Joseph Krist

Publisher

TAR HEEL MEDICAID EXPANSION

North Carolina has become the 40^th state to expand Medicaid under the provisions of the Affordable Care Act. Advocates have estimated that expansion could help 600,000 adults. The legislation includes nearly all adults who make less than 133 percent of the federal poverty level. The provisions of the bill will go into effect at the start of 2024, and county social services departments can begin accepting applications from eligible individuals beginning as soon as December of this year.  

The expansion of Medicaid is especially important in states with significant rural populations. Between 2010 and 2021, 136 rural hospitals have closed. The bulk of rural hospital revenue comes from government payers, of which Medicare comprises nearly half. Medicaid expansion is one policy that has helped rural hospitals remain viable. Rural hospitals received COVID-19 relief funds from the Coronavirus Aid, Relief and Economic Security (CARES) Act and the American Rescue Plan Act. With those funding sources running out, the pressure increases on their finances and ability to stay open.

The majority (74%) of rural closures happened in states where Medicaid expansion was not in place or had been in place for less than a year. The holdout states are: Wyoming, Kansas, Texas, Wisconsin, Tennessee, Mississippi, Alabama, Georgia, South Carolina and Florida.

I FOUGHT THE MOUSE AND THE MOUSE WON

We have been clear that the effort by Florida Governor Ron DeSantis to politicize the operations of the former Reedy Creek Improvement District was poor governance. This week, we see that it may just be incompetence on the part of the Governor. While the Governor was busy renaming the district (the Central Florida Tourism Oversight District) and assembling a board to run it, Disney was busy quietly putting together a plan to effectively maintain control over the District for as long as it wanted.

In the final meeting of the Reedy Creek board, a new development agreement between the District and Disney was approved and executed. This agreement cements Disney’s role in the development of the District. One important change is the duration of the agreement. “Shall continue in effect until twenty one (21) years after the death of the last survivor of the descendants of King Charles III, King of England living as of the date of this declaration.” 

That contractual language is known as a “royal lives” clause. The use of this language is not uncommon. It seems to leave the Governor with no ability to interfere in the new development agreement. It also limits the District’s ability to use Disney’s name, Mickey Mouse and other characters without the company’s approval. The board knows its position. In the words of one new director “The board loses, for practical purposes, the majority of its ability to do anything beyond maintain the roads and maintain basic infrastructure,”.

It isn’t as if the royal lives clause is some obscure trick. It is a staple of first year law classes so it should not have been a surprise. Let’s just say that we have a strong view of which dwarf the Governor is after this conclusion to his effort.

NAVAJOS AND THE COLORADO RIVER

The Supreme Court of the United States ruled in a  908 case called Winters that when the government creates an Indian reservation, it accepts an obligation to deliver water to that reservation for agricultural use. The Navajo tribe has limited access to water from a few Colorado River tributaries. It does not have rights to the Colorado directly even though much of the reservation borders the Colorado River’s main stem. The tribe argues that it should have rights to use that water.

The Navajo have been able to get their legal quest to obtain Colorado River water to the Supreme Court. The question before the Supreme Court is whether the United States’ treaties with the Navajo Nation requires it to find more water for the tribe. In 1849 and 1868, the Navajo Nation signed two treaties with the United States which created a reservation that would serve as a “permanent home” for the Navajo so long as the tribe allowed settlers to live on most of its traditional territory, which include much of what is currently New Mexico, Arizona, Utah, and Colorado. 

The case sets up a dispute between the seven states in the Colorado River basin and the tribe. This reflects that the reality is that water from the Colorado is the most likely source of water for the tribe. The Biden administration is taking the side of the states. This based on the concern that giving the Navajo water rights would further increase the difficulty in allotting the Colorado’s diminishing supply.

A decision in favor of the Navajo would allow the tribe to pursue its interests in court as the states continue their process of reallocating water from the Colorado River basin. That process was supposed to be settled in the summer of last year but those negotiations have been contentious and non-productive. Ultimately, a settlement could be imposed. The federal government already would prefer for the states to work things out amongst themselves.

WASHINGTON STATE CAPITAL GAINS TAX

The Washington Supreme Court found the state’s capital gains tax constitutional. The 7-2 ruling was over a contentious bill previously overruled by lower courts and passed into law in 2021. Two opponents challenged the law by saying that the tax was a property tax on income, which violated the privileges and immunities clause of the state constitution and the dormant commerce clause of the U.S. Constitution.

The law provided for a 7% tax on an individual’s long-term capital gains exceeding $250,000 while imposing no tax for individuals with capital gains below the $250,000 threshold. Opponents claimed that the levy based on the amount of gains violated the state constitution’s uniformity requirement. The Court found that “The capital gains tax is a valid excise tax under Washington law. Because it is not a property tax, it is not subject to the uniformity and levy requirements of article VII, sections 1 and 2 of the Washington Constitution,”.

Collections on the tax will proceed as planned. The tax went into effect on Jan. 1, 2022, and the first payments for 2022 are due on or before April 18. The legislation provided for the deposit of the first $500 million of each tax year to a legacy trust account to support K-12 education for early learning and childcare programs. All additional revenue collected after would be donated to a school construction account funding the construction of school facilities.

Washington becomes the only state to levy a capital gains tax without taxing earned income.  

CLIMATE LITIGATION SONG REMAINS THE SAME

The latest jurisdiction to opine on the proper venue for climate litigation against oil companies is the US District Court for the Eighth Circuit. Just as was the case with the Tenth Circuit in Colorado’s case against fossil fuel companies, the Eighth Circuit said that the proper venue for these cases is the state courts. This makes the sixth court to reach that conclusion.

The states have been careful to base their actions on issues of state rather than federal law. In the case, the appeals court was clear that Minnesota’s suit rests solely on state law, including claims of common law fraud and violations of various consumer protection statutes. They were clear that “there is no substitute federal cause of action.” “Minnesota is not the first state or local government to file this type of climate change litigation. Nor is this the first time that the Energy Companies … have made these jurisdictional arguments. But our sister circuits rejected them in each case. …. Today, we join them.”

The companies continue to work to find a way to get the issue before the US Supreme Court. They got there once but the case was sent back to the lower court with instructions as to how wide a range of issues must be considered by the lower court. This decision comes in the wake of those concerns.

WEST VIRGINIA HOSPITAL DOWNGRADE

Cabell Huntington Hospital is a regional referral center with over 300 beds and serves as the primary teaching hospital for the Marshall University Joan C. Edwards School of Medicine in Huntington, WV. It is part of a two-hospital obligated group which includes St. Mary’s Medical Center, a tertiary care hospital with 393 beds. In addition to the hospitals, the system owns various outpatient sites, and is the largest healthcare system in the primary service area. The combined system saw 40,169 inpatient admissions in FY 2022 and over 33,000 surgeries. 

Huntington is the hub of a declining rural area at the connection of WV, KY and OH. Like many hospitals it faced significant strains during the pandemic. When those pressures abated, the system was in a weaker position with a declining balance sheet. Then it experienced a month-long strike of the services workers union in November 2021. Like so many others, the issues of labor costs, general inflation and a slow recovery of utilization levels pressured results.

All of this has resulted in a downgrade of the system’s ratings on its $334 million in outstanding debt at fiscal year-end 2022. Moody’s took their rating to Baa2 from Baa1. It maintained a negative outlook on the new rating. The outlook reflects an expectation that Cabell will face difficulties achieving substantial margin improvements in 2023 given ongoing and significant labor challenges and related costs.

FUNDING A NORTHWEST PASSAGE

Proposals to replace the crucial I-5 bridge between Washington and Oregon all rely on uncertain funding of the $6+ billion cost. Each of the states is committed to fund $1 billion of the cost. To date, the funding for Oregon’s share has been uncertain. Now, the legislature will get to debate and vote on a plan.

The latest proposal would see the State issuing $300 million of bonds backed against Oregon’s general fund and $700 million backed by the highway user tax program used by the Oregon Department of Transportation.  Concerns are around funding that debt service versus the trend of declining revenues. Proponents would be happy to move to a mileage tax and that is part of the debate.

Participation in the state’s mileage tax experiment has been a disappointment. The failure to act in years prior to this plan are coming back to haunt this as well as many other projects. The impact of inflation, supply chain problems and shortages in the workforce – all issues we’ve cited before – accounts for a recent increase in the estimated cost of the project to upwards of $7 billion.

It is a trend that is emerging as infrastructure providers negotiate the application process for federal funding. Various local matching funds requirements must be met at the state and/or level to qualify for funding. In many cases, the situation is competitive so there is a real incentive to solidify commitments to facilitate applications.

RENEWABLES

Last year, the U.S. electric power sector produced 4,090 million megawatt hours (MWh) of electric power. In 2022, generation from renewable sources—wind, solar, hydro, biomass, and geothermal—surpassed coal-fired generation in the electric power sector for the first time. Renewable generation surpassed nuclear generation for the first time in 2021 and continued to provide more electricity than nuclear generation last year.

Natural gas remained the largest source of U.S. electricity generation, increasing from a 37% share of U.S. generation in 2021 to 39% in 2022. The share of coal-fired generation decreased from 23% in 2021 to 20% in 2022 as a number of coal-fired power plants retired and the remaining plants were used less.

The share of nuclear generation decreased from 20% in 2021 to 19% in 2022, following the Palisades nuclear power plant’s retirement in May 2022. The combined wind and solar share of total generation increased from 12% in 2021 to 14% in 2022. Hydropower generation remained unchanged, at 6%, in 2022. The shares for biomass and geothermal sources remained unchanged, at less than 1%.

More wind-generated power was produced in Texas than in any other state last year. Texas accounted for 26% of total U.S. wind generation last year, followed by Iowa (10%) and Oklahoma (9%). One of the largest wind farms in the United States (nearly 1,000-megawatt capacity [MW]) came online in Oklahoma in 2022.

In 2022, California ranked first in utility-scale solar generation, producing 26% of the country’s utility-scale solar electricity. Texas was the second-largest producing state (16%), followed by North Carolina (8%). Several of the largest solar plants built in the United States in the last three years are located in Texas, including the 275 MW Noble solar plant, which started operations in 2022.

NUCLEAR HURDLES

It is becoming clear that the Biden administration supports nuclear power.

Recently, the Department of Energy (DOE) released “roadmaps” to guide industry and policymakers about new energy technologies. Nuclear was one of the three highlighted sources of carbon-free energy. According to DOE, advanced nuclear could become a major contributor to net-zero goals in 2050, accounting for around 200 gigawatts of the firm power capacity necessary to meet the deadline. But the department said that within the next few years, at least one specific nuclear design needs to emerge as a clear leader by winning contracts to build anywhere from five to 10 reactors.

Here’s what DOE says about modular nuclear and its context. Small modular reactors (SMRs) can provide more certainty of hitting a predicted cost target and are likely to play an important role in the early scale-up of nuclear power; scaling the industry toa full 200 GW of new nuclear capacity may require large nuclear reactors as well. DOE also describes where the market is in terms of the development of nuclear right now. While the estimated first of a kind (FOAK) cost of a well-executed nuclear construction project is ~$6,200 per kW, recent nuclear construction projects in the U.S. have had overnight capital costs over $10,000 per kW. Delivering FOAK projects without cost overrun would require investment in extensive upfront planning to ensure the lessons learned from recent nuclear project overruns are incorporated.

Subsequent nuclear projects would be expected to come down the cost curve to ~$3,600 per kW after 10-20 deployments depending on learning rate; this cost reduction would largely be driven by workforce learnings and industrial base scale-up. However, the nuclear industry today is at a commercial stalemate between potential customers and investments in the nuclear industrial base needed for deployment—putting decarbonization goals at risk.

The risk of delay is clear. Rapidly scaling the nuclear industrial base would enable nearer-term decarbonization and increase capital efficiency. If deployment starts by 2030, ramping annual deployment to 13 GW by 2040 would provide 200 GW by 2050; a five-year delay in scaling the industrial base would require 20+ GW per year to achieve the same 200 GW deployment and could result in as much as a 50% increase in the capital required.

EL PASO BALLOT

On May 6, voters in El Paso, TX will be asked to vote on one of the most detailed and complex voter initiatives we have seen in a long time. The initiative will ask voters: Should the City Charter be amended to create a climate policy requiring the City to use all available resources and authority to accomplish three goals: to reduce the City’s contribution to climate change, invest in an environmentally sustainable future, and advance the cause of climate justice.

The initiative would require the City Council to employ a Climate Director, who shall report directly to City Council; create a Climate Department to be directly overseen by the Climate Director; create a nine member climate commission appointed by City Council, create an annual goal for climate jobs and the adoption and implementation of a policy that will transfer current City employees to climate work and provide a preference for contractors who are able to advance the City’s climate policy.

The City would be required to create an annual Solar Power Generation Plan for the City of El Paso and to require the City Manager to establish and maintain policies that encourage the development of rooftop solar power generation capacity within the City of El Paso using existing City facilities and require both new buildings and retrofitted buildings to include solar power generation capacity.

The initiative would establish goals of requiring (1) 80% clean renewable energy by 2030 and (2) 100% clean renewable energy by 2045. The initiative calls for the City of El Paso to employ all available efforts to convert El Paso Electric to municipal ownership; to require the City to undertake all necessary efforts to prepare City infrastructure to withstand extreme weather conditions and ensure uninterrupted provision of basic services and utilities to City residents.

It would require the City to ban the use of City water for fossil fuel industry activities, defined to include El Paso Electric, outside of the city limits and prohibit the City from selling or transferring any water for purposes of fossil fuel industry activities outside of the city limits, or otherwise allow any City water to be used for such purposes. It would prohibit the City from imposing any fees, fines, or other financial or nonfinancial burdens that limit the purchase, use, or generation of renewable energy and nullifying any such fees, fines, or other burdens in existence at the time the charter amendment takes effect.”

The complexity of the initiative is what happens when one tries to legislate through the ballot. Complexity will not necessarily translate into support. It often leads to people either not voting on it or voting no simply because it is so complex.

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

ESG 

Utah’s State Treasurer is now invoking God in his argument against ESG investing. He recently gave a speech in which he opined that

environmental social governance, or ESG is an “outcomes-based” plan, like the biblical “war in Heaven.”  “Outcomes-based governance like the UN’s [Sustainable Development Goals] and ESG opens the door to authoritarianism.” ESG ignores “the very real human cost of boycotting fossil fuels” and that its “coercive tactics” mean that “capital is not going to where it would normally go—to profitable projects in the oil and gas industry.”

So far, the Treasurer has moved about $100 million in state money previously managed by the investment firm BlackRock to different asset managers. (Out of $30 billion under his management.) The Public Treasurers Investment Fund is where the state, cities, counties and other public entities deposit money to earn investment income until it’s needed. There is still $6.8 billion with BlackRock.

It is clearly not a state policy. The Utah Retirement Systems manage some $45 billion of pension funds. URS has the $6.8 billion under BlackRock management, and it has made no changes in its portfolio or asset managers related to ESG. The decision as to where and how to invest is made by the pension fund’s managers who report to a board.

We see that as a good thing in that the Treasurer clearly is not using logic or reason in his approach. It is hard to take someone seriously who opines as a government official that the UN’s Sustainable Development Goals “have widely been touted by UN leaders as the master plan for humanity” and were partially created by the Chinese Communist Party.

MODULAR NUCLEAR

NuScale Power says it will need to reach an 80% subscription level by February 2024, up from the current 25%, for its plans for a small modular reactor, or SMR, plant in Idaho. Failure to reach that level would require NuScale to reimburse Utah Associated Municipal Power Systems, or UAMPS, for costs incurred. NuScale will seek to increase subscriptions from members, power producers yet to join the consortium or others.

GOVERNANCE – VIRGIN ISLANDS POWER

The US Virgin Islands is now moving forward to comply with a ruling on legislation that compels the reorganization of the Virgin Islands Water & Power Authority’s Board of Directors. The law provides an opportunity for a changing of the guard at VIWAPA and is a positive turn for the embattled credit. 

Act 8472 was passed into law unanimously by members of the 34^th Legislature on August 3, 2021 after previously being vetoed by Governor Bryan. The legislation restructures the WAPA board to afford greater independence and establishes professional criteria for those who serve. Following the unanimous override of the veto, the Administration took steps to prevent the implementation of the new law by filing for both a temporary restraining order and a permanent injunction with the Virgin Islands Superior Court.

The VI Supreme Court has now ruled in favor of the law. The ruling on legislation that compels the reorganization of the Virgin Islands Water & Power Authority’s Board of Directors. It is some 16 months after the release of a scathing report on the failures of the existing Board. They include findings that WAPA’s Board and management did not fully exercise due diligence in undertaking the LPG Conversion Project, did not ensure that it mitigated WAPA’s financial risk when they approved the Project without detailed engineering plans.

WAPA’s management did not follow WAPA’s established procedures for contracts and change orders. In addition, WAPA’s contract negotiations lacked transparency. Furthermore, WAPA officials created an apparent conflict of interest when they engaged the professional services of a firm that also worked for Vitol during a similar time period. Finally, WAPA did not achieve its goal to convert the number of power-generating units it needed to burn LPG and did not ensure that its rented units could burn LPG as stipulated in rental agreements.

CLIMATE LITIGATION

Colorado municipalities, like many others across the country, have been litigating against fossil fuel companies over their lack of disclosure of the risks of climate change related to fossil fuel production and use. As has been the case in all of the other litigation, the plaintiffs sue in state courts. In response, the fossil fuel defendants try to have the cases moved to federal court. This is seen as more favorable for the defendants. The process has been for a federal court to deny the transfer to federal court. The federal appeals process plays out and this case now goes to the US Supreme Court.

In this case, the federal government was asked to weigh in on its view of the case as to the appropriate jurisdiction. Now, a brief is submitted in response to the Court’s order inviting the Solicitor General to express the views of the United States. In the view of the United States, the petition for a writ of certiorari should be denied. The brief notes that in similar litigation brought by the City of Baltimore, the court of appeals rejected petitioners’ contention that “there is federal-question jurisdiction over [respondents’] state-law claims because they are governed by federal common law.”

SOLAR AND PROPERTY VALUES

Researchers at the federally sponsored Lawrence Berkeley National Lab have released their findings from a survey in six states which looked at the impact of large-scale solar projects on local property values.

The study used data from CoreLogic on over 1.8 million residential property transactions that occurred within six years before and after a LSPVP was constructed in the five U.S. states with the highest concentration of LSPVPs as measured by number of installations: California (CA), Massachusetts (MA), Minnesota (MN), North Carolina (NC), and New Jersey (NJ), as well as in Connecticut (CT), chosen for its relatively high population density (i.e., urbanicity) near LSPVPs.

In our six-state study area (CA, CT, MA, MN, NC, NJ), we find that homes within 0.5 mi of LSPVP experience an average home price reduction of 1.5% compared to homes 2–4 mi away; statistically significant effects are not measurable over 1 mi from a LSPVP. These effects are only measurable in certain states (MN, NC, and NJ), for LSPVPs constructed on agricultural land, for larger LSPVPs, and for rural homes.

Changes in sales price are not statistically significant for CA, CT, and MA. However, MN, NC, and NJ, show a statistically significant negative effect of 4%–5.6%, more than double that of the average across all states in the base model. statistically significant home value reductions are only observed for homes nearest to LSPVPs that are sited on previously agricultural land.

LSPVPs accounted for over 60% of all new solar capacity in the United States in 2021, and, as the largest resource by capacity in interconnection queues.

MORE POLITICS IN FLORIDA

A group of suburban legislators is pushing legislation which would effectively take control of the Gainesville Regional Utilities out of the hands of local elected officials and place it in the hands of political appointees of the Governor. The proposed legislation comes after proponents of the change were defeated at the ballot box. The legislator behind the current bill also sponsored a 2018 referendum Gainesville for a bill that would put an independent GRU board in place appointed by the City Commission, rather than the governor. The vote failed, with 40% of voters in favor. 

The bill targets GRU specifically, one out of 33 regional electric utilities in the state. GRU is the fifth largest in Florida, serving 93,000 customers. Some 37,000 people served by the city-owned utility can’t vote for Gainesvillecommissioners. GRU rates were the second highest in the state in 2022. It’s not clear exactly how the proposed bill would change things as non-resident customers still won’t be able to vote on city positions.

CARBON PIPELINE TEST

The issue of land acquisition and the potential use of eminent domain to accomplish this for a carbon capture pipeline has emerged as one of the debates in the Iowa legislature. This week the Iowa House passed House File 565. The bill would require CO2 pipelines to obtain 90 percent of the miles of the route through voluntary easements and provide some compensation protections and require CO2 pipelines to obtain 90 percent of the miles of the route through voluntary easements and provide some compensation protections.

The bill also contains a requirement that pipeline projects be paused until the new federal regulations are announced, as well as requirements that pipelines be in line with all local zoning rules and obtain permits in other states before being granted a permit in Iowa. A proposed amendment to remove those provisions failed. The bill has bipartisan support. Conservatives are coalescing around the idea of opposition to eminent domain being used to build for-profit projects for private companies.

The debate included testimony from a federal regulator about carbon pipeline safety. There was something for both sides of the debate. The fact that the history to date provides a favorable statistical view of pipeline safety is evaluated in light of a 2020 CO2 pipeline break in Mississippi which forced evacuations and some hospitalizations. The fact is that federal regulations are still not fully developed. The goal is to produce regulations reflective of the 2020 experience to the rules in two years.

As it stands, support for the bill in the Iowa Senate is unclear and the Governor says she supports the current permitting process.

P3 FOR SCHOOLS AND ENERGY

The Washington State legislature unanimously passed a bill which would authorize the use of public private partnerships to finance and develop projects at schools in the state to increase energy efficiency. Municipalities, including cities, counties, and port districts, may negotiate performance-based contracts with companies that offer water conservation, solid waste reduction, or energy equipment and services under the terms of the bill. Conservation projects may be funded through utility savings, capital funding, grants, or loans.

The state would be authorized to issue COPs backed by pools of school district projects under the bill. This would also create a roll for the state in terms of project scope and compliance requirements. The underlying project contracts will call for a district to contract with a private provider who will develop, own, operate and maintain financed equipment. A traditional sale/leaseback arrangement between the district and the private provider provides for the equipment to return to district ownership at the end of the lease.

PRAIRIE STATES THREAT

It is hard to believe that a project which has been at the center of much of the energy debate in Illinois could escape full scrutiny from the many interest groups involved. That appears to be the case with the Prairie States Generating Station in southern Illinois. In a lawsuit filed this week the Sierra Club alleges that the coal-fired base load plant does not have a permit to operate. The suit follows a financial release from the operating entity from the plant owned by Prairie State Generating Company which operates the plant for its owners – the Illinois Municipal Electric Agency (IMEA) and the Northern Illinois Municipal Power Agency (NIMPA).

Prairie State reported to state regulators that it had during April 2021 exceeded the mercury emissions limits in its construction permit, which reflected federal mercury standards. Prairie State applied for the permit from the Illinois Environmental Protection Agency in 2010, but the state agency never granted nor denied the permit. The plant began operating in June 2012. 

A construction permit under the Clean Air Act to begin operations, but that permit is supposed to be replaced by an operating permit. The construction permit explicitly stated it was only valid for one year after operations began. The lawsuit demands that Prairie State cease operations until an operating permit is in place. The suit unintentionally shines a truly unfavorable light on the obvious weaknesses in the Illinois system of permitting and supervision. It also reflects badly on advocacy groups who “assumed” that there was an operating permit in place.

Illinois’ 2021 energy law allows the plant to keep operating with a mandate to close or capture all carbon emissions by 2045. Almost all other coal plants in Illinois will need to close by 2030. 

SALT RIVER RENEWABLES

The Salt River Project in Arizona has announced that it has acquired 100% of the capacity of a 161 MW wind project in northern Arizona. Construction begins this week and the facility is scheduled to begin delivering energy to SRP customers by early 2024.  The project is being developed by a private developer who will finance construction and operation of the assets. It will include some 50 windmills and as a privately owned facility is projected to generate nearly $10 million in direct tax revenue to the host county over its life.

SRP already obtains power from the 127-MW Dry Lake Wind Power Project, which was the first large-scale wind power facility built in the state. SRP’s renewables push includes wind and solar. SRP will install 2,025 MW of solar by 2025, which is enough to power more than 450,000 average-size homes.

PREPA RULING

The judge presiding over Puerto Rico’s Title III proceedings has found that bondholders  had a “unsecured net revenue claim” against PREPA. The holders had hoped that they would receive a claim on net revenues. Now, the ruling facilitates efforts the get the PR Oversight Board’s plan for those bondholders moving forward. It is a huge disappointment to them as they could receive as little as 0.2% of their principal under current proposals.

It is a carefully crafted and worded statement. In our view, the judge has made a real effort to make a ruling that is specific to this credit. There are references to individual words in the bond resolution that indicate that the ruling is narrow as it relates to revenue bonds in general. Judge Swain found that “the word “pledge” is an “unsecured” promise and did not create a lien, which would require use of the words “lien or charge.”. The Oversight Board takes the position that the PREPA trust agreement only granted a lien on cash in accounts held directly by the trustee.

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

PENNSYLVANIA GAS

The Commonwealth of Pennsylvania has been monitoring production in the natural gas industry which revolves around fracking. Now, the state’s Independent Fiscal Office has released data which shows drillers produced 1.6% less gas in 2022 in Pennsylvania than the year before. This is the first annual drop since data became available in 2012. The decline in production in the final quarter of 2022 was a reduction of 5.1% from the same time a year earlier. This is the largest year over year decline recorded since 2015. 

The average price of natural gas in Pennsylvania was $4.45 per million British thermal units (MMBtu) at the end of 2022. It represents an increase of 12% over prices at the same time the year before. In the recent cycle, the price reached a high of $6.89 per MMBtu earlier last year. The declines continue a trend in evidence since 2019. It has been attributed to a reliance on older less productive wells as new drilling sites have slowed.

Contrast this with the data from other producing states. Texas drillers reported a nearly 6% increase in gas production. Louisiana production grew by 17%. 

TRAINS, PLANES, AND AUTOMOBILES

New York has long stood out for its lack of ready mass transit access to its airports. Yes, the Air Train has run from Queens to Kennedy Airport. It has not proved to be quite the convenient option of choice it was supposed it would become. Nonetheless, the effort to connect La Guardia Airport with the city’s mass transit infrastructure was considered to be a prime interest of then Governor Andrew Cuomo.

The project had drawn much opposition from those living along its proposed route. The construction of the link to JFK was a nightmare for residents as well as travelers seeking to get to Manhattan. That experience was not lost on opponents. Once Governor Cuomo resigned, the project lost its primary champion. Now that loss of support has led to a new course for LaGuardia and access to mass transit.

The Port Authority of New York and New Jersey had received expedited federal approval of its plan to build the AirTrain between La Guardia and Willets Point, where it could have connected with the No. 7 subway line and the Long Island Rail Road.  As cost estimates increased to some $2.4 billion, the Port commissioned outside advisors to look at alternatives.

That panel recommended the Port Authority and the MTA should enhance existing Q70 bus service to the airport and add a dedicated shuttle between La Guardia and the last stop on the N/W subway line in Astoria. That would eliminate much of the cost (buses would be $500 million) and address neighborhood concerns connected with construction.

GIG WORK

The plight of drivers for transportation network companies (TNC) has been in the news on both coasts. Recently, NYC granted approval for drivers to receive raises of some 9%. The approval had been withheld for some time and this was the subject of protests over year-end. The raises come in the aftermath of the pandemic and in the midst of the effort to revive the city’s economy.

A California appeals court ruled that Proposition 22, the ballot measure passed by state voters in 2020 that classified Uber and Lyft drivers as independent contractors rather than as employees, should remain state law. The Service Employees International Union, which, along with several drivers, filed a lawsuit challenging Proposition 22 in early 2021, is expected to appeal the decision to the California Supreme Court.

Initially, drivers won their battle to be classified as employees which would have likely forced the TNC to pay costs that can include drivers’ unemployment insurance, health insurance and business expenses. An initial challenge to the law received a favorable decision in 2021. It is that decision which was appealed in this case. The latest ruling found that requiring collective bargaining to occur through an amendment to the proposition “violates separation of powers principles,” and ordered that clause to be severed from the rest of the ballot measure.

The case is unfolding as challenges to another law governing employee relations moves through the California courts. Proposition 22 gave gig workers limited benefits but exempted them from Assembly Bill 5, a law passed by the California Legislature in 2019 that set a new standard for determining whether workers should be considered employees under the law. If upheld, A.B. 5, is ever applied to gig drivers, the TNC could be found to be improperly treating those drivers as independent contractors rather than as employees.

MILEAGE FEES

Legislation has been introduced in the Oregon Legislature which would impose mileage fees on electric cars. Oregon has been conducting a voluntary pilot program since 2015 which imposes mileage fees. Now, SB 945 would measure the miles traveled, starting from when the car is registered, and charge at a rate that is equivalent to the gas tax owed by drivers getting 30 miles per gallon.

According to the state of Oregon, there are 60,623 registered electric cars in the state as of November 2022. The pilot program has enrolled only 2100 of them.

MARYLAND P3 IN TROUBLE

Maryland’s plan to build a new American Legion Bridge and put toll lanes along part of the Capital Beltway and Interstate 270 faces real questions with the news that Transurban – the leader of the consortium which was to be the state’s partner has withdrawn from the project. Now for the project to move forward, a new private partner must be found.  

Transurban’s announcement comes two weeks before a key performance milestone. The partnership was expected to submit a detailed plan for the project this month.  This also comes within less than 90 days from the change in administrations in Annapolis. It should be noted that Transurban cited challenges including delayed environmental approvals, “a changing political landscape,” and unresolved lawsuits. It also noted Maryland’s decision to pursue alternatives – whether that is in project scope, delivery, or partnership.”

The decision provides an opportunity for a “progressive” administration to see if its equity-based model for providing infrastructure can succeed. This is the second time that a major P3 project has been delayed or ended because of issues arising between the state and its P3 partners. The result has been increased costs and lengthening delays in project provision. It’s not just roads but mass transit too which has found itself in this position in Maryland.

TECHNICAL COLLEGES

Clarkson University is a private research university with a main campus in Potsdam, New York. It had 3,498 full-time equivalent students in fall 2022 and generates $135 million of operating revenue. In spite of its long-established name, it faces many of the same pressures buffeting private colleges nationwide.

Escalating student demand challenges include weak regional demographics and evolving consumer trends. This in spite of the fact that Clarkson is not considered a liberal arts college but rather one with a focus on technology and engineering programs. Nevertheless, weak operating results are projected in fiscal 2023, following a significant operating deficit in fiscal 2022. Current results are impacted by higher discounting and missed enrollment goals.

The University’s name and reputation along with currently sufficient investment assets protect its Baa1 rating from Moody’s. The outlook is negative. That outlook acknowledges the continuing student market challenges that could lead to a continuation of operating deficits beyond fiscal 2023 if the university is unable to adjust expenses to align with enrollment outcomes.

Another school with a technical rather than a liberal arts base is the Illinois Institute of Technology. Illinois Tech is a private, not-for-profit university located in Chicago, IL. In fiscal 2021, Illinois Tech generated operating revenue of approximately $274 million and enrolled 5,885 full-time equivalent (FTE) students as of fall 2022. It’s enrollments actually increased in the last year by some 7%. This has not translated into fiscal stability.

As a result, Moody’s downgraded Illinois Tech’s rating to Ba2. The downgrade to Ba2 is largely driven by rapid escalation of significant operating deficits. Meaningful structural operating deficits are likely to continue through at least fiscal 2024. The university consumed an estimated $62 million of its financial reserves in fiscal 2022 due to a large fiscal 2022 deficit.

What really hurts is the structure of the institution’s debt which includes reliance on working capital lines of credit and includes various covenants. The current trend of financial performance makes a covenant violation a real risk and Moody’s is concerned about a potential for acceleration of debt. “The negative outlook reflects prospects for further credit deterioration if the university is not able to make observable improvement in operating performance and stabilization of unrestricted liquidity beyond fiscal 2023.” 

WESTERN WATER

The California State Water Resources Control Board approved a request by the U.S. Bureau of Reclamation to take more than 600,000 acre-feet from the San Joaquin River and send much of that water flowing to areas where it can spread out, soak into the ground and percolate down to the aquifer beneath the San Joaquin Valley. The areas receiving the water have been reliant on significant drawdowns of underground aquifer water supplies.

Those drawdowns have a significant downside. Declines in water levels that have left families with dry wells in rural areas across the Central Valley. Subsidence has become a larger problem in addition to the lack of water which results from excessive pumping of underground water. The state order allows the federal government to deliver floodwater from the Mendota Pool, a small reservoir on the San Joaquin River, to be used for replenishing groundwater.

The pull of the agriculture industry certainly helped the decision along. Agricultural uses were the source of some of the biggest drawdowns so now those agencies (like irrigation districts) which support it are being favored in the distribution process. With those districts benefitting, those farther down the chain are facing their own choices.

Even with other shortages like those in the Colorado Basin, The Metropolitan Water District of Southern California will relax emergency water restrictions on dozens of communities with a combined population of nearly seven million people in the face of the recent record precipitation. In place since June, the limits required parts of the state, including parts of Los Angeles, to limit outdoor watering to once a week or restrict the volume of water that could be used. 

At the same time, a different approach is being debated in Nevada. The Nevada legislators are considering legislation that will give water managers the authority to restrict the amount of water available for residential use. The proposed bill would make Nevada the first state to allow a water agency, the Southern Nevada Water Authority, to shut off water use for single-family residences that use more than half an acre-foot of water, roughly 163,000 gallons, each year.

The Authority contends that the measure would only impact the top 20% of Las Vegas water users. The average customer in the Las Vegas Valley uses 130,000 gallons per year. Las Vegas depends on the Colorado River for 90% of its water supply. Nevada has already lost about 8% of its Colorado River supply from mandatory cuts by the federal government. Those cuts are occurring as the seven states in the Colorado Basin continue to be unable to agree on allocation formulas going forward.

ROTTEN AT THE CORE

Now that some time has passed from the onset of the pandemic through to its current condition, we are beginning to see data regarding population trends spurred by the pandemic. Efforts have been made to measure the impact we all see on economic activity in the core centers of major U.S. cities. The results of those efforts may give pause to holders of long-term debt from some of the cities studied.

Among the top 15 metropolitan population percentage gainers, 13 were in the South, with two in the West (Phoenix and Las Vegas). Austin had the strongest population growth (3.0%), followed by Raleigh (2.4%), Phoenix (2.4%) and Jacksonville (2.0%). Nine more metros exceeded growth rates of 1.0%: San Antonio (1.7%), Dallas-Fort Worth (1.6%), Charlotte (1.5%), Tampa-St. Petersburg (1.4%). Las Vegas (1.2%), Houston (1.2%), Riverside-San Bernardino (1.2%), Nashville (1.2%), and Oklahoma City (1.1%). Atlanta and Tulsa grew 0.9%. The largest numeric gains were in Dallas-Fort Worth (122,000), Phoenix (100,00) and Houston (85,000).

Now for the bad news. The largest losses were in the San Francisco Bay area, with metro San Francisco losing the most, (-2.6%) and San Jose second (-2.4%). Four more metros lost more than one percent, including New York (-1.8%), Los Angeles (-1.5%), Honolulu (-1.5%) and Chicago (-1.1%). Losses of from -0.8% to -0.4% occurred in Boston, New Orleans, Miami, Pittsburgh, Detroit, Cleveland, Milwaukee. Rochester and Washington.

The picture of NYC especially Manhattan is not favorable. The population and domestic migration losses in New York City were unusually high (337,000 and 383,000) over the 15 months. New York City had 43.5% of the state’s population (8,804,000) in April 2020. Since that time, the city accounted for 92.2% of the New York State’s population loss and 94.3% of its net domestic migration. Among counties with more than 20,000 residents in the nation, New York County (Manhattan) had the largest percentage population loss since the census, at 6.90%. Numerically, Manhattan trailed only Los Angeles County in terms of population loss.

SOUTH CAROLINA DISCLOSURE MESS

The South Carolina legislature is considering abolishing the office of State Comptroller. The elected position effectively makes the officeholder the State’s chief accountant. That puts the position in a difficult spot when a large “accounting error” is spotted. That is where the state finds itself after a review of the office by the State Legislature.

The Senate Finance Constitutional Subcommittee in the state legislature investigated how the state came to be overstating its cash position. The Comptroller admitted that a $12 million coding error in 2007 had gone undetected. When data was not updated in connection with an accounting systems conversion in 2011, it accelerated the impact of the error. The error effectively double counted the amount of money provided by the state to the state university system.

In the ten years after the initial mistake, the cash position was overstated by over $1 billion. Since then, the state has significantly increased funding for its university system and the cash overstatement has grown to $3. 5 billion. The Comptroller’s office admitted the mistake in February. Now, the committee urged South Carolina’s General Assembly to relieve the comptroller of his position “for willful neglect of duty”.

The comptroller general oversees the state’s annual financial report. That includes determining which cash expenditures to include or exclude in the year-end report. This raised a question as to the validity of the state’s financial statements dating back over a decade. It raises significant governance questions. It also leads one to question whether a state with clearly weak financial oversight is truly a Aaa credit.

NON-PROFIT HOSPITALS AND TAXES

There have been efforts over the years to attack the tax-exempt status of many not-for-profit hospitals. As these institutions have grown and consolidated, their operations mirror more and more those of profit-oriented enterprises. As the pandemic unfolded, hospitals were in the news for their aggressive efforts at debt collection related to stays in hospitals due to COVID. These included both secular and religiously sponsored institutions. This focused more attention on the issue of hospitals and their tax-exempt status.

Now, a study from the Kaiser Family Foundation raises issues about that tax exempt status. KFF found that the total estimated value of tax exemption for nonprofit hospitals was nearly $28 billion in 2020. This represented over two-fifths (43%) of net income (i.e., revenues minus expenses) earned by nonprofit facilities in that year. The total estimated value of tax exemption (about $28 billion) exceeded total estimated charity care costs ($16 billion) among nonprofit hospitals in 2020, though charity care represents only a portion of the community benefits reported by these facilities.

It is a long-term trend. The value of tax exemption grew from about $20 billion in 2011 to about $28 billion in 2020, representing a 41 percent increase. What is the tax loss to governments? The estimated value of federal tax-exempt status was $14.5 billion in 2020, which represents about half (52%) of the total value of tax exemption. The total estimated value of state and local tax-exempt status was $13.2 billion in 2020, which represents about half (48%) of the total value of tax exemption. This amount includes the estimated value of not having to pay state or local sales taxes ($5.7 billion), local property taxes ($4.4 billion) or state corporate income taxes ($3.1 billion).

THE EMERGING NATURAL GAS COMPROMISE

We commented two weeks ago about an apparent compromise ordinance to address the issue of natural gas usage.  Denver enacted an ordinance that called for a ban on natural gas for water heaters and furnaces in newly constructed buildings. This was to address strong objections from many cooks (both individuals and restaurants) over banning gas for stoves.

Now, San Francisco is taking a similar approach to the issue. The Bay Area Air Quality Management District (BAAQMD) has voted to adopt new rules that seek to eliminate harmful nitrogen oxide (NOx) emissions from these appliances. The rules will ban the sale of NOx-emitting natural gas water heaters in 2027 and prohibit NOx-emitting furnaces in 2029 and large commercial water heaters in 2031. The Air District regulates stationary sources of air pollution in Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Santa Clara, southwestern Solano and southern Sonoma counties.

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

OHIO CONVICTION

A federal jury convicted former Ohio House Speaker Larry Householder and the ex-chair of the state Republican Party of conspiring in a $60 million bribery scheme to save a pair of power plants then owned by FirstEnergy Corp. with a taxpayer-funded bailout package. He becomes the only speaker expelled from the Legislature and then convicted in a federal corruption case in Ohio history. The case revolved around the passage of House Bill 6 in 2019 which was designed to fund nuclear operations at two generation plants and was seen by many as a blatant bailout of First Energy.

The case had a bit of everything – dark money groups, payments through a web of vehicles, friends wearing wires, plea deals. In July 2021, FirstEnergy admitted it bribed Householder and a state regulator and agreed to pay a fine of $230 million. It is the largest public corruption conviction in Ohio history. Racketeering conspiracy carries with it a maximum term of 20 years.

Everyone knows that the emerging “clean energy economy” involves a titanic struggle between huge and well-funded interests. This crime lays bare the depths to which that struggle can sink.

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AMAZON TAX INCENTIVE REVISITED

The effort by Amazon to receive significant tax incentives from New York City to locate a 25,000 job second headquarters generated heated debate at the time it was being considered. While there were a variety of issues that created hurdles, it was clear that the project would have been a net job producer. When Amazon finally decided to take an offer from Arlington, VA to locate and build there, it seemed like an obvious win for VA and a loss for NYC.

News this week will partially vindicate those in NYC who did not back the deal. Amazon will pause construction of some buildings at the second headquarters it is building in Arlington. Amazon has hired more than 8,000 of the 25,000 employees it projected to add in Arlington and plans in June to formally open the first phase of construction. A second larger phase has now been put on indefinite hold.

It is not unlike any number of corporate decisions regarding office space in the post-pandemic era we see across the country. It is important to remember that many projects falling into that category were planned just prior to the pandemic. The resulting and likely permanent change in office attendance and utilization has produced a glut of supply. Amazon announced last month that it would require workers to work from the office at least three days per week. This coincided with a plan to move 2,000 employees within Seattle to vacate leased space.

DIABLO CANYON EXTENSION

The Nuclear Regulatory Commission announced that it has granted PG&E an exemption that could allow California’s last nuclear power plant to continue running after the expiration of its federal operating licenses. Currently scheduled for closure in 2025, the exemption would allow the plant to operate while the NRC reviews an application for an extension of the operating license.

It is not unusual for a plant to operate while its operating license extension is considered. If a nuclear plant files for a license extension at least five years before the expiration of the existing license, the existing license remains in effect until the NRC’s application review is complete, even if it technically passes the expiration date.  That five-year requirement is what had to be overridden in the process. The company has said it intends to submit an application to extend the plant’s life by the end of this year. 

OIL AND PRIVATE ACTIVITY BONDS

The developers of a rail project designed to transport heavy crude oil products from Utah’s Uinta Basin oil fields to the national railroad network have announced their intention to seek some $2 billion in private activity bond capacity.   Utah’s Seven County Infrastructure Coalition was formed nearly nine years ago for the express purpose of supporting an oil export project.  The timing of the announcement, in the shadow of the East Palestine train wreck has drawn attention to the project and the material it will transport.

The Uinta Basin’s yellow and black waxy crude is laden with paraffin and notoriously difficult to move.  The rail cars would have to heat the material while it moves. Opposition existed prior to recent developments which will likely increase opposition now. The project would extend some 88 miles and cross into Colorado along the Colorado River.  It received approval in 2020 from the Trump administration.

The oil industry in Utah has been seeking a variety of alternatives to transporting its oil to refineries. The industry is fighting restrictions on coastal terminal facilities. Those barriers have concentrated support on a plan to access existing Gulf Coast oil infrastructure.  

FLORIDA AND STATE REGULATION OF MUNICIPAL UTILITIES

Newly filed legislation in the Florida State House and Senate would alter the way municipal utilities can operate, charge customers, and transfer money. The House Bill would cap the surcharges a municipal utility collects from people living outside of the boundaries of the government that runs it at 10 percent. The percentage must also be based on the number of customers outside the municipality’s boundaries. The Senate Bill, if passed, would redefine the legal definition of a public utility and empower the Florida Public Service Commission to regulate the utilities for five years.

The bill would also require voters to approve the amount of money that can be transferred from a utility to the municipality that runs it.  Customers who live outside of the boundaries of the municipality which owns and operates a public utility system often find that they cannot vote for the officials who run them. In this case, Gainesville Regional Utilities runs an electric utility which serves the greater metropolitan area. GRU has been at the center of a number of issues including rates and the siting of generating facilities.

It is not clear how much support the legislation has.

A SUCCESSFUL P3

On 28 February, the Kansas City, Missouri Airport Enterprise opened its new single terminal. The new terminal was completed within the $1.5 billion project budget and as originally scheduled. The project was developed through a public-private partnership (P3). The city entered a development agreement with private developer Edgemoor to design and construct the terminal for a guaranteed maximum price (GMP) of $1.36 billion. The airport enterprise retained risk for potential increased costs from events beyond the developer’s control, such as the COVID-19 pandemic. On budget completion has fully mitigated that risk.

The project addressed several concerns that the old terminal building’s unique design which made it difficult to satisfy security requirements. In addition, the new terminal will facilitate more connecting service. At one time, KCI had been a major hub.

CA HIGH SPEED RAIL

The California High Speed Rail Authority is required to update the state legislature regarding progress on the high-speed rail line designed to provide intercity service between SF and LA. The project has been plagued by delays and overruns. The project has achieved environmental clearance for all segments between San Francisco and Palmdale (Los Angeles County) and between Burbank and Los Angeles – 422 miles out of 500.

Construction is well underway on the first 119-mile section in the Central Valley, which will initially serve as a test track for high-speed trains, and additional advanced design is proceeding on stations and the 52 miles of extensions into the downtown Merced and downtown Bakersfield. The latest schedule calls for completion all environmental documents for the entire 500-mile system connecting San Francisco and Anaheim by the end of 2025. 

By 2028, complete and begin train testing on the first 119-mile, double-tracked and electrified high-speed rail test track between Madera and Poplar Avenue. Between 2030 and 2033, begin high-speed passenger service between Merced, Fresno and Bakersfield. By 2030, advance Northern and Southern California sections to 30% design so that construction can continue to progress if and when funding is provided

It is clear that the full project is significantly short of resources for the full train line to be completed. The Authority is looking to rely on significant federal grant funding and is looking to the Legislature to establish a clear source of funding after 2030. In addition, cost estimates have been raised. The new estimate no longer represents a “single-track” phased implementation approach to delivering the Merced to Bakersfield project – it includes double-track and fully built out facilities including stations and maintenance facilities rather than phasing them in. Compared to the 2022 Business Plan, the updated estimate has increased by between $6.5 billion to $9.7 billion.

The Authority has developed a new ridership forecasting model. It takes into account changes in travel and work wrought by the pandemic. In line with nearly all other surveys of mass transit demand, for the Merced-Bakersfield segment — which includes construction now under way in the central San Joaquin Valley — the expectation for overall train ridership in the Valley dipped from almost 8.8 million passengers per year forecast in a 2019-2020 financial plan to about 6.6 million in the 2023 project update. Ultimate annual demand is projected at 31.3 million in 2040, down from the 2020 estimate of 38.6 million.

OKLAHOMA AND RECREATIONAL CANNABIS

Oklahoma may be the medical marijuana capital of the US – the state counts 2,890 active licenses for medical dispensaries – but that did not translate into support for legalized recreational cannabis in an election this week. Proposition 820 was defeated by a significant margin – 62% to 38%. The measure would have, in addition to legalizing the use of marijuana for those 21 and over, would also have set up a process for expunging criminal convictions for certain past marijuana offenses. 

The initiative was set up for failure following an old script. By scheduling an election just on this issue outside of the normal voting schedule, a low turnout was assured and skewed towards those likely to oppose the measure. The vote took place while the Oklahoma legislature debates a bill introduced in this legislative session which would place new restrictions on ballot initiatives, including barring them from even-numbered years, when turnout is higher. 

The state’s approach has been somewhat scattershot. The number of dispensaries is high because of policies enacted which offered licenses at reduced rates compared to those of other states. That led the state legislature to pass a two-year moratorium on new medical marijuana business licenses last year. 

NYC MUNICIPAL WORKFORCE

The DeBlasio administration ramped up hiring by city government and brought it to its historical high headcount of some 330,000. It was to be expected that a new administration might slow that growth but the pandemic and some policy choices have put the City in a difficult place. One of those policy choices was to require in person attendance on a full-time basis by city employees. That has been a serious barrier to the retention and attraction of city employees.

Now a report from the NYC Comptroller has documented the impact of the Adams administration policies on not just headcount but also on the provision of services. The report notes that agencies which are at the front lines of the recovery from the pandemic – the Department of Small Business Services (SBS), Department of Health and Mental Hygiene (DOHMH), Housing Preservation and Development (HPD) and Department of City Planning are also consistently failing to meet or improve on the performance goals set for them.

The report notes a correlation between the inability to meet service provision goals and vacancy rates at the agencies charged with providing those services. SBS has a 32% vacancy rate, for example. Small businesses took the brunt of the impact of the pandemic so the vacancy rate is troubling. Similarly, agencies impacting some of those most vulnerable to the pandemic and its aftermath are facing clear limits on their ability to provide services.

One potential change to address vacancies was included In the recently-announced tentative agreement between the NYC Office of Labor Relations and DC 37 (the City’s largest municipal labor union), the parties agreed to establish a “Flexible Work Committee” to discuss options to provider greater flexibility and enhance employee morale, including remote work, compressed and flexible work schedules, and improve transit benefits. The parties’ goal is to begin a pilot program that includes remote work no later than June 1, 2023.

AMERICAN DREAM NIGHTMARE

East Rutherford, NJ is the home of the American Dream mall in New Jersey and the issuer of significant debt payable from payments in lieu of taxes paid by the developer. The financial problems of the project are well known. Now those problems are having real effects. East Rutherford has commenced legal action to recover some $7.6 million due from the developer. The payments are due under a payments in lieu of taxes agreement between the borough, the mall, and the New Jersey Sports and Exhibition Authority.

The developer has taken the position that the mall is not “fully open” as it still has some vacant space. If the mall is not “fully open”, the developer maintains that it does not owe anything on the parcels in question. East Rutherford’s suit argues that PILOT payments for those parcels were due once the mall and its associated entertainment venues opened in 2019.

The lawsuit highlights a concern that investors saw when the bonds were sold for the project.  “The defendants would prefer not to pay the borough because American Dream opened shortly before the COVID-19 pandemic, closed for a matter of months, and, according to widely circulated reports in the press, has struggled financially in the more than two years since it reopened post-pandemic.”

The action comes as the developer has received some covenant relief on its $1.7 billon of private debt. We are not surprised that the project has not met its demand projections which we never believed in. Debt-service reserves have been drawn down to make payments due on $800 million of PILOT backed bonds issued though the Wisconsin-based Public Finance Authority. Payments are also being missed on grant anticipation debt.

ZONING AND HOUSING

Affordable housing advocates have been increasingly focusing on zoning restrictions as a major impediment to the expansion of the affordable housing stock. In particular, the role of single-family housing zoning is a primary target. The idea is to promote both better land use and flexibility in terms of creating new housing on existing sites. Think two family houses or apartments over free standing garages.

Now, the Washington state legislature is moving a bill which would require cities between 25,000 and 75,000 people to allow two units per lot anywhere and four units on lots within one half-mile of a bus stop. Cities with more than 75,000 people or with a continuous urban area with more than 275,000 people would have to allow four units per lot anywhere and six units per lot within a quarter mile of a bus stop.

The bill also eliminates parking requirements for developing middle housing on lots within a half-mile of a major transit stop. For those lots smaller than 6,000 square feet, cities will not be able to require more than one off-street parking space per unit. For those lots greater than 6,000 square feet, cities can’t require more than two off-street spaces.

Some jurisdictions are revising local zoning ordinances. The Spokane City Council approved a temporary zoning ordinance to allow duplexes, triplexes, quadplexes and townhomes on all residential zones citywide for a year. It is all part of the movement towards density and proximity to transit and work. It is also a reminder that preemption goes two ways. Efforts to limit local regulation have been fought. Now, the proponents of zoning changes seek to use the same tactic to advance their goals.

It is what makes the debate over how best to implement policies so difficult to resolve.

CARBON STORAGE

Pore space is the open spaces in rock or soil. These are filled with water or other fluids such as brine. CO2 injected into the subsurface can displace pre – existing fluids to occupy some of the pore spaces of the rocks in the injection zone. The sequestration companies are undertaking to obtain easements on several such rock formations which cover large areas under predominantly agricultural land. The latest example of the problem is unfolding in Illinois.

Navigator CO2 Ventures’ is undertaking to get two sequestration sites approved in Illinois. It hopes to store up to 15 million metric tons annually of carbon dioxide. It is not clear how much fluid will be displaced at these sites and where it will go. This has raised the issue of potential groundwater contamination such as the acidification of local water. That occurs when CO2 and water mix and form carbonic acid.

In January, the Illinois Commerce Commission received a recommendation from its staff to deny a project permit because a sequestration site had not been acquired. Navigator then withdrew its initial permit application with the Commission. Illinois law does not address the use of eminent domain above underground pore space. Some believe that Navigator may need to get every landowner living over the sequestration area to agree to sell off a portion of their land rights.

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

BOLINGBROOK, ILLINOIS

Moody’s has released its current rating on the Village of Bolingbrook, IL. There has been a debate over what the impact on a default on non-guaranteed debt should be on a municipality’s when this happens. In this case Moody’s makes the argument that “governance is a driver of the current rating action given the village’s weak transparency and disclosure practices as reflected in the failure to report the Series 2005 Sales Tax Revenue Bonds, debt secured solely by sales tax revenue within a limited geographic area in annual financial reports. Public disclosure on this particular debt has not been timely.

The pledged revenue for Series 2005 Sales Tax Revenue Bonds fell short of the required sinking fund amounts because of weak home rule sales tax collections within a limited project area, which is extremely small relative to village’s full tax base creating idiosyncratic risks that are not indicative of the village’s general credit quality.”

We reiterate that investors need to focus on the underlying economics backing a credit. This is true when a credit is backed by a limited economic/revenue base. In this case, it looks like some buyers focused on a legal approach (even though it was pretty clear that this was a stand-alone credit) and the idea that reputational risk would motivate the Village to use general tax revenues to pay the sales tax bond debt service.

SMALL COLLEGE CREDIT

The latest example of the pressure on smaller private college financial positions is one of the more established names in this sector, Hartwick College. Moody’s Investors Service has downgraded Hartwick College’s (NY) issuer and debt ratings to B2 from B1. Ongoing multi-year deficit operations and decreasing liquidity are the primary sources of difficulty.”  Hartwick is in the sector which is increasingly vulnerable to the impacts of demographics and price. Hartwick College is a small, tuition-dependent private liberal arts and sciences college with fall 2022 enrollment of 1,089 full-time equivalent students and fiscal 2022 operating revenue of about $44 million. 

Moody’s Investors Service has confirmed Kaweah Delta Health Care District, CA’s (KDHCD) Ba1 revenue bond ratings. The system breached its debt service reserve fund covenant at December 31, 2022 which will require funding of a debt service reserve fund at maximum annual debt service of roughly $18 million.  The confluence of weak financial performance and declining reserves will challenge financial covenants for June 30, 2023 with expectations for a breach.

SMALL RURAL HOSPITALS

KDHCD operates a variety of health care facilities including 435-licensed bed Kaweah Delta Medical Center, a skilled nursing facility, a mental health hospital, a rehabilitation hospital, a dialysis center, and various other outpatient facilities including five hospital based federally-qualified rural health clinics. All combined, KDHCD has 613 licensed beds across its various campuses. Facilities are concentrated in Visalia, CA.

Recently, Moody’s affirmed the District’s revenue bond rating at Ba1. It kept the already below investment grade credit on negative outlook. The system breached its debt service reserve fund covenant at December 31, 2022 which will require funding of a debt service reserve fund at maximum annual debt service of roughly $18 million.  The confluence of weak financial performance and declining reserves will challenge financial covenants for June 30, 2023 with expectations for a breach. 

While the system remains the major tertiary referral center for Tulare County, the negative outlook reflects the risks to achieving projected results for year-end and into fiscal 2024, and a thin cash cushion to absorb any potential cash losses from operations should performance improvement stall.

NATURAL GAS

The use of natural gas is the subject of many debates across legislatures across the country. In some cases, the lead fight is at the state legislative level. This year the issue of natural gas bans in NYS has become highly politicized and a part of the budget process. Other states look at legislation to override local bans on natural gas. On the local level, restrictions on the use of natural gas for newly constructed buildings continue to be enacted.

The latest example of the issue is found in a legislative approach taken by the City of Denver. New building codes in Denver will ban natural gas furnaces and water heaters in new commercial and multifamily construction starting in 2024.  And by 2027, natural gas will not be permitted for any heating or cooling equipment in new commercial buildings. Here’s the difference between this and other bans. These restrictions do not apply to gas stoves. It is a clear attempt to split the baby to get support. The culinary industry strongly resists limits on gas for cooking, understandably. Getting that sector on board with the gas ban made its enactment easier.

It also acknowledges the role of politics. My e-mail gets inundated with political messaging about the proposed NY ban. You’d think a van full of stove removal agents is going to pull up in your driveway and take your stove away.  Denver’s approach was able to defuse that by exempting stoves.

SMALL NUCLEAR COST SETBACK

The Utah Associated Municipal Power Systems (UAMPS) has been undertaking  an effort to develop small modular nuclear generators. The developer of the units – NuScale – is hoping to show that groups of small modular reactors can be a realistic and less costly way to provide energy without carbon. UAMPS was the first municipal utility to try to go down this path. As the high costs of large scale nuclear have been clearly reaffirmed through the Votgle debacle in Georgia, proponents had high hopes for the modular approach.

The plan was for the development of six 77-MW reactors. The plan is now in some jeopardy as NuScale has informed members of UAMPS that the estimated costs of building the six 77-MW reactors had risen by more than 50 percent to $9.3 billion. Ironically, it is not for the “usual reasons” that this nuclear technology is more expensive than when proposed.

The reasons for the updated costs are rooted in general commodity inflation. Copper (up 32%) and steel (up 106%) are markedly more expensive. The major point for the participants is that the new cost estimates will raise their retail price by some 53.4%. That has already led to individual participants dropping out and the project’s power output is only 20% subscribed. The agency has said that it will need to reach 80% for planning and construction to proceed next year.

Good news? NuScale was the first of dozens of companies working on SMRs to have a design approved by US regulators. An application to construct and operate the plant is expected to be submitted to the U.S. Nuclear Regulatory Commission early next year. UAMPS has also decided to continue with the project despite the cost increases. Some 26 out of the 27 remaining UAMPS member agencies voted in favor of continuing the project. 

Another proposed modular nuclear generator which developers hoped to build on the Hanford Reservation in Washington State has been forced to look at a relocation. It will now build in Louisiana where the process of approval is felt to be more streamlined. X-energy has been working to meet an Energy Department timeline that calls for bringing the project on line by 2028. That process had effectively stalled.

The California Energy Commission (CEC) approved a staff analysis recommending the state pursue extending operation of Diablo Canyon Power Plant (DCPP) through 2030 to ensure electricity reliability. DCPP is currently scheduled for phased retirement in 2024 and 2025. The nuclear power plant supplies about 17% of California’s zero-carbon electricity and 9% of total electricity.

The Biden administration said on Thursday it is offering $1.2 billion in aid to extend the life of distressed nuclear power plants which, for the first time, could offer funding to a plant that has recently closed. The funding comes from the $6 billion Civil Nuclear Credit program, created by the 2021 infrastructure law, and will be distributed by the Department of Energy (DOE). The plan to offer support for recently closed plants is a plus.

The Palisades plant in Michigan would be able to apply. It closed in May 2022. Michigan is the home state of Energy Secretary Granholm. Holtec International, the current owner, had its first-round application rejected. It has estimated the cost of recommissioning at $1 billion.

CONGESTION PRICING

The MTA released its February Financial Plan, which stated that revenue collection from congestion pricing is now expected to begin in the second quarter of 2024, meaning April 2024 would be the earliest that drivers are charged for driving into Manhattan’s Central Business District. The move will cost it roughly $250 million in anticipated congestion pricing revenue in 2024.

NORTHWEST HYDRO

The municipal utilities in Washington State have long relied on the federal dam system for hydroelectric power. With 145 large federal dams, Washington state is the nation’s leading producer of hydropower. The region has experienced fluctuations in annual precipitation over the years but the region is in much better shape than the Colorado River basin. One example is the recent two years.

Water year 2021 was especially dry in Eastern Washington, most of Oregon, and most of Idaho. 2021 also featured an exceptionally dry spring and of course the record-breaking June heat wave. The result was decreased river flows and a twenty year low in hydropower production.

More snow and rain in 2022 fueled a 17% surge in power production in Washington, including a 19% increase at Grand Coulee Dam, the nation’s largest producer of hydropower. Hydroelectricity generation at rivers in Oregon jumped 19% during the 2022 “water year” from October 2021 to September 2022.

COLLEGE ENROLLMENTS

UC San Diego said it received 130,830 applications, a decline of 396 over the previous year. The change was a significant negative change from last year’s figure was almost 13,000 higher than it was for fall 2021. The number of California residents seeking a spot for this fall increased by 584, to 84,910. And the number of out-of-state applicants rose by 173, to 23,951. But the number of international students fell by 1,153, to 21,969.

The numbers highlight two of our regular themes. The most obvious one is the role of international students in the demand for college spots. These usually full fare paying customers are always attractive to these institutions. If that is indeed the driving force, it shows that the pattern of restrictions on international students has finally made its mark. Initially, it was immigration policies under the Trump Administration that hurt international demand. Then it was the limits due to the pandemic. 

The importance of international students’ willingness to pay top dollar has caused political pushback. In 2021, the California legislature looked to UCSD, UCLA and UC Berkeley to reduce the number of undergraduates it accepts from outside California to make more room for students who live here. Some accused the schools of favoring international students because they paid much higher tuition.

While the international shortfall is the primary culprit, the negative demographic trends driving demand reduce the cushion available when one particular demand cohort faces special issues or limitations.

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