Joseph Krist

Publisher

The dog days of summer are here. The weather is hot, the benches are clearing for fights over beanballs, and traffic to the shore is outrageous. All of that is offset by the fact that it’s state and county fair time. The heck with spreads and basis points. How about you guess which goat, sheep, or pig is going to win the 4H competition. It’s your chance to see cars crash into each other on purpose. And you can do it while eating something off of a stick and likely excessively fried. If you can’t find joy in funnel cakes and ice cream and fresh corn on the cob, I can’t help you. Put your cell phone down and try to win a stuffed toy!

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PENNSYLVANIA BUDGET

The Commonwealth is into week four of a standoff between the Legislature and the Governor. Education funding – especially the issue of vouchers – is at its center. Specifically, $100 million was to be allocated for school vouchers, just 0.2% of the spending plan. Republicans believe that the funding of $300 million in Democrat priorities was the basis of the agreement to fund vouchers. Pennsylvania has a hard core of constituents who support either faith based small private schools or home schooling. The result is a split legislature with one house substantially more conservative than the other and newly elected Governor.

The immediate issue is that the lack of final budget action precludes the Commonwealth from making certain aid payments to school districts and localities. It’s bit of gamesmanship that has the potential to disrupt lower levels of government and force them to borrow to cover anticipated funding shortfalls. The interim process is a bit messy as the State Treasurer decides what does and does not get paid. She has laid down a narrow range of acceptable expenses for payment.

As is almost always the case in a state budget impasse, school aid and payments to social service providers are the first entities to be impacted. The state Senate isn’t slated to reconvene until Sept. 18. It is that body which must ratify the budget.

SALT ON THE MENU?

The issue of the state and local tax deduction limitation is back on the agenda. Since the limit was passed as part of the 2017 tax cut, various efforts have been undertaken to increase or eliminate it. While the impact on decisions by individuals to stay or move from New York is individual, the change did stimulate real estate activity in some of NYC’s old-line suburbs. It has just been hard to truly quantify the impact.

Now, a new effort is underway to change the limit. A group of moderate Republicans has formed the “SALT Caucus” to press for a tax cut for residents of their largely blue states. Republican House members from those states are threatening to vote against a tax package approved in June by the House Ways and Means Committee unless a provision is added to raisethe SALT cap. The package is centered around maintaining Trump tax cuts which run out in FY 2025.

SOLAR AND AQUEDUCTS

The idea that California’s extensive aqueduct and irrigation systems and canals could provide a site for the use of solar panels has been kicking around for a decade. The discussion over the potential of deployment of solar panels over the canals had not been accompanied by any sort of objective data. That lack of evidence was seen as an obstacle for support for implementation of such an idea.

While water is abundant in the short run currently, the drought experience of the last decade has encouraged reconsideration of the idea. One municipal entity – the Turlock Irrigation District – decided to encourage a study of the issue by one of the state’s universities. The University of California, Merced did such a study which was completed in 2021. It estimated that 63 billion gallons of water could be saved by covering California’s 4,000 miles of canals with solar panels that could also generate 13 gigawatts of power. 

The study allowed the various interest groups and governmental entities to have some objective evidence to point to. This led to the formation of a public-private partnership between the State, the District, and a solar panel vendor. This resulted in Project Nexus. The Project, supported by $20 million in public funds, is turning the pilot into a three-party collaboration among the private, public and academic sectors. About 1.6 miles (2.6 kilometers) of canals between 20 and 110 feet wide will be covered with solar panels between five and 15 feet off the ground.

There are numerous potential benefits above the generation of power. The drought focused attention on the open nature of much of the aqueducts’ infrastructure. This leads to water loss through evaporation which can be mitigated by the cover from the panels. Case studies of over-canal solar photovoltaic arrays have demonstrated enhanced photovoltaic performance due to the cooler microclimate next to the canal. 

CONGESTION FEES – THE BATTLE IS ON

In a completely unsurprising move, the State of New Jersey is suing the U.S. Department of Transportation (USDOT) and the Federal Highway Administration (FHWA) over their approval of New York City’s congestion pricing plans. With the filing of the litigation, the waves of hyperbole have begun washing ashore with charges that mass transit will be subject to “irreparable harm.”  The suit calls for a more exhaustive study than the M.T.A.’s assessment saying that the authority did not do an adequate job of studying whether the tolling program would harm people in disadvantaged communities. It is an argument raised by residents of the Bronx as well so it is not just a New Jersey thing.

As controversial as it is, congestion pricing seems to be a lighter political lift than many other alternatives. Manhattan is a double-parking nightmare primarily due to commercial vehicles. Various solutions to this problem have been proposed – commercial delivery hours and commercial parking zones are two examples. Drop off/pickup zones reduce cruising by empty Uber cars.

The fact is that while congestion pricing may not be supported by commercial interests, they can price the cost into their systems. Car drivers do not have the same pull as commercial interests and so that resistance is seen as being easier to overcome. Consequently, the burden is likely to fall on individuals. This raises issues of equity at a time when the MTA is already operating low-income fare programs.

The issue has gotten to this point as the result of a lack of creativity and a failure to address many of the issues related to congestion. The DeBlasio administration caved to the presence of some 100,000 transportation network vehicles often cruising empty. A deal which accepts flat annual fee payments from delivery companies in lieu of enforcement against things like double parking makes that problem permanent. It reflects the political cowardice of the 1990’s when short-term parochial interests destroyed the usefulness of the MTA commuter tax.

It is the combination of all those factors that generates the opposition to the charges. That and the MTA’s long record of cost overruns and construction delays breed a lack of faith that the money will actually be spent on capital rather than operating expenses. The plan puts the one agency with one of the poorer reputations at the center of this fight.

EV ROLLOUT SPEEDBUMPS

The corporate world generated some sobering news about EV sales. While the infrastructure universe debates things like where to put charging equipment or how to charge for the power, the rate of production for EVs has been disappointing. While the manufacturing base is built out, especially for batteries – there is a shortfall in some batteries that is delaying production. This week’s case in point comes from GM.

In the first half of this year, G.M. built just 50,000 electric vehicles, and about 80 percent were Chevrolet Bolts that use an older battery pack made by a supplier. In the United States, G.M. sold fewer than 2,800 vehicles that used its new, modular Ultium battery packs, which are made at an Ohio factory that the company owns with LG Energy Solution. Two other Ultium factories are under construction, in Tennessee and Michigan.

G.M. was sticking with a previous forecast that it would make 400,000 electric vehicles in North America from 2022 to 2024, and it is expected to make 100,000 in the second half of this year. G.M. currently offers only a few vehicles that use Ultium batteries. They include the Cadillac Lyriq S.U.V.; the GMC Hummer a $90,0000 vehicle; and large delivery vans made by a new division called BrightDrop. This summer and fall, G.M. is supposed to add three electric Chevrolets — the Blazer and Equinox S.U.V.s and an electric Silverado pickup. 

MILEAGE FEES

With the rollout of electric vehicles proceeding, the issue of how to pay for roads without the benefit of a tax on motor fuels takes on greater urgency. The Georgia Department of Transportation is looking for 150 volunteers to take part in a federally funded pilot project that will replace gasoline and other motor fuels taxes with a tax based on the number of miles driven. 

A legislative study committee formed last year to look for ways to accommodate an expected increase in electric vehicles plying Georgia highways recommended making any future mileage-based tax the state adopts comparable to what drivers of gasoline-powered vehicles pay in fuel taxes.

The pilot project will include both GPS and non-GPS options to keep track of the miles the volunteers drive. The GPS option will determine how many miles a volunteer drives inside of Georgia compared to outside of the state, which is important for taxing purposes.

I-81 ON THE MOVE

After much legal wrangling, the project to dismantle the I-81 viaduct in Syracuse, NY is finally underway. The project is one of the first to support the dream of many urban planners to remove barriers to movement and access which resulted from a spate of 1960’s highway projects which split many communities in half. The $2.25 billion project will create a Community Grid to reconnect downtown neighborhoods severed by the I-81 viaduct’s construction. 

The Community Grid design will reconnect neighborhoods that have been separated since the viaduct’s construction. The project will upgrade a portion of Interstate 481, which would be re-designated as I-81, and construct the new Business Loop 81 along Almond Street to improve connections to downtown and other business districts.

DROUGHT CONTINUES OUTSIDE CALIFORNIA

The freakish winter weather in California has rightly captured much attention but that only serves as a diversion from the realities of water in the rest of the West. Upstream from the Colorado River Basin, low snow and rain levels in places like Montana have contributed to a deteriorating supply situation.

SKQ Dam, located up stream from a generation facility on Montana’s Flathead River, is the only hydropower dam in America owned by an Indian Nation. The level of lake water is down almost two feet below what’s considered full pool. That’s never happened during the summer months since the lake’s SKQ hydroelectric dam was built on the southwest end in the 1930s.

Like many other dams, a license from the federal government requires the dam to release a minimum amount of water downstream for endangered species protection.  The rate of releases under the license currently exceeds the rate of replenishment. Efforts to increase available supplies from dams farther upstream were unsuccessful. A request to add more water from the Hungry Horse Reservoir upstream was denied, with the Columbia River Basin Technical Management Team (TMT) citing concerns over impacts on fish and water levels next year. 

The limits on flow through to the generation station have caused hydropower to be about 60% of what is normally generated this time of year for electricity. At the same time, in Colorado the U.S. Drought Monitor last week reported that 20% of the state is back in drought, just two weeks after its July 6 finding that the state was drought-free for the first time since 2019. The areas in question include river cities like Gunnison and Durango.

ANTI-ESG REALITIES

We come across two examples of what happens when ideologically generated legislation collides with the realities of implementation. The first example is Florida where House Bill 3 was enacted. HB-3 is designed to prevent companies like commercial banks and investment banks from doing business in the state if such companies are perceived as boycotting or otherwise discriminating against certain industries or other companies that are not aligned with their particular environmental, social and governance (ESG) or diversity, equity and inclusion (DEI) policies.

In this case, the law goes beyond a generalized state ban. It includes all state and local issuers in Florida from issuing ESG bonds. Under HB-3, ESG means simply “environmental, social, and governance” and “ESG Bonds” means bonds designated or labeled as being used to finance a project with an ESG purpose. The definition of “issuer” is defined so as to encompass all state and local bond issuers.

On June 29, the Florida Division of Bond Finance released a notice intending to clarify the impact of HB-3 on Florida issuers, rating agencies and other market participants. The notice is meant to clarify the intent of HB-3 which apparently is to prohibit the issuance of any ESG-designated or labeled bonds, whether the designation or label comes from an issuer or a third-party. Such prohibition includes paying or using a third-party verifier to certify any such designation or label. So, in the end, it’s all about labeling. Not a substantial issue. That is clear from the qualifiers in the law.

HB-3 permits financial institutions (including federal or state banks) to circumvent its anti-boycott provisions in connection with the purchase or underwriting of bonds (other than ESG Bonds) issued in Florida. does not prevent or prohibit licensed financial institutions from underwriting bonds issued within the State. The law bans Florida issuers from entering into contracts with rating agencies whose ESG scores have a direct, negative impact on the issuer’s bond ratings. Rating agencies may continue to assess the risks posed by hurricanes and other natural disasters, for example, or other risks deemed relevant to an issuer’s overall credit rating.

In the end, it may amount to much ado about nothing.

In Oklahoma, State Treasurer Todd Russ released the list of banned companies in early May. The 13 companies include BlackRock Inc., JP Morgan Chase & Co., Wells Fargo & Co., Bank of America and State Street Corp. The list came out of the Oklahoma Energy Discrimination Elimination Act, which lawmakers passed in 2022. 

The reality is that the law is already raising issues on two fronts over the cost of compliance. One is the fact that localities are finding themselves having to select a bid which is more costly for a capital project. The lack of clarification from the state as to how to balance low bid requirements versus the limits of the Act is delaying contract awards due to financing uncertainty.

At the state level, the state’s seven pension systems combined manage more than $47 billion in assets. The Oklahoma Public Employees Retirement System, or OPERS, has the largest exposure to companies on the treasurer’s restricted financial companies list. More than 60% of its assets are managed by companies on the list. 

At the same time, counties and localities cite the fact that the law as written seems to apply to only state entities. The pension systems run by Tulsa and Oklahoma counties and the systems run by Oklahoma City and Tulsa aren’t covered under the Oklahoma Energy Discrimination Elimination Act. 

PIPELINE LEGISLATION

The leadership of the House Energy and Commerce Committee has released its draft of The Pipeline Safety, Modernization, and Expansion Act of 2023. The proposed law would enable the Federal Energy Regulatory Commission (FERC) to issue any federal permit required for the construction, modification, expansion, inspection, repair or maintenance of a pipeline. It would also enable individuals to request FERC make a final decision on a permit if the federal agency tasked with permitting a pipeline fails to complete a proceeding within one year.

The next provision is where the bill wades into the weeds of local regulation. It would also prohibit a state or local jurisdiction from banning transportation of an energy source like natural gas that are sold in interstate commerce using a pipeline regulated by the federal Pipeline and Hazardous Materials Safety Administration (PHMSA).  The bill would further require PHMSA to finalize safety standards for carbon dioxide transportation pipeline facilities no later than one year from the date of enactment. It also clarifies the authority of the Environmental Protection Agency to identify areas suitable for underground sequestration of carbon dioxide.

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

EV TAX BREAKS UPHELD

The Georgia Supreme Court has declined to hear an appeal challenging the $5 billion project’s bond agreements with the state and the Joint Development Authority of Jasper, Morgan, Newton, and Walton counties (JDA). Rivian hopes to develop a $5 billion facility, expected to occupy 2,000 acres in the state, was announced in late 2021. The estimated production output the plant is 400,000 electric vehicles per year.

Construction on the site was originally set for 2022, which would have allowed operations to begin within two years, but due to a number of legal challenges, Rivian has moved the launch date back to 2026. The lawsuit before the Georgia Supreme Court claimed the state was not legally allowed to arrange the deal and challenged the validity of bonds tied to the offer.

A Michigan judge also declined to issue a preliminary injunction which would have suspend zoning ordinance changes supporting the Ford Motor Co. BlueOval Battery Park Michigan. The $3.5 billion, 2,000-acre plant will create about 2,500 jobs in the Marshall, MI area. Opponents filed a petition to call for a public vote on the matter but the city clerk deemed it insufficient.

That led the group to file the lawsuit on June 27, calling the clerk’s decision unconstitutional and arguing leaders violated the city charter when they tied an appropriation to the rezoning — which made it ineligible for a petition challenge. It asked for an injunction and for the court to order the city clerk to accept the petition.

NY TAX BREAK SCRUTINY

The Citizens Budget Commission (CBC) is a long-standing well-respected organization which analyzes the finances of New York City and State. Recently, it released the results of its analysis of economic development spending by the City and the State. The level of spending in the state has long been among the highest in the nation. The findings were not surprising but nonetheless disappointing.

CBC’s analysis of economic development spending in 2022 finds that: State economic development spending totaled nearly $4.4 billion, including $2.5 billion in foregone revenue from tax expenditures and $1.9 billion in direct spending; and local and county government spending cost $6.3 billion, including $3.1 billion in tax breaks, $2.1 billion in direct spending, and an additional $1.1 billion in foregone local sales tax revenue resulting from State sales tax exemption programs.

The cost of existing incentive programs is projected to increase by $500 million in 2023, a 22% increase from fiscal year 2022, and could increase by another $1 billion annually starting in 2024 as three new and expanded programs take effect: the expansion of the film tax credit increased the annual cap from $420 million to $700 million per year; the extension of the theatrical production increases the lifetime cap of the tax break by another $100 million to $300 million; Green CHIPS (a tax credit for the semiconductor industry) will increase expenditures as much as $500 million per year if fully utilized.

The biggest issue raised by the report is the lack of transparency which makes it very difficult to assess the effectiveness of the strategy overall and for discrete projects. This has created an environment where the State continues to expand existing incentives without evidence that they are necessary or cost-effective. In some cases, State officials have extended or expanded incentives despite independent evaluations showing that the credits are ineffective.

PA SEVERANCE TAXES

There have long been calls for Pennsylvania to adopt some form of severance taxes on the production of natural gas. The Commonwealth currently levies an “impact fee” which is levied on producers for each hole they drill. The fee has raised $2.5 billion since it was created in 2012. Many believe that use of the impact fee approach versus a severance tax has put the Commonwealth in the position of seeming to have left significant dollars on the table.

Now that debate is being revived in the Commonwealth legislature. The state House passed a resolution directing a nonpartisan committee to study severance tax structures in other major gas-producing states. The resolution directs the Legislative Budget and Finance Committee to conduct a study to compare impact fees and severance taxes in the largest natural gas producing states and examine the competitive business climate for the industry in those states.

In 2022, Pennsylvania accounted for 19% of marketed natural gas production in the United States; and Pennsylvania’s marketed natural gas production was at an annual high of 20.9 billion cubic feet per day (Bcf/d) in 2021 and averaged 20.5 Bcf/d in 2022. The amount of gas produced increased from 1,066 billion cubic feet in 2011 to an estimated 7,600 in 2022. The resulting revenue income to the Commonwealth remained essentially flat.

The study is also charged with producing estimates of how much revenue was foregone due to the failure to levy a severance tax. This was the original goal of the supporters of the study. The original resolution focused on that potential revenue loss. The finished product evolved into a study of other factors such as permitting and even climate and their impact on production. This makes the study much more complicated and dilutes the focus on the lack of severance taxes and the potential revenue loss.

URBAN RECOVERIES

Much has been made of the slow recovery of many downtown business areas across the country. There have not been too many studies to produce data to reflect those realities. A recent effort by the University of Toronto has been able to generate an index of urban core recoveries that puts some real data behind people’s estimates and impressions.

The study looked at data derived from mobile phone use an increasingly widespread method of researching mobility. They are computed by counting the number of unique mobile phones in a city’s downtown area in a specified time period, and then dividing it by the number of unique visitors during the equivalent time period in 2019. For example, the March 2023 – May 2023 time period is compared to the March 2019 – May 2019 time period.

A recovery metric greater than 100% means that for the selected inputs, the mobile device activity increased relative to the comparison period. A value less than 100% means the opposite, that the city’s downtown has not recovered to pre-COVID activity levels.

While San Francisco remains the focus of much attention on its problems with its downtown recovery, the data shows that several other big American cities are coping with slow recoveries. San Francisco was ranked last with a 36% recovery. Other cities with recovery rates at or below 50% include Seattle, Boston, Philadelphia, St. Louis, Portland.

That is not to say that recoveries in the major cities outside that group have been great. Recovery rates for many big cities remain below 60%. That group includes Chicago, Nashville, Atlanta, Denver and Houston. Los Angeles and Miami have identical recovery rates of 65%. New York has recovered at a 67% rate which is the same as San Antonio. Washington, D.C. has complained about remote policies for federal employees but the recovery rate there is actually 75%.

The survey found only four cities had reached a recovery rate of 100% or higher. The best large city recovery rate was found in Salt Lake City at 139%. El Paso showed a 107% recovery rate.

MORE PURPLE LINE DELAYS

The State of Maryland and Purple Line Transit Partners are seeking Board of Public Works approval of a modification to the Purple Line Public-Private Partnership Agreement that extends the contractual deadline for achieving Revenue Service Availability to Spring 2027. The schedule change reflects delays in completion of utility relocation activities. The project is more than 50% complete.

In addition to the extension of the project’s Revenue Service Availability deadline, the Maryland Transit Administration will provide net compensation to Purple Line Transit Partners of $148 million, including an increase of  $205 million paid during the construction period, less a $57 million reduction to payments made during the operations and maintenance period. The compensation amount reflects the additional cost of continuing construction activities during the extended period.

OH, CANADA

In November, voters in Maine will cast a ballot on a referendum question on whether to disenfranchise the state’s two largest privately-owned electric utilities to create a consumer-owned utility called Pine Tree Power. If Maine residents were to vote in favor of creating a consumer-based electricity utility, it would likely stimulate negotiation. An elected board of directors would also be formed to manage the Pine Tree Power Company.

One of those electricity companies which would be impacted by a vote in favor of the referendum is Versant Power. Here’s where things get tricky.  Versant is currently owned by Enmax after a deal valued at $1.8 billion was completed in 2020. Enmax is the electric utility serving and owned by the City of Calgary, Alberta. Yes, a publicly owned utility. That is what makes its position on the referendum a bit of a tangle. To date, it has spent some $7.5 million opposing the referendum.

What is it that this municipal utility in Canada dislikes about the deal? “A government-controlled utility company is a risk Mainers can’t afford.”  So says the Enmax funded advocacy group. It’s turning into a bit of a “through the looking glass” experience. It will also highlight the role in several areas of foreign-owned transmission and distribution utilities which have acquired these systems as outlets for their own sources of power.

Those efforts have accompanied a pattern of poor service and underinvestment in the physical grid components those forms maintain. While that underinvestment continues, dividends continue to be upstreamed to foreign parents. Opponents of the operations of Enmax estimate that since Enmax’s acquisition of Versant Power in 2020, it has sent Enmax a yearly dividend which then is revenue to the City of Calgary. It is estimated that Calgary received $82 million from Enmax.

MTA FARE INCREASE

The potential imposition of congestion fees on drivers coming into Manhattan has dominated much of the discussion about the need for increased revenues at New York’s MTA. The focus on that topic has allowed the Authority to consider a fare increase even though the return to pre-pandemic utilization levels has not occurred. Now, the M.T.A.’s board voted to raise the base fare for subway and bus trips for the first time in eight years, to $2.90 from $2.75, by late August.

Weekday ridership has rebounded significantly but still hovers at about 70 percent of pre-pandemic levels. The $2.75 base fare has been in place since 2015. The most recent fare increase came in 2019, when the price of unlimited weekly and monthly MetroCards rose. The board also voted to increase tolls on bridges and tunnels next month by 6 percent for drivers paying through the E-ZPass system and by 10 percent for those who pay by mail.

The increases come after the NYS budget was adopted which granted increased state revenue to the MTA. The state’s funding package includes a $65 million payment earmarked to prevent an even larger fare increase to help make up for the one that was skipped in 2021. The additional aid also creates an environment where discounts and/or exemptions can be considered by the Commission generating toll recommendations.

MORE HOSPITAL PRESSURE

Nuvance Health (Nuvance) operates seven hospital campuses: Vassar Brothers Hospital, Putnam Hospital, Northern Dutchess, Danbury Hospital, New Milford Hospital, Norwalk Hospital, Sharon Hospital and three Medical groups in Eastern New York and Western Connecticut. It reported $2.6 billion revenue in FY 2022. Like so many other systems, it faces higher labor costs while utilization has not fully returned to pre-pandemic levels.

This puts pressure on profitability as well as liquidity. Results have been poor enough so that Moody’s anticipates that Nuvance will breach its debt service coverage covenant at the end of fiscal year 2023. Given the current trends, Moody’s downgraded Nuvance Health’s revenue bond rating to Baa3 from Baa2. The rating outlook was maintained at negative.

The outlook reflects the fact that stabilization of the system’s finances will require the success of management at addressing the cost side of the problem. That will be hard as the trends driving costs are national rather than regional or site specific. The generation of a larger “customer” base through service expansions cannot be counted on to generate short term liquidity improvement.

MICHIGAN MUNI SOLAR POWER

Michigan’s state capitol, Lansing, has announced a significant bond-financed plan to expand its generation of renewable energy. The Lansing Board of Water & Light (BWL) has been at the front of the climate debate having closed its last coal-fired generating facility. Now, the Board said it plans broad-ranging investments in solar, wind and at least one new gas-fired electric generation plant in a $750 million plan over the next 10 years. The combined increase in new capacity would be 650 MW. The utility currently can generate around 735 megawatts of electricity.

BWL board members approved rate increases for water and electric last fall, raising electricity rates 9% and water prices more than 18% over a two-year period. About half of those increases took effect Nov. 1 and the other half will take effect this fall. Currently, the utility does own some of its own solar capacity but most of its solar power is purchased. The plan is specific about proposed investment in new solar and wind assets.

The plan provides for the possibility of an additional natural gas-fired peaking plant. BWL just added to its natural gas fleet in 2022. The lack of real specificity about the development of the natural gas capacity gives the Board time to evaluate the political climate for a gas plant and whether it would still be feasible.  

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

ANOTHER PATH TO GAS BANS

The City of Cambridge, MA has become the first known city in the country to mandate non-residential buildings to reduce their greenhouse gas emissions with a net zero requirement by 2035 for large buildings (larger than 100,000 square feet) and 2050 for mid-size buildings (100,000 square feet or smaller). The City is doing this through amendments to its building codes – the Building Energy Use Disclosure Ordinance (BEUDO) – first passed in 2014.

That established code requirements for energy and water reporting from commercial properties over 25,000 square feet and residential properties over 50 units. This ordinance regulates approximately 1,100 buildings in Cambridge. It has been suggested that the use of building codes to effect changes in use for things like gas stoves is a more effective way of withstanding legal challenges. The Berkeley, CA ordinance against natural gas appliances specifically has not fared well in court to date. That litigation has led to suspension or postponement of enforcement of similar ordinances in other municipalities.

This week, Eugene OR repealed its ban on new natural gas appliances that was enacted only this past February. The City Council cited opposition to the ban and the court decision invalidating Berkeley, CA ban on natural gas hookups.

CARBON CAPTURE AND LOCAL REGULATION

Summit Carbon Solutions and an owner of an ethanol plant in Shelby County, Iowa have obtained a preliminary injunction against the County to keep it from regulating the location of proposed carbon capture pipelines. The lawsuits seek declarations that the ordinances are preempted by federal and state regulations, permanent injunctions that prevent their enforcement and attorney fees.

The ruling in the federal Southern District of Iowa, said state law does not explicitly prohibit the Shelby County ordinance in western Iowa but that such a prohibition is implied. The judge found that the ordinance’s requirements for pipeline companies to submit safety plans to the county and to notify the county when use of a pipeline is discontinued conflict with federal rules. She noted that the County would have a role in land restoration under state law and the lack of explicit reference to the County’s right to regulate is evidence that “the Legislature did not envision a role for counties in regulating the location of pipelines,”.

In two other companion lawsuits against Emmet and Story counties, motions for preliminary injunctions remain under review.  The Iowa Utilities Board is poised to start a final evidentiary hearing for Summit’s project on August 22. 

GEORGIA TRANSIT FUNDING

Georgia voters in 2020 passed a constitutional amendment requiring all revenues that the state’s dedicated trust funds collect to remain inside those programs rather than be diverted into the general budget. To implement the will of the voters, nine trust funds were created by the Legislature in 2021. One is The Transit Trust Fund which gets its dedicated revenue from a per-ride tax on ride-sharing services like Uber and Lyft.

The Transit Trust Fund Program (TTFP) is administered by GDOT and uses a population-based formula, based on 2020 Census data, to distribute state funding to Georgia’s counties with existing transit service. The first full fiscal year of results indicate that Georgia public transit systems are getting about $27 million. Half of that is split between MARTA and ATL the main transit providers in Atlanta. The rest aids smaller systems throughout the state. The awards have to be spent on new services, instead of ongoing operations.

NUCLEAR AND TAXES

Back in 2021, the Byron Nuclear Power Station in Illinois was chosen for closure. The price of its power was not competitive in its market. As the closure date approached, the Illinois Legislature passed bills providing some $700 million in operating subsidies to keep the plants open. In terms of the climate, it was a positive development given the carbon-free nature of nuclear generations. In terms of policy and politics, positive is likely in the eyes of the beholder. 

Byron Generating Station’s two nuclear reactors can produce up to 2,347 megawatts (MW) of zero-emissions energy. Byron Generating Station Unit 1 is licensed through 2044, and Unit 2 is licensed through 2046. Now that the issue of operation is out of the way for the foreseeable future, the plant’s owners – Constellation Energy – have come to an agreement over the taxation of the plant for the next five tax years. Constellation will pay more than $33 million in property taxes, over half of which will go to the host school district.

The rest will be distributed to eleven other local municipalities and districts. The plant will retain an assessed value of $500 million through the term of the agreement.

CLEAN ENERGY JOBS

Clean energy jobs include jobs in the technologies related to renewable energy; grid technologies and storage; traditional electricity transmission and distribution for electricity; nuclear energy; a subset of energy efficiency that does not involve fossil fuel burning equipment; biofuels; and plug-in hybrid, battery electric, and hydrogen fuel cell vehicles and components.

The U.S. Energy and Employment Report (USEER) is a comprehensive summary of national and state-level energy jobs, reporting by industry, technology, and region with data on unionization rates, demographics, and employer perspectives on growth and hiring.  Recently, it published its 2023 USEER. It shows that the energy workforce added almost 300,000 jobs from 2021 to 2022 (+3.8% growth), outpacing the growth rate of the overall U.S. workforce, which grew by 3.1%. Clean energy jobs increased in every state and grew 3.9% nationally.

As of 2022, the energy sector has recovered 71% of the jobs lost in 2020.3 The energy sector has added back 596,000 of the 840,000 jobs lost during the first year of the pandemic. Nuclear electric power generation employment increased by 1,358 jobs in 2022, up 2.4% from 2021, whereas it had decreased the previous year. Employment increased and decreased across different categories of fossil energy for electric power generation. Coal electric power generation jobs decreased by 6,780 from 2021 to 2022, down 9.6%, while natural gas electric power generation jobs increased by 7,311, a growth rate of 6.6%. Oil electric power generation employment increased by 2.4%, adding 279 jobs in 2022.

Where are those jobs? Energy jobs grew in all 50 states and Washington, D.C., with the largest growth in Texas, California, and Pennsylvania. Clean energy jobs grew across all 50 states and D.C. Excluding traditional transmission and distribution, California added 13,116 jobs (+3.6%), followed by Texas, which added 5,198 (+5.5%), and New York, which added 5,054 (+3.0%). When including transmission and distribution jobs, California added 13,293 (+3.2%), followed by West Virginia, which added 6,975 (+19%), and Texas, which added 5,136 (+3.5%).

ESG – EXECUTIVE ACTIONS ARE A DOUBLE-EDGED SWORD

The idea of executive action when the legislative process and/or the judiciary system do not provide the answers one wants is gaining increased currency. The SCOTUS recent decisions on student loan debt and affirmative action have increased calls for executive action. It is good to remember that the use of executive action can easily be a two-edged sword.

The ESG space is the latest source of pressure to act via executive action. Those who oppose the concept have been hard at work in the most recent legislative sessions in efforts to legislate against the use ESG. The last two years have seen a spate of such legislation enacted. Fourteen states have enacted at least one law designed to limit the use of ESG principles in making investment decisions and/or awarding business. This year there were proposed some 165 pieces of legislation in 37 states to counter ESG investment practices, according to Pleiades Strategy, a climate-focused research and advisory firm. But of those 165 proposals, only 22 anti-ESG laws in 16 states were approved this year.

That is not fast enough to satisfy ideologues holding state office. The latest example is Missouri. Missouri is one of ten states which assign the regulation of the securities industry to the State secretary of State. Missouri’s Republican secretary of state, John “Jay” Ashcroft, issued a rule on June 1 that requires broker-dealers to obtain consent from customers to purchase or sell an investment product based on social or other nonfinancial objectives, such as combating climate change. (Yes, Mr. Ashcroft is the son of the man who ran for Senate and lost to a dead man).

Republican lawmakers failed to pass a similar measure during the state’s legislative session that ended on May 12. The Secretary is now going to try to accomplish through regulation what could not be accomplished legislatively. It is the first step in a process to rely on executive or administrative orders and attorney general opinions. In Wyoming, Secretary of State Chuck Gray has proposed ESG disclosure rules for investment advisers like Missouri’s. A public comment period is expected soon.

SENIOR LIVING BLUES

We were recently asked to look at current conditions in the senior living sector of the municipal market. The sector has been experiencing increasing defaults and it stands out as one of the weakest credit sectors in the market. We see several reasons for that.

COVID – The sector clearly came under attack during the pandemic especially in 2021. COVID clearly has impacted the view of senior living on the part of consumers and families alike. So now the attractiveness of one of these facilities will be diminished for some time. That is the first demand driver.

Interest Rates – Then there is the impact of inflation/higher interest rates. The stickiness being observed in the housing market generally is both a supply issue as well as an access to capital issue. Now that younger people are effectively priced out of housing ownership, the model of selling granny’s house to pay the entrance fee doesn’t work as well. If trends against traditional zoning laws continue, the attractiveness of turning the garage into an accessible living space for a senior will only increase.

Refinance Restrictions – The days of multiple refundings to adjust debt service schedules as problems arise is diminished. Only able to refund once and only on a current basis, a borrower has a much more limited menu of options to deal with cash shortfalls. This will show up in more defaults but supported by the willingness of lenders to hold back on covenant enforcement.

Inflation – Just like hospitals, they have gotten creamed by higher costs for supplies, utilities, and labor. Labor is especially hard to find so by definition becomes more costly.

Size matters – While hospitals face many of the same issues, the larger established facilities in that sector had more resources and larger revenue bases to rely on to tide them through. Those that were smaller did not do so well. Many of the senior living credits are site specific so the flexibility which one might hope to find is limited by the relatively smaller resource base supporting those credits.

GAINESVILLE UTILITIES TAKEOVER AND GOVERNANCE

A non-profit and a group of citizens has filed a lawsuit in the Florida courts challenging the State’s takeover of the local utilities authority in Gainesville. (MCN 7.10.23) The move by Governor DeSantis to politicize the operations of GRU should raise issues for investors who care about governance issues. The first issue reflects the fact that while the authority will be a unit of Gainesville city government, the City Commission will not control or direct it.

The plaintiffs in the litigation are actually suing on the basis of free speech grounds. The law says the authority “shall consider only pecuniary factors and utility industry best practices standards, which do not include consideration of the furtherance of social, political or ideological interests.” The plaintiffs note that members of the public in the past have petitioned the City Commission on issues such as “rates and services for low-income people and social issues such as environmental safety, racial fairness in infrastructure and living wages for GRU (Gainesville Regional Utilities) employees.”

The plaintiffs contend that the new ‘law eliminates plaintiffs’ and others’ rights to petition the board for redress of grievances pertaining to social, political, environmental, and ideological issues that are inherent in the operation of a utility system,” the lawsuit said. “Even if the authority allowed plaintiffs or others to address them with respect to ‘social, political, or ideological interests,’ the authority is legally prohibited from taking any action in response.”

CYBERSECURITY

A federal grand jury has indicted an individual, charging him with intentionally causing damage to a protected computer after he allegedly accessed the computer network for the Discovery Bay Water Treatment Facility, located in the Town of Discovery Bay, Calif., and intentionally uninstalled the main operational and monitoring system for the water treatment plant and then turned off the servers running those systems. The individual was an employee of a private company which operates the plant.

It was a serious breach. It is alleged that the individual installed software on his own personal computer and on his employers private internal network that allowed him to gain remote access to Discovery Bay’s Water Treatment facility computer network. Then, in January of 2021, after the individual had resigned from the private operator, he allegedly accessed the facility’s computer system remotely and transmitted a command to uninstall software that was the main hub of the facility’s computer network and that protected the entire water treatment system, including water pressure, filtration, and chemical levels.

MUNI BONDS FOR SOLAR

The Sandoval County, New Mexico Commission approved a resolution that would issue $275 million in Industrial Revenue Bonds that would go to building an 1,100-acre solar farm. The bonds would be paid from revenues derived under a Payment In Lieu of Taxes agreement from the owner. The power is expected to be sold to existing and projected data centers supporting companies like Intel and Facebook.

The use of PILOT payments continues to facilitate a wide range of development including sports facilities and projects like this. The County has issued PILOT debt before so it is a tested concept. The PILOTs will be divided by the County and the five school districts located in it. The five school districts receive a total of 38% and Sandoval County receives 62% of the PILOT payment. Rio Rancho would get 22.64% of the PILOT payments. Cuba would get 7.27%, Jemez Valley 4.64%, Bernalillo 3.20% and Corrales would get 0.11%.

SPORTS FACILITIES AND REALITY

This week, two situations involving sports facilities in New York and Oakland highlight the complicated relationship that cities have with sports teams. Over the years we have seen a variety of responses which serve to undermine the position of those who believe that subsidies for facilities for professional sports teams a bad investment. The two situations serve to highlight the idea that actions speak louder than words.

This week, the New York City Independent Budget Office (IBO) released an analysis of the cost/benefit of a tax exemption granted to the owners of Madison Square Garden (MSG). Madison Square Garden is the city’s oldest operating professional sports arena and the only major league sports facility located in Manhattan, sitting directly above Penn Station, the busiest transit hub in North America.

The MSG arena opened at its current location in 1968 and hosts two professional teams—the New York Knicks and the New York Rangers. As a private property, the arena paid property taxes until the 1982 New York State Legislature exempted MSG indefinitely.  Local Law 18 passed by the City Council in 2017, turned to IBO to issue periodic evaluations of the city’s economic development tax expenditure programs. The new report finds that since the property tax exemption took effect, MSG has been exempted from paying more than $946.7 million in property taxes, as measured in 2023 dollars.

IBO concludes that it is unlikely that the property tax exemption for MSG is the determining factor for the Knicks and Rangers maintaining their location in New York City. Potential relocation options for the Knicks and Rangers are limited by current market saturation within the leagues and the economic benefits of MSG’s current location (which affect ticket and broadcasting revenues for the stadium) are strong.

The first arena special permit was issued in 1963 for a term of 50 years, expiring in 2013. The City Council chose to renew the permit in 2013 but restricted it to a length of 10 years, leading to the current expiration in July 2023. One might expect a tough negotiation with MSG especially given the efforts to renovate and expand Penn Station. The City Planning Commission has proposed letting MSG have its permit renewed if the Garden cooperates with renovations to Penn Station. Those plans would replace a theater in one part of MSG. Now, the City Council may balk at the agreement but there seems to be no real threat to the Garden operating at its current location.

In Oakland, the City is making a last-ditch effort to prevent the Oakland A’s from moving to Las Vegas. The proposal comes after the A’s entered into a deal with Bally’s Corp. to build a stadium on part of the Tropicana Las Vegas resort site and received approval from the Nevada Legislature for about $380 million in public funding. Now after years of fighting the notion of subsidies for the City’s last remaining pro sports franchises, a proposal has been made.

The city said it secured more than $425 million in funding to cover offsite infrastructure costs, $65 million more than the A’s requested. The team would pay for onsite infrastructure and development, but the city would reimburse about $500 million of that cost through the creation of an infrastructure financing district.

The irony is that the City’s proposal would locate the stadium where the A’s wanted in the Howard Terminal industrial site. The new Mayor who took office in January is pursuing a different path than that of her predecessor. The depth of support for any public funding from the City has always been an issue. The combined expenditure of nearly $1 billion by the City runs against the mantra of scarce resources for public services being gobbled up by a for profit entity that has been put out there for many years.

So, one has to ask oneself exactly which view actually has currency – public funding or no public funding?

NEW YORK CITY HOUSING AUTHORITY

NYCHA has been in the news for its state of disrepair and overwhelming need for capital. A lack of federal funding support has not helped but the quality of management at the Authority has been a sore point for some time. The Authority’s chief executive is in turmoil. Multiple administrations have found funding needed repairs in amounts anywhere close enough to cover what was an estimated $41 billion capital need to properly maintain the existing stock have not materialized.

We say was because the Authority released a new estimate for the cost of funding repairs to NYCHA’s buildings. The new estimate released this week puts the price tag at $78 billion. NYCHA officials estimate that $60 billion relates to things that will need replacement in the next five years — including boilers and heating systems. The new estimate is the first developed while NYCHA operates under a federal monitor.

Eighteen months into the Adams administration, the Mayor’s plan to privatize management of the Authority creeps along. This would facilitate the provision of public housing through the private sector. Politically, the plan has many opponents including residents who would see their housing demolished to facilitate new housing. It is an idea first hatched in the Bloomberg administration and it did not get far under Mayor DeBlasio.

The sheer scale of NYCHA’s portfolio makes it matter. NYCHA’s developments are home to more than 330,000 people, disbursed through 2,100 buildings. Rents for public housing residents tend to be capped at 30 percent of their income, and the average rent is less than $560 per month. NYCHA estimates that 40% of the families living in NYCHA homes have at least one person who is working. Nearly 275,000 families were on the waiting list for a NYCHA apartment this year.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

MEDICAID WORKRULE REDUX

Georgia has been one of the original holdouts against the expansion of Medicaid eligibility from the enactment of the ACA. This in spite of the fact that some 90% of the cost would be funded by the federal government. Previous efforts by states to impose work requirements on Medicaid recipients have been overturned in the federal courts. The Biden administration did not appeal, allowing the program to take effect. Now, one of the states which tried the tactic is trying again.

Beginning on July 1, Georgia’s Pathways to Coverage program will become the state’s mechanism for judging eligibility for Medicaid. The plan was approved very late in the Trump administration. Georgia was already known for having one of the strictest Medicaid requirements in the country. It will only cover parents earning up to about 30 percent of the federal poverty line (an annual income of no more than $8,000 for a family of three).

The changes in effect on July 1 will partially expand Medicaid coverage to people with incomes up to the federal poverty level: less than $25,000 per year for a family of three. Applicants will need to prove they already meet the 80-hour monthly work requirement in order to apply, and there is no grace period. The rules apply to new applicants. Existing recipients in Georgia are covered under the state’s traditional fee-for-service Medicaid program.

If the work requirements are not met, the state will not remove anyone for failing to comply. (When the federal courts blocked the previous program in 2019, it was estimated that some 18,000 people lost insurance in the first seven months of enforcement.) The state will instead move them from the private insurance used for Arkansas’s expansion to the traditional fee-for-service Medicaid program, which is less generous.

GAINESVILLE REGIONAL UTILITIES

Governor DeSantis signed a law creating a new board to take over the operations of the Gainesville Regional Utilities. GRU serves some 93,000 customers in the city of Gainesville and surrounding areas. Throughout its history, it has been governed by the City Commission, which appoints a general manager to handle the day-to-day operations. Recently, suburban customers of GRU who cannot vote in local Gainesville elections have been complaining about rates and the location of generation facilities.

Those complaints generated the legislation which was enacted this week. The bill takes away the city commission’s control of GRU and gives ultimate authority to an unpaid five-member board appointed by the governor. The board would have the ability to hire and fire GRU’s general manager. That sets up a legal conflict as the city’s charter still says that the role is a “charter officer” position that answers to the City Commission.

Now that a new board will be appointed by the Governor, it is believed that GRU is the next municipal utility in Florida which has been targeted for sale to a for-profit utility like Florida Power and Light. Gainesville voters soundly rejected appointing an independent authority to govern GRU in 2018.

The increasingly partisan approach to the state’s municipal utilities has already led to one colossal failure to privatize the Jacksonville Electric Authority. The moves to privatize JEA led to the indictment of JEA’s chief executive officer and finance chief, who were accused of trying to extract millions out of the city-owned utility before selling it off to a private operator. That process led to federal investigations amid charges of corruption. CEO Aaron Zahn and CFO Ryan Wannemacher are due for trial in October.

A citizen-led nonprofit group, Gainesville Residents United, has said it will file a federal lawsuit in the coming days in response to the bill. No surprise there. In June the city commission authorized the spending of $250,000 from the GRU utility system reserves fund for outside counsel to provide legal advice in connection with analyzing and potentially litigating the impact of the bill on the city. The move to take over GRU is a primarily political act.

ROAD FUNDING

While the debate over how to fund roads – gas taxes or mileage fees – continues, the immediate needs of transportation agencies cannot be ignored. That led to the enactment of a variety of gas tax increases across the country. It also led three states to impose new taxes on the use of charging stations. Here’s where the changes took effect on July 1.

California – The gas tax rises from 53.9 cents to 57.9 cents per gallon. The per-gallon tax on diesel goes from 33 cents to 34.5 cents; on Oct. 1 it will rise again to 50 cents.

Colorado – The existing gas tax includes fuel fees that increase July 1. The fee for a gallon of gas rises by 1 cent; the fee for diesel goes up by 2 cents.

Illinois – The gas tax goes up from 42.3 cents to 45.4 cents per gallon. The tax on diesel rises from 49.8 cents to 52.9 cents per gallon.

Indiana – The gas tax increases from 33 cents to 34 cents per gallon.

Iowa – The per-gallon tax on ethanol and ethanol-gas blends will rise from 24 cents to 24.5 cents per gallon. For higher-grade biodiesel, however, the tax will decrease from 30.1 cents to 29.8 cents per gallon.

Kentucky – The tax on gasoline increases from 26.6 cents to 28.7 cents per gallon.

Maryland – The gas tax goes from 42.7 cents to 47 cents per gallon; for diesel, the tax rises from 43.45 cents to 47.75 cents per gallon.

Missouri – The gas tax increases from 22 cents to 24.5 cents per gallon.

Virginia – The gas tax increases from 28 cents to 29.8 cents per gallon; the tax on diesel goes from 28.9 cents to 30.8 cents per gallon.

Iowa, Montana, and Utah included new electric vehicle taxes.

Iowa – At public and commercial charging stations, there is a new tax of 2.6 cents per kilowatt hour.

Montana – An electric current tax of 3 cents per kilowatt hour takes effect at new vehicle charging stations (those opened after July 1, 2023).

Utah – There is a new 12.5% tax at electric vehicle charging stations but the gas tax rate falls from 36.4 cents to 34.5 cents per gallon.

NUCLEAR RESTART FUNDING

The effort to restart the Palisades nuclear generating plant in Michigan received a boost from the State of Michigan. The budget for the FY beginning on October 1 was passed by the Michigan legislature. It includes some $150 million designated for a portion of the cost of restarting the privately owned plant.  Palisades owner Holtec is about $300 million short of what it needs to get the plant operating again. It’s also seeking funds from the U.S. Department of Energy loan office to get Palisades back online.

GATEWAY TUNNEL

The federal government will give $6.88 billion, the most ever awarded to a mass-transit project, for the construction of a second rail tunnel under the Hudson River to New York City. The Gateway Tunnel would relieve strain on the over a century old existing tunnel serving railroads into New York. It has been the subject of debate and has been slowed down by politics. Chris Christie refused to fund New Jersey’s share of the proposed tunnel.

The existing tunnels have been steadily deteriorating since Hurricane Sandy flooded them with salt water in 2012. The federal money will allow the project to formally begin the process of selecting contractors. The estimated $16 billion project is planned for completion in 2035. Amtrak, which owns the tunnels, plans to shut those tracks for repairs, one at a time, once the new tunnel is in use.

CARBON CAPTURE

The efforts by Summit Carbon Solutions to obtain approvals for its proposed pipeline for captured carbon have been controversial. Most of the opposition has been fueled by the potential use of eminent domain to obtain right of way for the pipeline. Those efforts are being litigated in the courts. Now, the effort is taking on a more aggressive turn.

In North Dakota, two counties have passed ordinances governing the establishment and operation of pipelines like the one proposed by Summit. Summit submitted paperwork in June asking the North Dakota PSC to declare the two county ordinances “superceded and preempted” by state and federal law. “Those ordinances, which contain setbacks and other safety-related measures, would frustrate if not outright halt investment in North Dakota’s carbon capture, utilization, and storage industry,” according to Summit.

What do the ordinances say? One of the county ordinances states that a hazardous liquids pipeline cannot be constructed within 10 miles of an electric power generating facility, an electric transmission line, an electric transmission substation, a public drinking water treatment plant, a public wastewater treatment plant or the extraterritorial line of an incorporated city.

Other limits would not allow the pipeline to be built within 4 miles of a church, school, nursing home, long-term care facility or hospital; within 2 miles of a public park, recreation area, occupied structure or animal feeding facility; and within 1 mile of a confined feeding facility or the ordinary high-water mark of the Missouri River. The challenge to a designated agency’s ability to regulate land use is a bold move with potential ramifications beyond those of the pipeline itself.

In South Dakota, the house passed with a two-thirds vote, HB 1133 which would have limited the ability of companies doing carbon sequestration to use eminent domain. The debate there focused on whether sequestered carbon was a commodity in the same way natural gas and electricity are treated for regulatory purposes. The answer will drive the definitions of how to treat captured carbon and then whether the project constitutes public use. The Senate, with its 31-4 Republican majority would not take up the bill.

Summit faces additional review in Iowa where the same property issues have been at the fore of pipeline opponents. They have applied for an extension of existing permits supporting a proposed 31-mile addition to a carbon dioxide pipeline. Summit has said it wants a decision on its first permit by the end of the year. A final evidentiary hearing, which initially was expected to start in October, will instead get underway in August. Summit filed its eminent domain list with the Iowa Utilities Board that shows it has not obtained voluntary land easements for 1,036 parcels. That represents about 30% of the route.

WISCONSIN BUDGET

Governor Tony Evans used his constitutional veto power to reduce an income tax cut included in the budget passed by the state’s Republican-controlled legislature. The veto reduces the total revenue loss to the state from $3.5 billion to $175 million. It eliminated tax cuts for the highest two income brackets entirely. The process using “partial vetoes” or what are line-item vetoes reflect the highly partisan environment which has grown in Wisconsin over the last 15-20 years.

The process can produce some interesting results and this biennium is no exception. The partisan divide is clear with the legislative budget cutting taxes for all income levels vs. the Governor’s plan; the Legislature cut funding for DEI at the University of Wisconsin and the Governor restored all 188 positions in his plan. The Governor’s plan includes provisions designed to provide in future biennia and effectively in perpetuity, school districts with additive per pupil revenue adjustments of $325 every year.

The State’s localities benefit from the budget. 2023 Wisconsin Act 12 created a funding structure that provides a $275 million boost to state aid to localities by funding the supplemental county and municipal aid program. This includes a $68 million increase in aid for counties and a $207 million increase in aid for municipalities in fiscal year 2024-25, representing a 36 percent increase over current county and municipal aid entitlements. The legislation provides additional aid to counties and municipalities in fiscal year 2025-26 and beyond by linking both current and supplemental county and municipal aid to the growth rate in the state sales tax.

SAN FRANCISCO

Moody’s Investors Service has revised the outlook on the City and County of San Francisco, CA’s long-term ratings to negative from stable. Concurrently, Moody’s affirmed the Aaa ratings on the city’s issuer rating and on approximately $2.6 billion in outstanding general obligation (GO) bonds. The revision of the outlook to negative primarily reflects the various near term financial and economic headwinds facing San Francisco. 

The city expects draws on reserves in fiscal 2023 and across budget years 2024 and 2025. Prolonged weakness in the city’s commercial real estate market, stubbornly slow to rebound office worker attendance, and low downtown utilization continue to weigh on the broad economic vitality of San Francisco’s core business, retail, and tourism districts. 

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.