Joseph Krist

Publisher

This is effectively a double issue of the MCN. Our next issue will be the December 5, 2022 issue.

This week finds two of the major issuance and credit entities providing updated credit information. NYC saw Mayor Adams issue the November 2022 Update to the City’s five-year Financial Plan. The California Legislative Office issued a new update to its outlook for the State’s finances. Bankruptcy is in the news as the City of Chester, PA declared Chapter 9 and FTX the crypto exchange and arena sponsor chose the Chapter 11 route. The cost of the immigration stunts pulled by southern governors is becoming clearer in NYC.

As usual, we see lots going on in the power generation sector. Austin, TX is in the midst of a serious debate over rates. We see the role of solar in grid resilience and two public agency-owned nuclear power plants will participate in a pilot project to produce hydrogen. Several municipal utilities find themselves in the middle of the swirl of issues stemming from the western U.S. drought.

The Port of Los Angeles gets an upgrade 25 years in the making. Two midwestern cities are piloting various forms of income support programs. Enjoy the most universal American holiday on Thanksgiving.

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NYC FINANCIAL PLAN UPDATE

The latest financial update to the City’s financial plan was not exactly filled with good news. The impacts of the pandemic remain, the city economy has been slow to return to its pre-pandemic state, and the performance of the financial markets largely negative. So, it is no surprise that City officials disclosed that they were now projecting a combined budget gap of $13.4 billion for the next three fiscal years, compared with the $12 billion the city projected in June. The City attributes the growing gap to the travails of the financial markets. The impact from the markets is direct in terms of trading activity and pay but also has implications for future funding of pensions costs by the city.

The update comes as the state comptroller released a report highlighting the difficulties the city faces in recovering from the pandemic. The city’s full-time workforce declined by 19,113 employees over the last two years, the largest decline in staffing since the Great Recession of 2008. Despite the city hiring over 40,000 new employees in the last fiscal year, city job vacancies stand at more than 21,000.

The 6.4% decrease in the city’s workforce during the pandemic was found to be uneven across its 37 largest agencies, with 11 experiencing a decline in staffing of more than 13%. The Department of Correction had the greatest loss of employees with a 23.6% decline, followed by the Department of Investigation at 22.2% and the Taxi & Limousine Commission at 20.5%.

The ongoing issues facing the city in regard to public safety and homelessness only highlight the unplanned nature of some of the reductions in headcount. The Police Department (6.7%), Department of Social Services (13.7%), and Administration for Children’s Services (15.6%) accounted for more than half of the citywide workforce decline from June 2020 to August 2022.  Divisions within Social Services, Education, Parks and Recreation, Homeless Services, and Mental Health and Hygiene had the highest vacancy rates of more than 20%. 

The city’s current financial plan looks to fill 24,969 positions by fiscal year 2023. In October, more than half of the city’s major agencies had external job postings for at least 20% of their openings, while other major agencies did not show significant efforts to hire as of October 2022.

IS REAL LIFE RETURNING TO STATE BUDGETS?

The massive infusion of federal aid to lower levels of government to deal with the costs of response to the pandemic was the clear factor supporting state credits. It allowed all but one state to avoid borrowing from the Federal Reserve. It also provided a pool of cash to legislators whose existence is based on the ability to deliver government funded services. Across many jurisdictions, the cash funded either new or expanded service initiatives which required long-term sources of revenue. That has been a huge caution light when looking at the states.

Now, we see the first signs of the potential impact of removing the fiscal punchbowl. The State of California’s Legislative Analyst’s Office has released a report warning of potential shortfalls in revenues and a growing budget gap. Reflecting the threat of a recession, the LAO revenue estimates represent the weakest performance the state has experienced since the Great Recession. The result is the Legislature could face a budget problem of $25 billion in 2023‑24. The budget problem is mainly attributable to lower revenue estimates, which are lower than budget act projections from 2021‑22 through 2023‑24 by $41 billion. 

The $25 billion budget gap in 2023‑24 is roughly equivalent to the amount of general‑purpose reserves that the Legislature could have available to allocate to General Fund programs ($23 billion). Based on historical experience, should a recession occur soon, revenues could be $30 billion to $50 billion below the LAO revenue outlook in the budget window. LAO anticipates anticipate revenues will decline between 2021‑22 and 2022‑23 by more than the budget act anticipated, but then remain largely flat between 2022‑23 and 2024‑25, before growing again in the last two years of the outlook.

CHESTER CHAPTER 9

The latest distressed municipality to try the bankruptcy option is the City of Chester, PA. This industrial suburb of Philadelphia is a poster child for the example of historically disadvantaged cities. The City was admitted to the Commonwealth of Pennsylvania’s Distressed Municipalities program under the well-known Act 47 in 1995. A quarter century later a fiscal emergency was declared by the Governor. Now, the city, under the guidance of a state overseer has filed for Chapter 9 bankruptcy.

Chester has long had much working against it. The major industrial development of the late 20^th century in Chester was a refuse to energy plant which served the city and the surrounding area. The concurrent economic decline only damaged the city’s direct revenue generating abilities. At the same time, the City was run poorly even under the best of circumstances. Expenses were delayed or not paid including nearly $40 million of required payments to fund pensions. Even the state overseer has noted the lack of information or concealment of information by city financial officers. His office has expressed frustration at city officials for what is described as a lack of cooperation while trying to get finances in order. 

The city paints a dire picture of layoffs, pension reductions, service reductions. Employees blame “Wall Street” or the state or anything else that doesn’t reflect on their city managers. And yes, the issue of race will overhang the discussions. Chester is an example of the results of years of issues now generally grouped under the heading of equity. If the recent pattern of bankruptcy resolutions holds up the pensioners will take a smaller haircut than will any holders of the city’s debt. In the meantime, it remains to be seen if the Commonwealth will challenge the bankruptcy filing as it did in the case of the City of Harrisburg.

FTX AND MIAMI

Cryptocurrency was having its moment a couple of years ago and some municipal officials embraced it with a real level of gusto. As the pandemic unfolded, a variety of events and factors served to draw a number of participants in the cryptocurrency industry to the City of Miami. The Mayor of Miami has been the leading advocate not only seeking to attract traders and exchanges to the city but also advocating for paying workers in crypto and even investing city funds in cryptocurrency. Through earlier ups and downs in the value of crypto, the Mayor remained a steadfast advocate.

That led one player in the industry to locate in Miami and as was the practice of that player, take a number of steps to insinuate themselves into the community in very prominent ways. That is why the naming rights to the arena which serves as the home of the Miami Heat of the NBA were sold earlier last year to FTX. Yes, that FTX – the one which spectacularly flamed out last week. The immediate impact is on the Miami Arena which had barely gotten the name up over the entrance when it had to be taken down. Those naming rights will now be reauctioned.

It could just be that Miami is the place for trendy products or industries to die at least when it comes to naming rights. It’s easy to forget the Blockbuster Bowl games in the 90’s in then Joe Robbie Stadium. The arena had been called the FTX Arena since June 2021. The naming agreement had a 19-year term and was projected to produce $90 million over the term of the lease for Dade County. It just repeats a pattern seen over the years.

BEHIND THE IMMIGRATION STUNTS

Nothing stimulates debate like the issue of immigration. It is a subject that increasingly becomes more emotional and apocalyptic by the day. The issue has gotten much attention in NYC where the asylum seeker phenomenon has been in full view. Whether it is tent cities in the Bronx or in the middle of the East River, the issue is not going away under the current national immigration scheme. Lost in all the political hyperbole are facts about what this is actually costing NYC.

Once again, the City’s Independent Budget Office (IBO) has stepped in to fill the breach. A new report notes that as of early November, the Adams administration reported that 23,800 asylum seekers have arrived in New York City, in most cases looking to escape economic and civil unrest in their home countries—Venezuela in particular.  Based on the number of asylum seekers who had arrived as of early November, IBO estimates that the city will spend at least $596 million over the course of a year. 

That figure covers costs related to shelter stays, public schools, basic health services, and some legal assistance. The number just covers those who have arrived to date. Additional costs can be estimated but vary widely based on who is getting the help (individuals versus families). For example, individual cost estimates could range from about $1,900 for an individual who does not enter the city’s shelter system and receives some health and basic legal services to nearly $93,000 for a family of four who enters a shelter for a year and has two children enrolled in the city’s public schools, along with receiving some health and basic legal services.

IBO’s best estimate is that another 10,000 asylum seekers locating to NYC could generate additional expenses of some $246 million.

SOLAR AND BLACKOUTS

A newly released study by the US Energy Information Administration showed that while 2021 recorded the third highest rate of total annual electric power outages since 2013, state markets with a high rate of rooftop solar adoption have shown to have the shortest timeframe for recovery from outages and higher grid resiliency. The EIA study found that increasing solar states such as Florida, Delaware, the District of Columbia and Nevada, experienced outages ranging from 52 minutes to 102 minutes in the most recent year.  That contrasts to states with prohibitive solar and net metering incentives, such as West Virginia, Louisiana and Mississippi, which saw power outages stretch from 19 hours to more than 3 days.

The US experienced a record number or 21 named storms in 2021, the third-most active Atlantic weather season on record. In addition to four major hurricanes in 2021, a winter storm affected the Midwest and Southeast as far south as Texas. Customers in Louisiana, Oregon, Texas, Mississippi, and West Virginia experienced the most time with interrupted power in 2021, ranging from almost 19 hours in West Virginia to over 80 hours in Louisiana. Louisiana also had the highest number of power interruptions, followed by Texas.

AUSTIN ELECTRIC

Austin, TX and its electric system were heavily impacted by the electric distribution disaster that was Texas in February 2021. The city’s municipal electric system is now trying to restore the utility’s financial position which was impacted by the higher purchased power costs resulting from February 2021. The city council is now considering rate increase proposals to address the utility’s diminished financial position.

The rapid spike in costs led Austin Energy to consistently over the past two years drawdown $90 million from its reserves. This led to two downgrades of its debt rating, from AA to AA minus. Now it is asking to recover an additional $35.7 million in base rates largely through residential consumers. That has led to serious opposition. An alternative proposal from some stakeholder groups would raise the fixed residential fee to no more than $12 per month rather than Austin Energy’s proposed $25. That would result in a new lower revenue requirement from $35.7 million to just $12 million.

The base rate request follows the approval just one month ago of an increase in a pass-through charge, This is intended to cover an estimated $104 million in operating costs incurred by the utility over the last year. The approved increase for average customers starting Nov. 1 was $15 a month. The regulatory process has seen Austin’s rate proposals successfully challenged before. In the settlement of Austin Energy’s own 2016 base rate review, the Council approved a revenue requirement that was $25 million lower than Austin Energy originally requested.

The cost of power in Texas in the wake of the 2021 freeze has become a real issue. The Census Bureau reports that 45% of residents said they had to forgo spending on basic necessities, such as food and medicine, in order to pay their energy bills. Texas ranked worst among all states and its reported rate was 11 percentage points higher than the national average of 34%.

NUCLEAR GOES HYDROGEN

The U.S. Department of Energy (DOE) is partnering with utilities on four hydrogen demonstration projects at U.S. nuclear power plants. Hydrogen would be produced at the nuclear plants through high- or low-temperature electrolysis, a process of splitting water into pure hydrogen and oxygen. High-temperature electrolyzers use both heat and electricity to split water and are more efficient.

The selected plants are among the most well-known and longest operating nuclear generation plants in the country. Two of them have been the subject of subsidy payments to enhance the economics of continuing to generate nuclear power and two were owned at one time by municipal power agencies. DOE is supporting the construction and installation of a low-temperature electrolysis system at the Nine Mile Point station in Oswego, New York. Nine Mile Point would be the first nuclear-powered clean hydrogen production facility in the U.S. and would also use the hydrogen to help cool the plant. The former NY Power Authority owned plant is the oldest operating plant in the country.

The second plant which formerly had municipal utility ownership to participate in the hydrogen is the Palo Verde plant in AZ. DOE is negotiating an award with Arizona Public Service (APS) and PNW Hydrogen to demonstrate another low-temperature electrolysis system at the Palo Verde Generating Station. The hydrogen will be used to produce electricity during times of high demand or to make chemicals and other fuels.

DOE is continuing to support the development and maturation of clean hydrogen production, including funding for six to ten regional clean hydrogen hubs across the United States through the Bipartisan Infrastructure Law. At least one of the hubs will be focused on clean hydrogen production using nuclear energy.  Additional funding, through the Inflation Reduction Act, will be available to support clean hydrogen production via tax credits that will award up to $3/kg for low carbon hydrogen.

MORE ELECTION UPDATES

South Carolina will see its rainy-day fund showered with enough funding to increase the required level under the state’s constitution. Voters approved two constitutional amendments requiring the state to increase its budgetary reserves to 10% of prior-year revenue from the current 7%. They apply collectively to the state’s rainy-day funds — the General Reserve Fund (GRF) and Capital Reserve Fund (CRF). The higher required reserve level is an obvious positive rating factor.

The amendments boost the budget reserve funds’ required amounts as a share of state revenue, which are determined using the most recently completed fiscal year. The GRF’s requirement will rise over four years to 7% from 5% of revenue, and the Capital Reserve Fund’s will immediately grow to 3% from 2%. Balances required by the amendments as of 30 June 2022, would amount to approximately $918 million — an increase of $274 million above prior requirements.

San Francisco voters did not do the City’s GO credit any favors through approval of two ballot items. Proposition G requires the city to appropriate money to SFUSD based on estimates of the city’s excess Educational Revenue Augmentation Fund (ERAF) revenues, money remitted back to the city after it meets certain unique school district funding requirements. The city controller estimates appropriations will grow from $11 million in fiscal 2023-24 to $35 million in 2024-25 and $45 million in 2025-26.

Voters approved a second ballot measure to increase pension cost-of-living adjustments (COLAs) awarded to a subset of retirees by removing a conditional requirement tied to the funded status of the San Francisco Employees’ Retirement System (SFERS). Beginning 1 July 2023, San Francisco’s annual pension contribution requirements will rise by roughly $8 million annually for 10 years as a result of Proposition A’s approval.

COAL AND WATER

Arizona State University researchers recently addressed the issue of power generation and water supplies. Their report summarizes findings from extensive research to identify and describe the amount, source, and ownership of water rights used by coal-fired power plants and coal mines throughout the Colorado River Basin. There are currently about 37 coal-fired power plants and coal mines in the Colorado River Basin. These plants and mines are located in five states—Arizona, Colorado, New Mexico, Utah and Wyoming—and together they withdraw an estimated 131,130 acre-feet of water each year. Coal plants use the vast majority of this water, about 130,000 acre-feet per year, while coal mines collectively use a modest 1,130 acre-feet.

There are plants owned by public power agencies and cooperatives that are analyzed in the report. Salt River Project (“SRP”), an Arizona-based utility, owns coal water rights that entitle it to around 100,000 acre-feet of surface water each year in Arizona and Colorado. Coronado Generating Station is owned by SRP and located near St. Johns. Coronado used about 5,200 acre-feet of water in 2020, all of which came from about 30 groundwater wells with a combined pumping capacity of 44,000 acre-feet annually. All of the wells are owned by SRP.

Craig Generating Station in Colorado is owned by Tri-State G&T, PacifiCorp, Platte River Power Authority (“PRP”), SRP and the Public Service Company of Colorado (“PSCC”) and is located near Craig, Colorado. It used about 13,300 acre-feet of water for cooling purposes in 2020. According to the EIA, all this water was surface water from the Yampa River. In New Mexico, Four Corners Power Plant is owned by APS, Pinnacle West, SRP, TEP and the Public Service Company of New Mexico (PNM) and is located near Fruitland, on land leased from the Navajo Nation. According to EIA data, the power plant used about 17,000 acre-feet of water for power generation and cooling in 2020, all from the San Juan River.

In Utah, Hunter Power Plant is owned by Utah Associations Power Systems, Deseret Power Electric Co-op, Provo City and PacifiCorp and located near Castle Dale. The plant used about 16,400 acre-feet of water in 2021. It gets its water from Cottonwood Creek in Utah. Bonanza Plant is owned by Utah Municipal Power Agency and Deseret Generation & Transmission Co. (“Deseret G&T”) and is located near Vernal.

The plant used 5,442 acre-feet of water in 2021. As the EIA correctly reports, Bonanza Plant gets all this water from the Green River, under a water right jointly owned by Deseret G&T and the Utah Municipal Power Agency with a capacity of 10,859.5 acre-feet per year. Deseret G&T also owns another water right in the area entitling it to an additional 10,859.5 acre-feet of water per year, but it is not clear whether this right is used at Bonanza Plant.

Intermountain Power Plant is owned by Intermountain Power Agency and is located near Delta. It used about 7,233 acre-feet of water in 2020. The mine gets its water rights from over a dozen water rights, all owned in whole or in part by Intermountain Power Agency, with a total capacity of 15,300 acre-feet per year. Intermountain Power Plant is not within the Colorado River Basin, but it is near the Basin’s boundary, such that its water use could impact Basin water resources.

Just two of the largest water users on the list account for enough water each year to fill the requirements of some 100,000 homes. In a part of the country where every drop matters that puts users like these at the center of the Colorado River water debate. SRP increasingly finds itself at the center of the conflicting forces driving the climate debate. The utility maintains ownership shares of three of these plants and their associated water rights. It has also gone through a bruising process over siting a gas generation expansion. It also has lobbied against net metering rules in AZ which might raise or maintain current price requirements for excess power taken from solar users.

PORT OF LOS ANGELES

Over the past few years, the Port of Los Angeles has been at the center of many of the issues confronting port operators and providers – trade volumes, pressure to reduce pollution, pressures to implement automated operations and the historic relationship between ports and the unions representing various labor interests at the port. It created a challenging operating environment in the best of times. The pandemic raised a host of concerns – pressures on trade activities; delayed offloading as pandemic restrictions led to container backups and the potential for substantial labor disruptions through 2022 – which could have a negative credit impact.

Cargo volume at the Port of Los Angeles dropped in October as the Port handled 678,429 Twenty-Foot Equivalent Units (TEUs), a 25% decrease from October 2021. The Port of Los Angeles has processed 8,542,944 TEUs during the first 10 months of 2022, about 6% down from last year’s record pace. Our concerns over labor issues are acknowledged by the Port. “Cargo has shifted away from the West Coast as some shippers await the conclusion of labor contract negotiations. “With cargo owners bringing goods in early this year, our peak season was in June and July instead of September and October.”

This week, the efforts of Port management to handle these coincident pressures paid off in an upgrade. The Port of Los Angeles has been upgraded to an AA+ bond rating with stable outlook on its outstanding bonds by Standards & Poor’s (S&P), the highest rating given to a seaport without taxing authority. “Trade tensions with China have not resulted in weaker financial performance, and supply chain disruptions and congestion have somewhat subsided, thereby mitigating operational challenges.”

S&P also cited the Port’s continued strong business position, stable portfolio of assets and excellent historical financial performance as factors contributing to the rating. Prior to its AA+ upgrade, the Port of Los Angeles maintained an AA rating with S&P since 1996. 

INCOME EXPERIMENT

The Toledo, OH City Council approved a plan which would allow the City to apply a portion of COVID related federal funding to reduce at least one category of student debt. COVID-19 Stimulus Package, which gave $800,000 to Toledo for emergency funding and relief. Lucas County had agreed it would then contribute an additional $800,000, bringing the total to $1.6 million. Those proceeds would be used by city government to buy medical debt through the nonprofit RIP Medical Debt, an organization that specializes in purchasing “bundled medical debt portfolios on the secondary debt market.

It comes after the City of Chicago approved its own plan in July of this year along similar lines with Cook County participating as well. The Illinois plan hopes to erase $1 billion in debt with RIP Medical Debt, using the $12 million in federal funding provided to them. To qualify, the debtor has to earn less than four times the federal poverty level, and the amount of the debts are 5% or more of their annual income. 

PROPOSED HOSPITAL MERGER

Sanford Health and Fairview Health signed a non-binding letter of intent to combine the two regional health systems based in South Dakota and Minneapolis. The goal is to conclude a merger by the end of 2023. It is not the first time that such a merger was proposed. In 2013, the two systems proposed a merger only to have it shot down by Minnesota regulators over competition issues.

The resulting parent company, with more than 78,000 employees and dozens of hospitals, would be Sanford Health and be operated out of South Dakota. The idea is to bring a generally rural patient base and link it to a significant metropolitan base. The rural hospital sector continues to get pummeled, especially in the wake of the pandemic. Fairview’s hospitals are generally based in the Twin Cities, including the University of Minnesota Medical Center.

Sanford is rated A+ by Standard and Poor’s. Fairview’s A3 Moody’s rating had a negative outlook. The institutions generated similar levels of pre-pandemic revenues and they share characteristics such as the operation of senior care facilities and they have significant presence in their home states. There are a number of stumbling blocks to be overcome as there has been historically opposition to a merger which might give control of the U of M medical center to a non-Minnesota entity.

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

THE VOTE

It will be hard to know the true implications for federal infrastructure policy of the election until control of the Senate is established. On the House side, it shapes up as a lot of investigating and media stunts so nothing gets done. That leaves the local results to give us clues. Our 10.31.22 edition outlined many of the issues on the ballot.

The NY legislature supermajority was lost. That will temper some of the zeal on the left which has implications for a variety of programs. Congestion pricing and cannabis regulation are two which come to mind.

Speaking of cannabis, Missouri and Maryland passed legalization initiatives. The other three states where weed was on the ballot saw it go down to defeat. Arkansas and North Dakota were not a surprise but South Dakota hasd already legalized in 2020 only to see the courts overturn legalization. Opposition was much better organized this time around and it was not an off-year election so the environment was less favorable.

Millionaire’s taxes resulted in a split decision. California rejected its plan while Massachusetts voters approved their proposal. Efforts to make it harder for ballot initiatives were defeated in Arkansas.  

Medicaid expansion continued its broad support. South Dakota voters approved a constitutional amendment that would extend Medicaid eligibility under the Affordable Care Act. Anybody making less than 133 percent of the federal poverty level (about $18,000 for an individual or $36,900 for a family of four) would qualify for Medicaid coverage. An estimated 45,000 South Dakotans would be covered by the expansion including some 14,000 Native Americans.

Taxes to support efforts by municipalities to decarbonize were supported in Denver and Boulder, CO. Taxes to fund transit projects had mixed results. In California, transit taxes were supported in San Francisco and Sacramento but they failed in three other counties. Arizona saw Pinal County’s tax proposal defeated. In Florida, three counties saw tax increase proposals go down to defeat. One was the Hillsborough County referendum which has been the subject of numerous legal efforts to keep the item off of the ballot. (MCN 10.31.22) Transit related initiatives were supported in Texas and the Carolinas. In Michigan, metro Detroit voters supported three transit tax increases. Ann Arbor voters supported a tax increase to fund climate change adaptation.

NATIVE AMERICAN WATER RIGHTS

The Supreme Court agreed to hear a dispute between the Navajo Nation, the Biden administration and the states of Arizona, Nevada and Colorado. The Navajo tribe is asking the federal government to determine that it has the right to waters from the Colorado River. In 1964, the Court issued a decree partially apportioning the waters of the Colorado River among several states and five Indian tribes, not including the Navajo Nation, represented by the United States as trustee. The Navajo Reservation stretches into Arizona, New Mexico, and Utah, and is located almost entirely within the Colorado River Basin. The Colorado River forms a large part of the Reservation’s western border.

The United States both failed to assert a claim to the Colorado’s mainstream on behalf of the Nation and successfully opposed the Nation’s attempt to assert such a claim on its own behalf. The Court thus did not adjudicate the Nation’s rights to the Colorado. Now, the Navajo are seeking to have its claim to water rights from the Colorado. The litigation brings together the already pressured position of the three states which comprise the lower basin and those of the Navajo Nation. It will be heard amid the ongoing efforts by the Federal government to reach agreements with lower basin water consumers in the face of the two-decade old drought drying out the Colorado.

The questions presented are: Whether the lower courts had jurisdiction over the Navajo Nation’s breach-of-trust claim seeking an order requiring the United States to assess and develop a plan to meet the Nation’s water needs, but not a judicial quantification of the Nation’s rights to Colorado River water, or whether this Court has exclusive jurisdiction under the Consolidated Decree. And whether, given the United States’ promise to provide the Navajo Nation sufficient water by entering into the treaties establishing the Navajo Reservation, coupled with the government’s nearly exclusive statutory and regulatory control over the Colorado River, the United States owes the Navajo Nation a fiduciary duty to assess the Nation’s water needs and develop a plan to meet them.

Given the ongoing “negotiations”, the opposition to the suit by the Lower Basin states is not surprising. They are already under pressure and an “additional” straw in the river would only cause losses for other users. The Colorado has begun a less than zero sum game. It is more an issue of limiting lost resources.

NATIVE AMERICANS AND CLIMATE CHANGE

The Bureau of Indian Affairs has announced that it will give money to five Native American tribes to help them relocate away from rivers and coastlines. The funding will go to three tribes in Alaska and two in Washington State. It is distinguished from other relocation programs in that it is not tied to a disaster event. Rather, it is a limited test of the concept of managed retreat.

One tribe will get $2.1 million to help replace its aging health clinic with a new building on higher land, farther from the Pacific. Other payments to other tribes will provide funding to move between 15 and 20 homes in their villages. It was a popular plan with some 11 tribes applying for relocation funding under the new $130 million program.

While small in scope, the program provides a test of the managed retreat theory. If it is seen as successful, managed retreat will likely become part of overall disaster response and management. As flooding becomes more frequent and serious, the ability of property owners to rebuild on site will be limited. Relocation will become more cost efficient than paying claims on federal flood insurance claims. It is all part of a comprehensive approach to disaster management comprising prevention, remediation, and relocation.

MUNI UTILITIES, RATES AND GOVERNANCE

Municipal utilities across the country have long been seen as sources of revenue for municipal governments. That tactic causes utilities to set rates which generate surplus utility revenues to keep residential property tax rates lower than they would be. That is how the practice is justified when it requires what should be a cost-based utility to levy rates in excess of needs. That trade off has made the practice acceptable to many ratepayers. When municipal utilities generate excess revenues for purpose other than to support general government, it raises issues.

The latest example comes from Clearwater, FL. Municipally owned Clearwater Gas is the only option for residents and businesses in north Pinellas and west Pasco counties for gas water heaters, cooking ranges, dryers and other appliances. It operates as a monopoly under state law. With wild fluctuations in natural gas prices, utilities like Clearwater Gas get more attention than they generally experience. That attention has been focused recently on Clearwater Gas’ use of customer revenues to “promote” the utility.

The Florida Public Service Commission the commission prohibits using funds from rates for promotions related to “image enhancing,” according to state statute. A Tampa Bay Times analysis found that Clearwater Gas spends substantially more on activities which could be considered by some to be “promotional” than any of the other 26 municipally-owned utilities in Florida. It includes “charitable” contributions tied to promotions of the utility as well as the use of facilities like suites at spring training games. Clearwater Gas has paid the Philadelphia Phillies $359,000 since 2015 in exchange for the stadium suite, food and drinks, and the Clearwater Gas logo displayed on the scoreboard and pamphlets.

The problem is that Clearwater Gas has taken the promotional effort to levels well beyond those of the other six municipal utilities in the state which fund “sponsorship” programs. How far beyond? Try eight and a half times the total spending on promotion by the next most profligate utility. It’s $2.2 million. Now, Clearwater Gas returns a dividend each year to the city’s general fund which is required by policy to be at least 50 percent of net income. Clearwater Gas has returned to the city an average of $3.3 million every year since 2015.

The ongoing issues around natural gas prices and their increasing role in higher utility rates has focused attention on utility rates, spending, sources of supply. At the same time, climate pressures in Florida are driving demands for non-fossil fuel generation. The promotional efforts by Clearwater Gas to drive more natural gas use and less electrification fly in the face of climate mitigation efforts. It competes with those who wish to use residential solar but face pressure from utilities who are trying to lower net metering payments.

Now, the mayor of Clearwater has sought to exert more oversight over the utility’s promotional activities. Clearwater Gas cannot provide information on who benefits from things like the suite, tickets to cultural events and golf tournaments. That is a governance issue which should concern all stakeholders.

NYC AND COVID FUNDING

Just over $13.5 billion in federal Covid-19 stimulus funds have been made available to New York City. This is comprised of $5.9 billion in unrestricted State and Local Fiscal Relief Funds from the American Rescue Plan Act of 2021 (ARPA-SLFRF) and $7.2 billion in restricted education aid. Of the dedicated education funding, $4.8 billion is authorized through ARPA (ARPA Education) and $2.4 billion is through the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (CRRSAA).

The education stimulus is mostly earmarked for spending by the city’s Department of Education (DOE), with some funds restricted for the City University of New York (CUNY). The city has also received some smaller awards, totaling around $380 million for transportation, remote learning technology, and Section 8 housing vouchers.

As of the close of fiscal year 2022, the city has claimed more than $6.9 billion in these stimulus funds to cover costs, per the city’s Financial Management System. This includes $1.2 billion in FY 2021, and $5.7 billion in FY 2022. Of the nearly $6.2 billion remaining, $4.1 billion are earmarked for educational purposes (from ARPA Education and CRRSAA) and $2.0 billion are unrestricted ARPA-SLFRF funds.

As of the release of the 2023 Adopted Budget, the city had budgeted $4.7 billion—across these stimulus funding sources—from 2023 through 2025. This means that $1.5 billion of the city’s federal stimulus award has neither been claimed nor is currently budgeted for spending in this or future fiscal years, and therefore, is available to be allocated to agencies’ budgets in the city’s upcoming financial plans.

NYC HEALTH AND HOSPITALS

Health + Hospitals (H+H), New York City’s public hospital system, is the largest and one of the oldest public hospital systems in the country. H+H is the largest provider of emergency room care, care for mental health diagnoses, and uninsured care in the city. It was arguably at the center of efforts to address the COVID-19 in NYC. This was an obvious result given the demographic and economic profile of the majority of potential demand for these hospitals. It expanded bed and staffing capacity at the start of the Covid-19 surge and launched new temporary initiatives such as the Test & Trace Corps and staffing vaccination sites across the city, as well as built three new Covid-19 community health centers, and expanded its telemedicine offering.  

The New York City Independent Budget Office (IBO) estimates that the city will provide a total of $2.3 billion in operating support to H+H in 2023 (all years refer to city fiscal years). This is in addition to the $564 million the city has budgeted to provide to H+H for delivering services on its behalf. City operating support planned for H+H is similar to what the city provided in 2022. However, city support has been growing in recent years; its subsidies to H+H averaged $1.5 billion per year from 2018 to 2021.

The primary source of city operating support for H+H is through supplemental Medicaid payments. H+H serves a disproportionate share of Medicaid and uninsured patients and it is receiving additional Medicaid (DISH) funding. By providing these supplemental payments, the city triggers an equal amount of funding from the federal government. The city plans to provide $1.5 billion for its share of the supplemental Medicaid payments in 2023.

There are cash flow risks which could result from the reliance on these funding sources as policies change and COVID aid goes away. DSH cuts were originally required by the Affordable Care Act to begin in federal fiscal year 2014, but have been continuously postponed, most recently due to Covid-19 and then by the 2021 Consolidated Appropriations Act.

Cuts are now forecast to resume in federal fiscal year 2024 (beginning October 1, 2023). DSH cuts were originally required by the Affordable Care Act to begin in federal fiscal year 2014, but have been continuously postponed, most recently due to Covid-19 and then by the 2021 Consolidated Appropriations Act. Cuts are now forecast to resume in federal fiscal year 2024 (beginning October 1, 2023).

If all the H+H reserves are depleted as a result of the cuts, then the system would be in a very precarious situation and would either need to drastically cut expenses and services (likely through layoffs or closures), or require a city bail-out. This situation could be averted by spreading out expense cuts over time. The system may continue to incur unreimbursed Covid-19 related costs after federal funding and the public health emergency period end.

If that is the case, H+H or the city would have to absorb the cost. Indeed, this has already begun to happen. Covid-19 federal relief for the uninsured and programs for Covid-19 testing and treatment ended in March 2022; in April 2022 for funding for vaccine administration was shutdown. The city’s latest adopted budget included $200 million of city funds for Test and Trace in 2023. Test and Trace was a temporary program.

COVID SPENDING FOR TRANSIT

Due to the COVID-19 public health emergency, ridership decreased 24.7 percent from 2020 and Federal assistance for transit (2021 constant dollars) increased 18.2 percent. Report Year 2021 fare revenues decreased by 30.4 percent due to the COVID-19 public health emergency. Federal funding increased 4.2 billion dollars to fill the funding deficit.

Beginning in RY 2020, transit agencies received funding from Federal programs such as the Coronavirus Aid, Relief and Economic Security Act (CARES), Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA), and the American Rescue Plan (ARP). In RY 2021, 852 transit agencies spent over 13.1 billion dollars from these programs, mostly on operating expenses. This represents a 95% increase in the amount of Federal funding expended from the three programs collectively compared to NTD Report Year 2020.

In 2021, for each dollar spent on operating costs per trip across all modes and all transit systems, 12.8 cents are recovered through fares. This is a 30 percent decrease from the 2020 fare recovery ratio of 18.4 cents per dollar spent on operating expenses, resulting from the COVID-19 public health emergency. That is a trend which is difficult to reverse. Ridership trends have been negative for some time. Total urban transit ridership has decreased significantly from 2012 to 2021, going from about 10.36 billion passengers to 4.40 billion passengers.

On average, directly generated revenues, including passenger fares, fund 17.4 percent of public transit operating expenses for urban agencies in the U.S. Local and State sources together fund less than 50 percent of operating expenses, at 25.6 percent and 20.8 percent respectively. Federal Government sources fund the remaining 36.2 percent of total operating expenses.

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

TEXAS CENTRAL

A lawyer for nearly 100 property owners will seek legal action against Texas Central, the consortium which hopes to build a bullet train between Dallas and Houston. The hope is that such a suit could result in an opportunity to depose Texas Central. This could force Texas Central to provide information desired by property owners who do not wish to accommodate the railroad’s planned right of way.

Texas Central secured eminent domain authority to seize private property from the Texas Supreme Court in July. Texas Central plans to obtain any and all federal Surface Transportation Board certifications required to construct and operate the project. The individuals actually running the enterprise all left after the decision was handed down, however. Now, the enterprise is being “managed” by a consultant but there has been no guidance as to whether the railroad intends to proceed as they claim.

How realistic is the plan? The mayor of Houston who is a big backer uttered a phrase on a promotional trip to Japan that may not be the most encouraging. “If you build it, people will take full advantage of it.” We’ve seen too many projects which have been built on that hope which do not succeed.

SMALL COLLEGE BLUES

Founded in 1815, Allegheny College in western Pennsylvania is one of the oldest small, private liberal arts colleges in the United States. The college served 1,545 full-time equivalent students in fall 2021 and generated $63 million in fiscal 2021. Now, like so many other small liberal arts institutions, the College’s finds that its finances are under pressure.

The reasons are common: elevated competition, shifting demand for the college’s core academic offerings, and weak demographics will continue to strain revenue and contribute to deep operating deficits in fiscal 2022 and likely fiscal 2023. Until it can rebalance its finances, it will continue to rely on endowment drawdowns. Allegheny College’s Baa2 issuer rating is largely supported by its solid wealth and liquidity. If trends continue that source of support will be diminished and then the new negative outlook will be borne out.

“The negative outlook reflects Moody’s expectations that significant student market and budgetary challenges will contribute to sizeable operating deficits through fiscal 2023 and likely drive at least some erosion to financial reserve levels. The outlook also incorporates the headwinds the college will have in implementing expense reductions due to human capital and shared governance constraints.”

Another institution in that class is upstate New York’s St. Lawrence University. Moody’s revised St. Lawrence University’s outlook to negative from stable while maintaining its A2 rating. The reasons will sound familiar. “The outlook revision to negative from stable is largely driven by a deeper than forecasted operating deficit in fiscal 2023 due to lower than projected fall 2022 enrollment.

While expense reductions and federal support alleviated structural deficits over the past several years, the need to adjust expenses to offset declining revenue will be challenging due to inflationary pressures, the university’s small scope of operations, and a high 67% reliance on student charges. Weak regional demographics, are a key driver of this outlook action. In a shrinking market, the university confronts elevated competition, which will continue to depress pricing flexibility and student-related revenue growth.”

In fall 2022, St. Lawrence enrolled 2,155 full-time equivalent students, and it generated approximately $130 million in operating revenue in fiscal 2022.

PUERTO RICO

The latest debt restructuring agreement dealing with defaulted Puerto Rico debt was announced. The Puerto Rico Oversight Board reached an agreement with bondholders owning some $1.09 billion in principal of debt issued for the Puerto Rico Public Finance Corporation. The debt was not secured by a revenue pledge, only by a covenant to appropriate funds from the legislature. It was clearly unsecured debt. Nevertheless, holders were able to obtain some limited recompense depending on when their bonds were issued. Overall, the settlement provides a recovery in the range of 6.4%.

In that sense, it is a win for bondholders given the haircuts taken by holders of debt with stronger security positions. We told the Daily Bond Buyer “in the case of annual appropriation debt, especially debt from a non-specific source of revenues, you pay your money and you take your chances. In the case of this appropriation debt, investing in that debt at the point in time it was issued clearly carried lots of risk. That risk continues to be highlighted by the clear language that the DRA debt is very appropriation reliant. I would argue that the buyers of this debt had to be willing to write it off or take a very long-term view in terms of recovery.”

The debt has been in default since August, 2015.

SANTEE COOPER

Last week we detailed issues facing the South Carolina Public Service Authority over its future sources of generation. (See MCN 10.31.22). Now in the wake of the decision by Central, the Santee Cooper Board of Directors announced that it had “discussed” plans for a new natural gas unit to partially replace retiring coal units. Specifically, Santee Cooper is proposing a 1×1 natural gas combined cycle unit with a summer capacity exceeding 338 megawatts (MW) to be located Hampton County, S.C. The plant design is expected to potentially convert to emissions-free hydrogen fuel when hydrogen is more commercially available. 

 The South Carolina Public service Commission will have the final say on Santee Cooper’s plans. Ultimately, resources proposed to Santee Cooper’s combined system will be analyzed as part of Santee Cooper’s 2023 Integrated Resource Plan to be presented to the South Carolina Public Service Commission, next May. The utility offers the standard response when the choice of natural gas is criticized. “Santee Cooper needs additional natural gas generation to provide the flexibility to add more solar power.” The citation of all of the potential limits on solar are repeated – “the sun rises, falls, or hides behind an afternoon thunderstorm” – that we hear across the country from natural gas proponents.

MILEAGE FEES

Efforts to locate electric car assembly and battery manufacturing facilities in Georgia are fast making it one of the centers of the US electric car industry. It makes sense then that the state legislature is considering the substitution of mileage fees revenues for those derived from gas taxes. A bipartisan committee of state lawmakers has been established to discuss the future of its gas tax and a possible transition to a tax based on miles-driven.  The committee hopes to submit formal recommendations in December.

As part of the process, the Georgia DOT will begin a pilot program in 2023.

STUDENT HOUSING P3

The last two years were not kind to the privatized student housing sector. The pandemic was about the worst thing which could have happened to credits supported by revenues tied to occupancy. There was concern that the vulnerabilities exposed during the pandemic period could produce more obstacles to the continued expansion of these projects. We may see one answer in a bond issue being sold to finance privately constructed and operated student housing in a more traditional campus setting.

Eastern Michigan University was established as the state teachers’ college in 1849. EMU Campus Living, LLC’s proposed $200 million Project Revenue Bonds will finance a project which will encompass all of the university’s on-campus housing. It entails the construction of two new on-campus apartment buildings (700 beds), renovations to 8 existing residential halls/apartments (2,029 beds), and the demolition of 7 residential facilities (1,966 beds). In total, EMU housing stock will shrink from 4,307 beds to an end-state of 3,041 beds.

As opposed to most privatized student housing models, this is more of a P3 project. The university will continue managing the residence life functions of the housing system, the facilities are on-campus and do not secure the deal. The physical operations are to be managed by the LLC. The University’s financial support for the project is the major new facet of this private student housing deal security.

The project bonds are secured by a net revenue pledge of the project and includes the trustee’s first-lien security interest in various agreements between EMU Campus Living LLC/CFP3 and, respectively, the from Moody’ Board of Regents of Eastern Michigan University, the issuer, the property manager and the developer. An occupancy agreement from the university to make 1.0x debt service coverage from subordinated general revenue in case of a debt service shortfall from project revenue means the University is not fully protected from the project.

That security structure earned a Baa2 project revenue bond rating from Moody’s. That reflects the perceived strength of the University’s overall credit. The rating acknowledges the recent financial improvement bolstered by federal COVID relief funding. The university used it to strengthen its balance sheet and liquidity. The overall project reduces bed count by some 29% but this reflects demographic and other demand factors pressuring many schools.

PENN STATION DEVELOPMENT ON HOLD

The realities of the impact of the pandemic on demand for office space in NYC are still being measured and felt. One can look at occupancy rates for offices, rental demand, the performance of the economy dependent on commercial real estate. That is what made the continuing push for significant midtown office development a bit puzzling. Now, we may be seeing a real sign of how the recovery is progressing.

The renovation and expansion of Pennsylvania Station has long been a regular feature of New York politics. Before he resigned in the summer of 2021, Andrew Cuomo championed the Penn Station renovation project. His successor, Governor Hochul moved forward with a funding plan dependent upon commercial development. Vornado (Steven Ross’ development company) was named as the lead developer for 18.3 million square feet of office space and 1,256 apartments. 

Now, the timeline for development is in jeopardy. This week, Vornado let investors know that “the headwinds in the current environment are not at all conducive to ground-up development.”  This puts the station renovations under pressure as the price for the transit amenities alone is estimated in excess of $7.5 billion under the general project plan. The Empire Development Corporation estimates that $4.1 billion in payments in lieu of taxes are expected from Vornado in exchange for development rights to fund New York’s share of Penn Station renovation. 

The real question is whether the demand for office space and mass transit will return fully in the long term. The short-term indicators are weak – at least to Vornado. They cite tenants taking less office space, regardless of demand in Class A developments near transit infrastructure. At the same time, the East Side Access station underneath Grand Central is scheduled to commence service in December. It will take time for all to assess the impact on transit and the use of these stations.

The Penn Station redevelopment could be a real indicator of where the greater NYC economy is heading. The last two decades have seen a consistent stream of developments in all five boroughs. The city got used to that financially. In the wake of the pandemic, the potential for a recession will pressure the city’s most economically productive sectors. That could dampen the momentum for growth in the city’s revenue base. This makes the decision to delay development a significant indicator for our outlook on the city’s credit.

LABOR, UNIONS, AND ILLINOIS

Illinois has a long history of contentious labor relations. The Haymarket bombing and the Pullman strike were just two examples. With the state and especially Chicago involved with organized labor, those contentious relations continued over into the public sector. That led to the enactment of laws and constitutional changes to solidify the rights of workers.

In 2018, the then Governor supported litigation which was ultimately decided in the US Supreme Court that sought to overturn a prior decision in 1977, in which the Court said nonunion employees could be required to pay a portion of union dues, known as agency fees, to cover the cost of collective bargaining and prevent “free riders” — workers who get the benefits of a union contract without paying for it. That case – the Janus case- was decided in favor of the plaintiff, Janus.

Since then, the Governorship has changed and some of the temperature has gone down. That may change as Illinois voters are being asked to vote on Amendment 1, the Illinois Right to Collective Bargaining Measure. It would amend the Constitution to state that employees have a “fundamental right to organize and bargain collectively through representatives of their own choosing for the purpose of negotiating wages, hours, and working conditions, and to protect their economic welfare and safety at work” and prohibit any law that “interferes with, negates, or diminishes the right of employees to organize and bargain collectively.”

The economy of the state continues to change with job sources like power plants and coal mines on the way out and new sources like electric auto and battery manufacturing. Unions are not as established at the companies developing those jobs, some of which are not nearly as hospitable to organized labor as was the case with traditional automakers and suppliers or in the electrical or coal industries.

There are three states where a constitutional right to organize exists – Hawaii, Missouri, and New York. This amendment is different in that it not only grants the right to collectively bargain but also seeks to prohibit the enactment of among other things, right to work laws. Language preempting right-to-work or other laws was not included in the state constitutions of Hawaii, Missouri, or New York. 

If approved, one can expect an immediate court challenge and that litigation will ultimately be decided by the U.S. Supreme Court.

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.