Joseph Krist

Publisher

COLORADO RIVER SETTLEMENT

Arizona, California and Nevada – the lower basin states -have agreed to take less water from the Colorado River. The federal government has agreed to pay about $1.2 billion to irrigation districts, cities and Native American tribes in the three states if they temporarily use less water. In aggregate, the reductions would amount to about 13 percent of the total water use in the lower Colorado Basin.

The agreement struck over the weekend runs only through the end of 2026. The majority of the cuts — 2.3 million acre-feet — would come from water districts, farm operators, cities and Native American tribes that had agreed to take less water in order to qualify for federal grants offered under the 2022 Inflation Reduction Act. Those payments will total about $1.2 billion. 

The plan as is provides some political shelter over the 2024 election cycle. It does not really address any of the long-term issues around that of water. The individual states will manage the specific cuts to specific agencies so that will leave issues like agricultural versus residential water use for later discussion. The melting snowpack is providing additional supplies to southern California through temporary water diversions. This will temper the impact of proposed cuts but that sort of weather cannot be counted on.

ILLINOIS BUDGET

As we go to press, a budget agreement has been announced for the State of Illinois. The legislature had failed to reach agreement before last week’s deadline. The spending plan is estimated to be $50.5 billion. Governor Pritzker’s proposed budget plan from February totaled $49.6 billion in spending. The budget framework includes a $200 million additional pension payment, bringing total pension stabilization investments to $700 million.

As is often the case, education funding was at the center of the debate. The budget plan provides $250 million to fund the first year of the governor’s early childhood plan to eliminate preschool deserts and help stabilize the childcare workforce. It also includes $50 million for early childhood capital improvements — and $350 million for the state’s evidence-based funding formula for K-12 schools. The plan funds a $100 million increase for public universities.

With Chicago being a favored destination for asylum seekers, the City sought additional funding for things like healthcare costs for the immigrants. As has been the case in New York, pinning down a realistic cost estimate for these costs has proved difficult. While the numbers are substantial, there are real arguments about the actual cost. The city has estimated its cost at some $1 billion.

KENTUCKY PENSION CHANGE

Kentucky announced that the County Employees Retirement System (CERS) has increased its assumed rate of investment return to 6.50% from 6.25%. The rise in general interest rate levels is the ostensible cause. In reality, governments will be required to contribute less to CERS beginning July 1, 2024 (i.e., fiscal 2025). Using the system’s most recent valuation, the actuaries for CERS preliminarily estimate that contributions from participating governments will fall to around $814 million from $866 million in fiscal year 2015, roughly a 6% reduction.

The move will be a short-term benefit for the county governments. In the longer run, the changes will lead to less cash inflow and slower asset accumulation for the historically underfunded CERS. The change occurs in the context of the Commonwealth’s history of severe underfunding of pensions. Moody’s valued CERS’ unfunded liabilities for pensions and OPEBs combined at $19.8 billion, with a funded ratio of 44%. This was based on Commonwealth of Kentucky data most recently audited financial statements as of June 30, 2022.

We view the change negatively on several levels. The assumption that the current interest rate environment will become the norm seems to ignore the economy. It is clear that current rate levels are suppressing parts of the economy. With enormous pressure being brought to bear on the Federal Reserve to slow if not reverse the interest rate trend, the move to increase the discount rate for a long-term portfolio seems questionable.

At the same time, the liability to pensioners continues at the same level. What the move does is to take a step back from addressing Kentucky’s long-term pension issues. It took a long time for any positive trends to be established. It would be a shame to see that change.

MASS TRANSIT AND BUDGETS

New York’s Metropolitan Transit Authority has announced the inevitable. It plans to raise bus and subway fares to $2.90 and increase the cost of a weekly pass. The announcement comes as the Authority continues the process of levying congestion fees against drivers. The 15-cent increase could be in effect by Labor Day. The hike is part of a proposed package of 3 to 5 percent increases in transit fares and railroad ticket prices, plus a 6 to 7 percent hike in bridge and tunnel tolls.

The announcement comes on the heels of the documentation of lost revenues of nearly $700 million due to fare evasion. The package will raise approximately $300 million annually for the agency — slightly less than half of the losses from fare-beating last year. The fares for the express bus favorited by commuters in neighborhoods with limited subway access would jump by a quarter from $6.75 to $7, while the cost of a seven-day pass would increase from $62 to $64. Railroad riders would see the cost of a monthly or weekly pass increase by 4.3 percent on average, though the MTA will still cap the price on the most expensive 30-day tickets at $500.

The fare increase process of public hearings and votes will focus unwanted attention of the subway system which continues to experience challenges in its efforts to restore patronage levels. The city continues to lag in its recovery from the pandemic. While employment has returned to prepandemic levels, attendance at the office has not.

In Illinois, the Chicago Transit Authority is looking to the State of Illinois for increased operating funding. CTA has identified a $400 million gap to be closed in its budget. Federal dollars have been offered for rolling stock replacement but funding for operations has been scarce. It comes at a time when big city mass transit systems are hard pressed to employ enough operators to maintain service.

In California, mass transit agencies in the state are seeking significant operating subsidies as well. The statewide ask is some $6 billion.

HIGHWAY ERA ENDING

The latest example of the move to remove highway infrastructure designed in the 1970’s continues. The focus has been on elevated highways which cut right through urban areas effectively creating barriers to movement within the city. From time to time the debate has unfolded in the aftermath of accidents or disaster. In the 1970’s it was Westway in Manhattan. In the eighties and early nineties, it was the Bay Area and the replacement of the Embarcadero and elevated sections of highway in Oakland.

The success of those projects led to the consideration of elevated road replacements not driven by disaster. In Seattle, the Alaska Way was dismantled after many years opening up access to the Seattle waterfront significantly. In upstate NY, the replacement of the I-81 viaduct in Syracuse moves forward. Now, the latest example of the movement’s strength comes from Milwaukee.

A process is underway to determine the best costs of action for the replacement of infrastructure for I-794, an elevated road slicing through Milwaukee’s downtown. The City has undertaken a plan for downtown development and hopes to connect more of its downtown with the City’s waterfront. The state is undertaking a process to determine the best course of action to deal with the structures need for renovation.

One of five possible approaches is the removal of some of the elevated road and its replacement with a street level boulevard. It would not be the first such road to be dismantled in Milwaukee. The first was some 20 years ago and that plan is considered to be a success.

PUBLIC POWER UNDER PRESSURE

The New York State Legislative Commission on the Future of the Long Island Power Authority, have been studying the feasibility of not renewing the current management contract with PSEG Long Island, a unit of New Jersey-based Public Service Enterprise Group (PSEG) when it expires in 2024. The company was hired in the wake of high levels of customer dissatisfaction with the recovery of Long Island’s energy grid after Superstorm Sandy. As the legislative process unfolds, the politics of the issue get more complicated.

Supporters of the plan to revert to direct control by LIPA believe that direct operation would provide better service through more accountability. Opponents cite “lost taxes’ and greater taxpayer liability for the systems operations. On April 17, a feasibility study was released which concluded that the public would likely reap some financial benefits if the utility was transitioned to a public power authority. According to the report, LIPA customers could conceivably save $50 million or more annually by replacing PSEG Long Island. Much of that assumes that direct control will keep rates lower than would be the case under the status quo.

The irony is that the direct operating model was seen as a weakness given its susceptibility to local political pressure. Now, it is seen as salvation. The process will continue over the summer with a goal of having a legislative plan in place for the 2024 legislative session. In the short run, the status quo prevails.

In California, a public agency which distributes “green” energy to its customers faced possible dissolution. The Orange County Power Authority was established to develop aggregate demand for non-fossil fueled power. It serves eight localities but the two largest customers – Huntington Beach and Irvine – account for 70% of the power demand. The existence of the Authority has been a contentious issue in more conservative Orange County.

The agency has been under pressure as the result of transparency and management concerns. The CEO was fired and new procedures adopted. Nonetheless, discontent with the agency grew. Recently, Huntington Beach voted to withdraw from OCPA and return to being a Southern California Edison customer. The city accounts for 30% of demand. This focused much pressure and attention on the other large customer Irvine.

Huntington Beach residents and businesses will likely no longer be able to choose to pay for 100% renewable energy. And their electricity bills may actually go up — currently OCPA’s basic rate plan is cheaper than the one offered through Southern California Edison. All of this may have influenced the City of Irvine to choose a different path. It voted to remain a customer of OCPA.

PORTS

Ports continue to be impacted by slower activity levels. The West Coast ports where labor negotiations color the outlook for the ports reported significant drops in throughput. The Port of Los Angeles reported a 22.5% decline when measured against 2022’s strong year. The port processed 688,109 20-foot-equivalent unit containers compared with 887,357, or a decline of more than 199,000 TEUs. The adjacent Port of Long Beach also reported a 19.6% year-over-year decline as the complex moved 659,049 containers in April compared with 820,718. The Port of Oakland processed 180,482 TEUs, compared with 188,442 for a 4.2% decline from 2022.

It is a national trend. Ports in Seattle and Tacoma, Wash., reported a 12.8% decline to 232,321 containers in April compared with 266,635 a year ago. On the East Coast, the Port of Savannah, Ga. processed 408,686 containers in April, its second-highest month this year. Still, it marked a 17.5% year-over-year decline from 495,782. However, that’s up more than 11% from 367,880 in March, which was the slowest month for the port since July 2020. Volume at Port Houston also slowed by 8% in April to 307,879 containers compared with 334,493 a year ago. The Port Authority of New York and New Jersey reported that in March, volume declined 33.4% to 574,452 TEUs compared with 862,117 a year ago.

CARBON CAPTURE

Summit Carbon Solutions is a familiar name to readers as the sponsor of a carbon capture pipeline network through the Midwest. Iowa farmland owners have been among the leading critics and opponents of the project. In North Dakota, a different source of opposition has arisen. The legislature has requested that the state investigate the ownership structure to see if the proposed pipeline violates — Senate Bill 2371 and House Bill 1135 — which were passed earlier this year and go into effect Aug. 1.

Senate Bill 2371 prohibits foreign adversaries of the United States and foreign business entities with principal executive offices located in a country that is identified as a foreign adversary from owning and developing property in North Dakota. House Bill 1135 prohibits people who are not a U.S. citizen, U.S. permanent resident or Canadian citizen from directly or indirectly acquiring agricultural land in North Dakota.

The bill also states that limited liability companies can’t directly or indirectly acquire or otherwise obtain any interest in any title to agricultural land unless the ultimate beneficial interest of the entity is held directly or indirectly by citizens of the United States or permanent resident aliens of the U.S. The request reflects the fact that Summit has listed five owners of which one – TPG Rise – is supported by investment from The Silk Road Fund — an investment fund backed by the Chinese government.  

These concerns come in the wake of The Department of Energy’s announcement that it would not follow through on a $200 million proposed grant to Microvast Holdings Inc., a lithium-ion battery company that is planning a manufacturing facility in Tennessee, seven months after the award was tentatively approved. A Securities and Exchange Commission decision in 2022 added Microvast to a list of companies subject to potential intellectual property violations in China.

UPDATES

More support for the development of a lithium extraction industry in and around California’s Salton Sea came when Ford announced a large purchase from a Salton Sea producer. Energy Source Minerals will supply Ford with lithium hydroxide produced at ESM’s Project ATLiS, located in Imperial Valley California. Project ATLiS is expected to be operational in 2025. GM had already been involved with another Salton Sea producer since 2021.

Moody’s assigned a negative outlook to California’s GO rating. The surprise increase in the budget gap garnered points with no one.

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

CALIFORNIA BUDGET

The May revision to the Governor’s proposed budget dropped on Friday afternoon. If the budget was filled with good news, it would not have been released during a prime news dump period. So, it should have been a clue that a surprise was in store.

That surprise came in the form of an unanticipated increase in the estimated deficit facing the State. Since the release of the Governor’s Budget in January, monthly revenue shortfalls have continued, which have contributed to the May Revision General Fund revenue estimate shortfall of $8.4 billion (before transfers and adjustments). The additional budget shortfall at the May Revision, after transfers and adjustments, is estimated to be $9.3 billion. The $309 billion revised budget now reflects a $31 billion shortfall, some 10% of state spending. The state has reserves in the Budget Stabilization Account (BSA), which is now approximately $22.3 billion.

The volatility inherent in the State’s tax structure – nearly half of all personal income tax in the state is paid by the top one percent of earners – is at the heart of the problem. Consistent underperformance in personal income tax withholding in the second half of 2022, which tracked to the 19.4-percent decline in the S&P 500 for the year, translated into lower revenue from the small share of taxpayers whose higher incomes can vary substantially with market volatility.

The Internal Revenue Service’s decision (and the state’s subsequent conformity) to delay 2023 tax filing deadlines to October due to the winter storms affects more than 99 percent of California’s tax filers in 55 of the state’s 58 counties. As a result, the May Revision forecasts roughly $42 billion in scheduled tax receipts will be delayed until October 2023. Of this amount, $28.4 billion is personal income tax—the state’s largest source of General Fund revenue—and $13.3 billion is corporation tax. This represents around 23 percent of projected personal income tax and 32 percent of corporation tax revenues for the current fiscal year.

So, what to do? The May Revision reduces an additional $1.1 billion in spending across the 2021-22 through 2023-24 fiscal years. Combined with the Governor’s Budget’s $5.7 billion in reductions and pullbacks and a $57 million adjustment, the May Revision includes total solutions in this category of $6.7 billion. Additional maneuvers include $3.3 billion in shifts of spending commitments from the General Fund to other funds; the withdrawal of $450 million from the Safety Net Reserve; $3.7 billion in revenue and borrowing, which consist primarily of an additional $2.5 billion from the Managed Care Organization tax and $1.2 billion in additional borrowing from special funds. Combined with the Governor’s Budget amount of $1.2 billion, there is a total of $4.9 billion in new revenue or borrowing.

The word “shift” appears all over the proposals. In some cases, shift involves the source of revenues. In others, it represents a shift from current funding to the use of bonds to finance projects which were formerly supported by General Fund spending.

NEW YORK CITY BUDGET AND THE MTA

When the most recent proposed budget from the Mayor was released, the state had not yet adopted its budget. The state budget is an important component of the City’s budget process and those negotiations can produce some unexpected and expensive changes in state funding. Now that the State budget has been adopted, changes to funding ratios create problems for the City.

The Executive Budget did not anticipate additional paratransit costs that became clear with the adoption of the state budget. Starting in July of this year, the city is required to subsidize MTA’s paratransit operating costs at 80 percent—up from 50 percent—after fares and dedicated tax revenues. This increase is limited to 2024 and 2025 and is capped at $165 million in addiƟonal contribuƟons each fiscal year. IBO esƟmates this policy will increase the city’s paratransit subsidy by $163 million in 2024 and $165 million in 2025, for a total of $328 million over the two years—or about 30 percent more than the $1.1 billion the MTA previously projected.

This comes as the MTA has quantified the negative impact of fare evasion. Fare evasion cost the MTA $690 million in 2022. The MTA is on track to lose $1 billion this year due to fare evasion. Critics cite facts like those to point out that the losses are about equal to what the MTA hopes to generate from congestion pricing. It is difficult to generate support for those fees when there are daily examples of fare evasion.

STATE REVENUE SHORTFALLS

In Massachusetts, a report by the Massachusetts Department of Revenue showed April revenue was down 31% year-over-year, with the state collecting $4.78 billion, $2.1 billion less than in April 2022. In its revenue report, the Massachusetts DOR Commissioner highlighted steep dips in short-term capital gains as a major factor in tax declines for April. Nonetheless, the state is expected to move forward with both tax cuts and new spending. most of the key proposals in the governor’s budget proposal, including a $600 child tax credit, new seniors tax credit, renters assistance, a reduction of the estate tax, and a centerpiece short-term capital gains tax cut that would reduce the rate from 12% to 5% over two years.

Illinois revenues sunk in April by $1.8 billion from April 2022 collections. The governor’s budget office in a report to the Legislative Budget Oversight Commission this week cut this year’s revenue projections by $616 million to $50.7 billion after April revenues fell $849 million below the budgeted level while the legislature’s Commission on Government Forecasting and Accountability (COGFA) cut its estimate $728 million to $51.2 billion. COGFA noted that Illinois revenues are still up $132 million from last year but that counts $325 million of one-time federal American Relief Plan Act funding that won’t be available in the coming fiscal year.

MAINE TRANSMISSION

A Maine jury unanimously found that Central Maine Power was entitled to resume construction of the New England Connector transmission line. More importantly, the plaintiffs in the case announced that they would not appeal the verdict. This will allow construction to resume. CMP immediately sued the state to reverse the results, arguing the referendum was unconstitutional for creating a retroactive law nullifying a project that had been lawfully permitted by numerous state and federal government agencies. the Maine Department of Environmental Protection is expected to lift the freeze on construction which was imposed after passage of the referendum halting the project in 2021.

STADIUM NEWS

This week two cities effectively ended the possibility of professional sports franchises staying in their current homes. In one case, a referendum process allowed voters to make the decision directly while in the other the local political structure would not support a project.

Voters in Tempe voted against a proposed development plan centered around a new arena for the NHL Arizona Coyotes.  And the vote comes after the City of Phoenix and Sky Harbor Airport raised concerns about the location of the proposed development and threatened additional litigation against the deal. Propositions 301, 302 and 303 — all needed to receive a majority of “yes” votes in order for the Coyotes project to move forward. Each one was losing by a 56% to 44% margin, with the exception of Prop. 303, which was losing 57% to 43%.

There is a real likelihood that the franchise will move given the lack of a permanent place to play. There are already four cities which have been suggested as a future home for the team. Three of those cities have available arenas and the fourth will see one later in connection with an Olympic bid. The Coyotes are not the first NHL team to have arena woes – the NY Islanders eventually landed on their feet with the UBS Arena in Elmont, NY.

The Oakland A’s of MLB announced that they had entered into an agreement to develop a baseball stadium right on the Las Vegas Strip. Part of the transaction would include some $350 million provided by the State of Nevada, subject to legislative approval. It is impossible to overstate the impact that the success of the NHL Vegas Golden Knights has had on the perception of Las Vegas as a viable professional sports city. Concerns about consistent attendance and any worries about issues related to gambling simply have not materialized.

THE MOUSE WARS ESCALATE

Last month the CEO at Disney asked about Florida “Does the state want us to invest more, employ more people, and pay more taxes, or not?” Apparently, Disney believes that the answer for now is no. Following through on that conclusion, Disney announced that it was not going to pursue a planned development within the District which would have transferred 2,000 employees from California (at a state estimate of $120,000 average salaries) and seen an overall $1 billion investment.

There are lots of reasons why Disney would cancel the project. Employees were unhappy with the move and the company is in the midst of a major cost cutting program. Nonetheless, the opportunity to up the ante in Disney’s dispute with the Governor allowed Disney to package the cancellation of the project as being in support of its position.

The situation reflects the toxic matching of ideology and political ambition. It tends to backfire and it occurs on both ends of the political spectrum.

SOLAR AND NET METERING

The effort to reduce the favorable economic impact for customers who install solar panels continues to spread. Net metering – the mechanism for paying for surplus solar generation – has been steadily under attack. Ironically, most of these actions are being undertaken in states where solar would make sense. The primary effort is to reduce the price paid by distribution utilities for solar generated electricity. Such actions have been seen in California, Arizona, Texas, Florida.

North Carolina recently approved new net metering rates which will lower payments to those with solar. The new net-metering rules are scheduled to take effect July 1. A settlement negotiated last year by three North Carolina solar installers and included in the utilities commission’s May order will allow existing residential solar owners to continue to be credited for excess electricity at the current standard rate for up to 15 years.

Under new rules approved by the utilities commission March 23, customers will be credited more during times of peak demand — such as early morning in winter and evening in the heat of summer — and less when loads are lower. Overall, it is expected to lower payments to residential solar customers.

In addition, the insurance industry in Florida is cancelling homeowners insurance policies for many who have installed solar. It is estimated that half of the state’s home insurance carriers are making the move. Add that to the already existing issue of declining coverage as the result of hurricanes and it will put even more pressure on government backed insurance plans.

HYDROPOWER

It is estimated that 45% of the U.S. hydro fleet has licenses that expire by 2035. Bipartisan hydropower permitting reform legislation introduced last week in the U.S. Senate would establish a two-year permitting process to install turbines on non-powered dams and a three-year procedure for pumped storage projects unconnected to waterways. The sponsors and co-sponsors are from four states with significant hydro resources and the partisan split is even.

According to the Energy Information Administration, the United States has 1,029 FERC-licensed facilities with about 80 GW of hydroelectric capacity and about 22 GW of pumped storage capacity. Last year, hydropower accounted for about 6.2% of total U.S. utility-scale generation and almost 29% of utility-scale renewable generation. The bill, The Community and Hydropower Improvement Act, S.1521, seeks to cut years off of the relicensing process.

It is the pumped storage issue which is most intriguing. The process has recently gained lots of attention even though pumped storage has been utilized for years. Municipal investors have long been familiar with pumped storage projects. About 35 GW of potential additional pumped storage capacity is available in the U.S. FERC is reviewing three pumped storage license applications in California, Washington and Wyoming totaling nearly 2,672 MW. 

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

ROAD FUNDING

Oklahoma’s Department of Transportation is inviting drivers to take part in a six-month pay-per-mile pilot program set to launch this July. The Fair Miles program is designed to address emerging impacts on funding as electric car use grows. Drivers who volunteer to be part of the pilot will have several mileage reporting options (MRO), including an onboard device (OBD-II) and telematics, if provided by the vehicle manufacturer.

Oklahoma joins Oregon, Utah, Virginia and Washington in conducting similar pilot studies. In Oklahoma, the state is looking for 500 diverse participants, who will each be paid $50 for taking part. The project was authorized in 2021.

Indiana is taking a different approach while it figures out a long-term source of funding for roads which does not include a gas tax. In 2017, a state task force recommended several provisions which became law. They included raising the gas tax by 10 cents, indexing the tax to inflation with a cap of one penny, and directing revenue from a separate gas sales tax to a dedicated road improvement account rather than the state’s general fund.

Under current law, the annual inflation adjustment to the gas tax, which is limited to a penny, was set to end in 2024. Lawmakers in the budget agreed to an extension, pushing the expiration date out to 2027. 

CALIFORNIA TRANSIT FUNDING

The issue of state funding for transit usually plays out in places like New York and Illinois where the use and demand for mass transit is quite concentrated. There debates over state revenue assistance to transit agencies is taken for granted. It’s usually not an issue of whether to subsidize or not. This year, the issue of operating subsidies for local mass transit is coming to the state budget negotiations in California.

The California Transit Association which represents 85 public transit systems has proposed that the state appropriate some $5 billion to subsidize operating revenues to fill in projected shortfalls in local transit revenues.  The systems anticipate a cumulative budget deficit of around $6 billion over the next five years, according to the association. The state has never done this before.

The agencies are hoping for additional funds from the state’s sales tax on diesel fuel and unallocated revenue from the state cap-and-trade program. They’re also asking to use some existing capital funding to support operations over the next several years. How badly is the money needed? The agencies say they’re willing to give more operating oversight of transit operations to the state, and respond to demands for “accountability” in the form of safety and service improvements.

CONGESTION PRICING

The Federal Highway Administration tentatively approved an updated draft of a report commissioned by the Metropolitan Transportation Authority that identified ways to mitigate the potential harm of congesting pricing on disadvantaged communities. This opens a 30-day comment period after which FHA is expected to give its final approval. The M.T.A. says the tolling program could begin as soon as spring 2024.

That assumes that a toll level will be agreed upon in spite of continued strong suburban resistance. Other critics include taxi drivers, as well as Lyft and Uber drivers. The M.T.A.’s own research has shown that fare increases triggered by the tolls could slash demand for taxis and for-hire rides by up to 17 percent.

ASYLUM COSTS

Last week we discussed the budgets for the State and City of New York. One result was that the City was not going to receive financial aid from the state to reduce the costs of the asylum surge into NYC in the amounts the City had hoped for. The recently adopted New York State Budget included funding to reimburse New York City for 29 percent of costs associated with sheltering asylum seekers, up to $1 billion in reimbursement over two years. 

As the budget process moves to the City side, the NYC Council commissioned the City’s Independent Budget Office (IBO) to examine city expenses associated with serving asylum seekers that were included in the Executive Budget. A most frequently cited figure by the Mayor is $4 billion. IBO modeled a baseline cost scenario which assumes variation in the influx of asylum seekers in line with current trends. It also studied a lower-cost and higher-cost scenario.

What did IBO find? All three IBO cost scenarios are based on the assumption that the volume of asylum seekers utilizing city services will fluctuate. When this is combined with varying cost models, the resulting total costs are between $600 million and $1.7 billion lower than the Executive Budget projection of $4.3 billion for fiscal years 2023 and 2024. How did the difference come to be?

Baseline-cost scenario ($3.07 billion) – IBO estimates that the asylum-seeking population in 2024 will continue to follow trends of arrivals, stays, and exits seen in 2023, and that the current cost of providing shelter and food and other city services for asylum seekers will remain constant. This scenario totals $3.1 billion across 2023 and 2024, $1.2 billion lower than the Executive Budget.

Lower-cost scenario ($2.67 billion) – assumes that, while the asylum-seeking population will continue to grow over the course of 2024, the city will find cost efficiencies next year, lowering the per-household cost of providing shelter and food for asylum seekers.

Higher-cost scenario ($3.728 billion) – assumes that the asylum-seeking population will continue to grow over the course of 2024 and that the cost to shelter and care for asylum seekers will be higher than current rates as the city continues to ramp up emergency spending.

Across each of IBO’s three cost scenarios, the city will not receive the full $1 billion it might get from the State. The findings will give ammunition to those City Council members who did not support budget cuts for things like libraries.

WATER, MICHIGAN, BANKRUPTCY

Stop me if you think you have heard this before but another Detroit suburb is having trouble with its water system. For ten years, the City of Highland Park and what is now the Great Lakes Water Authority have been in litigation over unpaid water bills. Last month, a Wayne County Circuit Court Judge ordered Highland Park to provide a payment schedule which would resolve the outstanding $24 million debt due to GLWA.

The court case against the city resulted in at least three mediations, with the last one being overturned by the court of appeals resulting in its reversal after DWSD/GLWA agreed to settle and pay Highland Park $1,000,000 for overcharges. Instead, the parties find themselves at this crossroads. Highland Park’s City Council voted to petition Michigan Governor Gretchen Whitmer requesting she authorize the city to go into Chapter 9 municipal bankruptcy. They had hoped that this would happen by April 20.

In 2014, the city chose a neutral evaluation process under state law which was a pre-bankruptcy mediation. The order of a payment program is actually a stick to get the parties to some agreement. In fairness, it is likely a burden for the majority of Highland park’s ratepayers to make their full payment. It is also symptomatic of the fiscal problems which have seen the city run under the State emergency manager laws – once for six years and again for two years between 2001 and 2015.

FLORIDA

In 1882, the US passed the Immigration Act. That law was enacted primarily at the behest of California where Chinese immigrants were accused of taking jobs and holding down wages. The law excluded merchants, teachers, students, travelers, and diplomats. It was renewed after its original ten-year term expired and after two renewals was replaced by the Chinese Exclusion Act. That law made the restrictions permanent and they stayed in place until 1943.

Now, in preparation for his Presidential campaign Florida Governor signed his state’s version of restrictions on Chinese individuals. The new law is structured to prevent “governments or agents” from “countries of concern” – China, Russia, Iran, North Korea, Cuba, Venezuela and Syria from buying farmland or any property within 10 miles of any military installation, seaport, airport, power plant, water treatment facility or any other location deemed critical infrastructure.

The law bans citizens from those countries of concern who are not lawful permanent US residents from owning any real estate in Florida. Those knowingly selling property in violation of the new regulations may be subject to civil and criminal penalties, and the new laws allow the state to seize property improperly obtained by foreign nationals.  The legislation also prohibits state colleges and universities from soliciting or accepting gifts and grants from foreign countries of concern and bans private schools from being owned or controlled by adversarial nations. 

While the language does not limit the law to exclusively Chinese interests, the Governor made it clear in the signing ceremony that the law targeted Chinese interests. The “CCP threat” is a popular talking point among the conservative voters being targeted by The Governor and his campaign. Whether it will have any practical effect on the issue is another thing. It is a continuation of some very noisy efforts to use the law and the courts to score cheap political points.

On that note, the state has enacted legislation which purports to overturn the development agreement adopted by the Reedy Creek District and Disney at the old board’s last meeting in February. The litigation related to this is piling up with suits and countersuits flying. While we do not believe that the legal battles will impact the payment of outstanding debt from Reedy Creek, we are troubled by the willingness of the Legislature to support an unnecessarily disruptive politicization of a municipal bond credit.

P3 DEFAULT

Eastern Michigan University is considered a commuter campus with only 17.5% of enrolled students living on campus. To facilitate the attendance of its commuter students, the University had operated an extensive parking system on campus. Part of that system included a garage for 740-odd vehicles. To facilitate the management and refurbishment of the garage, the University entered into a public-private partnership for the maintenance and operation of the garage. The term of the agreement was 35 years.

The project was financed through the issuance of bonds by the Arizona Industrial Development Authority, a conduit issuer. The proceeds of the Bonds were used to, among other things, refinance the Project by prepaying a Prior Loan and redeeming Prior Notes and finance certain costs of the Project. The debt service on the bonds would be paid from repayments under a loan agreement with the operator.

The Borrower failed to make at least the Loan Payments required under the Loan Agreement that became due on May 1st, 2021, November 1st, 2021 and May 1st, 2022. In addition, the Borrower failed to make the complete Loan Payment that became due on May 1, 2023 (together with the earlier missed Loan Payments, the “Missed Loan Payments”). Those were defaults under the loan agreement. The Borrower’s failure to timely make each of the Missed Loan Payments constitutes a Loan Default Event under the loan agreement and creates a default under the Indenture securing the bonds.

In the meantime, the garage is closed so there are no revenues generated. The dispute between the University and the operator has been in the courts. Provident EMU has sued EMU twice in both federal and Michigan court. The federal case was thrown out quickly. In litigation to date, Provident accused EMU of underselling the cost of repairs needed on a 784-space parking structure and either undercharging or reserving more spaces than planned in the garage. The parties have been in disputes resulting from pandemic restrictions which limited operations.

It is part of a pattern of disputes between Universities and private housing and parking providers. The attraction of the P3 model for universities is that it shifts risk off their balance sheet. If they had wanted to guarantee the debt, they could have issued traditional parking revenue bonds. The whole point of these transactions is to shift risk. So, when revenues do not meet expectations, relying on universities to suddenly step up and backstop debt which they worked very hard not to be responsible for may be a fool’s errand.

HOCKEY ON THE ARIZONA BALLOT

On May 16, the voters in Tempe, AZ will have their chance to cast votes for or against a proposal to issue debt for the development of a mixed use commercial and residential community anchored around a new arena for the NHL Arizona Coyotes. The Coyotes have been in the Valley of the Sun for a quarter century without ever being able to lock down a permanent home. Multiple ownership groups and continuing interest in moving the franchise have not helped.

The team now plays on the Arizona State University campus. It is designed for college and while its ice was rated the best in the league, the building holds only 5,000 people. It is not a viable long-term solution. After the Desert Dogs were kicked out of the arena in Glendale, a long-term solution had to be found before the pressure to move the franchise only grew.

The project was approved by the council to become a referendum on Nov. 10, 2022, and on Nov. 29, the proposed use of land and development that would be the entertainment district was unanimously approved. The team has agreed to pay the City under the terms of a 30-year Government Property Lease Excise Tax, which allows developers to build in Arizona by paying an excise tax instead of property taxes for a set number of years. 

A robust debate has unfolded with two sides offering what can only be described as the usual arguments. It is fair to say that a failed vote would result in enormous pressure to be placed on the NHL and its other owners to move the team to where it could have a permanent home.

PUERTO RICO

Beginning in 2016, CPI—a nonprofit media organization that has reported on Puerto Rico’s fiscal crisis—asked the Board to release various documents relating to its work. When CPI’s requests went unfulfilled, it sued the Board in the United States District Court for Puerto Rico, citing a provision of the Puerto Rican Constitution interpreted to guarantee a right of access to public records. The Board moved to dismiss on sovereign immunity grounds, but the District Court rejected that defense. The First Circuit affirmed. The case moved to the US Supreme Court.

The court began by citing Circuit precedent that Puerto Rico enjoys sovereign immunity, and it assumed without deciding that the Board shares in that immunity.

The question presented is whether the statute categorically abrogates (legal speak for eliminates) any sovereign immunity the board enjoys from legal claims. The Court held it does not. Under long-settled law, Congress must use unmistakable language to abrogate sovereign immunity. Nothing in the statute creating the board meets that high bar. Lacking that language, this Court assumed without deciding that Puerto Rico is immune from suit in United States district court, and that the Board partakes of that immunity.

In short, nothing in PROMESA makes Congress’s intent to abrogate the Board’s sovereign immunity unmistakably clear. The statute does not explicitly strip the Board of immunity or expressly authorize the bringing of claims against the Board. And its judicial review provisions and liability protections are compatible with the Board’s generally retaining sovereign immunity. The standard for finding a congressional abrogation is stringent. Congress, this Court has often held, must make its intent to abrogate sovereign immunity “unmistakably clear in the language of the statute.”

In short, nothing in PROMESA makes Congress’s intent to abrogate the Board’s sovereign immunity “unmistakably clear.” The statute does not explicitly strip the Board of immunity. It does not expressly authorize the bringing of claims against the Board. And its judicial review provisions and liability protections are compatible with the Board’s generally retaining sovereign immunity.

MAINE TRANSMISSION

Maine’s highest court ruled today that a 2021 ballot initiative seeking to block construction of a 145-mile transmission line was unconstitutional. It ruled that the ballot measure could not retroactively ban New England Clean Energy Connect, or NECEC as the project is known. They noted the proposed transmission line had received a certificate of public convenience and necessity from state utility regulators.

The decision still requires adjudicating the issue of whether Avingrid, the project sponsor and CMP owner had completed enough work on the project that it could not be stopped. The applicability of the decision on the initiative in this case depends on what a county jury decides in litigation currently ongoing to resolve that question. 

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

LAKE MEAD

The Upper Colorado Basin’s snowpack stands at almost 160% above normal. Forecasts say the melting snow flowing into Lake Powell via the Colorado River and its tributaries could hit 177% of average this year. Colorado’s snowpack is well above average, and Utah had its snowiest winter on record. So, we’re all good? Right?

Colorado River flows have declined about 20% compared to historic flows, even with this year’s record-breaking snowfall. Regional water authorities predict that Lake Powell will end 2023 at 3,573 above sea level. That would be a clear improvement over last year when it ended the year at 3,524 feet. Lake Mead ended 2022 at 1,044 feet, and authorities predict it will end this year at some 1,068 feet.

Those levels must be compared with Lake Powell’s official full level of 3,700 feet. It’s peak storage was when it filled to 3,708 feet in 1983. In 1983, Mead reached 100% full at 1,225 feet. At their lowest levels, Lake Powell was at 23% of capacity, while Lake Mead had reached 28% of capacity. Combined, they are today only about 26% full.

MAINE TRANSMISSION TRIAL

The New England Clean Energy Connect, a long-running effort by Massachusetts to import 1,200 megawatts of electricity produced by hydropower from Quebec is facing a crucial legal test. A jury of nine Cumberland County residents in Maine’s Business and Consumer Court will sit at trial to decide if the billion-dollar project can move forward. 

The trial revolves around the question of whether or not a 2021 referendum on the project which resulted in a 60% -40% vote against the project came in time to stop it. The jury’s specific task is to decide whether Central Maine Power had completed enough work by the time the referendum intervened that it can legally finish the project. The referendum came after the project had completed the full approval process before Maine state regulators.

The politics of the issue have, as they say, made for strange bedfellows. The usual profiles of opposing groups on these sorts of issues do not fit this case. On one hand the opposition is over process and how much local participation there was. Those interests have combined with operators of natural gas fueled merchant generation to oppose cheaper hydropower. Some environmentalists find themselves on opposite sides of the issue from entities like the Sierra Club.

What does not help is the role of the energy supplier – Avingrid – in this mess. Avingrid (a foreign owned company) acquired Central Maine Power as part of an effort to develop a retail base in the US for its renewable energy projects. (Full disclosure, I am an Avingrid customer. Thoughts and prayers are accepted.) 

Based on their abysmal customer relations policies and operational shortcomings, those subsidiaries are seen negatively by the public. Comments from CMP’s customers in Maine were among the things which led the New Mexico power regulators to deny Avingrid’s bid to purchase Public Service of New Mexico.

CLIMATE LITIGATION A STATE COURT MATTER

The Supreme Court last week declined to hear five appeals from the fossil fuel industry seeking to move climate change lawsuits it faces to the federal courts. The lawsuits before the high court were filed by Rhode Island, the cities of Baltimore, Honolulu, and Imperial Beach, California, and counties in California and Hawaii. 

To date, at least five federal circuit courts of appeals have considered the jurisdictional issue and concluded that there were insufficient grounds to move the cases from the state courts to federal jurisdiction. A separate appeal filed by the oil companies challenging lower court decisions in cases out of New Jersey and Delaware is still pending before the Supreme Court.

The decision is the first since a 2021 SCOTUS ruling that found that an appeals court relied on too narrow an interpretation of a procedural issue against the fossil fuel companies.

NY BUDGETS

NYS finally has a budget some one month late. Fiscal and non-fiscal issues delayed enactment and revolved around perennial concerns – housing, mass transit, bail reform. The issue of housing was effectively punted until the budget was completed as there is some 60 days more in the legislative session. Bail reform was reduced as an issue which left funding for the MTA as the remaining fiscal issue.

The budget agreement provides new and recurring funding for the MTA through an increase in the payroll tax paid by the city’s big businesses. The increase is expected to generate about $1.1 billion for the agency. In addition, the agreement includes a one-time payment from the state of $300 million. It also includes an additional $65 million payment to reduce a proposed fare hike. New York City will be expected to provide $165 million. The state initially proposed a yearly payment of $500 million from the City.

The State budget includes a $1 increase in the tax on a pack of cigarettes. Tuition for out of state students at SUNY and CUNY will increase. The budget agreement also included a prohibition on the use of gas stoves in new construction. The ban on the stoves is the first statewide ban to be enacted. All of the previous bans were imposed by localities. Note that existing gas furnaces can be replaced. The ban is only on new construction.

Now that a budget has been arrived at, the focus moves to the NYC budget. The state will provide some $1 billion of aid to address the costs of asylum seekers. The aforementioned payment from the City to the MTA and the addition of $300 million in state assistance to the MTA remove significant uncertainties from the City budget.

HOSPITALS – BIG GETS BIGGER

The wave of consolidation in the healthcare industry continues. The latest example comes from the announcement that Kaiser Permanente is acquiring Pennsylvania’s Geisinger Health System. Geisinger is a large regional provider with an extensive provider network. Like Kaiser it combines hospitals and insurance in its basic business model. The transaction expands Kaiser Permanente’s footprint across the country.

Kaiser has formed a subsidiary – Risant Health – which plans to acquire several health systems. Geisinger would operate independently under the new subsidiary of Kaiser’s hospital unit after the deal closes, which is expected early next year. Geisinger, based in Danville, Pa., reported about $6.9 billion in revenue last year. It counts 10 hospitals and about 600,000 health plan enrollees and employs more than 1,700 doctors. 

MAY 11

This week will mark the end of the use of Title 42 as a method to limit crossings primarily from the southern border by immigrants. Rooted in public health control issues, Title 42 was seized upon by the Trump administration to limit crossings from Mexico by basing its use upon pandemic limitations. As the pandemic waned, Title 42 has remained in place as the size of the pool of potential asylum seekers has continued to grow.

Without Title 42, asylum seekers will be able to gain admittance to the US for processing of their claim. This will focus even more attention on the costs of the lack of a realistic immigration system. It will also focus attention on the budgets of two of the nation’s largest cities – New York and Chicago. Government officials in border states, especially in Texas, have already indicated their intention to continue to bus new arrivals to these two cities. New York already counts over 50,000 new asylum seekers. More than 8,000 migrants have come into Chicago since August, according to city officials. Chicago runs eight shelters dedicated to new migrants. 

In Texas, El Paso, Laredo and Brownsville declared states of emergency ahead of the end of pandemic-related asylum restrictions. In Denver this month, officials announced that only immigrants with a formal application to stay in the U.S. will be allowed in emergency shelters. Denver has spent nearly $13 million sheltering and supporting more than 6,000 migrants.

TRANSIT FUNDING

While much of the attention focused on the Tennessee legislature this year has been about social issues, there has been action on transportation. Tennessee Gov. Bill Lee signed a bill that will allow for the creation of “choice lanes” on congested highways in urban areas. The plan would let drivers pay a fee, which rises and falls with traffic demand, to use an express lane. Buses will be able to use the lanes without paying the toll. The legislation authorizes public-private partnerships for the development of the “choice lanes.”

The big effects reflect the decision to at least authorize toll-based funding and the use of P3 structures to finance, fund, and construct transit infrastructure. The increased use of tolling in the Southeast reflects long standing changes in culture and the migration of Northerners who have experienced toll roads as a fact of life.  That historic resistance has slowed the implementation of toll-based funding. The framing of the issue of tolling as one of user-based funding to support the use of tax dollars to fund these expansions has had appeal.

In Colorado, legislation was enacted to expand a free fare program for mass transit to reduce air pollution by offering free public transit rides during peak ozone season. Zero Fare for Better Air was backed by $28 million of funding and provided free bus and train rides for the entire month of August.  A total of 15 transit agencies took part. This year’s bill expands the grant program allows transit agencies to roll over the money and use it for rider outreach. It also gives transit agencies more flexibility on when to use the money, as Colorado regions experience ozone season differently.

It clearly had an impact on ridership. Denver’s RTD reported a 22% increase in ridership during the free-fare month and an increase of 36% from August 2021. Ridership increases in other counties were significant. Pueblo County reported a 59% increase over the year prior, Archuleta County a 56% increase and 48% for Mountain Metro in Colorado Springs. 

VIRGIN ISLANDS WATER AND POWER

When we last commented, the Virgin Islands Water and Power Authority was staring down a deadline to finance a $145 million buyout deal with propane supplier Vitol. The highly politicized board of the Authority was delaying a vote on the plan effectively risking the Authority’s ability to operate its power generation facilities. Finally, a package of funding was approved by the legislature and the buyout can move forward.

The legislature has been debating a proposal to approve a $150 million line of credit to make an initial cash payment of $45 million to Vitol which was due on April 14. It finally approved amended legislation on April 21, granting the government access to a $100 million line of credit. That meant to enable the government to make the initial payment to Vitol by the new deadline, which was May 1. A first payment of $45 million is being advanced by the V.I. government under the line of credit. WAPA will fund the payment to Vitol $100 million by August 14. The generation facility would then be controlled again by WAPA enabling it to procure Propane more freely.

It is a short-term fix as the ultimate source of the $145 million cost of the buyout has yet to be established. WAPA plan was to apply for reimbursement for the $145 million buyout from the U.S. Department of Housing and Urban Development, but the federal agency has yet to agree to provide that funding. That reliance on a federal buyout has been seen as problematic by many and it continues to limit the positive credit impact it will have.

Power remains a highly expensive commodity in the VI. The current retail rate is 41 cents a kilowatt hour, including 22 cents for the Levelized Energy Adjustment Clause or fuel rate, plus 19 cents from the base rate, which pays for day-to-day operating costs. WAPA’s actual operating cost is around 55 cents, depending on fuel prices. The gap has been subsidized by the VI government. The fuel cost declines expected under the new structure are looked at as a chance to reduce the subsidy.

RATINGS

Moody’s announced that it has downgraded the City of Jersey City, NJ’s issuer, general obligation unlimited tax (GOULT), and city-guaranteed ratings to A1 from Aa3. The outlook was revised to negative from stable. The action is a reflection of the fact that bond raters, investors, insurers do not like surprises. Moody’s is pretty clear on this issue in the case of Jersey City.

In 2021, the city’s audit reported a financial result materially worse than indicated by previously published unaudited financials. Moody’s notes that this is an unusual occurrence in New Jersey. The final audit reflected a significant operating deficit and negative adjusted fund balance. Moody’s notes that the city has raised taxes materially and taken other steps to stabilize its finances. Unaudited results for 2022 reflect a considerable recovery.

An outside consultant which works with the City on its finances and suggests specific steps also reports out of date systems and internal controls. Weak internal systems in municipal governments are not a new phenomenon. That is unfortunate. In this case, Moody’s specifically cited the state of the city’s IT infrastructure as something “which must be addressed before the city’s finances can truly be on a healthy footing; as a result, governance is a key driver of this rating action.”  

The Northern California healthcare powerhouse Sutter Health has been dealing with a variety of legal issues relating to its anticompetitive practices. The system had to pay some $575 million to settle state litigation. The cash hit as well as the negative impacts of the pandemic on the hospital sector pressured Sutter’s ratings.

After a sustained period of bad credit news, the trend has been reversed. S&P Global Ratings raised its long-term rating to ‘A+’ from ‘A’ on Sutter Health. The move was based on improved operating results and the lack of extraordinary funding costs of legal settlements lead to an improved balance sheet as well.

Detroit was the beneficiary of a rating upgrade from S&P. S&P Global Ratings raised its long-term rating to ‘BB+’ from ‘BB’ on Detroit’s unlimited-tax general obligation (GO) debt. Another year of positive financial results and improvements to reserves and liquidity supported the upgrade. The outlook is positive based on Detroit’s recent revenue growth and forecasts showing that it can follow through with its financial plan, at least in the near term. The current administration has gained credibility and political support for its efforts to maintain balanced finances. The city benefits from the undeniable improvement in the city (at least its CBD) which reflects the strength of the state’s major industry.

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.