric Power Authority (PREPA) continues to stagger along. It is being crushed by its dependence on fossil fuels and its performance remains poor. Recent blackouts have increased opposition to PREPA’s operating structure. The orientation of the contractor running the system seems driven towards the sort of centralized large-scale generation and distribution system that has failed the island so often.

The utility is estimating losses in the current fiscal year due to the increased price of fuel. PREPA projects a total fuel expense spend in the three-month period from April 10 to July 8 of $883.5 million. That against the Puerto Rico Oversight Board budget which allocated $1.968 billion for full year fuel expense. The situation reinforces our long-held view that the island needs a much more diverse and localized energy grid.

On a third front, the federal appeals court with jurisdiction over issues involving Puerto Rico has decided that the Oversight Board overseeing Puerto Rico’s financial recovery is not entitled to sovereign immunity. The Board has been fighting media requests for information in a dispute dating back to 2017. The court said that it agreed “with the district court that, by including § 106, Congress unequivocally stated its intention that the Board could be sued for “any action . . . arising out of [PROMESA],” but only in federal court. Congress was unmistakably clear that it had contemplated remedies for constitutional violations and that injunctive or declaratory relief against the Board may be granted.

The Board can appeal or it can work out an agreement with media plaintiffs. It is hard to know if the release of the information requested would be harmful or helpful to the Board’s efforts at oversight. The Board had had to maneuver through an essentially hostile environment created by both sides of the Commonwealth’s fiscal problems. Potentially, the information could blunt or reinforce some of the many suspicions which have characterized the relationships between the Government, the citizenry, and the Oversight Board. It’s not clear who has the most to lose with an information release on the scale of that requested.

We are well-known disclosure advocates. We have never understood the resistance to disclosure on the part of governmental entities, They are public entities so their activities should be a matter of public disclosure.

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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PURPLE LINE

The long-awaited light rail project between Prince George’s and Montgomery Counties is moving forward under the recent agreement between the State of Maryland and the private consortium constructing the Purple Line (4.25.22 MCN). Now the contractors have given more detail in an interview with the Washington Post. It includes new estimates as to the schedule for completion and the likelihood that it will be achieved. We are struck by a couple of items sprinkled amongst the rest of the interview.

Obviously, the level of due diligence undertaken by any of the potential contractor groups would be a major component contributing to a more solid and likely completion estimate. “We had an opportunity [to inspect the work done by the initial contractor] during the proposal phase but only for those things that we could actually see above ground. Now it’s a question of having a look at, understanding and feeling confident with those things that are below ground, things that we have to uncover.”

We note this because of our comment just last week about a Virginia P3 that had contract issues related to soil composition along the project route. That is one potential risk to the date. The contractor did note that there is a $200,000 daily penalty for a late project. It would still be a surprise if the current completion date holds.

PENN STATION

One of the Bloomberg administration’s primary successes (in its view) was the development of Hudson Yards. The formerly industrial area was rezoned and developed into office and residential space. The development was supported in part by debt issued through city and state agencies and debt service on some of that debt was supported by annual appropriations by the City.

Now, just one block east of the Hudson Yards area a new development is being proposed to generate tax dollars for the reconstruction of Penn Station. There is 

no need to belabor the present state of the station and the continuing inability to bring the project to fruition. The scale of the proposed project and the need for it to meet projected revenue expectations have raised concerns among many that the plan as it exists could turn into a fiscal issue for the State and City.

The NYC Independent Budget Office was recently asked to review the current plan advanced by the Sate’s Empire State Development Corporation (EDC). The project, announced by then Governor Cuomo and now being continued under the current Governor, ESD would take title to eight sites surrounding Penn Station and allow private developers to build greater density than city zoning currently permits, bypassing the city’s normal land use processes. The expected property tax revenues and fees from the new development would be applied to the repayment of the debt funding Penn Station’s improvements and nearby public space upgrades.

Here are the conclusions of the IBO review. They raise some red flags. The total cost of the Penn Station improvement project and, therefore, the revenue needed to cover those costs remains unclear. ESD estimates the total public cost of the transit improvements, including the Hudson River Tunnel, to be $30 billion to $40 billion, with costs shared by the federal government, New York State, and New Jersey. New York State estimates its share of the cost from $8 billion to $10 billion, and thus far has authorized $1.3 billion in capital funding for the project.

Bond or other debt financing is expected to cover most of the remainder, although ESD has yet to provide details on how exactly this debt would be structured. ESD would use value capture financing, where payments in lieu of property taxes (PILOTs) and fees from the development sites are used repay the debt funding the station project costs. Because the Land would technically be owned by the state, it is exempt from city property taxes. This makes the funding mechanism the payment of PILOTs to ESD, not property taxes to the city.

The state has not released any revenue projections for these PILOTs, nor has it specified how the PILOTs would be structured, including, importantly, to what extent any property tax discounts would be offered. 

Currently, there are 55 property tax lots on the eight sites slated for new development. In fiscal year 2022, the city collected $60 million in property taxes on these sites, a very small share of the city’s more than $29 billion in total property tax revenue. ESD has indicated that it intends to reimburse the city for this lost tax revenue (with annual escalations), although this also has yet to be formalized.

Did the City learn anything from the Hudson Yards experience? Apparently not. The report clearly notes that ESD’s plan would finance near-term station improvements with revenue from future private development, posing a timing risk. The station reconstruction and expansion projects are expected to be completed by 2032, but the development sites would not be fully completed until 2044. When there was a similar timing issue for the nearby Hudson Yards development—financed by the city in a similar manner—the city provided hundreds of millions in debt service payments from its own coffers until adequate revenue was available.

NYC OFFICE CHALLENGE

The Partnership for NY, the entity which represents the major New York business interests released a survey covering the return to the office. In this case, it’s more like the lack of it. The Partnership surveyed 160 businesses and found that only 8% of full time return to the office has occurred. On the average weekday, 38% of Manhattan office workers are in the office. Respondents reported that employers expect that the number will rise to 49% by September. 

That would be the level projected to already be achieved by this April when the same questions were asked in January. Before the pandemic, 6% of businesses were operating under “hybrid” models. Now, that number has grown to 78%. Those changes grow in importance daily, as reduced office attendance shows up in mass transit use and general economic activity in central business districts.

It is clear, at least in Manhattan, that the local economy is a long way from full recovery. The small businesses which drive much first time and less educated employment to the benefit of those are still reeling. This has reduced employment and threatens to prolong and dampen the recovery.

It all matters because the City has baked in a fair amount of permanent increased spending and must make some difficult capital spending decisions. The speed and magnitude of the recovery will go a long way to determining the long-term credit outlook for the City.

SEC AND ESG

The Securities and Exchange Commission has extended the comment period for its proposed disclosure requirements related to climate change issues. Issuers would have had to be able to provide more disclosures regarding their carbon footprints. The rules were seen as requiring companies (and municipal bond market issuers) to be able to provide information even as it relates to actions by suppliers. The Commission received much criticism for an initially short comment period and this extension is in response.

The proposals have not exactly generated a rational response. One Utah state official likened the effort to a form of financial terrorism and at the federal level Republican House members called it an attempt at a scorched earth regulatory policy.

MILEAGE FEES

The Pennsylvania Department of Transportation (Penn DOT) is working with the state legislature on a proposal to enact alternatives to its gasoline tax. A series of proposed revenue sources are being examined with a mileage- based fee being the most likely alternative. The process is a reflection of the complex set of issues that make road finance and funding reform such a contentious issue in the Keystone State.

It’s easy to forget that the first commercial oil well in the U.S. was in Pennsylvania. The Commonwealth’s reliance on coal production and products which relied on coal like steel have long driven energy policies. This was only reinforced through the introduction of fracking which accessed vast natural gas supplies. That’s 175 years of reliance on fossil fuels.

So, Pennsylvania is using the tried and true process of identifying a question to be answered by a commission. Legislatures use this to try to fend off opposition to contentious provisions of legislation. In this case, the Governor formed a commission and that group has now made two primary suggestions for hybrid or electric vehicle owner fees: a flat annual fee or a fee based on actual miles driven.

The process has yielded data which has been used to serve as a base for estimating and comparing fee alternatives. PennDOT research found that the average passenger vehicle driver pays 2.9 cents per mile in gas taxes. For hybrid drivers it’s 0.7 cents per mile. An electric vehicle operator would pay nothing. Current driving habits show the median number of miles driven by passenger vehicles is about 9,000 a year.

Approximately one in four drivers travel account for in excess of 14,000 miles a year. The data showed that a 14,000-mile driver generated gas taxes of $400 per year. That number could serve as a jumping off point for calculating a fee which would generate revenues while being publicly acceptable. The amount of the fee will be one hurdle. The next will be the ever present issue of “privacy”.

Privacy concerns have always been raised when it comes to the introduction of technology which generates location information. Urbanites can laugh at those issues but it was a real issue when electronic payments were introduced into urban metro systems. It comes up with electronic tolls and is an issue with congestion fees. Now it comes to the issue of mileage fees.

There is data on what attitudes really are. The Eastern Transportation Coalition (the former 17 state I-95 Coalition) has produced research which weakens some of the claims of fee opponents. The tests conducted in Oregon and Utah have used plug-in equipment to monitor mileage. There are two plug-ins: one with GPS and one without. It matters if one drives a lot out of state as the fees only apply to in state use.

The Coalition’s 2020-2021 State Passenger Vehicle Pilot provided participants with two mileage reporting options, both of which utilized a plug-in device that inserts into the vehicle’s on-board diagnostic (OBD-II) port: plug-in device with GPS and plug-in device without GPS. How important was “privacy”? The vast majority of participants (80%) chose the plug-in device with GPS. This option used GPS technology to differentiate mileage by the state where the miles were accrued. The state-specific per-mile rates were applied to the mileage driven in each state, less a fuel tax credit based on the fuel consumed in each state and the state-specific fuel tax.

We think that the long-term answer is mileage-based fees collected with electronics and GPS. This will enable states to levy different rates reflecting their unique transit profiles.

PORTS

During the pandemic we commented on the impact of the pandemic, capacity issues, and the economy in general on port revenues. Whether it was revenue constraints due to pandemic limitations on operations or pressures associated with cargo backlogs at the major commercial ports Los Angeles and Long Beach, ports have been a good indicator of what was happening in the economy as a whole. In the Fall of 2021, those ports threatened the imposition of fees for containers not promptly moved to address trucking-based backlogs. Recently, after a period of more regularized operations, the waiting time for ships entering those ports was approaching one week.

Now, labor issues at the ports may be the next stumbling block. This past week, negotiations between the major West Coast ports and the unions representing dockworkers commenced. The existing contract expires July 1. The International Longshore and Warehouse Union (ILWU), represents dockworkers at the more than two dozen ports on the West Coast. They have long been aggressive negotiators very willing to use strikes. The ports include the Los Angeles Harbor Department, CA, Long Beach Harbor Department, CA table), Port of Seattle, WA and Port of Everett, WA (A2). The Alameda Corridor Transportation Authority, CA), a rail project jointly owned by the ports of Los Angeles and Long Beach, would also be affected.

Pressure will come from the effects of the pandemic and the potential for more future automation. After the development of containerization and its resulting crushing impact on port employment some 60 years ago, automation is a key component of every dockworker negotiation. Wages and salaries may be the easiest issue. It will be hard to argue that the ports aren’t busy and generating revenue. Maintenance of staffing requirements will likely be a key source of contention as the ports and shippers seek to speed the process of unloading in an effort to help the supply chain.

VOUCHERS

Vouchers have been a favorite of many conservatives to address a range of issues. It has been more acceptable to them than direct housing development as it also allowed proponents to claim racial integration benefits. In much the same way, voucher programs to address education inequality have been a favorite solution for “school choice” advocates. Now, in Connecticut we see vouchers offered as a solution to some environmental justice and equity issues.

The omnibus Connecticut Clean Air Act was enacted this week. The legislation significantly expands funding for an existing electric vehicle rebate program. The program – the Connecticut Hydrogen and Electric Automobile Purchase Rebate, or CHEAPR – offers rebates of $750 to $2,250 on the purchase of battery-electric vehicles and plug-in hybrid electric vehicles. Higher incentives are available for fuel cell electric vehicles.

Before the legislation, the program was funded by the first $3 million in greenhouse gas reduction fees paid every year on car registrations. As of July 1, all of those fees will be directed to the rebate program. It is estimated that this could increase funding by as much as $5 million annually. The program will be required to give the highest priority to residents of environmental justice communities, residents with incomes at or below 300% of the federal poverty level, and residents who participate in state or federal assistance programs, including the Operation Fuel energy assistance program.

COAL REALITIES

Even in a friendly regulatory environment there is only so much one can do to fight the market. The news that the owner of one of Montana’s major generating facilities will shut down last a large coal plant as a part of the bankruptcy of its owner. Talen Energy specifically cited the non-competitive nature of coal generation versus primarily natural gas. The Colstrip plant in Montana is not being converted from coal by Talen.

The closure affects the last of three units at the site. In 2020, Talen and Puget Sound Energy, which evenly split ownership of Colstrip Units 1 and 2, closed the units because the generators were no longer profitable. The situation highlights the ability of regulators in one state to influence the operations of a facility in another even though it is operated under its home state’s regulations. Oregon and Washington have set firm dates for their investor-owned utilities to stop using coal. Those utilities own 70% of Colstrip 3.

As the company’s filing said ““The previously low price of natural gas has meant that coal-fueled assets are no longer economical to run or keep updated. “

EMINENT DOMAIN UPDATE

There seem to be constant developments in the effort by the sponsor of a proposed carbon pipeline to move carbon dioxide from ethanol plants toa storage facility. The South Dakota regulators have noted that they have received more comment on proposed regulatory actions involving carbon capture pipelines than any other issue in memory. Five North Dakota counties have issued resolutions (albeit non-binding) against eminent domain use to acquire pipeline right of way.

The issue still remains on a larger scale in Iowa. Legislation to halt its use for one year was passed in its lower chamber but ultimately did not make it out of the Senate. With both carbon capture and transmission line developers seeking easements from landowners in the state, it remains a significant issue.

In Missouri, legislation was enacted that requires companies to pay landowners 150% of the fair market value on their land; would require that developers start construction within seven years of getting easements. If that did not occur, their rights to the property would expire. Court-appointed commissions would be established to undertake the process of determining the fair market value of a farmer’s land during eminent domain proceedings. They would be required to include a farmer who has lived in the area for at least a decade. 

Prior Grain Belt legislation required that at least 50% of the power carried by a transmission line be kept in the state for use by Missouri customers. Under this overriding bill, it would be required that transmission lines be set up to provide an amount of power to the state proportional to the length of the line running through Missouri. 

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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THE TRANSMISSION BOTTLENECK

Researchers at the US Department of Energy’s (DOE) Lawrence Berkeley National Laboratory surveyed seven electric grid operators and 35 major utilities, which together cover 85 percent of the US power load. They found that 1,300 gigawatts of wind, solar, and energy storage projects had been proposed as of the end of 2021, enough to meet 80 percent of the White House’s goal of carbon-free electricity generation by 2030. That is the good news.

Then there is the key issue of transmission capabilities. The researchers found that only 23 percent of the renewable generation projects seeking grid connection between 2000 and 2016 have actually been built. That is a result of the failure of transmission development to keep up with generation development. DOE found that the number of newly built high-voltage transmission lines has declined from an annual average of 2,000 miles in 2012-2016 to an average of just 700 miles in 2017-2021.

This gets us to where we are today. Renewable generation expansion is outpacing transmission expansion. Transmission expansion creates real issues over land use and right of way. Iowa’s Grain Belt Express is a perfect example. The issues over transmission are potentially working in favor of offshore wind generation. Coastal utilities would not need the sort of transmission infrastructure that other utilities might to access this source of power.

TRANSIT ISSUES POST-PANDEMIC

The City of San Diego currently permits seven operators permitted for 11,050 devices. The rapid increase in the availability and use of scooters has returned certain issues associated with their use back to the fore. Many of those issues concern the use and storage of these devices outside of the street setting. Riders on sidewalks and the predilection of users to leave the scooters all over have raised concerns.

Now the City is considering a plan which would reduce the number of devices by almost 4,000. Currently, devices must be permitted every six months. Through that permitting process, the City is proposing to use the permit renewal process to achieve the reductions. The proposals under evaluation by the City Council would see companies chosen through a request for proposal process, and then be contracted by the city. Chosen companies would be required to pay an annual $20,000 fee in addition to $0.75 a day per device. The number of devices would be capped at 8,000.

The importance of a revenue stream not dependent upon farebox revenues has been reinforced. New York’s MTA debt is supported by farebox revenues and the ongoing declines in ridership attributable in part to fear of crime have caused some to be concerned about the credit long term. Other systems across the country also see ridership under pressure but given that their funding for debt service is not farebox related it is less of an issue.

Case in point – the Chicago Transit Authority (CTA). The CTA is the second largest transit system in the US and provides service within the City of Chicago and several neighboring communities. Its debt is secured by the authority’s Sales Tax Receipts Fund (STRF), to which the Regional Transportation Authority (RTA) transfers both regional sales taxes and allocations of the state’s Public Transportation Fund (PTF) matching payments. Moody’s announced that it has upgraded to A1 from A2 the rating on approximately $2.1 billion of outstanding senior lien sales tax bonds of the Chicago Transit Authority, IL.

The upgrade reflects good recovery of pledged sales tax revenues from the impacts of pandemic restrictions. The pledge of sales tax revenues reduces significantly the Authority’s exposure to ridership pressures. The upgrade accompanied the upgrade of the RTA, the holder of the senior lien on some of the taxes pledged to the CTA bonds.

The same sales tax recoveries which bolstered the CTA are also positively impacting the RTA. An additional RTA factor is an assumption that state funding will remain stable and timely given improved fiscal conditions of the State of Illinois. In past years, the authority’s receipt of state public transportation funds had been subject to months of delay as the state faced its own fiscal challenges. The state is currently making distributions in a timely manner. 

ILLINOIS

Over the last decade as the State of Illinois’ credit and its ratings steadily deteriorated. Those declines also impacted the credits of the many issuers who receive significant resources from the State like the transit agencies we mentioned. The other sector which clearly saw downgrades related to the State’s difficulties was public university credits. Now that the State’s ratings have stabilized, the positive impacts are finally reaching bonds for facilities in the state university system.

This week Moody’s reflected that in several rating actions. The upgrade “reflects continued strengthening of the State of Illinois’ (Baa1/stable) fiscal condition with positive downstream effects to the university contributing to an improving operating environment. The state’s recently enacted fiscal 2023 budget increases direct operating appropriations to the university by 5%, as well as increased monetary assistance program (MAP) funding which provides financial aid for students.

Both are favorable for the university’s operating environment, aiding greater budget predictability and supporting student affordability. Increased pension contributions by the state lessens the risk of the state shifting future pension liabilities and associated contributions to the university.”

VIRGINIA P3 OUT OF NEUTRAL

The expansion in Virginia of the 95 Express Lanes to the Fredericksburg area is scheduled to be complete late next year. Construction of the new toll lanes is now 60 percent complete. That leads to a scheduled opening in December 2023. That would represent a delay of more than a year behind the existing schedule. Work on the 10-mile extension began in 2019 and was scheduled to be complete in October. 

Work was slowed while issues over the composition of the soil along the construction route were assessed and negotiated over. Transurban, the operator of the project and its contractor recently settled a dispute over the costs and timeline of the project. In an arbitration hearing last October, the contractor successfully argued that geologic conditions in the construction zone affected their ability to keep the project on schedule. An arbitrator ruled that it was entitled to a price adjustment and more time to complete the project. 

The ultimate cost of the needed mitigation required to deal with the soil challenges will increase the original cost of $565 million by about $100 million. Transurban is financing the project including the increased costs.

NATURAL GAS

Central Electric Power Cooperative, Inc. is the largest customer of the South Carolina Public Service Authority (Santee Cooper). Central, through its member co-ops serves about 1/3 of the Palmetto State’s population. That puts it at the center of the problems facing Santee Cooper especially those

related to the ill-fated Sumner nuclear expansion. That has raised the ire of co-op customers regarding the future course of their utility.

Now that discontent has been manifested in the decision by Central on behalf of its member distribution co-ops to oppose efforts by Santee Cooper to replace coal-fired generation with natural gas-fired generation. Central is supporting efforts to expand the renewable resources available for clean power generation. In 2021, Santee Cooper contracted for its share of 425 megawatts (MW) of new utility-scale solar power that will be added to the utility system in 2023. Central Electric Power Cooperative has finalized contracts with the same developers for the remaining share.

In Connecticut, the state has decided to end a program which provided cost incentives for homeowners to switch to natural gas. The program began in 2013 and was originally scheduled to be in place for ten years. The spike in natural gas prices and the growing sentiment that natural gas is not as clean as advertised led state regulators to conclude that the incentive program “no longer furthers the state’s overall climate and energy goals …. (and) is no longer in the best interest of ratepayers.” Connecticut’s Public Utilities Regulatory Authority has given the state’s three natural gas utility companies 90 days to end the conversion incentives.

SOLAR SPRING

Solar electricity generation has been a hot topic of legislative debate. Most of the argument is over the issue of net metering whereby a homeowner still on a distribution line from a utility generates power from their solar panels and then distributes any excess power back to the utility. The total monthly usage is calculated and the homeowner is billed for the amount of power used net of the solar power generated by the customer. The payment due is effectively a number net of the value of the solar power distributed to the utility.

The arguments to date have been based on differing views of how the value of a kilowatt hour generated by solar is established. It is becoming a significant political issue. Legislation in Florida which would have significantly reduced the value of solar power for net metering was vetoed by the Governor. Legislative efforts seek to both limit the period of time during which the more favorable net metering rates would impact a customer’s bill for solar generation. North Carolina regulators are considering Duke’s plan to add a $10 monthly charge for customers who install solar panels and to reduce what they get paid for excess electricity sent to the grid. 

TEXAS AND SYMBOLIC LEGISLATION

Much ado has been made over an effort by the State of Texas to “punish” financial firms which will not bank the fossil fuel industry. The State hopes to develop a list of offending firms and prohibit their participation in transactions such as bond issues from the State. The State is particularly focused on institutions which have made public pledges not to invest or run mutual funds which state that they will not invest in fossil fuels.

The State’s actions got a lot of attention but a closer reading indicates how merely symbolic they are. Companies that want to work with Texas can still avoid investing in fossil fuels as long as they are doing so for strictly financial, rather than ethical or environmental reasons. The ridiculousness of such a stance is clear. While a given institution may decide that fossil fuel investment is bad business, is it not reasonable to assume that the environmental and political factors behind the demand for ESG investments are what make it bad business.

A recent report by NPR cited comments from the state treasurer of West Virginia on the issue. They show the contortions that these state’s go through to create symbolic efforts. “(If) they’re saying we, as a financial institution, will not lend money to coal, for instance. That is a blanket statement that is a problem for the state of West Virginia.” “If they’re making a business decision somebody comes in for a loan for a coal company, and they decide that it’s a big credit risk, and they don’t want to do it, then that’s fine.” Why do they think it’s a credit risk?

It was also pointed out that for firms managing and investing money who have a strong ESG orientation, being put on the Texas list of ineligible firms might actually be a beneficial marketing tool. Back in the day, a theatrical production which had been “banned in Boston” often benefitted from that as it drove curiosity and ticket sales. This isn’t much different.

VIRGIN ISLANDS

This week Moody’s commented on the credit of the US Virgin Islands in light of the recent bond sale which sought to shore up the territory’s funding for its pension system. Some observers hoped that the outstanding Caa3 rating on the territory’s debt might be raised as a result of the refinancing. Those investors will be disappointed as the rating agency maintained the rating at its current level.

In maintaining the rating Moody’s noted that “Whether the government’s
statutory contributions plus dedicated matching fund revenues will be
sufficient to maintain the retirement system’s solvency will depend not
only on the performance of matching fund revenues, but also on the
retirement system’s investment returns.” Moody’s is rightfully concerned about investment performance. We have seen other pension funding deals fail to deliver their expected benefits when markets turn unfavorable. Ask New Jersey about that.

We agree that more is needed to produce real credit improvement. The move to refinance the retirement system is clearly a positive relative to no action. Nevertheless, the underlying economic problems continue and the infrastructure problems especially at the water and power authority continue to be a drag on economic improvement. Moody’s was right to hold the rating until more sustainable trends can be established especially in light of the redirection of rum tax revenues away from general revenues.

The USVI remains exposed to oil-related risks which have helped to destabilize the power system. It obviously is exposed to hurricane risk. So, it remains a highly speculative credit.

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.