Joseph Krist

Publisher

TRANSPORTATION

The increasing prevalence of e-bikes and other lithium-ion battery powered vehicles is leading to calls for increased regulation. The issues range from the use and storage of vehicles powered by lithium-ion batteries, to where they can be ridden, parking and insurance. It’s become clear that in today’s urban landscape, the explosion of the food delivery business ensures that the vehicles are here to stay.

The latest city to look at regulation is San Francisco. The City and County Board of Supervisors voted to create safety standards for some devices powered by lithium-ion batteries. Since 2017, the number of fires in the city associated with a lithium-ion battery has increased every year with a high of 58 in 2022. The data for 2023 is still being compiled. During that six-year period one person was killed and eight others were injured.

In New York City, the batteries are controversial as they tend to be owned by residents of large buildings. Fires attributable to the batteries pose a greater threat in those environments. Recently, the FDNY asked Congress to adopt national standards for the batteries. In 2023 alone, the city saw 268 fires caused by the batteries. The fires killed 18 New Yorkers, and left another 150 injured. 

SOUTH CAROLINA PUBLIC SERVICE

The South Carolina Public Service Commission unanimously approved Santee Cooper’s long term Integrated Resource Plan. After it’s ill-fated involvement in the failed Sumner nuclear expansion, the Authority moved away from nuclear going forward. The plan is controversial nonetheless as it includes the expansion of natural gas as a fuel of choice.

Santee Cooper is looking to partner with Dominion Energy on a gas plant that would be located on the Edisto River at the former site of a coal plant. The real controversy arises over the fact that it would require new pipeline projects that have not been disclosed to the public. The plan puts new focus on Santee Cooper’s management and its efforts to recover politically from its nuclear difficulties.

An independent consultant retained by the Commission also warned that Santee Cooper did not meaningfully evaluate alternatives to the gas plant and recommended that the utility accelerate solar and storage builds in the near term.

HOUSING AND TRANSIT

Two issues – climate change and housing shortages – are increasingly seen as two sides of the same issue. Climate advocates continue to advocate against cars and for mass transit. At the same time, the accessibility of mass transit remains an issue as there continues to be a disconnect between the location of transit relative to housing. Ironically, the role of local planning and permitting agencies is increasingly seen as one of obstruction.

This first became an issue in California. The expansion of BART farther away from the Bay Area has increased accessibility but expected housing development has not occurred as hoped. Efforts to revamp zoning restrictions to facilitate the development of housing near BART stations were stymied by local opposition driven by fears of gentrification. Those fears drove opposition to legislation which would have addressed those concerns and the effort failed in the legislature.

Now, the effort to link transit and development is spreading. In Colorado, a new bill (HB24-1313) has been offered which would authorize a new process for approving development. It would provide for the state to analyze cities to determine where they have current or future transit lines as well as how much developable property is within a half-mile of rail lines and a quarter-mile of most high-frequency bus lines. The state would then set “housing opportunity goals,” or “HOGs,” for the cities. 

Such a designation would require a city would have to allow an average of 40 units per acre across all of its transit-adjacent areas, with exemptions for certain properties. It would also provide for denser housing within areas designated as transit centers (typically adjacent to a station) by allowing cities to allow higher densities of up to 300 units per acre in a transit center — in the range of eight to ten floors. 

If local governments don’t cooperate, the state could withhold millions of dollars in transportation funding. Cities that don’t participate could lose out on funding from the Highway Users Tax Fund which is a major source of funding for localities to maintain roads.

The Connecticut legislature is considering legislation to encourage development around transit facilities as well. A bill would follow up on legislation adopted last year which established a state development entity to operate programs to encourage transit adjacent development. It provided for Transit Oriented Community Districts which are designed to accommodate transit adjacent development.

A municipality can choose to create such a district and in doing so would be in place to receive financial assistance from the state.

LITIGATION

Earlier this month, a Contra Costa County Superior Court Judge California Attorney General Rob Bonta’s petition to link the state’s climate accountability case with lawsuits brought by the counties of Marin, San Mateo, and Santa Cruz, and the cities of Imperial Beach, Richmond, and Santa Cruz. Oakland and San Francisco’s climate lawsuits have been the subject of separate legal proceedings but after a ruling by the U.S. Ninth Circuit Court of Appeals the case will be sent back to the state courts. The Oakland and San Francisco suits will be merged into this suit.

CYBERSECURITY

Fulton County, Georgia is the latest victim of malicious hacking activities. A ransomware attack interfered with the county’s processing of certain taxes and water bills, property transactions, communications, and operations of its court system. The County is fortunate in that the bulk of revenues which could have been impacted by the event had already been collected. This includes taxes collected by the County for underlying levels of government.

This attack follows a 2018 event which impacted the county’s largest city, Atlanta. The City experienced some $17 million of additional costs related to recovery. The County has not released a cost estimate related to recovery.

This news coincides with an announcement of a successful criminal prosecution of the perpetrator of a 2020 hack against the University of Vermont Medical Center. That event significantly impacted the facility’s ability to provide services. It wasn’t just about financial and records information. It impacted the provision of things like chemotherapy for nearly one month. It had a huge impact on the over 1.1 million people across multiple states who are served primarily on the hospital.

UNIVERSITIES

Moody’s Investors Service has placed University of Idaho’s (ID) A1 issuer and revenue bond ratings under review for downgrade. The action affects approximately $130 million in rated debt outstanding as of June 30, 2023. The outlook has been changed to rating under review from stable.

The placement of University of Idaho’s (U of I) ratings under review for downgrade is prompted by the potential proposed purchase of the University of Phoenix by Four Three Education, Inc. in the next two to four months. The Regents of the University of Idaho is the sole member of Four Three Education, Inc. Four Three Education is planning to issue $685 million in bonds to finance the purchase through separately secured debt. 

Given the proposed substantial increase in financial leverage, uncertainty regarding Four Three Education’s operating performance prospects and exposure to potential future legal action from the United States Department of Education, a multi-notch downgrade is possible. There are a ton of questions associated with the plan. Away from general operating risks, there are issues specific to the University of Phoenix which could create significant financial liability risk.

It is not clear what, if any, financial entanglements with the University’s general revenue backed credit. Ther are concerns that a host of potential legal and regulatory actions could create additional risk. It seems that the UI credit could ultimately be available to support repayment of debt to finance the purchase. The lack of detail is a major source of downgrade pressure.

Moody’s downgraded Roosevelt University’s (IL) (Roosevelt) issuer and revenue bond ratings to B2 from B1. Roosevelt is a moderate sized private university offering undergraduate, graduate and professional degree programs at its campuses in downtown Chicago and in Schaumburg, a northwest suburb of Chicago, and online. The university enrolled 3,585 full-time equivalent students in Fall 2023, with operating revenue of approximately $92 million.

A period of declined enrollments and strained finances are the primary weaknesses. The concern is that the University might violate debt service and liquidity covenants supporting outstanding debt. Primary among them is an unrestricted cash and investments to MADS covenant that is tested twice annually. Roosevelt must maintain coverage of no less than 150% through fiscal 2024, no less than 162.5% in fiscal years 2025, no less than 175% in fiscal 2026, no less than 187.5% and 2027 and no less than 200% in fiscal 2028 and beyond.

Moody’s downgraded Robert Morris University’s (PA) issuer and revenue bond ratings to Ba1 from Baa3. The outlook remains negative. Robert Morris University is a private university with its main campus in suburban of Pittsburgh. The university enrolled 3,555 full-time equivalent students across its undergraduate and graduate degree programs in fall 2023 and generated $110 million of operating revenue in fiscal 2023.

The concerns are that the university will continue to take elevated draws on financial reserves as the result of material operating deficits over the next two to three fiscal years as it pursues a strategy to grow net tuition revenue and return to fiscal balance. The negative outlook also incorporates uncertainty over fall 2024 enrollment and fiscal 2025 net tuition revenue results.  

ILLINOIS BUDGET

Governor J.B. Pritzker proposed a FY 2025 budget totaling $52 billion. It comes as the issue of asylum seekers and migrants has moved to center stage in the state’s fiscal debate. Chicago has received nearly 36,000 asylum seekers who have arrived since 2022 primarily as the result of being shipped there from Texas. Illinois has spent some $638 million on services for migrants over the same period.

Chicago enacted a budget which increased spending on migrants by some $182 million in the current FY. The proposed state budget would include additional funding for migrant services. Overall, the budget proposal increases spending by 2%. Spending for K-12 education is increased by about $450 million. Pensions continue to be a concern. The Governor proposes increasing the funding target to 100% from 90% while extending the proposed full funding date to 2048.

To fund proposed increased spending for asylum seekers and education, the proposal includes tax increases. Primary is an increase in the sports wagering tax — paid by casino sportsbooks — to 35% from 15%, generating an estimated $200 million. Pritzker also wants to cap a deduction that allows corporations to reduce their taxable income for $526 million in savings.

CALIFORNIA WATER

The California Department of Water Resources on Wednesday announced an increase in its projected statewide water allocations for 2024. California’s snowpack currently stands at 86 percent of the average for the current date and 69 percent of the average for April 1. Forecasts anticipated the agency would be able to fulfill 15 percent of supplies requested from the State Water Project, up from an initial 10 percent allocation predicted in December. The projected 15 percent of fulfillment, which is subject to reevaluation this spring, would translate to about 200,000 acre-feet of additional water. Lake Oroville, the State Water Project’s largest reservoir, stands at 134 percent of its average for the current date.

L.A. PORT RECOVERY

The benefits of the end of the pandemic and the settlement of outstanding labor issues had the expected salutary effect on the finances of the Port of Los Angeles. The Port of Los Angeles handled 855,652 Twenty-Foot Equivalent Units (TEUs) in January, the second-best start to the year on record. January 2024 loaded imports landed at 441,763 TEUs, up 19% compared to the previous year. Loaded exports came in at 126,554 TEUs, an increase of 23% compared to last year. The Port processed 287,336 empty containers, up 14% over 2023.

The potential labor problems at the Port did drive significant volume to U.S. East Coast ports. Much of that was facilitated by moving freight through the Panama Canal. A severe drought has made travel through the Canal much more difficult and expensive. This has significantly reduced the attractiveness of the East Coast ports.

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

PREEMPTION

Michigan’s new Clean Energy Future legislation takes effect this November. The law includes a provision that moves final authority for the permitting of large-scale renewable energy projects over to the Michigan Public Service Commission. Before that, such decisions were decided at the local township level. State legislators were concerned that local permitting hurdles would make the state’s efforts to achieve net carbon neutrality unachievable.

The Sabin Center for Climate Change Law at Columbia University reports that as of last year, the center counted nearly 300 projects that have faced serious opposition, and at least 228 local governments that either place onerous restrictions on wind and solar projects or ban them outright. The report calculates the number of challenged projects increased 39% and the number of local restrictions increased by 35% during the period of March 2022 to May 2023.

A new law passed by the Illinois General Assembly last year set statewide standards for wind and solar projects. It is a good example of the other side of the preemption issue. Most of what we have seen to date have been efforts by localities to adopt policies within their own jurisdictions. Those localities bridle at the idea that the state could override for those policies (usually social issues) but are happy to use the technique for climate goals.

Which leads us to…

PIPELINES

In South Dakota, legislation was rejected by a House committee which would have prohibited the use of eminent domain by carbon dioxide pipelines if more than half of the transported carbon dioxide is intended for sequestration rather than commercial uses such as carbonated beverages or enhanced oil recovery. The committee rejected a bill that would have required the pipeline project to have voluntary easements with landowners on 90% of the route before attempting to use eminent domain for the rest.

What drove the votes?  Two-thirds of corn grown in South Dakota is sold to ethanol plants, and ethanol producers have said they need the project to stay viable in markets that require fuels to reduce their environmental impact. Additional legislation has now advanced to the State Senate which would prevent counties from enacting local zoning rules strict enough to regulate gas or liquid pipelines out of existence. To offset the loss of local control, it provides

for counties to levy a per-foot surcharge on pipeline companies and codify certain landowner protections for things like disrupted drain tile.

In Missouri, the Missouri House approved legislation that will block cities and counties from requiring developers to install electric vehicle charging stations in new construction projects. the measure is aimed at preventing local governments from “overly burdening businesses with regulations”. The legislation came in response to a 2021 decision by the St. Louis County Council requiring developers to add electric car charging stations to parking lots. 

Under the terms of the bill, any city or county that requires the installation of charging stations in new construction projects must pay all of the costs and provide maintenance of the unit once installed. The measure also prohibits cities and counties from requiring more than five electric vehicle charging stations per parking lot in parking lots of less than 30 parking spaces. The measure now goes to the Senate, which has previously failed to advance earlier versions. 

House Bill 1034, a bill requiring hydrogen pipelines to be permitted by the South Dakota Public Utilities Commission, was passed by huge majorities. In Florida, legislation (SB 1084) advanced by the Florida Senate would preempt local governments from requiring a higher number of parking lot spaces to be reserved for electric vehicles. Sponsors made clear the measure would outlaw extra spaces even if developers want to put them in. The Florida Department of Agriculture and Consumer Services will have control over setting thresholds. They would be able to determine what percentage of spaces could be set aside for electric car charging. It would be against the law to exceed the limits.

NEW YORK CITY BUDGET

We know that there are many steps in the process of establishing a final budget but nevertheless the analysis of the Mayor’s proposed budget for FY 2025 from the Independent Budget Office (IBO) is useful. IBO starts with updated FY 2024 numbers which project a Current Year Surplus of $2.8 Billion more than the Adams Administration’s estimate. This higher surplus results from IBO’s forecast of approximately $900 million more in anticipated tax revenues in 2024 than the Administration’s estimates, coupled with IBO’s estimate that City-funded spending will total about $1.9 billion less than presented in the Preliminary Budget financial plan. 

A $3.8 billion surplus is projected for FY2025. The surplus is driven by IBO’s forecast of $2.0 billion more in anticipated tax revenues than the Administration’s estimate and the use of this year’s $2.8 billion surplus to prepay some of next year’s expenses but is tempered by IBO’s estimates of $1.5 billion in additional spending over the Administration’s projections. Although the outyear budgets are not balanced, IBO’s projected gaps are well within the range that the City has closed in the past. The City could roll forward some of the 2025 projected surplus to help close the gap in 2026.

On the spending side, IBO expects spending to come in notably lower than Preliminary Budget levels in two areas. IBO anticipates the City will spend $1.6 billion less on salary and fringe resulting from civilian, non-pedagogical vacancies in 2024. Current active full time headcount is approximately 285,000 positions, which is 5% lower than the peak of 300,000 positions in 2020.

IBO also estimates $2.4 billion less in spending on asylum seekers than what is reflected in the Administration’s estimates across 2024 and 2025. In addition, IBO forecasts lower charter school enrollment than the Administration, estimating $91 million in savings from 2026 through 2027 for charter school tuition costs. Spending continues to grow. In the current FY, spending has risen 7% since the adoption of the budget. City funded spending is up 3%.

As for the economy of the City, the sector that has gained the most jobs since the pandemic (nearly 138,000) is Health Care and Human Services. Most of that growth is concentrated in the low-wage ambulatory care subsector, which includes home health aides. Other sectors that have surpassed pre-pandemic levels include some of the highest wage industries in the City— particularly the finance and insurance sector and professional, scientific, and technical services. Employment in many low-wage industries continues to trail well behind pre-pandemic levels, notably retail trade and leisure and hospitality.

What drives spending? The Department of Education, Department of Social Services, and centrally budgeted costs such as fringe benefits, pension costs, and debt service, have the largest budgets by agency, in line with past years. As of the Preliminary Budget, they comprise nearly two-thirds of the City’s total expense budget.

TWO SIDES OF ENVIROMENTAL REVIEW

Two situations were reported this week which reflect different approaches to environmental laws and reviews. It may surprise you when you see which entities are taking the approach they are taking in regard to development. They both serve to undercut stereotypes about attitudes towards environmental regulation and both have potentially significant impacts on development.

The first is San Francisco where a State senator will introduce legislation which would effectively end environmental reviews for proposed developments in a large piece of San Francisco. The law would amend the California Environmental Quality Act (CEQA) to remove requirements for review to a 150 block area in downtown SF. It comes as 35 percent of office space remains empty four years after the onset of the pandemic in the city.

The proposal would limit reviews and the rights of individual entities to intercede in the environmental approval process. It highlights the contradictions in the concerns of advocates and interest groups. On one side are those who believe that the environmental process needs to continue to stymie “gentrification”. They are many of the same arguments made against prior proposals to encourage development around suburban transit facilities.

On the other side are the housing advocates who look at empty buildings and masses of homeless individuals and see a potential to significantly impact the supply of affordable housing. Those advocates find themselves to some degree on the same side as developers they historically oppose. Labor interests are also allied with the proposal. The law will waive environmental review for only projects that pay a prevailing wage. It would still require environmental review for hotels and waterfront property, as well as for the demolition of any building that housed tenants within the past decade.

In Montana, a state judge ruled that state officials have failed to impose adequate limits on the construction of new homes that rely on groundwater. At issue, was a proposed small housing development in ranch country. The project would have relied on new wells in an area where aquifer levels have been steadily declining. Nonetheless, the project received both county and state approval. The judge found that Montana’s policy for approving new developments violates state law.

BAD WEEK FOR AUTONOMOUS VEHICLES

Waymo announced a voluntary recall of its self-driving car software following two incidents involving its vehicles in Phoenix, Arizona. Waymo said the company chose to do the voluntary recall after consulting with the National Highway Traffic Safety Administration and its internal review of two incidents which took place in Phoenix on Dec. 11, 2023, in which two robotaxis crashed into the same towed pickup truck within minutes of each other.

Last week, a driverless Waymo car collided with a cyclist in San Francisco, causing minor injuries and the incident is now being reviewed by the state’s auto regulator. Tesla’s autonomous vehicle software was involved in a recent accident while being employed by the driver. The California DMV has filed formal accusations against Tesla saying that the company’s marketing and advertising is deceptive.

And then there is Cruise, the driverless car company owned by General Motors. Already under restrictions in SF, the company faces new charges. The California Department of Motor Vehicles is investigating allegations that a self-driving vehicle operated by Cruise nearly hit a 7-year-old boy after it failed to yield to him and his family while they crossed the street in San Francisco last year. The National Highway Traffic Safety Administration is investigating at least four incidents involving Cruise vehicles and pedestrians.

TURNPIKE KEEPS ON ROLLING

The pandemic was hard on New Jersey’s overall transportation systems. Low ridership on trains hurt revenues on New Jersey Transit and the PATH. So long as remote work predominated, toll revenues were hurt. Private bus services which had been a lynchpin of the New York metropolitan area transit in some cases found themselves out of business. One entity which has done just fine in the period of recovery from the pandemic has been the New Jersey Turnpike Authority (NJTA).

The Authority owns and operates the New Jersey Turnpike (NJT) and the Garden State Parkway (GSP). They serve as a key link in the I-95 corridor and are the gateway to the NJ shore, respectively. The system has established a history of continued demand for the roads through large rate increases, economic recessions, and other negative shocks like the recent pandemic. 

The Authority also has shown a much better record of toll adjustments. Historically, tolls were a very highly politicized issue. Now, under a state approved plan an annual toll indexation policy to ensure financial metrics has been established. There is still a potential for politicizing tolls as the Governor approves NJTA’s budget and toll rates. It is in a governor’s interest to support increases as excess Authority revenues can be transferred to the State.

Moody’s affirmed the Turnpike Authority’s senior revenue bond rating at A1 with a stable outlook this week.

COLLEGE CREDITS CONTINUE TO WEAKEN

Moody’s downgraded Allegheny College’s (PA) issuer and revenue bond ratings to Baa3 from Baa2 and maintained a negative outlook. One of the oldest private liberal arts colleges in the United States served 1,168 full-time equivalent students in fall 2023 and generated $67 million of operating revenue in fiscal 2023. Demand has been a problem and is not projected to improve.

Moody’s also downgraded Webster University’s (MO) issuer and revenue bond ratings to B1 from Ba3. The ratings have been placed under review for possible downgrade, previously the outlook was negative. A going concern opinion in the fiscal 2023 audited financial statement was an obvious issue as liquidity has dwindled. This has led the University to rely on through $40 million of outstanding lines of credit at fiscal end 2023 adds elevated credit risk. The lines are due on demand and collateralized by endowment funds. 

Another pressure source– employee costs. This week, the California State University system and the union representing 29,000 professors, lecturers, librarians, counselors and coaches reached an agreement which would immediately increase salaries for all faculty members by 5 percent, retroactively to July 1, 2023, with another 5 percent raise scheduled for July 1, 2024, if the state does not cut funding for the university system. The salary floor for the lowest-paid faculty members would immediately rise by $3,000 a year, and paid parental leave would grow to 10 weeks from six.

ROCKY MOUNTAIN HOMELESS

Denver, a city of 750,000, had received nearly 40,000 migrants, the most per capita of any city in the nation. Denver has spent more than $42 million on the migrants. If expenditures continue at the current pace of $3.5 million a week, the crisis could cost the city about $180 million in 2024, or 10 percent or more of its annual budget. The City has received only $9 million authorized in federal reimbursements. 

Denver does not allow local law enforcement to detain undocumented immigrants solely on the basis of their status and does not turn them over to federal authorities unless a judge has issued an arrest warrant. To become eligible for work permits, migrants must apply for asylum, a cumbersome process, and then wait 150 days. After pausing discharges of migrants in November because of the cold, Denver recently reinstated time limits for migrants in city-provided hotels. Stays will be up to 14 days for adults without children and 42 days for families. 

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

PORT AUTHORITY BUS TERMINAL

The Port Authority of New York and New Jersey released a draft environmental impact statement and a revised project plan in support of its effort to replace the nearly 75 year old Port Authority Bus Terminal, the world’s busiest bus terminal. The estimated cost of the project is $10 billion. The revised plan would include a 2.1-million-sq-ft main terminal, a bus storage and staging facility and ramps directly connected to the Lincoln Tunnel. 

The storage and staging facility will be constructed first and serve as a temporary terminal while the existing building is demolished. That will occur in 2028. The new terminal would be completed in 2032. The Port Authority is currently applying for a federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loan to help finance the project. The authority is also negotiating plans for commercial development above the terminal with city officials via payments in lieu of taxes.

LONG ISLAND POWER AUTHORITY

New York lawmakers have introduced a bill, The LIPA Public Power Act which would allow the agency to distribute electricity themselves to Long Island and Rockaway residents without the need for a third-party company. The utility has effectively been managed by PSEG Long Island, an investor-owned, for-profit utility company whose contract is up in 2025. Storms have been at the center of the latest debate over LIPA. The proposed change stems from the utility company’s poor performance in responding to Tropical Storm Isaias in 2020.

As of October 2023, PSEG Long Island customers spend an average of 22.73 cents per kilowatt hour for their residential electricity, which is 11.92% higher than the average state price of 20.31 cents. If enacted, it would represent yet another change in the management and operation structure. It was a major storm that drove cries for the current arrangement. Now the winds are blowing in the opposite direction. It is not clear whether the bill has enough support to pass.

EMINENT DOMAIN

State regulators in South Dakota have rejected the initial permitting request from Summit Carbon Solutions for a pipeline through the state to transport carbon dioxide. Summit can try again and now the State Legislature is working on several pieces of legislation which would, if enacted, add protections for private property owners when pipeline companies conduct surveying, ensure better terms for landowners in agreements with pipeline companies, and add financial protections for landowners subjected to eminent domain.

Two bills failed to make it out of committee. One was a bill to prevent carbon pipelines from using eminent domain at all. The second would have required carbon pipelines to have a regulatory permit before pursuing eminent domain. The pending bills would require any person or entity looking to conduct an examination or survey on private property to have a pending or approved siting permit application with the state. It would also require 30-days written notice to the property owner. The notice must include a detailed description of the property areas to be examined, the anticipated date and time of entry, the duration of presence on the property, the types of surveys and examinations to be conducted, and the contact information of the person or agent responsible for the entry. 

The bill also would require entities seeking to enter private property for surveys to make a one-time payment of $500 to the property owner as compensation for entry, in addition to covering any damage caused during the examination. Property owners would also be given the right to challenge the survey or examination by filing an action in circuit court within 30 days of receiving the written notice. 

Under a second bill, carbon pipeline agreements would not be allowed to exceed 50 years and would automatically terminate if not used for the transportation of carbon dioxide within five years from their effective date. Landowners would be entitled to annual compensation for granting the easement, set at a minimum of $1 per foot of pipeline each year the pipeline is active. 

In Nebraska, a bill has been introduced to limit the use of eminent domain. Legislative Bill 1366 would provide that a local government, such as a city or county where eminent domain is to be used, or the Nebraska Public Service Commission, would have to vote to approve its use. The bill would also require “good faith” negotiations and providing an appraisal to a landowner, before eminent domain could be used.

The Nebraska Public Service Commission has the authority to approve only the routes of oil pipelines under current law. The proposed bill would expand that to CO2, gas and natural gas pipelines, the agency said, “and possibly other private chemical and water pipelines,” both within the state and those crossing state lines.

The North Dakota Public Service Commission decided that state rules preempt local ordinances on pipeline zoning issues. It cited state law changes in 2019 that said “the approval of a route permit for a gas or liquid transmission facility automatically supersedes and preempts local land use or zoning regulations except for road use agreements.” Before 2019, the law said state rules may supersede local ordinances, if the local ordinances are deemed unreasonably restrictive. 

The decision will enable Summit Carbon Solutions to reapply for a permit of some 350 miles of its planned pipeline in North Dakota. It was initially denied in late 2023. The reapplication proceedings could begin in one month.

MASS TRANSIT

The Washington Metro Area Transportation Authority (WMATA) is facing a $750 million budget gap for FY 2025. Earlier this year it proposed significant service cuts in the absence of additional funding for its operations from its intergovernmental funding partners. Under that plan, several stations would close permanently, rail service would stop at 10 p.m., about one-third of bus lines would be cut.

Now, the District of Columbia has made a funding proposal to increase its support for WMATA in an effort to stave off service cuts. D.C. Mayor Muriel Bowser and two Council members said the city is offering up to $200 million, on top of its fiscal 2024 operating subsidy. The funds would be used to help close WMATA’s fiscal 2025 budget deficit. The city’s proposed contribution, combined with proposed funding from Maryland and Virginia, would help WMATA cover $480 million of a $500 million gap.

PUERTO RICO ELECTRIC

The Puerto Rico Electric Power Authority (PREPA) is in the middle of its continuing fight to avoid paying off its billions of municipal bond debt. While this effort drags on, planning must be undertaken to improve and develop the electric grid on the island. This week, the U.S. Department of Energy delivered its views on efforts to diversify and strengthen the electric system in support of the Commonwealth’s climate goals.

DOE and FEMA conducted a two-year study which concludes that Puerto Rico can successfully meet its projected electricity needs with 100% renewable energy by 2050. Puerto Rico must increase new power generation infrastructure significantly—on the scale of hundreds of megawatts—to stabilize the grid and alleviate current generation shortfalls, including rapid deployment of utility-scale and distributed renewable resources and significant amounts of storage. 

Here is where the ongoing bankruptcy proceedings for PREPA get in the way. Outside funding for resilience components of the resource plan (solar, wind) to address economic equity concerns is available. On February 22, 2024, residents can apply for DOE’s Solar Access Program — a program designed to connect up to 30,000 low-income households with residential rooftop solar and battery storage systems with zero upfront costs. 

This program is being funded from the Puerto Rico Energy Resilience Fund, a $1 billion DOE program focused on improving the resilience of Puerto disadvantaged households and communities. Frequent outages continue to impact Puerto Ricans on a day-to-day basis, caused in part by the poor state of repair of the electric transmission and distribution grid and insufficiency of the current generation fleet, which is frequently unable to supply enough electricity to meet load under even normal, non-peak conditions.

This only addresses part of the problem for an agency with massive capital needs and questionable market access.

RATES, INFLATION AND BUDGETS

At some point, the realities of recent years’ inflation combined with the impact of pandemic costs was going to negatively influence budgets. On top of those factors, many governmental employers were emboldened by the pandemic to take more aggressive stances in their contract negotiations. When you put those factors together, it is a formula for budget imbalance and pressures to reduce expenditures. It’s not just a challenge for smaller less well-to-do communities. Larger richer communities are under the same pressure.

The latest example is Santa Clara County, CA. This week it issued a budget update. Last summer, the county avoided a strike with its largest union, SEIU Local 521, when it reached a deal that resulted in the largest increase in wages in two decades. Now, the cost of salaries and benefits is expected to rise $488 million, or 9.5%, between the current budget and the 2024-25 fiscal year budget. Mid-way through this year, county officials predict a $45.9 million balance at the end of the 2023-24 fiscal year. 

Like many counties, Santa Clara faces significant healthcare costs. The general fund balance is just about totally offset by a $42 million shortfall in the County’s health system.

NET METERING

The pendulum continues to swing back and forth when it comes to the level of compensation provided to utility customers with rooftop solar and excess power. Last year, states like Florida and California reduced the payment amounts available from utilities to their customers with solar. These moves have lowered the demand for solar by rendering it less economical and affordable. The outcry from customers has begun to generate support for increasing those amounts.

Two bills in the Hawaii legislature would seek to increase rates that residential and business rooftop solar system owners receive for helping Hawaiian Electric balance its power needs on Oahu, Maui, Molokai, Lanai and Hawaii island under a program approved by the state Public Utilities Commission in December and scheduled to begin March 1. Under the new system, participating customers receive a fixed fee plus bill credits for exported energy, which on Oahu is 32.9 cents per kilowatt-hour.

The legislation would mandate that program participants receive the “retail” rate credit for exported electricity, meaning the rate Hawaiian Electric customers pay for electricity, which is about 40 cents per kilowatt-­hour on Oahu. The same arguments against the increase we have seen in other states are being advanced in Hawaii. Primarily, the issue is that customers without solar power are “subsidizing” customers who produce their own power. The fixed cost base of legacy utilities would be spread among fewer customers.

Hawaii Electric claims that solar incentives between 2001 and 2015 reduced company revenues by some $105 million. That may be the real issue that the utilities have. Rooftop solar helps to weaken the monopoly on service that utilities benefit from.

In Utah, legislation has been introduced to increase the energy bill credits for energy generated by rooftop solar power. Under current laws and regulations, Rocky Mountain Power charges 10 cents for each kilowatt hour it provides. When it credits rooftop solar equipped customers, it only credits customers with about five cents per kilowatt hour. The legislation would require energy companies to credit solar owners at least 84% of the cost per kilowatt.

In North Carolina, the Court of Appeals heard arguments this week challenging Duke Energy’s net metering rates. The battle over net metering between Duke and the state has been going on for a decade. The solar industry and electric customers are claiming that the State Utilities Commission failed to follow the law when it relied on a Duke analysis of the costs of net metering in arriving at a rate. Other provisions of the law regarding timetables for adoption of new rates were drafted by Duke.

The solar industry hopes to see that the Utilities Commission conduct its own studies as required by law. In the interim, delay in the implementation of a new rate schedule would occur until a final approval from the state.

PENNSYLVANIA BUDGET

Pennsylvania Governor Josh Shapiro released his budget proposal for FY 2025. His plan would increase total authorized spending by 7% through the state’s general fund, while tax collections are projected to increase by $1 billion, or 2%. The budget proposal holds the line on taxes, and instead draws down the state’s cash reserve from $14 billion to $11 billion. The additional money is intended to fund several education initiatives.

Last year, state courts found Pennsylvania’s system of school funding unconstitutionally discriminates against poorer schools. To address that, the budget proposes a $1.1 billion increase, or 14% more, for public school operations and instruction. This is based on a school funding commission’s recommendation last month supported by his appointees. A significant portion, about $872 million, would go toward poorer schools.

A major reorganization of the state higher education system is designed to facilitate increased access and lower costs. Shapiro’s budget allots an extra $200 million, or 10% more, for the state’s higher education institutions. He hopes the program will enable tuition to be limited for qualifying students to $1000 per year. Other significant investment would go to public transportation, increasing state aid by about $280 million, or about 20%. More than half of that would go to the Philadelphia-area Southeastern Pennsylvania Transportation Authority, or SEPTA.

TRANSIT SUBSIDIES

Various strategies to combat the impact of the pandemic on mass transit utilization have been suggested in its wake. Recently, the Mayor of Boston claimed that the primary factor keeping workers on a remote basis is the cost of mass transit. Her remedy would be to put mass transit on a fare-free basis. A number of small and medium size cities have tried free fare experiments. Their use on larger systems has been limited.

In New York, the city maintains a program to limit the impact of transit costs on low income individuals. The City’s Fair Fares NYC program provides half-price transit trips to New York City residents between the ages of 18 and 64 with household income below 120 percent of the federal poverty level (currently $17,496 for an individual and $36,000 per year for a family of four), who do not otherwise qualify for reduced-price MetroCards or city-provided carfare.

The NYC Independent Budget Office (IBO) examined the cost of expanding the Fair Fares program to include New Yorkers who are aged 65 and older have disabilities, and whose income is less than 200 percent of the federal poverty level. IBO estimated the cost if Fair Fares were to completely cover the price of these riders’ transit, rather than the program’s current half-price subsidy. IBO estimates this Fair Fares expansion would cost between $27 million and $67 million per year, depending on the transit services included in the program.

NEW ORLEANS AND FLOODS

Some 19 years on from the disaster that was Hurricane Katrina, flooding remains a major issue for the city. New Orleans’ stormwater infrastructure is currently funded through property taxes. A proposal is being made that a more comprehensive funding source which would include currently tax-exempt properties be established. A stormwater disposal or drainage fee could be levied against all properties regardless of their property tax status.

The rate would be based on size for single-family properties. For all other properties, it would be based on the amount of impervious area. That allows the impact of large facilities with substantial footprints to be factored in. Think warehouse facilities and shopping malls. Stormwater fees are a long-standing tool in the municipal market and they have appeared in many forms. In this case, the fees would support the issuance of bonds.

That part of the proposal has become a real issue. The Sewerage and Water Board of New Orleans does not have a favorable image among its stakeholders. Support for the plan may require the creation of a separate entity to oversee collection of the fee and its use. The Sewerage and Water Board of New Orleans says it needs about $1 billion to upgrade the city’s drainage system over the next decade. Backers of the proposal estimate that a fee would yield some $38 million annually to support debt service.  They would like a new entity to oversee things.

HEALTH SYSTEM CREDIT PRESSURE

Novant Health operates 15 medical centers in North Carolina, including several regional referral centers. The Novant Health Medical Group has nearly 2,000 physicians and maintains numerous physician offices and outpatient centers. The system is headquartered in Winston-Salem, NC. As the result of the acquisition of New Hanover Regional Medical Center, it has major operations in three different North Carolina markets.

That acquisition has come with a cost. Moody’s Investors Service has placed Novant Health’s (NC) Aa3 long term rating under review for downgrade. Novant closed on its acquisition of three hospitals from Tenet Healthcare for $2.4 billion on January 31.  Novant Health financed the acquisition with a bridge loan, roughly doubling its debt load to some $5 billion.

The system will have to make the case that the benefits of the expanded system are enough to offset the major increase in debt. The risks from integration issues are present in all of these deals.  

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

UPDATES

In our January 29, 2024 issue we discussed one Colorado River water users plans to retain water allotments even though they were not likely to use them. Now, the owner has announced that it had filed a motion to dismiss its diligence application for conditional water rights that date to 1966 and are associated with the construction of a 23,983-acre-foot reservoir on Thompson Creek. The motion was granted and the claim on water rights is now legally considered to be abandoned.

The Maricopa County Superior Court on Jan. 22 upheld the Arizona Corporation Commission’s approval for SRP to add capacity using natural-gas generators at the Coolidge Generating Station. The plant lies just east of the lower-income, historically Black community of Randolph. After an initial rejection of SRP’s plans, they reapplied and agreed to a modified plan under which SRP will reduce the number of new generators from 16 to 12, won’t add any more units there, and agreed to locate the new generators farther from the community and limit annual capacity to 30% averaged across the new units.

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DRUG COSTS

The North Carolina State Health Plan state funds to pay most prescription drug costs for 740,000 public workers, teachers, retirees and their family members. That puts the Plan in the position of having to fund the costs of an ever expanding portfolio of drugs prescribed to its members. The combination of demographic trends and drug development and marketing has increased demand for drugs. This is especially true of drugs now being offered for their weight loss inducing effect.

One class of drugs prominent in this emerging trend is that of drugs developed for diabetics which help weight loss. Much of the current demand for the drugs like Wegovy. This well advertised drug is used strictly for weight loss only on an off label basis. In June 2021, the insurance plan for North Carolina state employees was paying for 2,800 people to take weight-loss drugs. Last year, it paid for nearly 25,000. The Plan attributes some 10% of its prescription drug costs to weight loss drugs. Now the Plan will no longer cover these drugs.

It may seem a bit political but a truly diverse combination of private health providers is taking steps to limit payment for weight loss drugs for their covered employees. According to press reports, Ascension Health employs about 139,000 people and operates 139 hospitals in 19 states. Its employees must now pay out-of-pocket for GLP-1s such as Wegovy and Saxenda, which are FDA-approved for weight-loss, along with Adipex, Alli, Benzphetamine, Contrave, Diethylpropion, Imcivree, Lomaira, Orlistat, Phendimetrazine, Phentermine, Plenity, Qsymia, Resveratrol, and Xenical. The coverage exclusion will also apply to new weight loss drugs that become available in the future.

Even the Mayo Clinic will now provide a lifetime benefit of only $20,000 for the drugs for its employees. The University of Texas System Office of Employee Benefits stopped coverage of the drugs in September at the start of the fiscal year. Coverage of the medications for weight loss will end on April 1 in North Carolina.

LITHIUM

It is somewhat predictable that projects to derive lithium from California’s Salton Sea would be challenged by environmentalists. Last week ground was broken on a $1.85 billion construction project. By extracting boiling, mineral-rich brine from underground, the plant will create about 40 megawatts of steam power, then separate raw lithium out of the waste stream, and produce an expected 25,000 metric tons of commercial-grade lithium hydroxide each year. That’s enough for approximately 415,000 electric vehicle batteries. 

Now a coalition of environmental and “economic justice” advocates are threatening a lawsuit to halt construction. In this case the contention is that these mining activities will generate pollution which might be harmful to residents. Keep in mind that the existing situation at the Salton Sea is an environmental nightmare. The Salton Sea has been fed by pesticide- and fertilizer-laden runoff from area farms for more than a century as well as a sewage-polluted river from northern Mexico.

Under the current set of conditions, the dry lake bed of the Salton Sea generates huge amounts of dust which pollute the air with a variety of chemicals in the soil dating back to the formation of the Salton Sea. This would continue with or without the plant. The economic base which supported local residents is long gone.

An independent fiscal analyst hired by the county noted the project would generate nearly half a billion dollars over several decades in lithium production fees and property and sales tax revenues. An estimated 250 construction jobs and about 75 full-time jobs, with an average estimated annual salary of $85,000, are also projected to be created. Imperial County’s average income per capita in 2022 was $21,216.

There are more than a dozen existing geothermal steam plants at the Salton Sea. Steam is released from a boiling hot brine pool that sits as deep as 2 miles underground there, and which contains raw lithium and other minerals.

PARTISAN UTILITY MANAGEMENT

Nebraska is the only state with a one house legislature and the only state without an investor-owned electric utility. For many years, the elections for seats on the board of the state’s electric utilities were conducted on a non-partisan basis. From the perspective of the long-term investor, this was one of many factors which made the credits of the public power entities in Nebraska attractive.

Like so many utilities with aging generation stock, the public power agencies in Nebraska face some significant decisions. They were difficult enough given the many entrenched interests which might be impacted from increases in renewable power. More emphasis on ideology is not exactly what these agencies need in the current environment.

Now, partisan elections are being encouraged by sponsors a new bill which received a 29-16 vote in the Legislature which gave first-round approval to LB541 that would make elections for the Nebraska Public Power District and Omaha Public Power District boards partisan. The motivation is a belief that out of state “East coast money” is driving the election of people with a climate change agenda.

NPPD and OPPD have been holding public hearings dealing with proposals to increase the share of renewables in their respective generation bases. This has generated opposition. The utilities also depend on coal and nuclear for their baseload supplies. Both sides of the issue have seen increasing sums spent on power district board elections.

The bill is actually a softened version. Originally, a bill would have made all public power and irrigation district elections in the state partisan.

MENTAL HEALTH ON THE BALLOT

The ongoing dilemma as to how best to deal with homelessness and its companion issues of substance abuse and mental illness will be on the California ballot this March. In 2004, California voters approved Proposition 63, also known as the Mental Health Services Act (MHSA). The act taxes people with incomes over $1 million per year and requires that the money collected from the tax be used for mental health services. The tax typically raises between $2 billion and $3.5 billion each year. It is clearly not succeeding in its efforts to deal with homelessness.

Nearly all the money from the tax—at least 95 percent—goes directly to counties, which use it for mental health services. The rest of the money goes to the state to support mental health programs. Counties can only spend the MHSA money on certain types of services, but have flexibility in how to provide those services. The services include treatment for people with mental illness and prevention programs for people who may develop a mental illness. While counties can spend MHSA money on treatment for drugs and alcohol, the people receiving treatment must also have a mental illness.

Proposition 1 increases the share of the MHSA tax that the state gets for mental health programs from 5% to 10%. The proposition also requires the state to spend a dedicated amount of its MHSA money on increasing the number of mental health care workers and preventing mental illness and drug or alcohol addiction across communities. The increased state share will reduce the counties pool of funds to 90% of the tax.

Proposition 1 requires that counties spend more of their MHSA money on housing and personalized support services like employment assistance and education. While counties currently can use MHSA money to pay for these types of services, they are not required under MHSA to spend a particular amount on them now. Counties would continue to provide other mental health services under the proposition, but less MHSA money would be available to them for these other mental health services.

Proposition 1 would give up to $4.4 billion to the state program that builds more places for mental health care and drug or alcohol treatment. It would give $2 billion to the state program that gives money to local governments to turn hotels, motels, and other buildings into housing and construct new housing. The state government estimates that the bond would build places for 6,800 people to receive mental health care and drug or alcohol treatment at any one time. It also estimates that estimates the bond would build up to 4,350 housing units, with 2,350 set aside for veterans. The bond would provide housing to over 20 percent of veterans experiencing homelessness.

A November poll found that two-thirds of respondents support the plan.

REGULATION

In Iowa,  House Study Bill 608 would give the Legislature the power to intervene to halt eminent domain proceedings in the state. The bill would allow 21 members of the Iowa House or 11 Iowa senators to file a petition to halt an eminent domain process, stopping all associated hearings, trials or other proceedings. It would take a vote of at least 60% of the House and 60% of the Senate to resume the eminent domain proceeding. The eminent domain process could also continue if 60% of each chamber sign a letter attesting that they believe the use of eminent domain is constitutional in that case.

The target of the law, Summit has delayed its planned operation date for the pipeline, citing regulatory difficulties in several states. It now does not expect it to become operational until 2026, two years later than initially projected.

Two companion bills under consideration in the Virginia legislature would “Establishes a procedure under which an electric utility or independent power provider (applicant) is able to obtain approval for a certificate from the State Corporation Commission for the siting of an energy facility rather than from the governing body of a locality.” The legislation comes as some shore communities are attempting to regulate the siting of transmission lines related to wind generation. The primary opposition is from Virginia Beach.

P3 REVERSAL

In October, the Louisiana legislature approved a public-private partnership to build a $2.1 billion toll bridge over the Calcasieu River after officials renegotiated an initial deal rejected in October. The new structure would replace a 71 year old bridge which is well beyond its useful life. The renegotiated agreement would expand a 25-cent toll with a vehicle size limit for locals to all noncommercial vehicles in a 5-parish area. It would reduce the toll for large trucks from $12.50 with a transponder to $8.25. Large trucks without transponders would pay $12.36 instead of $18.73.

The new deal also returns 15% of any toll profits to the state, rather than no equity distributions included in the agreement presented in October. It also reduces LA DOTD retained costs from $415 million to $280 million, contingent on approval of design changes that would eliminate the need to relocate railroad and pipeline infrastructure. The state’s funding for the project remains essentially the same as proposed in October, with $800 million in public funds from federal grants, $250 million in vehicle sales taxes, $85 million in State General Obligation Bonds, and $150 million from the State General Fund.

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.