Joseph Krist

Publisher

We are breaking for the Easter holiday. The Muni Credit News will next publish on April 8. We think that it is even money at best that the NYS budget will be done by then.

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MIGRANTS

The two cities most prominently impacted by the influx of migrants – Chicago and New York – have announced changes in their shelter policies to reflect the ongoing pressures resulting from the problem. Chicago has received more than 37,000 migrants since August 2022. Nearly 11,000 migrants are living in 23 homeless shelters. The city began an eviction process for longer term residents. It is anticipated that some 2000 individuals will be moved out of city provided shelter by May 1.

Case reviews will provide exemptions for pregnant women, people with certain medical issues and migrants who are already in the process of securing housing. Families with children can receive renewable 30-day extensions. Chicago is a sanctuary city but it is not a right to shelter jurisdiction so these sorts of changes do not have to overcome legal hurdles that right to shelter provides.

In New York, an agreement has been announced that will grant the city some relief from court-imposed requirements that there is a right to shelter. It is this concept that has left NYC particularly vulnerable to the types of tactics used by the governors of Texas and Florida to “export” immigrants. Under the new plan, adult migrants will be allowed to stay in shelters for only 30 days under the agreement, city officials said. Some would be allowed to stay longer if they met certain conditions, including having a medical disability or an “extenuating circumstance”.  

The city would have liked to have done this earlier but it operates under a consent decree (won in 1985) requiring the city to satisfy the right to shelter. The new plan is the result of months of negotiations. Under the agreement, adult migrants ages 18 to 23 would have at least 60 days in the shelter system before having to move out, unless they meet the exceptions. Migrant families with children would not be affected. The settlement also does not apply to people who are not migrants and staying in city shelters.

The situation is still critical. There are 65,000 migrants still under the city’s care, 22 percent of whom are single adults or adult families without children, according to city officials. 

HOUSTON PENSION SETTLEMENT

The City of Houston has announced an agreement with its firefighters union over issues related to back pay and pensions. The firefighters and the City had been unable to negotiate a labor agreement and some firefighters had been working for eight years without a contract. The $650 million settlement to finally resolve the city’s looming liability addresses longstanding pay issues dating back to 2017.

Under the terms of the agreement, all current firefighters, retired firefighters, and the families of firefighters who have died since 2017 will receive lump sum payments for the wages owed back to 2017. In addition to the back pay, the agreement makes permanent the temporary 18% pay increases awarded to firefighters in 2021 and mandates additional raises of 10% on July 1, 2024. With the subsequent pay hikes specified through 2029, total firefighter pay will increase by up to 34% over the life of the contract.

The costs of the settlement will be financed with the issuance of judgment bonds. This is tax backed debt issued by an entity to fund a large near term payment while spreading its costs over a long period. It’s not an uncommon municipal bond practice but this case creates a much larger than usual amount to be funded and financed.

NEW YORK CANNABIS

This week NY Governor Kathy Hochul made it official – the rollout of the recreational cannabis regulatory mechanism in New York is officially a “disaster”. She ordered a full review of review of the state’s licensing bureaucracy. The main goal of the review is to shorten the time it takes to process applications and get businesses open. Disaster is one of the kinder words used by all sides of the industry – doctors, retailers, medical dispensaries. Some of the problem is blamed on the equity provisions of the rollout. The reality is more complex.

For whatever reason, the social and political goals of the program were allowed to overtake the nuts and bolts work of establishing and implementing a regulatory program. The state Office of Cannabis Management, which recommends applicants to the board for final approval, received 7,000 applications for licenses last fall from businesses seeking to open dispensaries, grow cannabis and manufacture products. But regulators have awarded just 109 so far this year. 

The agency has been plagued by staff as well as management turnover. It is led by a well meaning attorney who doesn’t have executive experience. The head of the equity side of the program had to resign over accusations of favoritism. This has all gotten in the way of a structured plan to award licenses. This had led to proliferation of illegal unlicensed retail sites including an estimated 1500 in New York City alone.

The emphasis has been on the social and economic equity goals enshrined in the legalization law. Its goal is to have half of all licenses go to people harmed by anti-cannabis policies; women; racial and ethnic minorities; distressed farmers; and disabled veterans. Much of the criticism of the office has been rooted in the role of equity concerns as an impediment to licensing. Along with a lack of enforcement in NYC, the botched rollout is actually increasing illegal activity.

BALLOT RESULTS

It took some two weeks to find out but in California Proposition 1 was approved by the voters with a razor thin majority. With just 50.2 percent of voters approving, the gap was less than 30,000 votes out of more than 7 million cast in the race. Only about a third of registered voters cast ballots in the California primary. There was a clear divide between the urban areas and the rest of the state. The vote authorizes over $6 billion of debt issuance capacity to address the issues of homelessness and mental health.

In Chicago, a referendum that would change the city’s real estate transfer tax and raise rates on high-value properties to fund homelessness programs appeared to be failing in the tabulated vote. Only 20 percent of registered voters in Chicago cast ballots. The vote is a huge political defeat for the Mayor as neither the voters nor the Council have provided support for higher taxes. The result puts the Mayor and the City in a weakened position as they confront the need to reach a contract agreement with the Chicago Public Schools teachers union.

TEXAS AND ESG

The Texas Association of Business Chambers of Commerce Foundation (TABCCF) released a new economic impact study illustrating the financial impact of Texas’ Fair Access law, passed in 2021. In the 87th Session of the Texas Legislature in 2021, lawmakers passed Senate Bills 13 & 19, barring any Texas municipality from contracting with banks if they are found to be restricting funding to oil & gas companies or discriminating against firearms companies based on their line of business.

In a 2023 study entitled Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies, Dr. Dan Garrett of the University of Pennsylvania and Dr. Ivan Ivanoff of the Federal Reserve Bank of Chicago examined the consequences. Their study found that competition in the public finance market was indeed reduced due to these laws, and that interest costs were 0.144 percent higher as a result. This new study builds on that work. Further examination of transaction costs associated with issuing debt, specifically the underwriters spread, shows a sharp increase in the fiscal years 2022-23 in the wake of the laws’ implementation. Applying the historic average from fiscal years 2015-21 implies excess costs of $270.4 million.

The real issue is at what level of government is the cost of anti-ESG policies borne. The move in Texas has been primarily driven at the state level. That isn’t where the cost is being borne. There is little sign of any external impact on underwriters spread at the State level post-2021. The situation appears to change locally, however, as the underwriters spread more than doubled from fiscal year 2021 (the last year before the anti-ESG laws were implemented) to fiscal 2023.

The study sums it up well. “In simple terms, when government attempts to mandate values (no matter what kind) to business, the market loses, and taxpayers bear the consequences.”

COAL

A joint resolution that passed the Kentucky House natural resources committee this week would direct the state’s environmental authority to defy federal rules for fossil fuel power plants. House Joint Resolution 121 says the U.S. Environmental Protection Agency is “overreaching” its regulatory power. It would also prohibit the state’s environmental cabinet from enforcing federal air quality standards related to power plants. The lead sponsor of the resolution stated that “actually enacting the measure could lead to a federal government takeover.” It’s not clear quite what he meant.

The legislation is designed to plan for Kentucky’s energy needs into the future through the creation of an “independent” energy commission that would review all requests to shut down existing power plants. That would be an added step on top of the existing Public Service Commission approval process. The bill is opposed by the state’s investor owned utilities Louisville Gas & Electric and Kentucky Utilities, and Duke Energy.

The sponsors want the state to declare itself a “sanctuary state” for fossil fueled electric generation. The IOUs believe that it would lead to higher energy costs and could force them to keep open ineffective and uneconomical plants. The irony is that the party of free markets is the one hoping to legislate against efforts to respond to market forces. This comes as Utah’s Governor signed legislation designed to keep the Intermountain Power Project alive as a coal fired generation plant.

It’s part of an effort to “nullify” federal laws and regulations governing the operation of generating facilities. Kentucky still gets about 68% of its electricity generation from coal and another 23% from natural gas, according to the resolution. Less than 1% comes from wind and solar power. The other side of the argument was best expressed by one legislator – “I’m not comfortable with going down the road of nullifying federal laws that we don’t like. It sets a dangerous precedent. It didn’t work out well 170 years ago.”

STILL MICKEY MOUSE TIME IN FLORIDA

Attorneys for the Central Florida Tourism Oversight District filed a motion for a protective order that would stop the board members of the District from having to give videotaped depositions to Disney attorneys. District attorneys cite the “apex doctrine,” to support a view that high-level government officers shouldn’t be subject to depositions unless opposing parties have exhausted all other means of obtaining information. Florida is one of a minority of states which recognize that doctrine.

The board members who claim that being forced to give depositions would “impede” their ability to fulfill their duties and divert resources and attention away from overseeing the district. Depositions are a basic part of the discovery process in almost any civil litigation. If you’ve ever been deposed you know the process is annoying at best. That does not do anything to mitigate how poor a look for the District this all is from a governance point of view. The good news is that debt service payments of the District’s debt continue to meet made smoothly.

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

INTERMOUNTAIN POWER

Utah lawmakers passed a measure Thursday that allows the state to purchase a coal-fired power plant operating in Delta that now serves California customers and some local cities.  Of particular angst to some lawmakers is the fact that California receives 98% of the power but Intermountain Power Authority (IPA) is using Utah water and stopped using Utah coal to run its 1,900-megawatt plant. When it transitions to natural gas as mandated by California’s clean energy standards, it also plans to purchase that fuel from Wyoming, not Utah.

The situation is driven by two concerns. One is the desire of many Utah legislators to find a way to save a coal plant. The move is being positioned as one of concern over access to water rights. The sponsors claim that the law is not intended to interfere with the Intermountain Power Agency’s transition to natural gas and potentially hydrogen in the next few years. It is being pitched as an issue of state and local control.

The second is that the plant is operated by the agency via the Los Angeles Department of Water and Power. It pays local taxes but it does so after doing what many other entities of its type do – the plant has appealed its county tax assessment 26 of 38 years. The real issue is that the bill’s sponsors feel that the plant operated with little Utah government oversight, despite being set up decades ago as a political subdivision of the state. They believe that a “California controlled” entity should not have control over the IPA budget.

PURPLE LINE BLUES

The Maryland Transit Administration will seek approval next month for as much as $425 million in “relief payments” related to delays in the Purple Line light rail project. The extra payments are the result of a roughly 234-day delay that will push the line’s completion back from spring of 2027 to December of that year. The Maryland Transit Administration took over the utility related work in 2020 as the original contractor began to exit from the project.

The Administration did complete the utility work in October. In December, operations and maintenance facility work was complete. The project is now 65% complete, with 13 of 21 stations in active construction. Additionally, nearly 17,000 linear feet of track has been laid. That gets the Administration out of direct construction activities.

Now construction is in the hands of Purple Line Transit Partners, the private consortium building the line. Partners will receive an initial $60 million from the state. Additional payments will be made as the company hits certain milestones such as the delivery of rail cars. The utility work payment is on top of $449 million in payments spread out over the next several years that is part of an increase already in the proposed Consolidated Transportation Program.

Seven months ago, the Board of Public Works approved an additional $148 million in payments to Purple Line Transit Partners. The money covered cost overruns and delays that pushed the project to spring of 2027. The additional funding being sought pushes the cost of the project to about $4 billion. Including financing over the 36-year life of the project, the cost is $10 billion.

NY HOSPITAL MERGER

Northwell Health (A3 stable) and Nuvance Health (Baa3 negative) signed a definitive agreement to merge later this year. The parties expect to close toward the end of 2024. It is a positive development for the Nuvance credit which is teetering around investment grade at Baa3 with a negative outlook. Northwell is a much larger entity generating some $16 billion in annual revenue compared to Nuvance Health’s $2.6 billion.

Nuvance Health’s weaker financial performance would be modestly dilutive to Northwell Health.  If the affiliation closed today, Northwell Health’s operating cash flow margin would decline by 30 – 60 basis points and days cash position would decline by a modest three days.

SMALL COLLEGE DOWNGRADES

Moody’s downgraded Hartwick College’s (NY) issuer and revenue bond ratings to Caa1 from B2. As of June 30, 2023, the college has approximately $35 million in outstanding debt. The outlook was revised to stable from negative. Ongoing deep operating deficits and a high reliance on large supplemental endowment draws is weakening already thin liquidity through at least fiscal 2024. 

S&P revised its outlook to negative from stable and affirmed its ‘BBB-‘ long-term rating on Champlain College in Vermont. The school has a debt service coverage covenant of 1.10x, which was not met in fiscal 2023 with debt service coverage of negative 0.43x. Based on the legal documents, the remedy for this covenant violation was to hire an independent consultant, which was fulfilled. “The negative outlook reflects our opinion that the college’s enrollment could continue to decline in the near term, leading to ongoing operating pressures. This could further pressure financial resources and weaken them to a level commensurate with a lower rating.” 

S&P lowered its long-term rating to ‘BBB’ from ‘BBB+’ on the Albany College of Pharmacy and Health Sciences (ACPHS).  “The downgrade reflects our view of the effects of ongoing demand challenges on the college’s enrollment and financial operations, as well as its weakened financial resources over the last two years relative to historical performance”. ACPHS’ operations are generally reliant on student-derived revenues that may likewise remain pressured.  

EMINENT DOMAIN

In 2022, NV Energy filed a court complaint to use the power of eminent domain in building a gas pipeline crossing property owned by an entity called Mass Land Acquisition (MLA). MLA’s parent is a company called Blockchains which hopes to develop a “cryptocurrency city”. MLA contested the eminent domain request all the way to the Nevada Supreme Court. The landowners argue that NV Energy’s use of eminent domain violates the state Constitution, which “expressly prohibits a private party from using the power of eminent domain to transfer interests in property from one private party to another.”

NV’s position is that state law and the Nevada Constitution actually clearly allows them to use eminent domain because they provide a “public use,” which specifically includes utilities and pipelines for petroleum or natural gas. The municipal bond angle – the Las Vegas Valley Water District and Southern Nevada Water Authority filed amicus briefs supporting the NV position.

The South Dakota Legislature passed three bills intended to strengthen landowner protections while maintaining a regulatory path forward for the Summit Carbon project. Carbon capture pipeline operators will have to pay $500 for access to survey land. Counties through which the pipelines run could collect a surcharge of up to $1 per linear foot, with at least half of the surcharge allocated for property tax relief for affected landowners. The remaining funds could be used at the county’s discretion.

The bills restrict easement durations, terminating them if a pipeline does not secure a Public Utilities Commission permit within five years or if the easement goes unused for the same period. Additionally, easements cannot extend beyond 99 years and must be documented in writing and recorded in a county register of deeds office. Current law says the Public Utilities Commission may overrule counties’ pipeline setbacks. The legislation establishes that the commission’s permitting process overrules local setbacks and other local rules regarding pipelines, unless the commission requires compliance with any of those local regulations. 

PIPELINE PLANS EXPAND

Summit Carbon Solutions plans to expand its carbon dioxide pipeline footprint in Iowa by about 50% — or about 340 miles according to a new regulatory filing in Iowa. That is in addition to the existing proposal for 690 miles of pipe through Iowa. Summit has more than doubled its number of ethanol plant partners in Iowa to a total of 30 out of 42 in the state. Two large ethanol producers — POET and Valero — that had initially agreed to be part of Navigator CO2’s competing pipeline have since signed with Summit.

The project now includes 57 ethanol producers in five states and is expected to transport more than 16 million metric tons of carbon dioxide each year. The system has a total capacity of about 18 million metric tons. More than half of the corn Iowa farmers produce is used to make ethanol. Summit filed requests with the IUB to schedule public meetings in 22 counties for its expansion plans. The company proposed the first meeting for Adams County on April 22. The rest would be held over the course of about three weeks, ending May 9.

NUCLEAR

The Nuclear Regulatory Commission released a long-awaited proposal – “Part 53” – aimed at speeding up licensing for advanced reactors. Part 53 is meant to offer a “voluntary” alternative to advanced nuclear applicants under a framework that would be applicable to all reactor technologies; use information from risk assessments to focus safety analyses on important issues; and ensure plants are regulated based on how they perform and not just how they are designed.

Advanced nuclear reactors are being developed under the existing Part 50 program which is designed for traditional large scale reactors. The uncertainty associated with this process has likely slowed development. The rulemaking process is likely to make implementation of Part 53 delayed until 2027. Recent setbacks in the industry have likely bought regulators some time to effectively catch up in terms of new regs.

SOLAR

The US solar industry installed 32.4 gigawatts-direct current (GWdc) of capacity in 2023, a 51% increase over 2022. This is the first year where new solar exceed 30 GWdc of capacity for the first time. Residential solar grew 12%, adding 6.8 GWdc of capacity as installations in California were accelerated as customers rushed to take advantage of more favorable net metering rules before the switch to net billing in April. Commercial solar saw a similar increase in California, leading to national growth of 19% over 2022. Community solar grew just 3% compared to 2022. Nationally, utility-scale installations spiked to 22.5 GWdc of capacity, a 77% increase over 2022. 

The result – Overall, photovoltaic (PV) solar accounted for 53% of all new electricity-generating capacity additions in 2023, making up more than half of new generating capacity for the first time.

Nevertheless, the California Public Utilities Commission issued a proposed decision that found that the Net Value Billing Tariff (NVBT) policy supported by solar advocates ​“conflicts with federal law and does not meet the requirements” of AB 2316, the 2022 state law that ordered the CPUC to create an affordable and equitable community-solar program.

The California investor-owned utilities argued that the community-solar and battery projects envisioned for NVBT fall under federal law that governs larger-scale generators operating in wholesale energy markets. What are the points of interpretation driving the arguments? AB 2316’s requirement that any new program must not increase costs for nonparticipating customers? An interpretation of the Public Utility Regulatory Policies Act (PURPA), a 1978 law that requires utilities to purchase power from certain non-utility-owned generators under structures governed by the Federal Energy Regulatory Commission.

BOSTON

The Boston Policy Institute (BPI) is a newly launched non-profit focused on analysis about the Commonwealth of Massachusetts and the City of Boston. Among its first efforts is a recent report on the impact of office building values on city revenues after the pandemic. The Fiscal Fallout of Boston’s Empty Offices raises several issues which put the City of Boston under more fiscal pressure than some other major cities.

The reports premises are based on the role of office buildings in the City’s tax base. More than one-third of Boston tax revenue comes from commercial

property taxes, by far the highest proportion among major U.S. cities.

This leaves Boston especially vulnerable to falling real estate values. The value of office space is projected by the BPI expected to decline 20–30 percent by

2029, and overall commercial real estate prices by 12–18 percent.

A second estimate is that Boston will face a cumulative revenue shortfall of $1.2

billion to $1.5 billion over the next five years. Boston will have few ways to compensate for this lost tax revenue. Massachusetts precludes cities from introducing local sales and income taxes; and fully offsetting the decline in commercial real estate would require a 25 percent to 30 percent increase in residential property taxes.

Whereas property taxes comprised roughly 55 percent of city revenues in 2002, today they account for 75 percent. Current estimates suggest that more than 20 percent of all office space in Boston is vacant. As is the case in other cities like New York and Chicago, remote and/or hybrid work is poised to be a long term drag on valuations for office real estate.

It remains a situation worth watching as the budget season unfolds.

NEW JERSEY GAS TAX

Funding for New Jersey’s Transportation Fund has been a major concern during the FY 2025 budget process. Now a plan has been advanced which would raise the state’s gas tax by some 10 cents per gallon over a period of ten years. It would also impose a fee ranging from $250 to $290 a year on electric vehicles over that period. Electric vehicles would be charged a $250 fee in the first fiscal year. That would increase by $10 a year after that, capped at $290 by the end of the five-year period.

Currently, the state collects 42.3 cents for each gallon of gasoline sold and 49.3 cents on every gallon of diesel — the seventh-highest rate in the nation. The level of the tax is determined annually through a formula established through a deal with the State Legislature in 2016 for the gas tax to be adjusted each October to ensure it generates about $2 billion a year in revenue to support the TTF.

The new tax is proposed to be in addition to rates derived from the formula. The higher gas tax and new electric car fee would take effect in July if approved by the Legislature and signed into law. The Governor has also proposed eliminating a sales tax exemption on electric car sales.

MISSISSIPPI

S&P Global Ratings revised the outlook to negative from stable and affirmed its ‘AA’ long-term rating on Mississippi’s general obligation (GO) debt. Elevated credit risks stemming partly from persistently weak economic and demographic trends, which could result in an increasingly challenging budget environment as the state manages through its phased-in income tax reductions…The risk of future budgetary pressure is further elevated due to pension contributions falling short of their actuarially determined contribution amounts in each of the past three years and a relatively high level of unfunded pension liabilities.”

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

TOWN AND GOWN AND TAXES

Newark, DE is the home of the University of Delaware. It is the dominant property owner in the city and obviously plays an outsized role in the local economy. It also is exempt from property taxes. This has always been an issue as it is in many “college towns”. The university is not ignorant which is why in lieu of property taxes, UD began making an annual payment of $120,000 in 1965. The annual payment level has remained at that level. It has been estimated that adjusting for inflation and enrollment which has quadrupled since 1950, that payment today would be almost $1.2 million since.

The City has been under pressure to find additional revenues and the tax exemption makes it harder to maximize property tax revenues. UD also added an annual police support subvention payment of $60,000 in 2001 but that has remained at that level as well. Newark City Council voted unanimously to advance a resolution seeking a charter change to levy a $50 fee per student per semester on the University of Delaware. The fee would apply to all full-time and part-time students, undergraduate or postgraduate, and would be adjusted annually using the previous 12 month Consumer Price Index.

The city is not requiring the fee be charged to students directly – that decision is up to the university. The next step is legislation in the state legislature to approve the charter change. Two-thirds of state lawmakers in both chambers now have to approve a bill for the city to amend its charter to levy the fee, and the governor would have to sign it. The City Council would then vote on it a final time.

The expected hue and cry from campus touches on all of the current political issues playing out on college campuses. Here’s one example of how the University may be generating its own trouble. The school makes its payments to the city through a credit card. This means that, according to the city, Newark absorbs $400,000 in processing fees a year despite requests asking the school to use a different payment method.

CHICAGO

Chicago’s progressive mayor ran on a platform of raising taxes on the rich. One of his main proposals concerned a levy on real estate transactions valued at $1million or more. Specifically, he proposed increasing one-time real estate transfer taxes on properties over $1 million, while reducing levies on transactions below that. The tax would also be graduated, with properties between $1 million and $1.5 million incurring a duty increase of $10 per every $500, and properties over that facing charges of $15 for every $500.

The tax was going to be submitted to voters on the March 19 primary ballot. Before it could get to the vote, the large real estate interests sued in Cook County Court to have the ballot item declared misleading. As we went to press last week, a County judge found against the ballot item. The Chicago Board of Elections could still appeal. In an interesting twist, it’s too late to remove the item from the ballot. This will allow a vote to occur on the item if the appeals process can reach a conclusion by the date of the vote.

Even if the ballot item is declared ultimately illegal, voters can still cast a vote for it. While the results of the ballot votes will not be publicly released if it is declared illegal, exit polling could generate some interesting insight into what the public thinks.

In the meantime, S&P announced that it has lowered its outlook on the City of Chicago’s general obligation debt to negative. S&P currently rates the City at BBB-. S&P cited rising public safety labor costs, recent legislative changes to pension contributions and the ongoing costs of migrant arrivals. It seems to feel that the city and state have not provided enough clarity as to total cost and funding related to migrants and charged that the City is unwilling to raise revenues.

Are they talking about Chicago or “stable” New York City?

NYC BUDGET

The combination of it being state budget season in NY and the ongoing asylum migrant crisis have led to several cases of whiplash in terms of the public utterances of the Mayor. The swings back and forth have made an analysis of the city’s budget that much more difficult.

The Adams Administration included a second round of reductions to agency budgets in its Program to Eliminate the Gap (PEG) in the Preliminary Budget and Financial Plan for fiscal year 2025. This PEG follows a first round of reductions from the Administration’s November Plan, and totals just over $3 billion for 2024 and 2025, although there were restorations of previous cuts that offset a portion. (All years refer to City fiscal years.)

While the third round of reductions for the Executive budget has been called off, the cuts included in the two most recent plans have the potential to substantially impact the life experiences of New Yorkers. Separately, shortly after the November Plan was announced, the Administration announced a 20% reduction to the estimated cost of providing services for asylum seekers—which was reflected in the Preliminary Budget. Last week, the Administration announced an additional 10% reduction in those costs, which is anticipated to be reflected in the Executive Budget. The NYC Independent Budget Office has taken its shot at explaining what’s going on.

The wild swings in the Mayor’s outlook have caused real tensions with groups facing the largest proposed cuts. Some of the areas proposed for cuts in both plans include those that largely contract with nonprofit organizations for the provision of human services: Department of Education early childhood programs, programs for justice-involved individuals (including criminal justice contracts, re-entry services, and mentorship programs), and older adult centers. There are no ready replacements for the services these entities provide and the impacted populations usually are among the lower income segments.

The Department of Cultural Affairs also received cuts in both plans and has reduced subsidies to the 34 members of the Cultural Institutions Group and grants to over 1,000 smaller organizations through the Cultural Development Fund (CDF) by 13% and 11%, respectively, since the Adopted Budget. IBO analysis of detailed CDF grant data showed that about 80% of this year’s grantees received smaller or no awards than last year, and generally organizations that received smaller awards last year received disproportionately larger cuts to their grants this year. 

The Preliminary Budget included cuts from the November Plan that were either partially or fully restored. Partial restorations included one police officer academy class and one year of Summer Rising programming that will provide enrichment for about 100,000 elementary and middle school students this summer. Full restorations included the Parks Opportunity Program (a six-month job training program for thousands of low-income New Yorkers) and litter basket service.

Among new cuts in the Preliminary Budget, the City reduced the overall budget for asylum seekers by 11% in 2024 and by 20% in 2025. The City’s share of the overall costs was also reduced by 36% over 2024 and 2025, partly due to additional State funding. Some cuts have resulted in reductions to full-time headcount at agencies such as the Department of Buildings and the Department of Parks and Recreation, which could contribute to concerns about adequate staffing for service provision.

CONGESTION PRICING – THE COST OF EXEMPTIONS

As the public comment period continues into March, various parties are making their case for their vehicle or class of vehicles be exempt from the charge. This has led to studies of possible results for given vehicle classes. This week, the NYC Independent Budget Office analyzed what the impact on congestion fee revenues would be if yellow cabs were exempted.

According to the MTA, taxis and for-hire vehicles made up more than half of the vehicles in the CBD prior to the Covid-19 pandemic. Under the proposed schedule, taxis and for-hire vehicles such as Uber and Lyft are exempt from the congestion toll, and instead are subject to a per trip surcharge paid by the passenger on any trips entering, exiting, or within the central business district (CBD). The MTA’s proposed surcharge is currently set at $1.25 for yellow taxis, green cabs, and traditional for-hire vehicles such as livery cars.5,6 A higher surcharge of $2.50 is set for high-volume for-hire services such as Uber and Lyft.

Based on current yellow taxi trip data—provided by the New York City Taxi and Limousine Commission (TLC)—IBO estimates an exemption just for yellow taxis would cost the MTA $35 million per year in foregone surcharge revenues, or about 3.5% of the authority’s $1 billion annual revenue estimate. While both industries still have ridership below pre-pandemic levels, yellow taxi ridership has been notably slower to recover. TLC trip data indicates that in October 2023, total yellow taxi trips entering, exiting, or within the CBD were at 49% of prepandemic levels, while high-volume for-hire vehicle trips were at 88% of pre-pandemic levels.

HOUSING AND TRANSIT

The MBTA Communities Law was passed in January 2021. It requires MBTA communities to establish multifamily zoning no more than half a mile from a commuter rail station, ferry terminal, or bus station, and the zoning districts must have no age restrictions and must be sustainable for families with children. In December 2023, Milton Town Meeting voters approved zoning changes that allow for more multifamily housing so that the town could comply with the MBTA Communities Law.

Milton is one of approximately 177 communities subject to the MBTA Communities Law and one of 12 that had a deadline of Dec. 31, 2023, to enact a compliant zoning district. Recently, the Town held a referendum on the plan. The result – 5,115 Milton residents voted “no” while 4,346 others voted “yes.” Now the Town faces consequences. The Massachusetts Attorney General is suing the Town for being out of compliance with the law.

Milton will no longer be eligible for a recent $140,800 grant for seawall and access improvements, which was contingent upon compliance with the law. The town will also not be eligible to receive MassWorks and HousingWorks grants and will be at a competitive disadvantage for many other state grant programs.

NEW JERSEY TRANSPORTATION

Gov. Phil Murphy wants to tax the wealthiest corporations in New Jersey to create a dedicated fund for NJ Transit. His proposed new “Corporate Transit Fee” would tax businesses that earn more than $10 million in profits.  The proposal would raise the corporate tax rate to 11.5% for affected businesses, instead of the 9% currently in effect. It would replace a previous fee program which expired at year end.

The original corporate tax surcharge raised about $1 billion annually, and the new one is expected to raise about $800 million. It comes as the state faces a funding shortfall for transit estimated at $1 billion. The Governor is fighting opposition from commuters to an announced 15% increase in fares scheduled to take effect on July 1. It is a reversal from his last budget address, when Murphy pledged to end the previous surcharge on wealthy companies’ taxes.

On another front, the Governor has proposed ending a sales tax exemption for electric vehicles. Since 2004, New Jersey residents were exempt from paying the 6.625% sales tax when buying, leasing and renting new or used fully electric vehicles, based on the zero-emission light duty vehicle tax break. The exemption did not apply to plug-in hybrid cars. Ending the sales tax waiver on electric vehicles over three years is also expected to net about $70 million a year based on current estimates.

Data from the New Jersey Department of Environmental Protection and the state’s Motor Vehicle Commission shows that as of June, 2023 there were just over 123,000 electric vehicles on the road in New Jersey. That represents just about 1.8% of the light-duty vehicles on the roads in the state. The New Jersey Coalition of Automotive Retailers (NJCAR) said in 2023 nearly 80% of car sales were gas-powered vehicles, about 11% were electric cars and roughly 9% were hybrid or plug-in hybrid.

CALIFORNIA PUBLIC POWER SOLAR

The Pasadena City Council unanimously voted on Monday to allow Pasadena Water and Power to enter into a $512.2 million, 20-year power contract with Southern California Public Power Authority for solar photovoltaic and battery energy storage. The City needs to replace its lost share of power from the Intermountain Power Project in Utah. This contract comes on the heels of contracts for 25 MW geothermal energy, and one third share of a 117 MW solar energy project through the Authority.

Beginning on December 31,2027, the contract will cover the daily delivery of a maximum of 105 megawatts of solar photovoltaic energy and up to four hours of dispatchable battery energy storage, not exceeding 55 megawatts. It is a 20-year fixed price contract.

SOONER TAX CUT

Oklahoma has eliminated its sales tax on groceries. The bill won’t go into effect until 90 days after the session adjourns on May 31. The bill also contained language that prohibits cities and towns from increasing the taxes on groceries until June 30, 2025. The state portion of the grocery tax generated $400 million each year. It comes as tax cuts in general are a major topic of the current legislative session. Other proposals would lower income taxes. The politics of the issue drove passage of the grocery cut (lower the regressive tax first) before an income tax cut which has been seen as favoring high income taxpayers.

MORE HOSPITAL CREDIT PRESSURE

Palomar Health is the largest public health care district in the State of California, with over $1 billion of revenues reported for fiscal 2023, and generating over 24,000 admissions. The district operates acute care facilities in the towns of Escondido and Poway, and captures 44.5% of the market share within the district. It’s operations have been under heavy stress but a decline in cash to only 39 days at year end has increased that strain.

The district’s Moody’s ratings were put on negative outlook in mid-2023 so the stress was becoming clear. Now, Moody’s has placed Palomar Health’s (CA) A1 general obligation (GO) rating and Baa3 revenue bond rating under review for downgrade. The change covers approximately $712 million of revenue bonds outstanding and $646 million of GO bonds outstanding.

As is often the case, potential covenant compliance issues are dictating the timing. The current trend of financial results puts financial covenants at risk for a breach at June 30, 2024, which could result in the acceleration of outstanding debt. Obviously, the district will have to articulate a plan to avoid covenant violations to support its ratings.

CARBON PIPELINES

The South Dakota House of Representatives approved Senate Bill 201, a bill which provides new regulations on pipeline transmission infrastructure and also allows counties to charge carbon dioxide pipeline developers $1 for every linear foot of pipe that runs in the county. The bill reinforces language on federal preemption of local ordinances and regulations affecting carbon dioxide pipelines.

Under existing law, if the South Dakota Public Utilities Commission does not determine that a carbon dioxide company’s pipeline route is “unreasonably restrictive,” proposed pipeline routes, like those by Summit Carbon, cannot violate county ordinances and local zoning and building rules. The law has allowed some counties along Summit Carbon’s pipeline project to implement a range of restrictive setback ordinances. 

STADIUMS

The Utah legislature will be asked to consider a bill which creates the Utah Fairpark Area Investment and Restoration District. The bill authorizes the district to levy: an energy sales and use tax; a telecommunications license tax; a transient room tax; a resort communities sales and use tax; an additional resort communities sales and use tax; and an accommodations and services tax. It provides for an increase in a car rental tax and provides for how the additional revenue is to be spent. The state would own the stadium and the land underneath it. 

The legislation comes following statements from both Major League Baseball and the National Hockey League regarding potential expansion. It is designed to allow the State of Utah to be in a position to fund half of the cost of a proposed stadium for baseball. Salt Lake City is positioned to be the recipient of a hockey team either through expansion or the relocation of the Arizona Coyotes.

Arizona is under tremendous pressure to solve its arena problems soon and there is an existing arena in Salt Lake City. Baseball will take longer to resolve stadium issues in Oakland/Las Vegas, Tampa Bay, and now Chicago. There will be no expansion until those items are resolved. The bill also sets a deadline to get an MLB franchise deal which must occur before 2034.

The issue of public financing and/or funding for proposed facilities in each of these cases has been controversial. One irony of the current cast of characters is that the White Sox ownership threatened to move in the mid 80’s. There was this new domed stadium sitting empty in Tampa Bay that was calling to the Sox to move. That was solved when the State of Illinois stepped up with state tax support for bonds to build the current stadium. Now, the Sox are doing it again.

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