Joseph Krist

Publisher

GOVERNMENT

CHICAGO CREDIT CURVE CONTINUES UPWARD

Another Chicago issuer got some good ratings news this week following on the improvement in the Chicago Public Schools credit. This time it was the City of Chicago itself. Moody’s Investors Service has revised Chicago (City of), IL’s outlook to positive from stable and affirmed the Baa3 issuer and the Baa3 rating on the city’s general obligation unlimited tax (GOULT) debt.

Moody’s based the outlook revision to positive on the basis of what they see as strengthened pension contribution practices and positive trends in the city’s financial position. A new pension funding policy was adopted in the fiscal 2023 budget under the prior administration. The reduction in uncertainty over whether a new Mayor and administration would continue those practices has been addressed. Those practices are continued in the fiscal 2024 budget which calls for pension contributions designed to keep the net pension liability (GASB NPL) from growing.

Moody’s also has affirmed the Baa1 rating on the city’s water revenue bonds, the Baa1 rating on senior lien sewer revenue bonds, and the Baa2 rating on the junior lien sewer revenue bonds. It is clear from Moody’s that the exposure of the sewer and water revenue bonds to the city’s credit challenges is the primary factor constraining the ratings despite otherwise strong attributes of the systems.

WEALTH TAXES

So far in 2024, lawmakers in 10 states – California, Connecticut, Hawaii, Maryland, Minnesota, Nevada, New York, Pennsylvania, Vermont and Washington – have proposed new taxes on “wealth”.  They are all variations on a concept driven primarily by Senator Elizabeth Warren. Each year an individual taxpayer would be assessed income taxes on increases in the value of assets they own. If their net worth exceeds a certain amount, the year over year increase would be treated as income for tax purposes.

One of the main sticking points holding back any effort to tax wealth is that the tax would be imposed merely because of a change in asset value. It would not be based on whether the change in value had actually been realized. No states currently assess any taxes on a living individual’s net worth or unrealized capital gains. 

Texas voters approved an amendment to their state constitution in 2023 which would effectively prevent taxes based on wealth or net worth. A campaign is underway which is expected to get an initiative on that state’s ballot in November which would eliminate the state’s capital gains tax. The Connecticut legislature is expected to consider a wealth tax which would eliminate the carried interest tax loophole.

WHAT ARE THEY THINKING?

One of the hallmarks of the U.S. securities markets is the respect in the U.S. for the rule of law. It has always been a significant factor driving the location and growth of the U.S. economy. Now, some are so ideologically driven that they seriously propose steps which would allow governments to ignore the rule of law. The most egregious one which we have seen has begun making its way through the Utah legislature.

The Utah Constitutional Sovereignty Act, or SB57, would allow lawmakers to reject any action from the federal government they view as unconstitutional, unless a court rules otherwise. Lawmakers could “prohibit the enforcement of a federal directive within the state by government officers if the legislature determines the federal directive violates the principles of state sovereignty”.

It is another attempt to limit the regulatory power of the federal government based on the 10^th Amendment to the U.S. Constitution. It argues that only federal actions specifically authorized in the Constitution are legal. Many fear the legislation could be applied to any federal action which two thirds of the Utah Legislature does not like. Its sponsor claims that “we simply want to look at a process whereby we can vet, very carefully, any of those situations” “where we feel like the federal government steps over and reaches in and does some harmful things to our citizens, our state, our businesses. 

That is a pretty broad field of play and that is the concern. The claim is that it would rarely be invoked but that is always the claim of legislative sponsors of legislation designed to fight policies in court which they cannot win at the ballot box. The votes come as Utah’s fossil fuel industry has been fighting regulations limiting its ability to export its products from their landlocked locations. Some of those are federal but state permit issues are what has killed proposed shipment infrastructure for the export of Utah fossil fuel products.

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ENVIRONMENT

SOLAR

Recently we noted the role of Arizona’s public power entity as a hindrance to the use of residential solar power. Other municipal utilities are moving the other way. The latest example is CPS Energy, San Antonio’s municipally owned electric and natural gas utility. It announced the acquisition of the capacity of a 150 MW solar generation project in rural Texas. The utility currently has 551 megawatts of operating solar capacity and solar energy makes up roughly 7% of CPS Energy’s current power generation portfolio.

WATER

Here’s one example of why the current negotiations over the redistribution of water from the Colorado River and its surrounding region are so fraught. A private oil shale development company is seeking approval for the development of a reservoir on land under the supervision of the Bureau of Land Management. The particular tract for which the company is seeking a permit is within the boundaries of an area that the U.S. Forest Service and BLM are proposing to withdraw from eligibility for new oil and gas leases.

Conditional water rights are a unique provision of Colorado law which allow a would-be water user to reserve their place in the priority system based on when they applied for the right — not when they put water to use — while they work toward developing the water. Older waters rights get first use of the river.  An applicant must file what’s known as a diligence application with the water court every six years, proving that they still have a need for the water, that they have taken substantial steps toward putting the water to use and that they “can and will” eventually use the water. 

When the holders of conditional rights with older priority dates finally begin diverting water they have not used in decades, they may force junior rights holders to stop using water. That could potentially curtail users that have been receiving that water in some cases for decades. It has been estimated that there were conditional water rights associated with oil shale development on impacting 736,770 acre feet of water to be stored in 27 reservoirs in the mainstem of the Colorado River basin. 

WIND

The New Jersey Board of Public Utilities has awarded two new contracts for electricity from offshore wind farms. The projects are being undertaken in the wake of the decision by a previous developer to abandon its efforts to produce power from offshore windmills. At the time, the developer cited increases in costs due to general inflation, supply chain issues and interest rates.

The new contracts reflect those factors. The Board of Public Utilities estimates that under the contracts New Jersey awarded the monthly, the monthly bill of the typical residential customer in New Jersey would go up by $6.84. The two projects together would be capable of producing about 3,470 megawatts of electricity. New Jersey remains contracted with another offshore project, Atlantic Shores, for 1,510 megawatts. Combined, the three projects could produce more than one-third of the state’s 2040 target. 

On the West Coast, the Humboldt (CA) Bay Harbor District was awarded $426.7 billion dollars in federal grant funds to construct its offshore wind terminal in far Northern California. The District is constructing a terminal to serve the offshore wind generation industry. It plans to partner with an existing private terminal operator which is supplying $422 million of its own funds for the project.

Humboldt Bay is situated to be the first site to build a terminal for the construction and deployment of commercial offshore wind turbines on the West Coast. It will include a 1,200 foot wharf. The total cost is projected at $853 million. The target operation date is 2028. The Bureau of Ocean Energy Management auctioned off rights for the first offshore wind farms on the West Coast in December of 2022, and additional auctions are planned off the coast of Southern Oregon.

COAL

In 2020, the Wyoming legislature passed a bill intended to compel utilities to retrofit coal plants with carbon capture technologies rather than retire the facilities. It was portrayed as an effort to ensure reliability in a state where the coal industry is under attack. What was not clear to many was that costs associated with carbon capture adaptation could be passed through to customers. Now the potential cost to consumers is beginning to be assessed against utility ratepayers.

State regulators this month approved a $1.1 million annual “low-carbon” surcharge for Black Hills Energy. According to preliminary filings with the state, if the utilities move forward on a state-imposed mandate to retrofit coal-fired power plants with carbon capture technology the state’s ratepayers, it could mean up to $1 billion in additional costs for Black Hills Energy’s 145,000 customers in the state, and more than $2 billion for Rocky Mountain Power’s customers.

Black Hills Energy operates two units while Rocky Mountain Power operates three coal-burning units in the state that are subject to the law. The reality is that the real hope held by supporters is that federal funding would limit the impact on ratepayers. They believe that the recently expanded federal “45-Q” tax credit program for carbon capture facilities, along with technological developments could reduce the ratepayer burden.

The one common thread to the debate between “green interests” and the legacy fossil fuel interests is the hope that someone else will pay the bill. Electric cars, solar, wind, heat pumps all currently cost money and remain out of reach to many. A “surcharge” to keep the coal industry alive in Wyoming would likely deter potential large customers. Corporate customers are in a position to resist the surcharge effort especially if they have power supply agreements for power generated at non-fossil fueled plants.

It’s a prime example of the challenges facing climate activists, ratepayers and suppliers during the energy transition.

DALLAS FACES ENVIRONMENTAL REFUND OBLIGATION

In 2007, a gas company paid the City of Dallas $19 million for the right to drill for natural gas on city park land. In 2013, the Dallas City Council voted to stop renewing leases on land amid new restrictions on drilling within the city. That move led to a 2014 lawsuit filed by Fort Worth-based Trinity East Energy, LLC. A Dallas County jury in February 2020 agreed with Trinity East Energy that Dallas had improperly denied its permits to drill on city-owned park land and nearby private land in 2013.

The state Supreme Court rejected the city’s petition for review of those decisions in September 2023 and also declined another city motion for a rehearing of its petition to review the case on Dec. 29.  Now, the Council has is scheduled to vote Wednesday whether to approve up to $55 million in bond money to cover the total costs of the judgment. It would be the use of an old tool, the judgment bond which was designed for the occasional unfavorable legal judgment.

CHICAGO NATURAL GAS BAN

The new mayoral administration in Chicago has introduced the Clean and Affordable Buildings Ordinance (CABO). It would eliminate harmful natural gas emissions by setting an indoor emissions limit banning the combustion of fuels that emit more than 25 kg/btu – effectively requiring all new construction to switch to clean power sources like electric or other high efficiency systems. That is the same standard New York City set in a law enacted in 2021.

The following are exempted from the proposed emissions standard: commercial cooking, emergency backup power, crematoriums, wood fireplaces, industrial production, commercial laundry and labs and hospitals. The ordinance is not designed to force anyone to “give up their gas stove”. It is only targeted at new construction (including new additions to existing buildings). By amending building codes, the ordinance is designed to be immune to legal challenges to other “gas bans” imposed across the country. It would go into effect one year after passing City Council, in line with Chicago’s three-year building code cycle.

CAT BONDS

Since Hurricane Ian in 2022, the Florida Hurricane Catastrophe Fund has issued $1.9 billion in reimbursements to insurers and anticipates additional payments amounting to $8.1 billion by 2028. The fund also continues to make payments related to Hurricanes Irma and Michael, which struck in 2017 and 2018, respectively.

Now, the Fund plans to issue debt to provide between $1.5 million and $3 billion of new funding. According to the State, the bonds can be fit into the program’s existing debt structure which means that assessments to support bond repayment do not have to increase.

According to the Insurance Information Institute, the average insurance premium for homeowners in Florida has spiked by 42% year-over-year, to an average of $6,000 in 2023. At least a dozen insurance companies have stopped issuing new policies in Florida since January 2022 and three companies have announced their intentions to withdraw from the state in the past year.

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TRANSPORTATION

The U.S. Department of Transportation (DOT) today announced the approval of $2.5 billion in private activity bonds authority allocated for the Brightline West High-Speed Intercity Passenger Rail project connecting Las Vegas, Nevada, and Southern California. The 218-mile, high-speed rail line will primarily run along the I-15 median with trains capable of reaching 186 mph or more, cutting the trip to two hours – half the time to travel by car. 

DOT previously approved a private activity bond allocation of $1 billion for Brightline West in 2020, bringing the total allocation for this project to $3.5 billion. In December, DOT also awarded a $3 billion grant from President Biden’s infrastructure law to the Nevada Department of Transportation for this project. In June, DOT awarded a $25 million grant to San Bernardino County Transportation Authority (SBCTA) through the Rebuilding American Infrastructure with Sustainability and Equity (RAISE) Program that will be used for the construction of the Brightline West stations in Hesperia and Victor Valley, California. 

We continue to note that high speed rail in the US continues to need public funding support. Both this project and its Florida counterpart were advertised as projects which were private which could serve as models for the future expansion if high speed rail. The reality has been that neither project would have happened without significant support from the Federal government.

MILEAGE FEES

Members of the far-right Arizona Freedom Caucus (in the state legislature) have offered a bill which would ban state, city, town and county governments from creating any tax based on miles traveled in a vehicle. The bill also would ban any of those government entities from tracking the number of miles a driver has traveled through odometer readings, traffic cameras or using phone tracking data.  It also includes provisions aimed at barring policies that reduce how much people drive.

The sponsor believes that mileage fees are part of a conspiracy to take away people’s freedom of movement. They believe that it is part of a plan to “force” people to use public transit and ban personal vehicles. A concurrent resolution being floated with the bill would put the issue of mileage fees to a ballot in November. 

PURPLE LINE

The ongoing saga of the effort to complete a light rail system in suburban Maryland known as the Purple Line continues. The latest turn of events is the news that Fitch Ratings had placed its ratings on debt issued to finance the project on negative outlook. The Negative Outlook reflects the project’s complex construction works that have led to delays approaching the design build (DB) and lenders’ longstop dates for a second time in the short two-year span since financial close on the first “renegotiation” of the P3 agreements behind the project.

The outlook change is an indication of the desire to see this impending second “renegotiation” concluded and executed. The removal of this source of uncertainty would alleviate the pressure on the project’s ratings. Fitch Ratings has affirmed the ‘BBB’ rating on approximately $100 million of private activity revenue bonds (PABs) series 2022A (green bonds) and $543.5 million of series 2022B PABs (green bonds) issued by Maryland Economic Development Corporation on behalf of Purple Line Transit Partners LLC (PLTP; limited liability company) for the Purple Line light rail transit (LRT) project (the project).

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

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RATINGS

CHICAGO PUBLIC SCHOOLS

Moody’s Investors Service has upgraded the Chicago Board of Education, IL’s (CPS) issuer rating and debt ratings to Ba1 from Ba2. It has long been a troubled credit but never lost market access. That is reflected by the district having approximately $7.8 billion of general obligation unlimited tax (GOULT) debt outstanding in total. Moody’s based the upgrade on improvements in the CPS operating fund net cash and improved cash flows as reflected in part by reduced cash flow borrowing.

Moody’s also cited material increases in operating fund net cash, which is estimated to have reached about 13% in fiscal 2023 from under 5% five years prior. Enrollments are always a concern in aid-dependent urban school districts. This year, the actually increased by 1,000. It is a modest increase for sure but a welcome interruption to long-term trends. This will generate a small aid increase but also provides a higher base for adjustments if enrollments drop again.

The positive news doesn’t stop there. Moody’s maintained its positive outlook as a reflection of a trend of strengthening fund balance and net cash. At the same time, it’s less than investment grade current rating is weighed down by the fact that the district’s operating fund net cash remains the lowest of large school districts. Its limited available liquidity with a general fund net cash balance of less than 5%, and a high leverage ratio of nearly 500% of revenues are significant hurdles.

WMATA

The last few years have not been kind to the Washington Metropolitan Area Transportation Authority. Maintenance issues as well as issues with service and safety had put the Authority in a difficult spot. The pandemic led to extended stay at home provisions for many Federal government workers who mad up a good portion of ridership. Ridership and passenger revenues remain well below the pre-pandemic peak. Average daily rail and bus ridership experienced annual gains in 2023 but remain at approximately 60% of 2019 levels. Passenger fare revenues have also been negatively affected by a higher proportion of shorter-distance flat fare trips.

At the core of the problem is the fact that there is no predominant established reliable revenue stream to support operations. Farebox revenues cover only about 20% of expenses. This makes the system reliant on funding from state and local governments served by it. The District of Columbia, Montgomery and Prince George’s counties in Maryland, and in Virginia the cities of Alexandria, Fairfax, Falls Church and the counties of Arlington, Fairfax and Loudoun) are legally obligated (subject to certain restrictions) to cover the operating and capital costs of the transit system from their respective legally available funds, subject to annual appropriation.

WMATA has put up a budget for FY 2025 which covers a $750 million budget gap. Without additional funding subsidies from those governments, WMATA projects service cuts, which include the elimination of rail service after 10pm, the closure of 10 rail stations, increasing rail headway on all lines (ranging from 17% to 67%), and a one-third reduction in bus service. Subsidy increases from participating jurisdictions are subject to a 3.0% annual statutory cap under the terms of a 2018 dedicated capital funding agreement.

All of this contributed to Fitch Ratings’ move to put the Authority’s AA and AA- ratings for its two credits on negative outlook. It comes in the midst of the budget processes of all of the relevant governments including the States of Maryland and Virginia. Cutting service and raising fares is a recipe for trouble.

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SOCIAL

CHILD FOOD BENEFITS

The U.S. Department of Agriculture (USDA) administers a new program which provides funds to families with children who are enrolled in school breakfast and lunch programs will begin this summer. Summer EBT provides grocery-buying benefits to low-income families with school-aged children when schools are closed for the summer. Through this new program Summer EBT, states will provide families with $120 per eligible child for the summer to buy food at grocery stores, farmers markets or other authorized retailers – similar to how SNAP benefits are used. Native American tribes will utilize the WIC program.

Funding in the form of grants was authorized by Congress in 2023. An initial “test” for the current proposal was deemed a success leading to the rollout of the plan nationwide. Yet another time, a veritable list of usual suspects among the states has declined to participate in the program. They are essentially the same states who are ideologically opposed to any expansion of health or social services spending. Even when the Feds are covering costs with free money. Which states said no? AL, MS, ID, IA, GA, TX, SD, NE, WY, VT, AR, LA, FL, OK. They all have conservative Republican governors.

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GOVERMENT

NYC BUDGET

Mayor Eric Adams proposed a $109 billion budget for fiscal 2025. The mayor announced that the city would be receiving $2.9 billion more in expected tax revenues over the 2024 and 2025 fiscal years than initially expected. The City Council had projected some $1.5 billion of unanticipated tax revenues. The new number is good news but the Mayor’s handling of the issue of migrants and the budget is creating a whole other range of problems.

Since the first of the year, the Mayor has been announcing proposed draconian cuts in services in an effort to garner support for state and federal assistance. In the recent run-up to the budget, he has backpedaled on several of those proposed cuts to education, sanitation, and police and fire services. The Mayor’s lessening credibility on the City’s financial position and outlook will make his budget process much more difficult.

It has become clear that there will be no federal windfall for the city. This puts Albany center stage in the Mayor’s efforts to get the State to cover more of the costs of the migrants. He does not have a lot of credibility with the State Legislature already and this budget will not enhance his position. After the efforts to export the migrant problem to upstate communities, his “discovery” of new money will create a higher hurdle to overcome.

The proposed city budget comes on the heels of Gov. Kathy Hochul’s budget proposal for the State that included $2.4 billion to help New York City manage its migrant crisis — a $500 million increase over last year’s allotment. Nevertheless, the Mayor is holding out for more. Mr. Adams said that if the city received enough funding from the state, he would cancel further budget cuts that were planned for April. In the meantime, city agencies have reduced management and planning flexibility until the funding level is established. It is leading to worsening provisions of public services.

The Mayor comes into this budget cycle with lower credibility and an increasingly problematic federal investigation into his campaign financing practices. His relationship with an increasingly assertive City Council is poor and his budget plan is not helping his credibility with that body. It also does not help to find that the City has been providing inaccurate data regarding migrants and homelessness to make the situation look more favorable.

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ELECTRIFICATION

CHARGING INFRASTRUCTURE

So far only New York and Ohio have opened charging stations using bipartisan infrastructure law funding, and a handful of other states have broken ground on their EV projects. Now, the U.S. Department of Transportation announced the selection of 47 EV charging projects to receive nearly $623 million in funding under the 2021 bipartisan infrastructure law. As of last January, there were only about 20,000 publicly accessible, high-speed Level 3 chargers across the country.

The National Renewable Energy Lab estimates the country will have another 40 million EVs on the road over the next 25 years. It estimates that there would be a need for at least 182,000 Level 3 chargers across the country by 2050 to accommodate them. The issue gains greater currency as EV purchases grow and the pool of driving and operating issue increases. Currently, the press is full of reports from unhappy EV owners who forgot that batteries of any kind do not do well in sub-freezing conditions. That will increase the demand for charging at less distances between them.  

GENERATION

The U.S. Energy Information Administration released its most recent Short Term Energy Outlook. EIA projects solar power to be the leading source of growth in electricity generation in both 2024 and 2025 as 36 gigawatts (GW) and 43 GW of new solar capacity come on line, respectively. the solar share of total generation is expected to rise to 6% in 2024 and 7% in 2025, up from 4% in 2023. This will occur as overall U.S. electricity generation will grow by 3% in 2024 and be unchanged in 2025. 

EIA expects that electricity generation from coal will decline by 9% in 2024 and by 10% in 2025, due to a combination of higher costs compared with renewables and another 12 GW of coal-fired capacity retiring over the next two years. U.S. coal production will decline by more than 90 million short tons (MMst) to less than 490 MMst in 2024 and then fall below 430 MMst in 2025, the least coal produced in the United States since the early 1960s.

Electricity generation from natural gas will be unchanged in 2024 and 2025 compared with 2023. U.S. production of dry natural gas is estimated to increase between 1% and 2%, or about 1.5 billion cubic feet per day (Bcf/d) in 2024 and 1.3 Bcf/d in 2025, down from growth of 4.0 Bcf/d in 2023. The slowing growth reflects a drop in natural gas production associated with oil drilling in the Permian Basin.

Something to think about is after all of the efforts and ink spilled on the changing climate and the role of fossil fuel, EIA forecasts crude oil production in the United States reaching 13.2 million barrels per day (b/d) in 2024 and more than 13.4 million b/d in 2025, both of which would be new records.

SALT RIVER PROJECT VS. ROOFTOP SOLAR

Arizona’s Salt River Project is a public utility which has been less than enthusiastic about the adoption of rooftop residential solar. The use of solar in the Valley of the Sun has seemed to be a no-brainer but utilities have done all they can to make rooftop solar less economically attractive to its retail customers. The key to the situation lies in the methodology SRP has adopted to determine how much it pays for solar generated power.

Now, two customers and an advocacy group are challenging SRP’s current rate structure. They claim that the current scheme violates regulations because customers who buy some power from SRP but have rooftop solar are charged a different price for SRP generated power than those customers who do not have rooftop solar. They are asking the Federal Energy Regulatory Commission (FERC) to find that SRP’s current rate structure violates the Public Utility Regulatory Policies Act (PURPA).

The challengers contend that through the fixed charges, SRP’s solar customers with service at 200 amps or less pay $12.44 more a month than non-solar customers for the same amount of SRP-provided electricity. The challengers also claim that PURPA requires SRP to buy electricity from qualifying facilities at the utility’s system-wide marginal cost. Instead, the contention is that the price established by SRP is based on one particular low-cost generator.

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ENVIRONMENTAL

CLIMATE ON THE BALLOT

Washington voters will have the chance to repeal or uphold the Climate Commitment Act. The climate law requires the state’s biggest polluters, such as power companies and oil refineries, to start paying for their greenhouse gas emissions through buying allowances in auctions. So far, the auctions have raised roughly $1.8 billion. Organizers of an effort to repeal the 2-year-old climate act collected more than 400,000 signatures to put an initiative on the ballot.

Revenue from the program is earmarked to go back into green state programs such as buying electric school buses and making public transit free for children. Opponents blame the state’s cap and trade scheme for rises in gasoline and food. The initiative is technically an initiative to the Legislature. This means that the legislature can adopt the initiative as written, reject it or refuse to act on it. Voters will get a chance to vote on the initiative if the Legislature rejects it and refuses to act on it.

PREEMPTION CUTS BOTH WAYS

A lot of the efforts at preemption have been directed at overriding local ordinances and regulatory processes which have limited the use of fossil fuels. In those instances, legislation has generally been directed at localities and zoning and siting regulations which fossil fuel supporters feel limit their ability to extract their various substances and produce fuels and other products. Those efforts were always decried by environmentalists.

Now, the shoe is on the other foot. This time it is green energy advocates who are upset over efforts to move the regulation of renewable generation assets to the state level. The efforts reflect the perceived need to develop renewables to meet promised deadlines for carbon neutrality which have been made at the state level. The latest example is in Michigan where the legislature is considering bills which would put the authority for siting renewable energy projects with the State.

This would enable the State to effectively override local zoning ordinances which have been used to slow the adoption of solar and wind. In many cases, willing sellers or lessors who hope to retain their farm land are facing local limits on energy development. Michigan has adopted a plan committing to carbon neutrality by 2050. They won’t get there without solar and wind power.

INSURANCE

The Florida Senate Banking & Insurance Committee unanimously passed two bills that would allow pricier homes to be covered by Citizens Property Insurance, a state-run company, and to provide $100 million for a grant program to improve homes’ protection against windstorm damage.  SB 1106, raises the cap on homes that can be covered by Citizens from $700,000 to $1 million. The bill would place a surcharge of up to $2,500 on homes above $700,000 to keep Citizens from competing with private carriers. 

SB 7028, puts $100 million toward the My Safe Florida Home Program. That program offers up to $10,000 in matching grant funds to homeowners who make windstorm mitigation improvements, such as roof, windows and door upgrades. It’s clear that the insurance market continues to reflect a worsening perception of risk and the continuing withdrawal of major private insurers from the Florida market.

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

Governor Newsome released his proposed budget for fiscal 2025. The 2024-25 Governor’s Budget proposes spending of $291.5 billion in total state funds, consisting of approximately $208.7 billion from the General Fund, $80.8 billion from special funds, and $2 billion from bond funds. Revenues for the General Fund include a transfer from the Budget Stabilization Account/Rainy Day Fund of $12,026 billion. Some 53% of GF revenues are projected to come from the personal income tax.

The budget shortfall facing lawmakers in 2024—estimated at $37.9 billion—is rooted in two separate but related developments during the past two years according to the Governor. They are the substantial decline in the stock market that drove down revenues in 2022 and the unprecedented delay in critical income tax collections.  The State pushed back its filing deadline until this past October as the State dealt with a number of natural disasters in the normal tax season.

The new estimate is significantly lower than the $68 billion gap estimated by the State Legislative Analyst in the fall. Last year, due to federal tax deadline delays and California’s subsequent conformity, the majority of the state’s revenues did not arrive until October and November. That means the correction that would have come as part of last year’s May Revision is instead being made in this January budget.

Had the filing delay not been in place, most of the revenue drop would have been reflected in lower tax receipts before the May Revision and incorporated into the 2023 Budget Act projections. This would have resulted in a larger budget gap in 2023, additional solutions to close it, and a smaller shortfall for 2024 than what is now faced. 

The governor proposed funding nearly $19 billion of the gap with drawdowns of the State’s reserves. The remainder of the gap would be addressed by reducing $12 billion from planned spending and delaying a little more than $7 billion in spending commitments into fiscal year 2026. The reductions are concentrated in cuts to spending on education, housing, and climate. In the smoke and mirrors category, using Prop 2 Debt Repayment Funding ($1.3 billion) to fund pension payments and delays in the distributions of funds to transit systems and to the state university system ae employed. 

NYC PROPERTY TAXES

The real property tax (RPT) is New York City’s largest source of tax revenue, comprising 44 percent of the City’s tax revenue collections in fiscal year 2023. Covid-19 pandemic’s effect on city property values led to swings in RPT revenue in 2022 and 2023, and RPT current forecasts through 2027 anticipate slower growth in tax collections. Property tax collections increased relatively steadily by an average of 6.4 percent per year from 2012 through 2021.

In anticipation of major declines in rental income for commercial properties and residential apartment buildings, the Department of Finance (DOF) sharply reduced the assessment of property values that were used to calculate the 2022 tax bills, which led to a 6.0 percent decrease in property tax collections that year. Annual RPT revenues rebounded in 2023, rising by 7.0 percent to a level just above 2021 revenues. Some of the rebound reflected adjustments to the prior year’s assessment adjustments.

In the current 2024 fiscal year, IBO forecasts a 3.6 percent increase in property tax revenue, followed by average annual growth of 3.2 percent from 2025 through 2027. This is about half of the annual growth seen in the decade prior to the pandemic. The bulk of revenue growth in IBO’s forecast comes from apartment buildings and commercial and industrial properties, which account for, respectively, 38 percent and 34 percent of aggregate gross levy growth from 2024 through 2027.

The IBO addressed the issue of office attendance declines and IBO’s baseline forecast accounts for some office market softening by projecting 2 percent annual growth in Manhattan office values throughout the forecast period, rather than the 5 to 6 percent growth seen before the pandemic. To address concerns about the issue, IBO tested by incorporating a 6 percent annual decline in the Manhattan office gross levy—rather than a 2 percent annual increase—calling this the “office doomsday” scenario. This substantially reduces IBO’s RPT forecast: IBO had baseline forecasted about $35.9 billion in revenues in 2027, and 3.2 percent annual growth from 2024 through 2027. But with this more pessimistic office outlook, IBO forecasts $1.3 billion lower revenues in 2027, and only 1.9 percent annual growth.

TAXES ON THE 2024 BALLOT

San Diego County voters will have the opportunity to vote on a proposal to raise local sales taxes to fund transportation improvements. The initiative hopes to provide funding for shoring up the coastal railroad route that is the only connection for freight and passenger trains between San Diego and Los Angeles. Previous efforts to get voter approval for taxes for transit failed. One lost at the polls by missing a two-thirds vote requirement. The other failed to get enough signatures to make the ballot.

This initiative is a “citizens initiative” which under California law requires only a simple majority vote – 50%+1 – in order to be enacted. The failed vote actually got a 57% majority so there is a real likelihood of passage.

NUCLEAR

The recent halt to plans for a demonstration small modular reactor in Idaho may have fallen through but proponents of the technology soldier on. The U.S. Nuclear Regulatory Commission (NRC) has voted to issue a construction permit to a private concern to develop a demonstration reactor to be built at the Heritage Center Industrial Park in Oak Ridge, TN. The project is the first non-water-cooled reactor to be approved for construction in the U.S. in over 50 years. 

The planned reactor will instead be a fluoride salt-cooled, high-temperature reactor (KP-FHR) technology. A separate application for an operating license and subsequent NRC approval will be required before operations can commence. Oak Ridge is no stranger to the development of new nuclear power technology. The funding is provided in part from a Department of Energy Advanced Reactor Demonstration Program (ARDP) award and will involve assistance from Oak Ridge National Laboratory and Idaho National Laboratory.

ESG, IDEOLOGY AND BACKLASH

We saw recent comments made by local municipal borrowers in Oklahoma after they had to delay bond issues and change underwriters due to anti-ESG legislation enacted in Oklahoma. The State Treasurer had released a list of financial institutions prohibited from doing business with governments in the state due to his determination that the companies violated the state’s 2022 Energy Discrimination Elimination Act by boycotting energy companies. The Texas Attorney General began maintaining his own list in 2021. There are similar stories of delayed issues there as well.

The Oklahoma localities are lobbying for changes to the law. At the time of enactment, it did not appear that the issue of local bond issuance was a paramount concern. Now there is sentiment being expressed that the State could do what they want with their resources but that the law was not intended to raise costs for local issuers and taxpayers.

Even at the state level, the policy has created issues. The Oklahoma Public Employees Retirement System voted 9-1 in August to retain BlackRock Inc. and State Street Corp. as investment advisers even though those banks were on the treasurer’s blacklist. A retiree and former president of the Oklahoma Public Employees Association in November filed a lawsuit against the state and its treasurer, calling the state’s anti-ESG legislation “government overreach” and a violation of free speech. The ERS cited a potential negative impact from the policy.

CLIMATE LITIGATION

The latest attempt to move lawsuits filed by states and localities against the fossil fuel industry into federal courts has failed. The U.S. Supreme Court declined to take up a challenge to a lawsuit brought by Minnesota Attorney General Keith Ellison against six fossil fuel companies. The industry has pretty consistently failed in its attempts to have suits dismissed at the state level. The case that has gone the furthest was filed by the city and county of Honolulu. That state’s Supreme Court recently ruled that oil companies did not have the arguments necessary to dismiss the case.

Proponents of sweeping bans on the use of natural gas appliances suffered another defeat in court. The 9th U.S. Circuit Court of Appeals declined to conduct an en banc hearing on a review an initial circuit court decision which invalidated a ban on gas appliances in new buildings enacted by the City of Berkeley, CA. Unless the city of Berkeley chooses to appeal the case to the Supreme Court, the 9th Circuit’s judgment is now final. It will apply to the eleven Western states within its territory.

The decision does not leave local government unable to regulate the appliances. Other approaches which have not been struck down include the use of building code requirements and overall limits on emissions designed to effectively diminish the use of gas, especially for cooking.  

WOOD

A producer of wood pellets for use in wood stoves is facing financial issues imperiling its ability to operate.  The situation threatens the credit supporting industrial development bonds issued in Alabama and Mississippi for manufacturing facilities operated by Enviva. The Alabama issue totaled $250 million while the Mississippi issue totals $100 million. The outstanding bonds are rated CC by Standard and Poor’s. In addition to the bonds, the company received significant economic aid from the State of North Carolina.

Enviva supplies European and Asian utilities with wood pellets as an alternative to burning coal.  After dismal third quarter 2023 results, Enviva announced it would delay completion of a new pellet plant in Mississippi. More concerningly, the company’s auditors issued a going concern letter. In November, Moody’s, S&P, Fitch all lowered ratings to the lowest levels above default.

According to Enviva, the company supports more than 1,800 jobs in mostly rural North Carolina at its four wood pellet production plants and Port of Wilmington facility and has invested more than $675 million in the state. That facility enables the export of the pellets to European and Japanese markets. In those markets, the choice is posed as wood or coal. On that basis, wood is less polluting and trees can be planted as trees are harvested. That results in wood pellets considered to be renewable biomass overseas.

The company cites collapsing prices for wood pellets, long-term contracts that lock Enviva into deals with customers at low prices, high interest rates that makes its loans more expensive to service, and operational issues at some of its plants. Enviva also faces significant litigation issues as the use of wood pellets as a “renewable” source of energy is highly controversial. The US takes a different approach to wood pellets than do European countries and Japan.

WESTERN HYDRO

The difficulty in long-term water use planning comes from the volatility of data relating to weather and water. A quick review of data from recent years provides a window into that volatility. Federal data shows that 2021 and 2022 were two of the three lowest years for hydropower generation nationwide since 2010. Much attention was paid to the impact of multiple atmospheric rivers in California and California increased its hydropower generation by 72 percent in federal FY 2023. At the same time, hydropower generation in Washington State—the national leader in hydropower—was down 23 percent compared to the previous 12-month period.

The latest water level data for Lake Powell, the reservoir in Arizona and Utah that feeds the Glen Canyon hydropower plant showed the surface of the lake level this week was 3,568 feet above sea level, according to the Bureau of Reclamation. On the same day last year, the water was at 3,525 feet—some 43 feet lower. That was close to the reservoir’s lowest level since it was initially being filled in the 1960s. It is at 35% of capacity.

If the level falls to 3,490 feet—78 feet below the current level—water will be too low to drive the turbines that generate electricity. If the level falls to 3,370 feet—198 feet below this week’s reading—it would reach “dead pool” status, when the water is too low to flow downstream from the dam. In October of this year, the Bureau of Reclamation reported that between October 2023 and September 2024, an estimated 9.4 million acre-feet of water would flow into Lake Powell. That estimate was cut to 7.6 million acre-feet just before the latest measurements.

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

This week we highlight several of the sectors which we think will be of significant interest to municipal bond investors in the coming year. The pandemic may be “over” but its effects linger on. Whether it is the impact of remote work, the pressure on demand in sectors like senior living and hospitals, school enrollments, retail commerce or mass transit – the footprints of the pandemic continue to be trackable. The impact of inflation continues. The budget season will be more difficult as intergovernmental aid for the pandemic is effectively over.

So, with that backdrop, we’re off and running for 2024.

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ALTERNATIVE TRANSIT HITS POTHOLES

Just before Christmas, Electric scooter maker Bird Global filed for bankruptcy protection. The company operates a short-term scooter rental business in more than 350 cities. Its operations in the US are the subject of the filing. The increasing incidences of injuries through operation as well as restrictions on and concerns with the batteries powering scooters and bicycles have reduced demand.

This followed the November announcement that Revel would pull its mopeds out of New York and shut down the moped service in San Francisco after previously ending it in other cities. While the company had faced claims related to injuries and complaints about inadequately trained users. During the pandemic it was a way to avoid public transit especially for remote workers. Revel’s monthly ridership soared to a high of 582,159 rides in July 2020.

Revel’s moped ridership in New York fell to 136,802 rides in July, a 30 percent drop from 194,278 rides in July 2022. The drop coincided with a more popular e bike program through Citi Bikes and e bike ownership has grown significantly. In New York, there were five deaths involving Revel mopeds — four were Revel riders and one was a pedestrian struck by a Revel rider — between 2019 and 2021, according to city records.

KAISER PERMANENTE LAYOFFS JUST A SIGN

In October, employees at Kaiser Permanente facilities struck to achieve a new contract. The primary issue was wages especially in the wake of the pandemic. An agreement was reached but its impact has cut both ways. Now Kaiser has announced administrative layoffs in a move which mimics those being undertaken currently across the country.

The impact is subtle. Individual check-in sites have been replaced by central check-ins which effectively reduce that administrative headcount. The cuts are going on at facilities and systems large and small. The slower than expected recovery of utilization levels on both an inpatient and outpatient utilization continues to pressure operating results.

A glaring example is the projected closing of the last acute care hospital below 23^rd Street in Manhattan. Mount Sinai (NY) announced the closing of the facility to take place this July. Various interests are trying to bring pressure on the money-losing facility to stay open. The facility’s increasing reliance on government payors has stressed operations for some time. Plans for a replacement with a heavy emphasis on outpatient care have not come to fruition.

The other way to deal with these pressures is further consolidation. Whether proposed mergers like that between Henry Ford Health and Ascension Health in Michigan will pass muster with an activist Federal Trade Commission is yet to be seen. Concerns about rural facility closings will continue and generate pressure in an election year. The Biden Administration continues to pressure small rural facilities to reduce themselves to clinics to feed distant acute care facilities.

RURAL HOSPITAL RECOVERY

The trend in recent years in the small rural healthcare sector has been towards downsizing and actual closures. The same pressures which drove those decisions have also made it hard to find viable financial recovery solutions. One facility in California however is showing that it is possible for these facilities to maintain themselves and survive.

A private operator had run Watsonville Community Hospital in California for years. The facility saw multiple management teams, declining results, and the apparently the theft of funds under the private management. The trends were so negative that a bankruptcy seemed like the option. In this case, the community seemed better prepared than most to deal with the issues.

In 2021, the Pajaro Valley Health Care District was created in anticipation of a Chapter 11 filing by the hospital. The District currently leases the facility. New management has succeeded in improving operating results. Now, the District hopes to get voter approval on March 5 for a $116 million bond issue. Proceeds would finance the purchase of the hospital and fund capital improvements. The district needs more than two-thirds of its voters to vote yes.

CALIFORNIA – NET METERING; WATER; GOVERNORS BUDGET

California regulators approved new rules to let water agencies recycle wastewater. California has been using recycled wastewater for decades. The prior uses were commercial. The Ontario Reign minor league hockey team has used it to make ice for its rink in Southern California. Soda Springs Ski Resort near Lake Tahoe has used it to make snow. And farmers in the Central Valley, where much of the nation’s vegetables, fruits and nuts are grown, use it to water their crops. 

Orange County operates a large water purification system that recycles wastewater and then uses it to refill underground aquifers. The Metropolitan Water District of Southern California, which serves 19 million people, aims to produce up to 150 million gallons (nearly 570 million liters) per day of both direct and indirect recycled water. A project in San Diego is aiming to account for nearly half of the city’s water by 2035.

The new rules require the wastewater be treated for all pathogens and viruses, even if the pathogens and viruses aren’t in the wastewater. That’s different from regular water treatment rules, which only require treatment for known pathogens. In San Jose, the Santa Clara Valley Water District recycles water and uses it irrigating parks and playing fields. 

These sorts of efforts may once again get support as the volatile nature of California’s water supplies become apparent again. After a winter of multiple precipitation rivers and record high snowpack, a level of muted optimism about the short-term water outlook arose. Now, just a year later, the headlines are about record low snowpack and probable diminishment of hydropower capacity.

The first snow survey of the season found the snowpack at 30% of average for the date, and 12% of the average for April 1, when snowpack is typically at its deepest. Data from electronic readings from 130 stations across California indicate the snow water content statewide is just 2.5 inches, or 25% of average for the date, compared with 185% at the same time last year.

Rainfall directly on reservoirs has offset a bit of the loss. California’s two largest reservoirs, Lake Shasta and Lake Oroville, are at 69% and 68% capacity, respectively. California’s water year runs from Oct. 1 through Sept. 30, with the majority of the state’s precipitation typically falling in January, February and March.

California’s NEM 3.0 net billing tariff was approved by state regulators at the end of 2022, and came into effect for distributed solar interconnection applications submitted on or after April 15. A survey from the California Solar and Storage Association reported that rooftop solar sales were down between 66% and 83% compared to the same time in 2022.  Industry analysts are predicting a 40% decrease in new residential solar in the state.

Efforts to get the new net metering regime overturned in the courts were dismissed at year end.

This week, the Governor will deliver his preliminary budget proposals. The backdrop is the recent Legislative Analyst Office estimate that the budget gap facing the State could be as high as $68 billion.

CARBON CAPTURE – DECISIONS LOOM

The ongoing efforts by Summit Carbon Solutions to construct a multi-state pipeline to take carbon produced at ethanol plants and inject it underground continue. The main battleground is in Iowa where a decision of whether to permit the project or not is pending before the Iowa Utilities Board (IUB). Two other companies have either abandoned their projects or withdrawn approval applications.

While that process unfolds, Summit continues its legal effort to eliminate local control over the regulation of its project. It recently filed suit against a fourth county in Iowa over the enactment of zoning regulations which would make it harder to build pipelines close to population centers. In other litigation by Summit, permanent injunctions against Shelby and Story counties that bar them from enforcing their ordinances were handed down by a federal District Court judge. Those counties recently appealed the judge’s decisions.

A third suit is pending. Summit also filed suit against a fourth county this week to overturn adopted County ordinances.

The Iowa House of Representatives approved a bill last year that would restrict the companies’ ability to use eminent domain to gain land easements until they obtained voluntary easements for 90% of their routes. The Iowa Senate did not consider the bill, but it could during the upcoming legislative session, which starts next week.

COMMERCIAL VALUATIONS

One of the concerns arising from the pandemic is the potential impact of WFH on the office real estate market. A couple of office building transactions in large cities have been sold at significant discounts to purchase price. The fear is that this is the start of a trend. The third-tallest tower in Los Angeles, has sold for $147.8 million — about 45% less than its last purchase price in 2014. One estimate says that 30% of downtown LA office space was available for lease or sublease in the third quarter. In Chicago, a smaller older building sold at an 89% discount to its last purchase price. With vacancies high and rents being discounted, newer stock is much more attractive than so-called Class B buildings.

WIND

The Vineyard Wind project off the island of Nantucket was one of the first approved for the New England coast. It had been anticipated that it would be the first to operate but that was not to be. Vineyard Wind instead is the nation’s second utility-scale offshore wind farm to start generating electricity having been beaten to the punch by the South Fork Wind off the Long Island coast. At present, Vineyard supplies 5 MW from one turbine. Ultimately, the project is designed for 62 turbines.

The short-term outlook for ocean wind power at scale is weak. A contract with New York to sell the state electricity from Empire Wind 2, a proposed 1,260-megawatt offshore wind farm that would be located southeast of Long Island was terminated. The same factors impacting this project are reflected throughout the industry – interest rates, inflation, supply shortages.

These pressures are changing the approach of some utilities to a wind based future. Vineyard is sponsored by Avingrid, a Spanish utility which owns CMP in Maine and NYSEG in New York. Avingrid had hoped to own significant distribution capability to use power from wind projects. Those efforts distracted from basic power supply and created widespread animosity towards Avingrid from both its Maine and New York customers.

That experience generated significant opposition to Avingrid’s acquisition of Public Service of New Mexico. After an intense and drawn out regulatory process, Avingrid threw in the towel on its efforts to acquire PSNM.

SENIOR LIVING

The facilities are in Michigan and Ohio. The management of the facilities is based in Louisiana. The conduit bond issuer is in Arizona. What could possibly go wrong? We are about to find out as the Great Lakes Senior Living Communities LLC is poised to default on its debt. Some $376.2 million of bonds were issued in 2019 and were outstanding as of Dec. 31, 2022, plus $19.5 million in fourth- and fifth-tier parity bonds issued in 2021 to fund additional capital needs on the project. The timing could not have been worse. With nursing homes at the center of the pandemic, it was effectively impossible for the projects to t projections.

The debt was downgraded in 2020 and results continued to be significantly below budget. The trend has continued and debt service reserves had to be tapped to cover debt service. Now, S&P has lowered its ratings to CCC and expects that a debt service payment may be missed. The project is already operating under forbearance agreements and debtholder control over its budget. Given the rise in interest rates, a refinancing would be more difficult given the operating position of the facilities.

The deal is just another example of the pitfalls of conduit financings. Like its counterpart agency in Wisconsin, the Arizona issuer has been involved in several other default situations. We have long considered the participation of conduits in already speculative credits to be problematic. It won’t be the last issue like this to run into problems in 2024.

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.