Joseph Krist

Publisher

CHICAGO

The City of Chicago received a rating upgrade from Fitch to BBB. The move rewards several actions which begin to address some of the City’s long-standing credit issues. The first is current performance. Chicago concluded 2021 (Dec. 31 fiscal year-end) with a large general fund surplus of $313.8 million or 6.3% of expenditures. The surplus reflected $221.6 million in revenue above budget, expenditures $107.2 million less than budgeted amounts and $782.2 million of American Rescue Plan Act (ARPA) revenue replacement. 

Pensions remain a significant credit factor for the City. The city increased its pension contributions from $848.5 million in 2016 to nearly $2.28 billion in 2022 as part of a five-year plan to reach the full statutorily-required pension contribution to the four single-employer pension funds covering municipal employees (MEABF), laborers (LABF), police (PABF) and firefighters (FABF). The proposed 2023 budget includes $2.39 billion in pension contributions (excluding a planned $242 million advance or supplemental payment, see below for more information), representing an increase of $92.3 million over the 2022 budget.  The statutory pension contributions are based on an amount that targets a 90% funding ratio by 2058 for all plans.

The upgrade comes in the midst of the City’s budgeting cycle for 2023. The city is projecting a surplus totaling $134 million in 2022 with year-end revenue estimated at $5.0 billion or $84.5 million above budget. The proposed 2023 budget totals $5.4 billion, which is nearly $392 million above the August budget forecast due to $160 million in baseline revenue growth, $56 million in tax increment financing (TIF) surplus and a $40 million initial payment from the city’s casino operator. The city projects a nearly 12% increase in YE 2022 sales tax revenues.

BALLOT TIME

For elections in 2022, 140 statewide ballot measures are certified for the ballot in 38 states.

The move to make it harder to get voter initiatives on the ballot continues. Whether it be Medicaid expansions or cannabis legalization, conservative (usually Republican) politicians have strengthened their efforts to take that power back for legislatures. In Arizona, voters will decide three constitutional amendments: (1) to create a single-subject rule for ballot initiatives; (2) to allow the legislature to repeal a voter-approved ballot initiative following a state or federal supreme court order striking down a portion of the initiative; and (3) to require a 60% vote for voters to pass ballot measures to approve taxes. In Arkansas and South Dakota, constitutional amendments to require three-fifths (60%) votes for certain citizen-initiated and referred measures are on the ballot. 

Marijuana is on the ballot again.

AR – Issue 4 would legalize marijuana use for individuals 21 years of age and older and authorize the commercial sale of marijuana with sales to be taxed at 10%. Of the tax revenue, 15% would be used to fund an annual stipend to all full-time law enforcement officers certified by the Commission on Law Enforcement Standards and Training that are in good standing. Adults could possess up to one ounce of marijuana. 

MD – Question 4 Amends the Maryland Constitution to legalize adult-use recreational marijuana and direct the legislature to pass law for the use, distribution, regulation, and taxation of marijuana.

MO – Amendment 3 Legalizes the purchase, possession, consumption, use, delivery, manufacturing, and sale of marijuana for personal use for adults over the age of twenty-one; allows individuals convicted of non-violent marijuana-related offenses to petition to be released from incarceration and/or have their records expunged; and imposes a 6% tax on the sale of marijuana.

ND – Statutory Measure 2 would legalize the personal use of marijuana for adults 21 years of age and older and allow individuals to possess up to one ounce of marijuana and grow up to three marijuana plants. The measure would require the Department of Health and Human Services, or another department or agency designated by the state legislature, to establish marijuana regulations, including for the production and distribution of marijuana by October 1, 2023.  

SD – Initiated Measure 27 legalizes marijuana use, possession, and distribution for individuals 21 years old and older

Taxes will be voted on in several states.

In Colorado, Proposition 121 would reduce the state income tax rate from 4.55% to 4.40% for tax years commencing on or after January 1, 2022. In Massachusetts, Question 1 creates a 4% tax on incomes that exceed $1 million for education and transportation purposes

SANTEE COOPER

Central Electric Power Cooperative is the largest customer of the South Carolina Public Service Authority. Central receives roughly 70% of its power supply from Santee Cooper. It distributes power to some 20 smaller distribution coops in the state. In the aftermath of the decision to end the Sumner nuclear project expansion, the utilities must plan for additional capacity to meet future demand. Santee Cooper was planning to develop new generating capacity which was fueled by natural gas. Now, those plans could be in doubt.

Central has announced a new power supply plan which includes purchasing power from existing and new power plants within and outside South Carolina, pursuing utility-scale battery storage projects and implementing voluntary customer programs to limit peak power needs. Like other generation and transmission coops across the country, Central faces pressure from its local utility customers to deliver power from a more diversified mix or resources.

The pressure to develop new generation continues, however. Santee Cooper plans to close a coal-fired plant at Winyah, S.C. by 2029. When it closes, the jointly operated Central-Santee Cooper system will lose 1,150 MW of electric generation capacity.

EMINENT DOMAIN

Two of the major midwestern energy projects facing issues over their efforts to acquire right of way face new obstacles. One is the Grain Belt Express transmission line. The Midcontinent Independent System Operator (MISO) which manages its regional power market has informed the Federal Energy Regulatory Commission is not eligible to be included in MISO’s long-term transmission planning process. The project is described as not an ‘advanced stage merchant transmission facility.

To be included, a transmission project must either be represented in a utility integrated resource plan — or in a “preferred plan” for utilities that do not have an IRP — or the project must have an interconnection agreement as of this month.

Summit Carbon Solutions has withdrawn its court request for immediate access to private property in northern Iowa for a land survey. The withdrawal follows an unsuccessful attempt by another pipeline company to obtain a temporary injunction in March of next year. 

AN EAST COAST/WEST COAST THING

The Ports of Los Angeles and Long Beach have long been the busiest ports in the U.S. As trade with Asia increased so did volume. This solidified their positions vs. those of the primary East Coast ports over the last two decades. Like so many other things, the pandemic impacted that long term trendline. That along with trade policy changes limited the growth of volume from the Chinese market. That alteration of trend now shows up in data.

The 10 largest U.S. ports saw a 5.5% drop in inbound container volume in September. The decline was driven by a 17% drop in inbound volume on the West Coast over the past 27 months. The report also noted a 24% reduction in ships waiting for berths compared to August. The Ports of L.A. has been delaying container storage fee increases for several months now as volumes decline.

The Ports of Savannah, New York, and Houston had the highest number of waiting ships in September. While overall volumes are expected to continue to decline, the current trend from West to East remains likely. The U.S.-China trade outlook would be considered uncertain at best with new restrictions on Chinese entities designed to reduce their trade with the U.S. There also remains the chance of a railroad strike which would impact West Coast ports unfavorably. Negotiations continue with West Coast longshoremen unions with a strike also possible.

SAN ANTONIO ELECTRIC – WHO IS IN CHARGE?

CPS is the municipal utility owned by the City of San Antonio. TX. Like many other utilities, it is planning for its future supply of power with an eye towards reducing or eliminating coal generation out of its supply mix. CPS owns one last coal-fired unit (Sprague 1 and 2) and it has committed to close Spruce 1, by 2030 and plans to convert the other unit, Spruce 2, to natural gas by 2028.  Now, the utility has admitted that the ultimate decision as to whether or not the Sprague units are closed is not the utilities decision to make.

The state grid operator ERCOT, is able to dictate whether or not the units can be shut down. When a utility seeks to shut down a generating facility it must submit a Notice of Suspension of Operations (NSO) with ERCOT. “Once the plant in question provides us with a Notice of Suspension of Operations (NSO) ERCOT performs a Reliability Must Run (RMR) assessment to determine if the retirement of the plant will cause a reliability issue. If it does, ERCOT may enter into an RMR agreement with the plant. 

CPS Energy will need to tell ERCOT exactly where the replacement megawatts will come from before getting permission to take any units offline. ERCOT may also require local transmission reliability upgrades to the grid before Spruce’s closure, which typically takes four to five years to install. In the interim, CPS drop roughly 3,000 megawatts of fossil fuel generation out of its portfolio by 2030. 

The plan to replace that power will likely leave clean energy advocates disappointed. CPS expects that some 20% of the fossil fuel generating plants capacity will be replaced by natural gas generation. The CPS plan currently calls for up to 900 megawatts of solar, 50 megawatts of energy storage and 500 megawatts of “firming capacity”.

MUNICIPAL ACCOUNTABILITY

The Portland Clean Energy Fund was created by a voter-approved ballot measure in 2018.  The fund receives revenue from a tax imposed on retail businesses. It is projected to reach $402 million by the end of the next fiscal year. Initially, it was projected to generate between $40 and $60 million annually. The flood of money has been accompanied by some shaky management and disclosure issues.

One of its initial grants had to be withdrawn and recouped when   the recipient group’s leader’s past — including a conviction for fraud and a string of unpaid tax bills. That highlighted weaknesses in the fund’s structure which raised concerns among the establishments forced to collect the tax. Those concerns were reinforced earlier this year when an audit of the fund by the City found  a lack of oversight and accountability systems and clear climate-action goals. 

Now the City is considering changes in the fund’s operations and management to address the concerns raised in the audit. The retailers had been calling for a hiatus in the fund’s operations until these issues were addressed. The proposed changes would allow governmental entities to participate in projects where before only NGOs were.

We expect that schemes such as this will be adopted on a more widespread basis. The growing pains of the Portland program highlighted important issues of disclosure and transparency. The concerns expressed around those issues are transferrable to any similar situation. It is something all investors should insist on.

JACKSON, MS. WATER UPDATE

Earlier this year we covered the difficulties at the water system serving Mississippi’s state capitol (MCN 10.17.22). One of the issues raised by activists was the role of the water system’s credit rating in raising the cost of capital for repairs and upgrades. This week, Moody’s released its latest review of the system’s credit.

Moody’s has affirmed the rating Ba2 rating for the revenue bonds of the City of Jackson Water and Sewer Enterprise of which there are outstanding approximately $240 million. The outlooks on the enterprise ratings are stable. At the same time, the rating action highlights the challenges facing the water system.

Here’s what Moody’s sees. They reference an ineffective billing and collection system, the system’s substantial and ongoing operating challenges as a result of considerable infrastructure weakness, the costs of repair and revenue loss which are still unknown. They note that environmental and managerial challenges which include last winter’s ice storm, a flood on the Pearl River in 2020, a decade long effort to update the billing and metering system, and a $900 million consent decree.

The system shut down cast a harsh light on the role of the State in the system’s demise. In response, immediate resources have been provided by the State of Mississippi Emergency Management Agency and the Emergency Management Assistance Compact and Mutual Aid Programs, which provided various technicians to the site to work on repairs. The federal government has deployed FEMA as well as personnel from the Environmental Protection Agency who are providing operational technical support.

In addition, the US Army Corp of Engineers is on site to provide assistance with an assessment of the water treatment facility including working with the city to develop a winterization and resiliency plan. The state has also committed to pay half of the cost of repairs to the water and sewer system, with the city expected to fund its share through a combination of FEMA monies, ARPA funds, IIJA disbursements or grants.

NEW ORLEANS RESILIENCE AND IDEOLOGY

While Hurricane Katrina was 17 years ago, the impacts of that event on infrastructure continue to be felt. That includes things like the source of electricity to power the drainage and sewer treatment systems. Recent near misses by hurricanes have allowed the problems with operations at the power station to go unaddressed. In the wake of these issues and the availability of additional infrastructure dollars, the Louisiana legislature gave its approval to a $44 million bond issue to replace aging and obsolete equipment for the generating facilities.

But wait! To actually issue the bonds, the Louisiana Bond Commission must give final approval. Here is where the story veers off track. Three of the commissioners, for clearly apparent political posturing purposes, refused to support the bonds for this project. The Sewerage & Water Board of New Orleans is obviously city owned and the City Council resolved not to enforce the state’s new limits on abortion. So, the three have held up the project.

Now, with the state election cycle a year away, the commissioners have relented and the bonds have finally been approved. The bond commission has not historically singled out local projects the Louisiana Legislature has already vetted and approved for state funding. It is in line with the general level of petulance exhibited by a growing cohort of conservative state officials who seek to use public finance to advance a particular ideological agenda.

It is not clear what changed in recent weeks but the bonds finally received preliminary approval last month. When it came up for final approval Thursday, it was one item in a group of more than a dozen other projects on the agenda that received approval without opposition.  

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

MEDICAID ON THE BALLOT AGAIN

If voters approve the referendum, South Dakota will be the seventh Republican-controlled state in the past five years to expand the low-income insurance program at the ballot box. A yes vote would expand its state Medicaid program to more than 40,000 people. 11 other states that have not expanded Medicaid, but only three — Florida, Mississippi and Wyoming — allow voters to collect signatures for a ballot measure. The expansions of Medicare which occurred under the Affordable Care Act added 17 million low-income Americans to the insurance rolls.

Under the American Rescue Plan enacted in 2021, Congress incentivized states to expand Medicaid by having the federal government cover an extra 5 percent of the costs of the program — on top of covering 90 percent of costs for the newly eligible population. In South Dakota, an American Cancer Society Cancer Action Network poll from August found that 62 percent of likely voters support the Medicaid expansion ballot measure.

A Kaiser Family Foundation analysis found that South Dakota would see increased costs of $50 million. The additional incentives however, would send $110 million to South Dakota. Opponents also tried to get a ballot measure to pass, in June to raise the threshold for approval to 60 percent. That effort was soundly defeated, meaning Medicaid expansion only needs 50 percent support to pass. A 60% vote requirement for such an initiative to pass in Florida is viewed as a serious impediment to expansion there.

The other path to expansion is legislative. The history is not favorable. The latest example is North Carolina where there is political consensus supporting expansion. There is one major hitch and that is the state’s Certificate of Need laws. The state’s hospitals would like that process to disappear. This would allow the various systems serving the state to expand and diversify their service areas. The state’s House and Senate passed separate bills on Medicaid expansion this summer but the CON issue prevented the final legislation of the issue.

DESALINIAZATION

California’s South Coast Water District has received approval from the California Coastal Commission for the construction of a water desalinization plant in the Orange County community of Dana Point. It would serve the district’s roughly 35,000 residents in Dana Point, South Laguna Beach and parts of San Clemente and San Juan Capistrano.  Proponents of desalinization have been trying for many years to have such a facility built to serve Southern California. In May, the Coastal Commission rejected Poseidon Water’s proposed $1.4-billion plant in Huntington Beach.

This plant uses different technology than the one in Huntington Beach. The water will be more costly than imported water from the State Water Project and the Colorado River. The Coastal Commission’s staff report estimates the increase at about 20% more at $1,479 per acre foot than for imported water. That translates to increased monthly costs of about $2 to $7 per household.  The district has already secured more than $32 million in federal and state grants. 

Opposition to these plants revolves around the potential damage to marine life. Other plants damage fish by drawing water directly. This plant would be the first commercial-scale desalination project to use slant wells that would collect seawater from beneath the seafloor. Seawater would be routed via a new pipeline to a treatment plant that will be built at a nearby site already owned by SCWD. SCWD plans to route its effluent to an existing, approved brine discharge system at South Orange County Wastewater Authority’s treatment plant. Those flows are discharged two miles offshore, 100 feet below surface water.

Other issues cited by opponents center around the use of electricity by these plants. The plant will include up to 5 acres of solar panels, which would provide 15% of that power. SCWD customers using 20% less water than they used in 2013. The district also sends 70% of its sewage flow to a treatment plant and reused for landscaping at local parks, resorts and other common areas.

CARBON CAPTURE

Opponents of carbon capture pipelines in Iowa have achieved a delay in efforts by one of the sponsors of a carbon capture pipeline to survey land for construction purposes. The sponsor had sought court support for its efforts to conduct such surveys under temporary restraining orders. One of those requests was rejected by a judge in Woodbury County.

The company has sought expedited court help because it says a delay of the surveys will impede its progress to its economic detriment. The company had argued that it needs to evaluate the land this month, otherwise those surveys might need to wait until the spring thaw. That will likely be the case as the judge noted that would have effectively ended the need for further litigation to approve the surveys. A ruling for Navigator would have resulted in its survey being completed, and the landowners’ arguments would have been rendered moot.

It is becoming a political issue. An Iowa newspaper surveyed candidates for the state legislature. The majority of Eastern Iowa political candidates seeking seats in the state Legislature who responded to the survey say they oppose using eminent domain for carbon dioxide pipelines. Two other county courts are weighing temporary restraining order requests which are being contested this week.

The debate also unfolds as residents of other proposed sites for carbon capture takes steps to review projects. A second Louisiana parish has enacted a moratorium on the drilling of wells associated with carbon capture. Louisiana utility Cleco recently revealed in a regulatory filing that the project in Rapides Parish will significantly increase the plants water consumption and reduce the generation output of the plant by 30%.

CALIFORNIA PROPOSITION 30

California voters will get to decide if a “millionaire’s tax” should be imposed to help people buy electric vehicles and to build charging stations, with some also dedicated to resources for fighting wildfires. Proposition 30 would raise the state’s top income-tax rate on Californians making more than $2 million to an eye-watering 15.05%—the highest in the country—from 13.3%. About 80% of the $3.5 billion to $5 billion in revenue annually would fund electric vehicles and charging stations—mostly for lower-income drivers—and the other 20% would go to wildfire mitigation. 

The driving force behind the campaign is Lyft has spent at least $45 million backing it. Facing a requirement that all rideshare vehicles be “zero emission” vehicles, it is not a surprise that a TNC would back such a measure. Without significant financial support, Lyft would not be able to require its drivers to drive an EV. Either its drivers get state help to buy electric cars or Lyft would have to bear the greater costs of EV deployment.

The initiative hits several hot button issues. The employment status of its drivers, the role of TNC vehicles in road congestion, the concentration of the income tax base among a relatively small group of taxpayers, and even school funding. It also comes in the midst of federal efforts to address issues with the employment status of drivers for companies like Uber and Lyft. On 11 October, the US Department of Labor (DOL) proposed a rule to clarify the classification of employees and independent contractors under the Fair Labor Standards Act (FLSA).

CLIMATE LITIGATION

New Jersey has joined the ranks of states suing oil companies over the issue of climate change and their role in it. Like the other suits, it alleges that the oil companies new of the risks of their businesses to the climate and that their failure to disclose them damaged the state. New Jersey does have one powerful motivation as it cited the impact of Superstorm Sandy in New Jersey, killing 38 and leaving more than 300,000 homes damaged.

This suit comes as the oil majors have asked the U.S. Supreme Court to review for a second time whether a lawsuit filed against them by Baltimore over the costs of adapting to climate change belongs in federal court. The companies were denied in their latest attempt to get to the Supreme Court this past April. Since the May 2021 Supreme Court decision, several appeals courts including the 1st, 3rd, 4th, 9th and 10th have all remanded similar  suits to state court. Those cases were filed by state and local governments in California, Delaware, Hawaii, Maryland, New Jersey and Rhode Island.

Another suit has been making its way through the Eighth Circuit seeking to stop the reestablishment of an Interagency Working Group on the Social Cost of Greenhouse Gases (“IWG”) established by President Barack Obama. The State of Missouri is the lead plaintiff along with Alaska, Arizona, Arkansas, Indiana, Kansas, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Tennessee, and Utah. Its roster includes seven cabinet members along with economic and science members of the Administration. It was disbanded by President Trump.

The issue driving the suit is the executive order reestablishing the Group which directed the IWG to publish interim and then final estimates of the social costs of greenhouse gas emissions (hereafter, “interim SC-GHG estimates”), and required federal agencies to use these estimates when monetizing the costs and benefits of future agency actions and regulations. Those estimates have been released only in preliminary form but the states sued nonetheless.

The Court decided that the States are requesting a federal court to grant injunctive relief that directs “the current administration to comply with prior administrations’ policies on regulatory analysis [without] a specific agency action to review,” a request that is “outside the authority of the federal courts” under Article III of the Constitution. The Court did point to a specific path for the issue to be decided. “these policy disagreements are for the people to decide through their elected representatives in the legislative and executive branches of government.”

INSULAR CASES

After the Spanish American War, the U.S. came into possession of several territories. They included Cuba, Guam, American Samoa and Puerto Rico. Under the terms of Treaty of Paris was a statement noting that Congress would determine the political status and civil rights of the natives of the island territories. In the early 1900’s, the Supreme Court was asked to review nine cases in total, eight of which related to tariff laws and seven of which involved Puerto Rico as a part of that process. 

The challenges to the precedent gained the most notice in association with Puerto Rico and its issues surrounding its status. Earlier in arguments about another case touching on the status issue, Justice Gorsuch had expressed a pretty clear view that he thought the Insular Cases were incorrectly decided, this gave hope to many that issues around the status of Puerto Rico and its citizens might lead to a decision to overturn the Insular Cases decision.

The hopes were dashed in the short term when the Court announced that it would not review a new challenge to these Cases. Unfortunately for Puerto Rico, this case revolved around plaintiffs from American Samoa which is treated differently by Congress than is the case with other territories.

MUNIS AND TVA

The operations and energy development plans of the Tennessee Valley Authority (TVA) have been at the center of the energy debate. Its reliance on older large-scale coal plants have led to debates by several long-term customers to consider replacing TVA as their primary supplier. Much of the demand for change is customer driven. This has led municipal electric systems to reconsider their power supply arrangements.

Memphis has been at the center of that debate as its municipal utility is considering whether to maintain TVA as their power supplier. As that debate unfolded, other municipal utilities considered their positions. Now, one utility serving the City of Huntsville, AL has made an effort to move to a greener energy source. The city council last week unanimously approved an agreement for Huntsville Utilities to purchase power from Toyota Tsusho, which is building a solar power facility near a Toyota Motor Manufacturing in north Huntsville. 

In 2020 the city council approved a power supply flexibility agreement with TVA. That agreement allowed Huntsville Utilities to purchase up to 5% of its electricity from a source other than TVA. Huntsville Utilities will build a $2.6 million substation to connect with the solar development, which is expected to be completed in February 2024. That power would be procured by the city at a rate that is lower than what TVA could provide.

Huntsville made a fairy straightforward case for the move. “If TVA were to raise its base rate an average of half a percent a year and increase the fuel cost adjustment by half a percent, the project would provide nearly $500,000 in savings for HU each year.” 

SPITTING IN THE WIND

The core of ideological attorneys general trying to “punish” financial institutions which employ ESG principals by withholding business from them has grown by one more. The Attorney General in Virginia is joining Arizona, Arkansas, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Oklahoma, Tennessee and Texas in an “investigation” of six major American banks. The plan is to issue a civil investigative demand, which acts as a subpoena, for the institutions to produce documents related to their involvement with the United Nations Net-Zero Banking Alliance. 

The Virginia AG contends that the banks – Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo – by participating in the Banking Alliance are trying to impose UN rule. It’s a favorite theme of conspiracy theorists on the political right. The Virginia AG has already joined another Missouri-rooted move to “investigate” Morningstar, Inc. and Multianalytes for alleged violations of state consumer protection laws. He claims that the ratings are driven by “credible allegations” that the companies “allow(ed) anti-Israel bias to infect the ESG ratings they provided to investors.” 

If you are an ESG investor, these suits have to raise governance issues. The idea that market participants have to toe the line established by ideological trends should raise issues for all investors. This applies to progressive attorneys general as well.  Interventions like this latest one made in an effort to fight market trends don’t usually succeed in that fight. If you are a believer in markets, these continuing partisan efforts call into question the dedication to the rule of law which has supported the market on the part of “conservative” political figures.

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

HOSPITALS AND THE CLIMATE

The end of October will mark the passage of ten years since Hurricane Sandy devastated the northeastern U.S. While there are many images which can be recalled, one was especially telling. The idea that three major hospital facilities experienced severe damage and that operations at those facilities could be curtailed for an extended period focused much attention on their location and vulnerability to floods. Hurricane Ian focused attention on Florida’s hospitals given the ever-increasing levels of population along the state’s coasts.

Climate researchers at Harvard recently released a study of the risks posed to hospitals from flooding associated with storms. The study examined 682 acute care hospitals in 78 metropolitan areas along the East Coast and Gulf Coast, all situated within 10 miles of the shore. It found that 25 of 78 metropolitan statistical areas (MSAs) on the U.S. Atlantic and Gulf Coasts have half or more of their hospitals at risk of flooding from relatively weak hurricanes. 0.82 m of sea level rise expected within this century from climate change increases the odds of hospital flooding 22%.  In 18 MSAs, at least half of the roads within 1.6 km of hospitals were at risk of flooding from a category 2 cyclone.

The areas of greatest risk are not a surprise. The Miami-Ft. Lauderdale-Palm Beach strip up the east coast of Florida contains the greatest risk from road flooding in addition to the obvious location risk of the institutions.  New York, New Orleans, and Tampa were other areas with substantial vulnerability.  Rising sea levels, put more hospitals at risk from hurricane induced storm surge. Sea level rise of 2.69 feet increases the odds of hospital flooding from any strength.

That level of sea level rise puts hospitals and beds in 6 MSAs (Easton, MD; Hammond, LA; Pensacola-Ferry Pass-Brent, FL; Savannah, GA; Washington, NC; and Washington-Arlington-Alexandria, DC-VA-MD-WV) at risk that would otherwise be unaffected by a category 2 storm without sea level rise and increases beds at risk by over 50% in 7 MSAs (Baton Rouge, LA; Beaumont-Port Arthur, TX; Boston-Cambridge-Newton, MA-NH; Corpus Christi, TX; Deltona-Daytona Beach-Ormond Beach, FL; Philadelphia-Camden-Wilmington, PA-NJ-DE-MD; and Virginia Beach-Norfolk-Newport News, VA-NC) from a category 2 storm.  

WATER UTILITIES

Water utilities have historically been a reliable sector in terms of creditworthiness. The revenues collected are usually protected in a bankruptcy of a general government as water revenues are treated as special revenues. This makes it harder to use revenues from a financially healthy utility to fund non-utility expenses. In combination with the absolute necessity of the supply of water, the sector has been a steady credit performer over an extended period of time.

In recent years, that image has been weakened somewhat by management and operations issues at several utilities. The Birmingham, AL bankruptcy largely was rooted in issues with its water and sewer utilities. Newark, NJ faced issues with lead pipes delivering tainted water. This summer, the Jackson, MS water system was unable to deliver water to its customers. That was reflection of mismanagement, neglect, and a distinct lack of support from the State of Mississippi for its state capitol.

Now another water system serving a state capital is under scrutiny and a candidate for takeover. The City of Trenton, NJ has long experienced operational and management difficulties. The state Department of Environmental Protection has cited the utility on multiple occasions in recent years for failing to ensure the safety of the 29 million gallons of water the utility delivers daily to 200,000 residents of Trenton and four adjacent townships. The state sued the city and utility in 2020, in a lawsuit joined by the impacted municipalities, for failing to pay for mandated upgrades.

In Mississippi, the situation reflects a real lack of support from the state. That reflects the realities of local and state politics. As suburban growth around Jackson continued, the remaining customer base became more concentrated among the city’s poorer (and let’s face it Blacker) population. The failure by management to address long standing infrastructure needs of the system make it vulnerable to operating and supply issues. The state’s neglect of the City and its water system was not at all benign.

The unwillingness of local utility officials to raise rates and address capital needs in Trenton has renewed calls for a new entity to operate and fund the City of Trenton water system. Now, state legislation is being offered that would establish an oversight commission to take control of the Trenton Water Works and monitor reforms. It would a create Mercer Regional Water Services Commission (Trenton is the county seat of Mercer County) would be created to oversee Trenton Water Works’ rate-setting, service quality, and infrastructure operations, as well as remediation measures to bring the utility into environmental compliance. State officials and leaders of the five municipalities served — Ewing, Hamilton, Hopewell, Lawrence, and Trenton — would comprise the bulk of the 17-member commission.

Water quality concerns drive the effort. There are issues with lead pipes as is the case with so many old utilities. Water quality was top of mind this summer when a study found 50% of homes serviced by Trenton Water Works in Hamilton tested positive for legionella bacteria, which can cause Legionnaires’ disease. The state sued the city and utility in 2020, in a lawsuit joined by the impacted municipalities, for failing to pay for mandated upgrades.

The City’s ability to help financially is limited. In August, Moody’s downgraded the City of Trenton, NJ’s outstanding general obligation bonds to Baa2 from Baa1. The outlook has been changed to negative from stable. The downgrade affects approximately $252 million in outstanding debt. Politics have overwhelmed the practical needs of the City.

The city council and the mayor have not only been unable to pass a budget for 2022, they were unable to agree to authorize debt service. The mayor publicly appealed to the state for assistance, which came in the form of a directive from the Division of Local Government Services (DLGS), ordering debt service to be made on time and in full. That is simply poor governance.

This brings us to an issue which some have raised in connection with utilities, especially water utilities. Many of the most publicized issues with municipal water systems have occurred in systems surrounded by weak economies. This has in turn led to those systems serving an increasingly poor and BIPOC population. This has led some to try to link ratings downgrades to race and imply that the rating agencies hold minority communities to different standards.

Over a five-decade career, I have had a hard time defending the rating agencies over many issues. This is one where the criticism is badly misplaced. Trenton, Birmingham, Newark, Flint, Detroit are all cities with significant water utility problems and yes, they all serve primarily BIPOC communities. But the other common threads are weak local resources and management (pass a budget on time) and an unwillingness to avail themselves of state assistance.

The lower ratings assigned to these credits usually have not been based solely on economics and demographics but on an inability to arrive at solutions by overcoming local politics. Rating agencies do not make rates, appoint management, or elect officials. These are weak credits as far as ratings are concerned.

PUERTO RICO HIGHWAY AUTHORITY DEBT RESTRUCTURING

Judge Laura Taylor Swain confirmed Wednesday the Puerto Rico Highway and Transportation Authority’s Plan of Adjustment (POA-HTA), a restructuring that -beyond cuts to the public debt- will require the public utility to reorganize its operations; will allow 30 years of consecutive toll increases adjusted to inflation; and will prepare the way to transfer all of Puerto Rico’s highways to private operators.

The plan cuts the agency’s debt by more than 80% and saves Puerto Rico more than $3 billion in debt service payments. HTA must establish a toll management office that is exclusively responsible for toll roads, separate responsibility for construction and maintenance between toll roads and non-toll roads, and transfer the Urban Train (Tren Urbano) to the Puerto Rico Integrated Transit Authority. The HTA Plan also requires HTA, during all times in which new HTA bonds (or refinancings thereof) remain outstanding, to maintain and comply with a debt management policy that imposes certain limitations on further borrowing after the plan becomes effective.

TAMPA TRANSIT STOPPED BY COURTS AGAIN

For the second time, efforts to get a transportation funding initiative off the Hillsborough County, FL ballot have been successful. (MCN 9.19.22). As was the case the first time, local anti-tax advocates seized on detailed ballot requirements to have the proposed removed from the ballot. Opponents have used the fact that the proposed ballot item would, if approved, violate requirements that the ultimate responsibility for identifying projects and allocating money lies with elected commissioners, not a pre-determined formula contained in the citizen-initiated referendum.

The ballot initiative was described as confusing so as to make voters think that approving the initiative meant approval for specific projects. Decide for yourself if the following was too “confusing”: “Should transportation improvements be funded throughout Hillsborough County, including Tampa, Plant City, Temple Terrace, Brandon, Riverview, Carrollwood, and Town ‘n’ Country, including projects that: Build and widen roads; Fix roads and bridges; Expand public transit options; fix potholes; Enhance bus services; Improve intersections;  Make walking and biking safer By levying a 1% sales surtax for 30 years and funds deposited in an audited trust fund with citizen oversight.”

Conservative activists use these challenges to defeat as many tax initiatives as they can. The arguments are never usually about the need for better roads and more public transit. They focus on procedural issues. The frustration in Tampa is that initiative backers relied on prior court actions when designing the second initiative. It is another example of ideology getting in the way of progress.

WHAT’S LEFT IN IAN’S WAKE

It is becoming clear that a lack of flood insurance is going to weigh on the recovery from Hurricane Ian in Florida. CNN did an analysis of data from the Federal Emergency Management Agency that shows how serious a situation it is. That analysis showed that some 25% of single-family homes in Lee County, by the coast, are covered by federal flood insurance. On Sanibel Island, about half of homes are covered. It is the inland counties where the lack of protection is highest – 4% of single-family homes in Seminole County, 3% of homes in Orange County and 2% of homes in Polk County are covered by flood insurance.

People without flood insurance will still be eligible for assistance payments from FEMA and any additional aid which might be approved by Congress. Those payments are not designed to replace flood insurance. In Seminole County more than 5,200 residential buildings have been damaged by the storm. Polk County has 3,000 buildings damaged in the storm, Orange County has 1,200, and Volusia County on the state’s eastern coast has at least 4,000 damaged.

The majority of the damage appears to be flooding related. Federal flood insurance limits payments for single-family home damage at $250,000 and contents of the home at $100,000. There will also be significant automobile losses adding to the cost burden for recovering residents. One bit of positive news. Moody’s says that Citizens Property Insurance Corporation can withstand damage claims. Citizens, an entity created by the Florida legislature that provides coverage for coastal properties, has the resources to withstand damage claims from Hurricane Ian. Florida Hurricane Catastrophe Fund’s reimbursement capped at $17 billion. Primary insurers will share a significant portion of the loss with The Florida State Board of Administration Finance Corporation (Florida Hurricane Catastrophe Fund, FHCF). The fund is well positioned to cover claims from Hurricane Ian because it has financial resources on hand that approximate its statutory reimbursement cap.

COAL TAKES ANOTHER HIT

The efforts of some to hold on with the last of their fingernails to the use of coal to generate electricity failed again. This time, the State of Montana failed to persuade a federal court that two newly-passed Montana laws intended to stop majority owners of Colstrip from closing the power plant were constitutional. The Court ruled that the laws violate the Commerce Clause and Contract Clause of the U.S. Constitution, as well as the Federal Arbitration Act.

The legislation authorized the state executive branch to issue $100,000-a-day fines or dictating maintenance and repairs the government finds necessary.  The federal court ruled that the laws served no legitimate purpose and instead attempted to thwart the business decisions of the power plant’s majority owners.

That interferes with efforts to negotiate financial issues stemming from the closure which is driven by the four out-of-state utilities which own 70% of capacity. The court concluded that SB 265 substantially impaired the rights of the Pacific Northwest owners under the Contract Clause of the U.S. Constitution, which prevents states from making law impairing the obligations of contracts.

MUNI UTILITIES MOVING FORWARD

Four Florida energy companies have signed agreements to join as members of the Southeast Energy Exchange Market (SEEM), effective Jan. 1, 2023. Two of the four are municipal utilities – the Jacksonville Electric Authority and Seminole Electric Cooperative – recently expressed their intent to join the expanded platform and expect active energy trading in mid-2023.

The platform is intended to facilitate sub-hourly, bilateral trading. This is designed to allow participants to buy and sell power close to the time the energy is consumed, utilizing available unreserved transmission. The two utilities join several municipal utilities which are founding members of the SEEM.  They include Associated Electric Cooperative, Dalton Utilities, MEAG, N.C. Municipal Power Agency No. 1, NCEMC, Oglethorpe Power Corp. and Santee Cooper.

NYC AND RESILIENCE

It will be ten years since Hurricane Sandy flooded Manhattan. The storm did some $19 billion worth of damage. The recovery was aided by some $15 billion of aid from the federal government. Now, the NYC Comptroller has released a report which documents how the City has used those resources. They can be viewed either positively or negatively. To us, they reflect the complex process of designing, approving, funding and financing capital projects in NYC. The fact that the money has been available has been no guaranty that the needed projects have been undertaken.

Of the $15 billion of federal grants appropriated for Sandy recovery and resilience, the City has spent $11 billion, or 73%, as of June 2022. The City has spent 66.2% of the nearly $10 billion in FEMA Sandy grants, and 92.4% of the $4.2 billion HUD CDBG-DR grants. The anticipated completion dates for some of the uncompleted Coastal Resiliency Projects are as far out as 2030. A major component ‘is the East Side Coastal Resiliency project (ESCR) which is expected to create a network of seawalls on existing parkland to protect Manhattan.

Four agencies received over a billion dollars each in FEMA grants: the New York City Housing Authority (83.5% spent), Health and Hospitals Corporation (45.3% spent), Department of Environmental Protection (58.8% spent), and Department of Parks and Recreation (61.8% spent). The report highlights one issue of import – the location of so much of the New York City Housing Authority’s housing stock which is vulnerable to flooding. Today, 17% of NYCHA’s buildings are in the 100-year floodplain; this number will grow to 26% by the mid-century.

On the private real estate side, In the past decade as new waterfront developments have steadily increased, market rate values of real estate in the 100-year floodplain have increased to over $176 billion – a 44% increase since Superstorm Sandy.

Rising tides and more frequent storms will put upwards of $242 billion (in current market value) at risk of coastal flooding by the 2050s – a 38% increase in value from today with Brooklyn experiencing the most dramatic increases in property values at risk in the coming decades. The tax lots in the current 100-year floodplain are estimated to generate $2.0 billion in annual property taxes. As the floodplain grows, more tax lots will be put at risk, threatening $3.1 billion in annual projected property tax revenues by the 2050s (using current property values).

HOSPITALS IN THE POST-COVID WORLD

This week’s poster child for the uncertain operating environment for hospitals is University Hospitals in Cleveland, OH. The A2 rated credit by Moody’s like many hospitals, confronts three primary sources of pressure – the aftermath of the pandemic, general inflation, and labor costs and availability. These three factors as well as the supply chain issues everyone is facing are pressuring hospital finances across the country.

University Hospitals operates an integrated network of 21 hospitals (including five joint ventures), more than 50 health centers and outpatient facilities, and over 200 physician offices in 16 counties throughout northern Ohio. The system reports a net operating loss of $184.6 million in the first eight months of 2022. To deal with the revenue shortfalls, the system has announced that it will lay off 100 administrative workers. It will also leave unfilled some 300 additional administrative jobs.

Utilization in the post-pandemic environment has been below what was expected at many institutions. This pressuring profits and more particularly impacting balance sheets. This is reflected in less favorable debt rations and declines in days cash on hand. It should not be a surprise that many hospitals were at least partially shielded from the full financial impacts of the pandemic. Only after massive injections of operating cash to hospitals slowed and ended did many of the impacts of the pandemic become clear.

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

PIGS AND ELECTRICITY

Next week, the U.S. Supreme Court hears oral arguments next week in a case about California’s Proposition 12, a law passed by Golden State voters in 2018 that requires that pork sold in California come from facilities where sows have pens that are at least large enough for the animals to turn around and stand up. In National Pork Producers Council v. California, the industry is challenging the law as being inconsistent with the dormant commerce clause, which bars state laws that hinder interstate commerce.

California is arguing that overturning the law would raise issues of states’ rights. The pork industry argues that the law has the practical impact of regulating out-of-state conduct [and] was impermissible under the dormant commerce clause. The petition effectively seeks to have the dormant commerce clause interpreted in such a way that would broaden its use. That may actually work against the pork producers. At least three of the justices are in record as being effectively against the clause.

The case has emerged as one with potential impacts on the energy sector. Laws which have the effect of regulating power suppliers in other states via state law – “extraterritoriality” – have been challenged before. The industry is concerned on a couple of levels. Clean energy advocates cite state laws and regulations governing utility operations as a major driver of renewable energy adoption. They fear that a win for the pork industry could undermine those efforts.

Some 30 states and the District of Columbia have Renewable portfolio standards (RPS) in place, according to the National Conference of State Legislatures. The Court has not had to rule on dormant commerce clause issues impacting the energy industry but at least one justice has. In 2015, Justice Neil Gorsuch ruled that Colorado’s RPS violated the dormant commerce clause because it required changes by out-of-state energy producers.

The pork producers will have to convince the Court that the law was designed to disadvantage non-California producers. The Biden administration has filed briefs in support of the pork industry. They took the position that California’s law does not directly benefit the state’s residents, as the state attorney general claims, unlike state statutes to prevent or limit environmental harm. The two are thus “not comparable.”

WINDY CITY BUDGET

Mayor Lori Lightfoot has proposed her executive budget for the City of Chicago in 2023. It has gotten attention because it deals with two politically fraught issues: taxes and pensions. The $16.4 billion budget plan does not include a property tax increase. That is a change from the last several years. Along with stable property tax rates, the mayor proposes to fund its pension system with contributions in excess of its annual actuarially required payment.

The extra payment is budgeted at $242 million. The City fully funded required contributions to all four pension funds for the first time ever in 2022. The 2023 budget would pay $2.6 billion, an increase of 15% from a year earlier. City revenues for 2023 are now expected to come in $260 million above an August projection. There is also a payment of $40 million from a casino operator which is being applied to pension funding. The pension funding would come at a time of poor investment results from equity and fixed income market performance.

The overall size of Lightfoot’s proposed 2023 budget is 1.3% smaller than the overall 2022 budget was. The mayor started from a stronger fiscal position with an anticipated estimated budget gap being lower especially relative to those in recent years. The 2022 budget gap was $733 million. The mayor was able to craft a budget with a beginning gap of $128 million.

The more solid position overall also occurs while spending for public safety is increased. Chicago’s main fund for city operations is the corporate fund. The police department’s budget would increase to $1.94 billion from $1.88 billion this year.

FEDERAL CARBON CAPTURE PROGRAM

The passage of the Inflation Reduction Act and its provisions impacting climate change has begun to manifest itself in program announcements. The latest comes from U.S. Department of Energy (DOE). DOE announced its $2.1 billion Carbon Dioxide Transportation Infrastructure Finance and Innovation (CIFIA) program. Enacted under the Infrastructure Law, CIFIA offers funding for large-capacity, shared carbon dioxide (CO2) transportation projects located in the United States.

Appropriated annually through 2026, CIFIA will support shared infrastructure projects, including pipelines, rail transport, ships and barges, and ground shipping, that connect anthropogenic sources of carbon with endpoints for its storage or utilization. The goal of the program is to provide economies of scale and help form an interconnected carbon management ecosystem that will enable commercial deployment of carbon management technologies. 

There is no doubt about the current federal view of carbon capture technology. “Carbon management technologies such as direct air capture, carbon capture from industry and power generation, carbon conversion, and CO2 transportation and storage technologies must be deployed at a large scale in the coming decades to meet the United States’ net-zero greenhouse gas goals by 2050.”

SALT RIVER PROJECT GOVERNANCE

While the debate goes on about what is and is not ESG investing, there continue to be clear examples of situations which should clearly raise issues with investors interested in one or more of the ESG trio. Our view is that the hardest one to find real examples of is in the governance sector. Governance, it seems, can be so broad and so subject to politics in the municipal space in particular that it is hard to find clear examples.

This isn’t about day-to-day management of an entity issuing municipal bonds. It is about the oversight and direction given by those charged with that responsibility. As politics have become more local and more heated, the potential for some activist participants to throw wrenches into the operating and management processes continues to grow. One recent example is the Salt River Project in Arizona.

SRP has been locked in a debate with environmental activists (of whom four are members of the SRP board) over the expansion of the utility’s natural gas fired generators. SRP initially wanted to expand an existing natural gas plant by placing 16 gas generators on a space at a site designed for said expansion. The plant is located in the “historically Black” municipality of Randolph.

Activists in the environmental movement were able to effectively accuse SRP of racism. The environmental justice and equity movement managed to convince state regulators not to approve the expansion at the Randolph site. So, that’s the end of the simple story? Guess again. After the proposed gas plants were rejected, the four “environmental” board members took it upon themselves to send an unsolicited letter demanding that the regulators not approve the plant.

The activists may have been acting as individuals but once an individual takes a position at a public agency, they have different issues that they may have to subsume in order to effectively carry out their responsibilities. A board member is expected to take a bit more nuanced approach especially from the inside. One has to ask how effective the move was now that the SRP Board has announced that the four members have been censured by majority vote of the board of directors.

There might be a cause to be made for opposing the plant and the environmental interests may have “won” by virtue of the fact that the utility has approved a significantly smaller natural gas project at its Copper Crossing solar plant in Florence . SRP had already purchased eight of the 16 gas turbines in anticipation of Coolidge expansion approval. And the resolution of the environmental justice and equity issues? The cities of Florence and Randolph are within a couple of miles of each other so unless the winds stop blowing…

EV HEADLINES

The old General Motors small-car assembly plant in Lordstown, Ohio became a symbol of economic politics in the 2016 election cycle. The plant had been shut down and residents were highly concerned about their economic outlook. Then candidate Trump went to Lordstown and advised residents not to sell their houses because there was a plan to rejuvenate the plant.

Six years and an administration later, the Lordstown site has returned to the production of motor vehicles. Commercial electric vehicle startup Lordstown Motors says it has slowly started production of its first model, the Endurance pickup. The Foxconn backed entity has produced its first three trucks and plans to begin a slow rollout of some 450 trucks in the first half of 2023.

The company will obviously need more capital to fund expansion but it had nearly $200 million of available assets to fund operations.

Rivian reports that it produced 7,363 vehicles at its manufacturing facility in Normal, Illinois and delivered 6,584 vehicles in the quarter ended Sept. 30. At roughly the same time, the local community college announced the construction of a facility designed to train workers for the electric vehicle industry.

LITHIUM SETBACK

There has been much attention focused on the extraction of lithium, a key component of the emerging electrified economy, through mining. The usual concerns regarding mining have been expressed. In addition, the locations of many potential sources of lithium are located on culturally significant lands in the American West including many Native American burial grounds. Those issues have led to lawsuits and delays around a prime source of lithium in Nevada.

The key role of lithium in battery development has driven extraction activities to places like the Salton Sea in California. There Berkshire Hathaway planned its facility to extract lithium from the brine in the Salton Sea. Berkshire already operates multiple power plants near the Sea where it flashes steam off brines brought from deep underground at temperatures around 700°F (371°C) to spin turbines that produce electricity. Technology for an extra processing step could be connected to one of the existing plants to extract lithium before the brine is reinjected underground. 

The State of California and the federal government both have provided grants to Berkshire for their lithium development effort. The federal grants were subject to a final negotiation process. The State grant was supposed to help during the development of the process of separating out the lithium from the brine.

The federal grant was meant to aid the development of one lithium-based product. Thirteen months after the process started, the federal grant was withdrawn in March of this year. Now issues are emerging with the lithium extraction process. The very heat which made the Salton Sea an attractive geothermal power source is apparently not compatible with the production equipment needed for the right lithium product.  

COLORADO RIVER

The Metropolitan Water District of Southern California, Imperial Irrigation District, Coachella Valley Water District and Palo Verde Irrigation District – proposed cutting their annual allotment of river water by 400,000-acre feet, or around 130 billion gallons. It is all part of the effort to reduce usage of Colorado River water by between 2 and 4 million gallons per year. In June, the federal government set a deadline for the states in the “lower basin” to craft an agreement to reduce their water usage. When the deadline for a new plan passed in August, the federal government announced that the river was in a Tier 2 shortage condition for the first time in its history.

The shortage declaration means Arizona, Nevada and Mexico will have to further reduce their water usage beginning in January. Of the impacted states, Arizona will face the largest additional cuts – 592,000 acre-feet – or approximately 21% of the state’s yearly allotment of river water. The number from the water agencies isn’t a final offer, and could change depending on what kind of federal money is available to the agencies under the Inflation reduction Act.

CONGESTION PRICING FACES PRESSURE

New Jersey Governor Murphy has let it be known that he has lobbied at the highest levels – with the President – about his issues with the proposed congestion pricing plan under consideration by New York City. The specific ask – that the federal government complete a full environmental impact study before the new tolls are implemented. Such a study would be welcomed not only by New Jersey commuters but also by residents of the Bronx where much truck traffic would be diverted.

Other concerns from west of the Hudson include the lack of real consultation with a significant potential source of expected revenue. It already costs $16 to cross into NYC via the three Hudson River crossings into Manhattan. Other issues include the inability of the existing mass transit infrastructure to handle extra riders. The environment is also hardened by some childish moves by legislators in both states.

Ridership on New Jersey Transit trains is estimated to have risen to 60% of prepandemic levels but the agency does not expect it to fully recover for several years. The Port Authority’s PATH trains are also carrying about 60% percent of its prepandemic passenger loads.

MORE ESG PERFORMANCE ART

The State Treasurer of Louisiana has announced the withdrawal of state funds from Blackrock. The move is another example of the sort of performance art which has characterized the debate over climate change. The Treasurer is expected to run for Governor next year and ESG investing is shaping up as a campaign issue. The Treasurer’s announcement seems to cover significant assets – Louisiana had already removed $560 million from BlackRock investments from its treasury fund and that $794 million will be divested by the end of 2022. The treasurer’s decision affects day-to-day state deposits and transactions.

Tellingly, the Treasurer’s announcement does not cover the state’s pension assets. While $1.2 billion of funds is not insignificant, the real goal of anti-ESG state financial officers is to take pension funds away from fund managers who do not toe the anti-ESG line. That probably not be enough to satisfy the anti-ESG movement which is being driven by the right-wing group, the American Legislative Exchange Council (ALEC).  ALEC has written “model legislation” it says will help states protect their pension funds from “politically driven investment strategies.”

The moves come in the midst of a significant debate over proposed SEC rules which would require reporting entities to support their claims regarding ESG in regular scheduled financial disclosures. Those plans have received howls of protest from issuers including many in the municipal bond market. Then again, most efforts to improve disclosure over the last four decades have been met by howls of protest.

The announcement came at virtually the same time as another major power generator – Duke Energy – announced a program to expand access to renewable sources of electricity in South Carolina. The program addresses a straightforward business concern. Duke cites the fact that “a majority of South Carolina’s leading employers have explicit decarbonization goals, and the carbon intensity of electricity suppliers is top-of-mind for economic development prospects too.” 

Duke’s plan would enable large-load customers to contract with either of Duke Energy’s South Carolina utilities to provide locally sourced environmental attributes, including renewable energy certificates (REC), generated from both utility-owned generation assets as well as third-party owned generation assets and could include energy-storage options. The fact that the plan is the result of customer input simply highlights the political nature of efforts to fight adaptation to climate change.

In New Jersey, a state Senate committee voted to advance a bill to force the State pension funds to divest from any investments in the fossil fuel sector. The state has an established history of divestiture reflecting politics of the day. It has laws which require requires state pension funds to divest from businesses that boycott Israel. The state has also moved to divest from gun manufacturers, the owner of Ben and Jerry’s over boycotts of Israel, and companies which has invested in South Africa. 

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.