Joseph Krist

Publisher

This week we celebrate the nation’s 248^th birthday. Enjoy whether you’re off for the week, long weekend, or just the day. We will take a mid-year break next week. The next issue will be dated July 15.

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CARBON PIPELINES

The Iowa Utilities Board gave its approval for the controversial Summit Carbon Solutions pipeline and for the company to use eminent domain to acquire landowners’ property. In giving its approval to the project, the Iowa Utilities Board ruled that Summit cannot begin construction in Iowa until the necessary permits are secured in South Dakota and North Dakota. 

The Iowa House approved legislation the past two sessions that would have given landowners more leverage over pipeline negotiations. In 2023, the House passed a bill requiring pipeline companies to obtain voluntary easements for 90% of their routes before they could use eminent domain for the rest. This year, the House voted to allow landowners who are subject to eminent domain requests by carbon dioxide pipeline companies to challenge the legitimacy of those requests in court earlier in the permit proceedings. Neither bill advanced in the Senate.

COAL REGULATION

The Supreme Court temporarily put on hold an Environmental Protection Agency plan to limit air pollution that drifts across state lines. The “good neighbor” plan would require factories and power plants in Western and Midwestern states must cut ozone pollution that drifts into Eastern ones. Under the Clean Air Act, states are allowed to devise their own plans, subject to approval by the E.P.A. In February 2023, the agency concluded that 23 states had not produced adequate plans to comply with its revised ozone standards. The agency then issued its own.

Resulting litigation ultimately left 11 states subject to the new rules. Ohio, Indiana and West Virginia, along with energy companies and trade groups — challenged the federal plan directly in the United States Court of Appeals for the District of Columbia. When a three-judge panel of that court refused to suspend the rule while the litigation moved forward, the challengers asked the Supreme Court to step in.

That is the basis of the suspension of the rules. It comes as a larger case is due to be decided on the larger issue of whether courts must defer to the reasonable interpretations by agencies like the E.P.A. of ambiguous statutes enacted by Congress. It was a true split decision with the liberal wing aligning with Justice Barrett in a strong dissent. “The court today enjoins the enforcement of a major Environmental Protection Agency rule based on an underdeveloped theory that is unlikely to succeed on the merits.” She notes that the plans “have been temporarily stayed,” and, “no court yet has invalidated one.”

TAXES AND TRANSIT

The decision to stop the implementation of congestion pricing in Manhattan drove quick consideration of replacing the revenue to be generated with taxes on business. That alternative was just as quickly rejected. Now, the MTA is left with threatening projects designed to comply with the ADA and other projects. The idea that those benefitting from the transit system should help pay for it has fallen on deaf ears in Albany.

In the meantime, New Jersey is showing New York how to do it. An agreement has been reached with the 600 corporations in the state that make at least $10 million a year in profits. Those firms will pay a 2.5% tax on all earnings for five years. The state in turn will not pursue restoring the sales tax to 7% from to 6.625%.

The announcement comes after a difficult couple of weeks for NJ Transit commuters who come into NYC through Penn Station. Power was lost on tracks (owned by Amtrak) which forced thousands to be stranded in the excessively hot conditions plaguing the region last week.

CALIFORNIA BALLOT

The California Supreme Court issued a ruling to invalidate the Taxpayer Protection Act, which would have made it harder to pass or raise taxes in California. The Act was part of a proposed ballot initiative scheduled for November. The ruling comes as the deadline for removing ballot initiatives occurs this week. A second announcement concerned a 2004 law which allowed workers to sue their employers on behalf of the state and other employees.  An agreement between organized labor and business groups will remove the initiative to repeal the Act.

The Bay Area Housing Finance Authority (BAHFA) today adopted a resolution to place a general obligation bond measure on the November 5 general election ballot in each of the nine Bay Area counties to raise and distribute $20 billion for the production of new affordable housing and the preservation of existing affordable housing throughout the region. 

The proposed bond measure calls for 80 percent of the funds to go directly to the nine Bay Area counties (and to the cities of San Jose, Oakland, Santa Rosa and Napa, each of which carries more than 30 percent of their county’s low-income housing need), in proportion to each county’s tax contribution to the bond. The remaining 20 percent, or $4 billion, would be used by BAHFA to establish a new regional program to fund affordable housing construction and preservation projects throughout the Bay Area.

Most of this money (at least 52 percent) must be spent on new construction of affordable homes, but every city and county receiving a bond allocation must also spend at least 15 percent of the funds to preserve existing affordable housing. Almost one-third of funds may be used for the production or preservation of affordable housing, or for housing-related uses such as infrastructure needed to support new housing. 

The BAHFA bond measure currently would require approval by at least two-thirds of voters to pass. Voters throughout California this November will consider Assembly Constitutional Amendment 1 (ACA 1) — which would set the voter threshold at 55 percent for voter approval of bond measures for affordable housing and infrastructure. If a majority of California voters support ACA 1, the 55 percent threshold will apply to the BAHFA bond measure.

AUTONOMOUS AND ELECTRIC VEHICLES

When GM’s Cruise autonomous taxis were forced off the streets of San Francisco, it led to questions about the division’s management. Now, a new CEO has been appointed. Since the California AV operation was halted, Cruise has since laid off a quarter of its work force and removed nine executives. As much as there were issues with the technology, good old fashioned management execution failures shared at least equal blame.

In the interim, AV competitors have had more favorable if limited experiences. Waymo, a subsidiary of Alphabet, has had driverless taxis operating in the Phoenix area since 2020 and San Francisco since late 2022 without serious incidents. It recently began service in Los Angeles. Zoox, an Amazon subsidiary, has been testing a steering-wheel-free robot taxi in Las Vegas since last June.

Cruise currently conducts limited testing of its supervised autonomous testing, with two safety drivers per vehicle. Those tests are underway in Phoenix.

The electric car movement has had a rocky time lately. Slowdowns in new electric car sales and announcements of delays in the development of planned production facilities had raised concerns. One example of the phenomenon is Georgia. Rivian the electric truck maker planned to construct a new production facility with substantial state support including subsidies. Rivian already had a production facility in Illinois.

Earlier this year, Rivian announced a pause in the development of its Georgia plant. Because it reflected lower than expected sales, there was a concern that the delay might be a sign of greater problems which could threaten the existing plant space. Amazon is still a significant Rivian shareholder and is one of its biggest customers.in Normal, IL. This week, a deal was announced which served to dampen those fears.

Volkswagen announced that it would invest up to $5 billion in Rivian and that the companies would cooperate on software for electric vehicles. Volkswagen said it would initially invest $1 billion in Rivian, and over time increase that to as much as $5 billion. If regulators approve the transaction, Volkswagen could become a significant shareholder. Rivian said the cash from Volkswagen would help the launch of a midsize S.U.V. called the R2 that will sell for about $45,000, and to complete the factory in Georgia. 

This represents more big money coming into the electric vehicle space. Amazon retains a significant ownership piece in Rivian and is Rivian’s largest truck customer.

WIND

The Vineyard Wind 1 project is now delivering more than 136 megawatts (MW) to the electric grid in Massachusetts. (New York’s South Fork Wind, the US’s first complete utility-scale offshore wind farm, is 132 MW.) This makes Vineyard 1 the largest operating offshore wind farm in the U.S. In February 2024, Vineyard Wind delivered approximately 68 MW from five turbines to the grid.

Vineyard Wind 1 now has 10 turbines in operation, enough to power 64,000 homes and businesses. The installation of a 22nd turbine is underway. Once completed, the project will consist of 62 wind turbines. It began offshore construction in late 2022, achieved steel-in-the-water in June 2023, and completed the US’s first offshore substation in July 2023.

OPIOIDS

It took years of painstaking negotiations to achieve a settlement to resolve the bankruptcy of Purdue Pharma and its owners, the Sackler family. One of the main features of the bankruptcy proceedings was the agreement that the Sacklers themselves would be protected from personal liability related to opioids. That resulted in $6 billion being pledged to states, local governments, tribes and individuals.

This week, the Supreme Court decided that the federal bankruptcy code does not authorize a liability shield for third parties in bankruptcy agreements. As a result, members of the Sackler family, who controlled Purdue Pharma, the maker of the OxyContin, will no longer be subject to a condition of the deal that granted the Sackler family immunity from liability in opioid-related lawsuits, even as they had not declared bankruptcy.

The first opioid lawsuits were filed against Purdue Pharma a decade ago. In 2019, Purdue filed for bankruptcy restructuring, which ultimately paused the lawsuits. The ruling effectively prevents the release of billions of dollars to plaintiffs from that settlement. That hold up has generated division within the ranks of plaintiffs. Some believe that the immunity provisions were worth the availability of payments. Now, what was seen as the longstanding primary obstacle to a deal has been placed at the center of any negotiation.

HOSPITAL TAXES

The Denver City Council approved putting a 0.34% sales tax increase on the Nov. 5 ballot to aid Denver Health, Colorado’s sole safety net healthcare provider. Uncompensated care totaled $140 million last year. That was an increase from $120 million in 2022 and $87 million in 2021. Those costs coincide with the arrival of migrants shipped into Denver primarily by the State of Texas.

The tax increase is estimated to produce $70 million annually. Under an annual operating agreement with Denver, the health system was allocated $73 million in funding for fiscal 2024. Colorado lawmakers this year passed $5 million in one-time funding, the same supplemental payment provided to the health system last year.

STADIUMS ARE BACK

The City of Charlotte has decided to continue to apply hotel and restaurant generated sales taxes to support the home of the NFL Carolina Panthers. It approved some $650 million of financing supported by existing hotel and restaurant taxes. The normal controversies around stadium renovations were in play here. They centered around the Panthers’ eccentric and impetuous owner. A combination of some poor public conduct choices and a poor won/loss record during his ownership tenure pressured the approval process.

In the aftermath of a failed referendum item to support taxes in greater Kansas City, MO to fund a new baseball stadium and improved foot ball stadium, proponents are looking west across the Missouri River for alternatives. The Kansas Legislature held a quick session to debate a financing package to join the Kansas Speedway as major sports venues in the state.

STAR Bonds are used to assist the development of major entertainment or tourism destinations in Kansas. State and local sales tax revenue generated by the attraction and associated retail development are used to pay back the bonds. In metropolitan areas, STAR Bonds can be used only for projects with an anticipated capital investment of $75 million and with at least $75 million in projected gross annual sales.

The professional sports facilities STAR bonds, which could be issued by a city, county, or the Kansas Development Finance Authority, will be backed by the incremental increase in sales taxes collected in a district created for the project and up to 100% of liquor sales within that district. The law also includes the potential for shares of sports betting and state lottery revenue. Besides expanding STAR bond-financed project costs to 70% from the current 50%, the law extends the maturity of the debt to as much as 30 years, up from 20 years. 

The economic rivalry between the Kansas and Missouri sides of the KC metropolitan area is longstanding. Tax policy and business locations have been flexible to say the least over the years as taxpayers tried to keep up the with the best deals. The situation with the two pro sports franchises just highlights the phenomenon at a significantly larger scale.

No professional sports franchise in the U.S. should ever ‘need’ public money for their stadia. The incredible appreciation of value of sports franchises continues as evidenced by recent team sales. We again are about to embark on a new cycle of stadium finance. We are already seeing the irrationality of the whole process. One difference now as opposed to the last cycle is that the cost of sports attendance is out of control. Now, the public is being asked to pony up funds for facilities they will likely never attend due to cost.  

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

Joseph Krist

Publisher

CALIFORNIA HOUSING

One of the approaches to solving California’s affordable housing shortage has been the use of Accessory Dwelling Units (ADUs). As was the case after the post-war expansion in the second half of the 20^th century, many of California’s communities enacted restrictive zoning codes in the 1940s, 50s, and 60s to limit population density. Like the other jurisdictions across the country, the laws designated large areas for single-family residences and enforced minimum lot sizes, effectively controlling urban sprawl. 

A combination of demographic issues along with tax policy that discourages the transfer of homes over the generations have kept homes off the market. To address this, homeowners hoped to be able to create housing on oversize lots. The concept behind the move was historically reflected in “mother-daughter” houses, the conversion of space for an apartment (granny flats) and other structures converted to residences.

The well-known housing market issues were already driving some use of ADUs when legislation was enacted to support and advance the concept. Assembly Bill 68, passed in 2019, reduced ADU permit approval time from 120 days to 60 days and prevented municipalities from imposing lot size or parking requirements. Assembly Bill 881 further allowed property owners to build ADUs without living on the same property, enabling ADU investments.

In 2020, one in 10 new homes built in California was an ADU. ADUs accounted for 20% of new home construction 2023. That is likely to continue and increase as a trend supported by additional legislation. In October 2023, the Legislature addressed the issue of restrictions on the ability of ADU owners to rent the homes.  Assembly Bill 1033, allows Californians to buy and sell them as condominiums.

Property owners in participating cities will be able to construct an ADU on their land and sell it separately, following the same rules that apply to condominiums. A key provision of the law gives cities to opt out and continue to require rental. In terms of tax issues, ADUs will be treated as discreet units for purposes of taxes and utilities. A property will also have to form a homeowners association to assess dues to cover the cost of caring for the property’s exterior and shared spaces, such as the driveway, a pool or a common roof.

FLORIDA GAMING COMPACT STANDS

The Supreme Court rejected an appeal of a suit challenging the compact between the State of Florida and the Seminole Tribe. (see 11.6.23 MCN). The case has been making its way through the federal judicial system since the compact was executed. The plaintiffs – two competing betting companies – had failed to see the deal overturned through two appeals court panels including an en banc appeal. The companies in February filed a petition seeking review at the Supreme Court after the full appellate court refused to reconsider the panel’s decision.

Under the terms of the 30 year compact, the Seminoles agreed to pay Florida about $20 billion, including $2.5 billion over the first five years. The deal also authorized the Seminoles to offer craps and roulette at their casinos and to add three casinos on tribal property in Broward County. It also allowed pari-mutuels (like the plaintiffs) to contract with the Seminoles and share revenue from sports betting. In November the Tribe rolled out a sports-betting app and in December launched craps and roulette at its casinos.

The Seminoles began making payments to the state in January and have paid more than $357 million under the revenue-sharing agreement, including a payment made Monday. A rule was adopted by the U.S. Department of the Interior earlier this year that allows states to enter compacts similar to Florida’s with Indian tribes.

ELECTRIFICATION

The Pasadena (CA) Water and Power municipal utility announced the approval of two contracts for renewable power. A 10-year $47.1 million contract wind energy contract with CalWind Resources Inc., begins on May 1, 2025.  is for a 20-megawatt wind turbine facility named Wind Resource II Project located in Tehachapi, California.  A 15-year, $55.3 million contract with Glenarm BESS LLC, a special purpose entity created by EPC Energy Inc., is for a 25 MW battery energy storage system. Pasadena Water and Power’s 2023 Integrated Resource Plan which recommends installing substantial solar and battery resources within Pasadena.

This year’s budget/legislative season saw three fronts open up in the effort to restrict or eliminate gas stoves. California, Illinois, and New York considered bills which would have required warning labels on gas stoves. Legislative proposals in New York failed to gain support and the Illinois effort was equally unsuccessful. In New York, the originally proposed bill was based on U.S. EPA pronouncements that components of natural gas, nitrogen dioxide and carbon monoxide, are “poisonous” and could “lead to the development of asthma, especially in children.” 

California continues to look at a labeling requirement after the courts ruled that efforts by California municipalities to ban gas stoves were not legal. California’s proposed label originally cited the U.S. Environmental Protection Agency and a state environmental health agency saying stoves emit pollutants indoors at concentrations that exceed outdoor air quality standards. A pending bill was amended to remove those references.

COLLEGES

There has rightly been much focus on the operating difficulties plaguing smaller colleges. At the same time, many of the large state systems are under pressure as well. The University of California system has been dealing with a variety of job actions by faculty and staff. Now, Penn State is dealing with staffing and expense issues as well. In May of this year, it announced the University’s Voluntary Separation Incentive Program (VSIP).

It has announced that a total of 383 employees, or about 21% of those who were eligible, opted for the VSIP. Roughly 77% of the employees who took the offer were staff. The university said the dollar value of the salaries and fringe expenses associated with these 383 employees is $43 million. A budget deficit had climbed to $49 million. In exchange for their voluntary departure from the university, employees received a lump sum payment equal to a year’s salary.

Employees that were eligible for the program included tenured or tenure-line faculty, academic administrators and staff who are full-time employees and not on fixed-term contracts. 

WATER

The Southwest Kansas Groundwater Management District was established by the State of Kansas to manage the use of groundwater pumped from the Ogallala aquifer. This massive underground water source has driven agriculture in the eight Ogallala states (Colorado, Kansas, Nebraska, New Mexico, Oklahoma, South Dakota, Texas, and Wyoming). It has long been recognized that groundwater is a finite resource and some areas have taken to concepts supporting reduced water use.

The District oversees groundwater usage and development in a 12 county area which is overwhelmingly agricultural. It has been a laggard in terms of encouraging conservation. Last year, Kansas lawmakers passed legislation squarely targeting the Southwest Kansas Groundwater Management District.

Crop irrigation accounts for 85% of all water use in Kansas—even more in western Kansas. Other districts have offered financial assistance to farmers investing in water-efficient irrigation systems and championed large-scale restrictions on pumping. GMD only spent 13% of its conservation-related budget between 2010 and 2022. This has raised concerns about District management.

Last year, in response to the criticisms, the district changed its financial statements, reporting fewer, broader categories. The new financial structure did not distinguish travel costs from other expenses. The travel is related to management efforts to build support for a pipeline to deliver Missouri River water from the east side of the state to its far west. The organization twice has trucked water 400 miles from the Missouri River to western Kansas in an effort to generate support for the idea.

As for conservation, Oklahoma allows farmers to use up to two feet of water each year on every acre they own. But usage is not monitored. Farmers report annual estimates of water usage. The state has not banned the drilling of new irrigation wells. Legislation passed this year that would require irrigators to meter their water use was vetoed by the Governor.

ROAD FUNDING AND DELIVERY FEES

In 2023, the Washington State Legislature enacted HB 1125, which included a budget proviso for a study on how a retail delivery fee could be implemented in Washington. The study must: Determine the annual revenue generation potential of a range of fee amounts; Examine options for revenue distributions to state and local governments based upon total deliveries, lane miles, or other factors; Estimate total implementation costs, including start-up and ongoing administrative costs; and Evaluate the potential impacts to consumers, including consideration of low-income households and vulnerable populations and potential impacts to businesses. The study should document and evaluate similar programs adopted in other states.

The study has now landed some two weeks before its deadline. Among other things the study found that the impacts will reflect the fact that households with an income above the statewide median tend to spend more on e-commerce than those below the statewide median, regardless of location. Generally, individuals from urban areas spend significantly more in the aggregate on e-retail purchases. Those who live in urban areas tend to spend more on online retail purchases than those from rural areas. New businesses or small businesses with gross revenues/sales less than $1 million in the previous calendar year will be exempt.

There are only two current comparables. Colorado, which enacted its fee in 2022, charges 28 cents on every delivery regardless of value. It generated $75.9 million in its first year for local and state uses, and clean transportation priorities. Businesses with $500,000 or less in sales are exempt. Minnesota enacted its fee in 2023 and it will be levied starting this July. The state will charge 50 cents only on deliveries of $100 or more. It will raise an estimated $59 million for cities and towns. The state exempts businesses with $1 million or less in annual sales.

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

WHERE CONGESTION PRICING DERAILED

In the wake of the decision to “pause” congestion pricing, it has been useful to look at how the MTA plan stacked up against the three large international examples. One of the most glaring issues is the fact that the level of revenue to be raised and the length of time in a day that the fees would be in effect had a real impact on perceptions.

It was recently noted that the example most relied on in New York is London. London does generate some $500 million of revenue each year. But it does so by collecting the fee only during the day – M-F 7am to 6 pm; Sa-Su Noon-6 pm. Much opposition was reflective of the fact that the MTA fee would be discounted but all day. The number of workers who worked shifts through public safety and hospital jobs and relied on vehicles as bus service is sporadic at night is significant.

Industries which see most if not all of their activity after 6 pm represented a significant block of opposition. Broadway has yet to return to pre-pandemic levels of attendance and tourist and restaurant areas like the Theater District, Little Italy, and Chinatown all saw the charges as a real hindrance to their businesses. At the same time, lower Manhattan has been transformed into an evermore residential district and those residents were not to be exempted.

Rightfully or not (beauty is in the eye of the beholder) Long Island commuters were wary of paying fees into a system which they believe shortchanges them. Any transit funding increase or change in its mechanics gets caught up in the city vs. suburb fight for money. That gets exacerbated by the lack of significant train service into the City from counties in the MTA service district west of the Hudson River. (Full disclosure: I live in one of those counties.)

Many of those who live in those counties are uniformed public servants and retirees who form a strong political block. They looked at the congestion fee as a $4,000 hit to their after tax income. As they say, the math is compelling. Add that to an extremely competitive set of elections to the U.S. House of Representatives and the fees became toxic.

In the end, the MTA has got to admit that it is often its own worst enemy. It wanted the $1 billion annual revenue requirement established by the Legislature. That left little if any room for negotiation. That shifted attention from the environmental reasons for the fee and created a perception that it was a money grab. It further alienated groups like the disabled. By effectively holding ADA compliance and full access (Full disclosure: I have a disabled family member) hostage to the imposition of the fee, it highlighted its abysmal record of providing that access.

If failure is an orphan, this one has a multigenerational genealogy.

PUERTO RICO

In a decision with implications for bondholders across the municipal bond market, a federal appeals panel found that PREPA bondholders have a non-recourse claim on PREPA’s estate for the principal amount of the bonds, plus matured interest. It also held that this claim is secured by PREPA’s Net Revenues — as that term is defined by the underlying bond agreement — and by liens on certain funds created by that bond agreement. The Bondholders were appealing the Title III court’s findings that they lacked a security interest in PREPA’s current or future Revenues or Net Revenues; that any such interest was potentially avoidable under; that they had failed to state a claim for breach of trust; and that they were not entitled to an “accounting” of misappropriated PREPA moneys.

In the Title III proceedings, the judge estimated the size of the potential claims. In the Oversight Board’s view, the Revenue Bonds were non-recourse, so the Bondholders could only recover from their collateral, i.e., the moneys in the Sinking and Subordinate Funds. In the alternative, the Board and its allies argued that the Title III court’s $2.4 billion estimation should be affirmed. Finally, the Board contended that if there were a lien on Net Revenues, it would be avoidable as unperfected.

PREPA’s Revenues and Net Revenues are “special revenues” under the Bankruptcy Code. The Court found that as security for the Revenue Bonds, PREPA pledged the Net Revenues and not just those moneys that made it into the Sinking and Subordinate Funds. The Court then asked does the lien on Net Revenues also apply to future Net Revenues, i.e., Net Revenues that PREPA has not yet acquired? The Court concluded that the answer is yes.

Several courts have also considered the scope of a municipal revenue lien like the one in this case. And all of them have concluded (or at least implied) that a revenue lien can extend to revenues to be acquired at a later date. Puerto Rico law, the Bankruptcy Code, and prior case law all indicate that the Net Revenues that PREPA acquires in the future will be subject to the pledge of Net Revenues made by PREPA in the Trust Agreement.

The Court found that the Bondholders had a legal “right to payment” rooted in the covenants outlined in the Trust Agreement. Because the Revenue Bonds specify the amount that PREPA legally owes the Bondholders, there was no need to estimate the Bondholders’ “right to payment” under section 502(c).

What is the amount of the Bondholders’ claim on PREPA’s estate? The Court concluded that the proper amount of the Bondholders’ claim is the face value (i.e., principal plus matured interest) of the Revenue Bonds. According to that Trust Agreement contract, the face value of the Revenue Bonds (i.e., the principal plus matured interest) is just under $8.5 billion. So, that is the amount of the Bondholder’s claim on the Net Revenues. The Court expressly declines to tell the Title III court — in the first instance and without adequate briefing — how it should deal with the Bondholders’ Net Revenue lien during plan confirmation.

ELECTRIC VEHICLES

The United Automobile Workers union announced a tentative contract agreement at an Ohio factory making batteries for electric vehicles. The accord covers 1,600 workers at a Lordstown plant operated by Ultium Cells, a joint venture between General Motors and a South Korean partner, LG Energy Solution. It produces batteries for G.M. electric vehicles. If you remember, closures of General Motors plants especially a Lordstown car production plant were a major topic in the 2016 presidential campaign.

This announcement is a product of UAW efforts regarding their national contracts. When the plant opened in 2022 it was a non-union shop. They were brought into the U.A.W. under the terms of the national contract the union negotiated with G.M. last fall. That process was followed by negotiations around wages and working conditions specific to this location.

G.M. started production this year at a battery plant in Spring Hill, Tenn., and has another under construction in Lansing, Mich. The union said it planned to use this contract as a template as it negotiated local agreements at other battery plants that G.M. and several other rivals are building. 

Ford Motor plans two battery plants in Kentucky, one in Tennessee and one in Michigan. Stellantis, the maker of Chrysler, Jeep, Dodge, and Ram vehicles, plans two battery plants in Indiana. With the exception of one of the Ford locations, those plants involve joint ventures that were brought under the U.A.W. umbrella under the national contracts the union signed with Ford and Stellantis last fall.

This new plant is located adjacent to the aforementioned Lordstown plant. The U.A.W. said about 200 workers who had once worked at the Lordstown plant and had taken jobs at other G.M. locations would soon transfer to the battery factory so they could return to the area.

CALIFORNIA FOREVER

California Forever is the entity which has purchased some 50,000 acres of farmland in Solano County for the purpose of starting a new city from scratch. The proposal is for a city of some 400,000 all living and working there in a walkable environment. The plan requires a vote by County residents to approve the zoning changes which would be necessary to permit development. 

California Forever has now qualified its utopian city initiative for the November ballot. Voters will be asked to allow urban development on 27 square miles  of land between Travis Air Force Base and the Sacramento River Delta city of Rio Vista currently zoned for agriculture. The project has been controversial from the start as the group of sponsors used “cover” buyers to allow the land to be accumulated. Farmers unwilling to sell have been threatened with legal action. Polls have shown significant opposition to the plan.

That is what is motivating the sponsors to offer a giant youth sports complex; $500,000 in grants to local organizations; a pledge to create at least 15,000 jobs averaging $88,000 in salary; $500 million to assist with down payments for housing, scholarships and other benefits for residents; and $200 million to revitalize the downtowns of such nearby cities as Rio Vista, Benicia and Dixon.

COLLEGES

Moody’s Ratings has revised Nazareth University’s (NY) outlook to negative from stable and affirmed its Baa2 issuer and revenue bond ratings. The outlook revision to a negative from stable was largely driven by a multi-year trend of softening enrollment and declining revenue, contributing to weaker operating performance relative to historical levels for the foreseeable future. The College faces a high reliance on student charges, a small operating scale, and a high age of plant.

Union College is a small private, not-for-profit college located in Schenectady, NY. In fiscal 2023, Union generated operating revenue of $141 million, and it enrolled 2,072 full-time equivalent (FTE) students as of fall 2023. The College’s A1 rating was maintained but the outlook is now negative. The school faces the common demographic risks confronting all small colleges but its debt structure and projected operating pressure are all weighing on the credit.

Marshall University is the second largest public university in West Virginia with approximately 76% in-state students. In fiscal 2023, Marshall generated operating revenue of $292 million and for fall 2023 had total FTE enrollment of 9,716. Its rating was lowered from A2 to A3 by Moody’s. The downgrade is driven by a structural deficit which is likely to persist through at least fiscal 2026.

A key contributing factor to the deficit is the declines in enrollment and student revenue in recent years driven by weak in-state demographics including a projected decline in the number of high school graduates, low higher education attainment rates and a price sensitive student population. 

HOSPITALS

Community Health System (CHS) is a not-for-profit, tertiary hospital system located in Fresno, California. It operates three acute care facilities: Community Regional Medical Center (CRMC), CHS’s flagship tertiary/quaternary facility with 864-beds; Clovis Community Medical Center (CCMC), a community hospital in the neighboring town of Clovis with 352 beds; and The Fresno Heart and Surgical Hospital (FHSH), which operates 57 beds.

Moody’s recently affirmed its A3 rating on CHS’ debt but it changed its outlook to negative. Revision of CHS’s outlook to negative reflects normalized financial performance (absent non-recurring items) that remains well below historical levels together with ongoing headwinds that may make targeted improvements difficult to achieve, including a new California state law to go into effect next month that will raise the minimum wage to $25 over the next couple of years for most healthcare employees.  

Oregon Health & Science University (OHSU; Aa3 stable) and Legacy Health (A1 negative) announced an affiliation agreement. The two Portland-based organizations would create a large regional system with over $7 billion in operating revenue, 12 hospitals, 100-plus locations and approximately 30,000 employees.  OHSU is the state’s only academic medical center and medical school while Legacy operates an extensive network of tertiary medical centers, community hospitals and distributive outpatient sites.

HYDROPOWER

The U.S. Energy Information Administration released data showing the least hydropower was generated in the western United States during the 2022–23 water year (October 1 through September 30) since at least 2001. Western region hydropower generation dropped by 11% from the previous water year. The western United States—Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming, California, Oregon, and Washington—produced most (60%) of the country’s hydroelectricity last water year (2022–23).

A combined 37% of total U.S. hydropower capacity is located in Washington and Oregon.  Water supply was below-average in the Northwest region for the rest of the water year, which reduced hydropower generation. In the 2022–23 water year, 23% less hydropower was generated in Washington than the water year before, totaling 62.3 million MWh. Hydropower generation in Oregon also fell by more than 20% in the 2022–23 water year.

In contrast, hydropower generation grew in California last year. From December 2022 to March 2023, a series of atmospheric rivers drenched parts of the western United States, especially California, with record rain and snow. In the Colorado River basin, hydropower generation at the Glen Canyon Dam increased by 27% during water year 2022–23 compared with the water year before. However, water conservation efforts downstream at Lake Mead reduced water releases. The Hoover Dam, which forms Lake Mead, generated 11% less electricity in the 2022–23 water year than it did in the previous water year.

UPDATES

This week it was announced that the Gateway Tunnel project would receive an additional $6.88 billion federal grant to fund the project. The federal grant — the most ever provided to a mass-transit infrastructure project in the country — was the final piece of the funding puzzle for the long-delayed tunnel between New Jersey and Pennsylvania Station in Manhattan. The grant would increase the federal funding for the Gateway project to about $12 billion, about 70 percent of its estimated total cost. That total includes about $1 billion from Amtrak, which owns the existing tunnels and Penn Station.

The balance, along with any overruns, will be supplied by New York and New Jersey. Last week, the two states and the Port Authority received approval to borrow their shares of the project’s cost from the federal government. The work could begin as soon as this year and is scheduled to be completed in 2035.

The Central Florida Tourism Oversight District announced an agreement with a locked-in, long-term plan for expanding Disney World. At least for the next 15 years, the length of the new agreement, Disney can develop the resort without worrying about interference. It gives Disney the ability to build a fifth theme park, add three small parks, expand retail and office space and build 14,000 hotel rooms, for a resort total of nearly 54,000. The district noted that, under the agreement, Disney is obligated to spend at least $8 billion. 

California AB5 was passed in 2019 to classify ride share drivers as full employees with a minimum wage, workplace protections and other benefits. The law was immediately challenged by Uber and struck down by an appeals court after years of deliberation.  In an en banc appeal, an 11-judge panel of the 9th Circuit of Appeals reversed the first appellate decision, determining the law does not illegally single out transportation gig workers, but merely changes regulations for all independent contractors. 

The 2019 law was impacted by the approval of a statewide ballot measure Prop 22 in 2020. That allowed companies like Uber to consider their employees to be contractors. That measure is also being challenged in court, with a labor union arguing last week that it unjustly hampers future legislation.

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.

Muni Credit News June 10, 2024

Joseph Krist

Publisher

CONGESTION PRICING CRASHES

With only four weeks until its expected commencement, Gov. Kathy Hochul is moving to delay the imposition of congestion pricing. The stated issue is concern over the impact on the revival of the Manhattan economy. There are still significant commercial and retail vacancies. Broadway has been slower to come back than was hoped. At the same time, a record number of shows are projected to open this fall. Restaurants, especially those in areas like Manhattan’s Korean and Chinese districts, have already been under pressure. They see a fair chunk of their demand tied to folks driving into Manhattan for dinner and/or a show.

A reversal would create a $1 billion yearly gap in MTA funding. Ms. Hochul suggested a tax on New York City businesses. Such a tax would require the approval of the Legislature. Procedurally, this would require either passage of new legislation this week or a summer special legislative session in Albany. It would also shift the burden of raising revenue to taxpayers in the City from a suburban and often out of state payor base.

Several pieces of litigation against the charge are making their way through the courts. Postponement of the charge may provide an opportunity for the litigation to be settled or adjudicated. It is clear that an opportunity exists to refine the plan and its implementation. And it provides a chance to reset the efforts at steering public opinion. The Governor also acknowledged that the approval of the scheme came before the pandemic in 2019. “Workers were in the office five days a week; crime was at record lows and tourism was at record highs. Circumstances have changed and we must respond to the facts on the ground.”

One first step might be putting a different face of the MTA forward. MTA head Jarod Lieber has been a poor front man with his bureaucratic demeanor and insistence that demands for exemptions should not be accommodated. An opportunity has been created for a complete rethink of the use of the city’s curb space. Things like delivery zones and delivery time limits can be revisited. Manhattan has always had traffic issues but the role of ride sharing services and the delivery economy in the current level of congestion cannot be ignored.

In the end, the MTA has to deal with the fact that it has no credibility with New Yorkers – historically corrupt, often inept, and opaque at best. At one point, it was estimated that the MTA loses as much to fare evasion as it would get in congestion pricing. The answer – spend more on fancier turnstiles but only explore remedies which don’t follow enforcement. Lost in all of this is that the facilities of the Triborough Bridge and Tunnel Authority have been subsidizing mass transit for years.

It comes down to the fact that the MTA is not trusted to execute the program or account for the money. It reflects the failure to explore alternatives. It reflects a lack of political will to create a tax structure that shifts the cost of the service. Now, MTA will use the pause to justify its dismal record of providing handicapped access (recent estimates put the achievement of full ADA access out until 2050), the ridiculous execution of the Second Avenue subway and a long history of delays and cost overruns.

BAY AREA TRANSIT FUNDING

Legislation dubbed the Connect Bay Area Act, would have authorized a November 2026 vote on a multicounty tax measure to raise as much as $1.5 billion a year to help pay for train, bus and ferry operations and for initiatives to help better integrate the 27 agencies that deliver those services. The bill would also pay for some street and highway work.

The proposal offered several alternatives: a half-cent sales tax, a parcel tax on property owners, a payroll tax to be paid by employers, or a future vehicle registration surcharge. The bill provided that tax proceeds would be funneled through the Metropolitan Transportation Commission. It guaranteed that during the proposed tax measure’s first five years, at least 70% of revenue generated in a county would be invested in projects and programs that benefited that county. That percentage would rise to 90% after the initial five years.

BART’s deficit in the fiscal year starting July 1, 2026, is currently projected at $385 million, with annual shortfalls of $350 million or more continuing into the foreseeable future. BART has said it may have to shut down two of its five lines, close some stations and run trains as much as 60 minutes apart. San Francisco’s Municipal Transportation Agency, which runs Muni transit service, expects its deficit to top $200 million during the same year. SFMTA chief Jeffrey Tumlin said earlier this week that major service cuts could begin next year.

The legislation was ultimately pulled from consideration in the current session. We are interested in the fact that Moody’s picked this week to announce a change in its sector outlook for the public transit sector. In the wake of the pandemic, the outlook had been negative. Now, the outlook has been upgraded to stable. Moody’s cites the overall recovery rate of 79% from the pandemic bottom. It also takes into consideration the impact of some funding increases in several jurisdictions.

Ultimately, it may be an issue of timing but the current period in the budget season is generating funding uncertainty. It seems a bit of a stretch to look at the “pause” of congestion pricing in New York and its impact on the nation’s largest transit system and see stability. We agree that there is a chance that some funding initiative will appear on the California ballot in November. Currently, BART and Muni will still be facing funding uncertainty. Chicago is dealing with operational issues and proposals to merge the city and commuter rail providers into a structure that looks more like the MTA in New York.

It is positive that there are funding initiatives making their way through legislatures in New Jersey and Pennsylvania. Our argument rests more on timing. All of this adds up to a fair amount of uncertainty for major issuers within the sector. Uncertain seems like a fairer assessment while these highly politicized situations play out.

Moody’s identified eight transit providers as being more fare-dependent pre-pandemic: New Jersey Transit, the New York MTA, The D.C.-area WMATA, Boston’s MBTA, the Chicago Transit Authority, the Southeastern Pennsylvania Transit Authority, the San Francisco Bay Area Rapid Transit District and the Bay Area’s Caltrain commuter rail line. Every one of them faces funding uncertainty. That’s a good chunk of the sector. A lot of that uncertainty will likely be resolved by the end of the budget process. A sector outlook change makes more sense then.

FUEL FOR THE NATURAL GAS DEBATE

Utilities and fuel producers continue to grapple with the need to reduce emissions while continuing to rely on some fossil fuels for generation. The most obvious cases are where large base load generators which run on coal are replaced with new base load generators. The debate stems from the proposed use of natural gas as a replacement. Gas has cost and relative emission production improvement over coal. This has not reduced opposition to new natural gas development and pipeline infrastructure.

Much of that opposition stems from the production of methane as a part of the process of extracting natural gas. After CO2 emissions, methane has been the next favorite target of environmentalists as a contributor to climate change. As large entities like the TVA and some municipal utilities consider the development of gas fired plants, the debate has increased. Some new data developed for and released by the US Environmental Protection Administration (EPA) will only fuel the debate.

The data shows that oil and gas extraction and refining emitted more greenhouse gases into the atmosphere than any other industrial subsector last year. At the same time, methane emissions from gas extraction fell by 37 percent. Overall greenhouse gas emissions, which count the industry’s considerable carbon dioxide releases, also fell, but by a more modest 14 percent.

The center of the gas extraction industry is the Permian Basin in Texas. Data specific to that area reflect Total hydrocarbon production in the Permian more than tripled from 2015 to 2022, and gas production rose by 163 percent. The overall emissions intensity of Permian energy production fell considerably. Methane intensity of gas extraction fell by 78 percent, and overall greenhouse gas intensity fell by 47 percent.

HOSPITAL PRESSURES CONTINUE

This was a rough week for hospital credits as they deal with the lingering impact of the pandemic on demand and utilization. A series of ratings actions showed that the pressures are across the board and not dependent upon location and/or size.

The DCH Health Care system in Alabama operates a 787 bed regional referral hospital in Tuscaloosa and two small facilities in the county. S&P announced that the Authority’s bond rating was lowered to BBB+ from A- and a negative outlook was maintained. The negative outlook reflects the continual operating losses and the expectation of weak operating performance over the outlook period, which could further negatively affect unrestricted reserves. The negative outlook also reflects DCH’s lower days’ cash on hand (DCOH) and reserves.

Mount Sinai in NY is a major provider which has been under continuing pressure as the result of the pandemic. In addition, it has been caught up in a regulatory problem over its decision to close one of its acute care facilities in Manhattan. These factors have combined to lead S&P to put the system’s low investment grade ratings on Credit Watch negative. “The CreditWatch placement reflects our view that there is at least a one-in-two likelihood of a downgrade within the next 90 days reflecting a trend of lower earnings at the flagship, MSH, and uncertainty around receiving necessary regulatory approvals to close Beth Israel Medical Center in July,”.

Baystate Medical Center in Springfield, MA is the major tertiary provider central and western Massachusetts. It’s has been long a highly rated credit. This week, S&P put a negative outlook on the system’s AA+ debt. “The outlook revision reflects our view of Baystate’s continued operating losses and thin maximum annual debt service coverage in fiscal 2023 that have continued into 2024. The outlook revision further reflects our view of lighter days’ cash on hand for the rating,”

COLLEGE CLOSING

The nearly 150-year-old University of the Arts in Philadelphia will close its doors as we go to press. “UArts has been in a fragile financial state, with many years of declining enrollments, declining revenues and increasing expenses.” Currently, it has 1,149 students and about 700 faculty and staff members.  The Middle States Commission on Higher Education, which accredited the institution, indicated on Friday that it had revoked the University’s accreditation immediately.

The closing was the result of a mix of cash flow constraints that are typical of schools like UArts, which depend on tuition dollars. In addition, UArts faced significant unanticipated costs, including major infrastructure repairs. The school was created by the 1985 merger of the Philadelphia College of Art and the Philadelphia College of the Performing Arts.

Tuition for the 2023-2024 year was $54,010. The pandemic was especially damaging for this and other institutions whose courses were much less viable online. Looking forward, UArts like the many other schools faces the looming demographic cliff which is clouding the outlook for reversing demand declines.

U.S. Census data based on the 2020 census shows project steady declines in the years ahead. In 2022, there were 17.4 million people in the U.S. aged 14-17. That number is already trending lower and is expected to decline annually through 2035. That would be an 11% decline in the number of prospective students from current levels.

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.