Joseph Krist

Publisher

CALIFORNIA FOREVER BUT NOT NOW

The sponsors behind the California Forever proposal have run into some obstacles in terms of public support. The entity had planned to qualify a measure for the upcoming November ballot to allow the project to advance outside of the usual development approval process. (see MCN 6.17.24) The hope was that the initiative would be approved for the ballot this week.

Now, California Forever has announced that it would instead be taking the normal route of going through an Environmental Impact Report and then seeking approval.  “…announcing last year that California Forever would seek a vote on the November 2024 ballot, without a full Environmental Impact Report and a fully negotiated Development Agreement, was a mistake.”

It is no longer seeking to place an item on the 2024 ballot. California Forever will now apply for a General Plan & Zoning Amendment, and proceed with preparation of a full Environmental Impact Report and the negotiation and execution of a Development Agreement. The project would still have to go before voters to win final approval.

AUTONOMOUS VEHICLES

General Motors said that it has restarted test operations in three Sun Belt cities, using self-driving cars (Cruise robotaxis) with human safety drivers. Cruise is now providing autonomous ride services in Dallas, Houston and Phoenix. Different vehicles are being used versus the models used in San Francisco. The stoppage of test operations in California was implemented after some well publicized incidents in San Francisco.

As a result of the suspension, there were major management changes at Cruise. Cruise booked a loss of $500 million before taking into account interest and taxes, an improvement from the $600 million it lost in the same period a year earlier.

CHICAGO PUBLIC SCHOOLS

Mayor Brandon Johnson suggested a plan for Chicago Public Schools to borrow up to $300 million to help pay for increased salary and some pension costs next year. CPS is in negotiations with the Chicago Teachers Union over a new contract. The Mayor has strong ties to CTU and there was always concern that negotiations would be a problem given that CTU is among the more militant unions in the country. Now, the Mayor’s idea is being exposed to significant scrutiny and support has been slow to coalesce.

An internal CPS memo outlines the risks of borrowing to pay for hypothetical 4% raises for teachers and principals and cover a $175 million pension payment that was shifted to the school district as part of the City of Chicago’s effort to stabilize its finances. If the district financed those raises and pension payments with debt, the district’s projected deficit would grow to $933 million for next fiscal year.

CPS has approved a $9.9 billion budget for 2025. The proposed budget does not include any new borrowing, or factor in the costs of new bargaining agreements that are being negotiated now, including with CTU. The proposal would close a $505 million shortfall — driven largely by the end of federal COVID money — through cuts at the district’s central office and staffing, as well through restructuring some existing debt and federal grants.

When the district faced deficits between the 2014 and 2017 fiscal years, CPS borrowed money to cover operating expenses since administrations at the time didn’t want to cut costs. The district owes $3.7 billion in principal and interest payments for that borrowing. The CPS credit will be mired in sub-investment grade territory for a long time.

BAY AREA WATER

The Bay Area’s five largest water agencies — the Contra Costa Water District (CCWD), the East Bay Municipal Utility District (EBMUD), the San Francisco Public Utilities Commission (SFPUC), the Santa Clara Valley Water District (SCVWD) and Zone 7 Water Agency (Zone 7) — are jointly exploring a regional desalination project that would provide an additional water source, diversify the area’s water supply, and foster long-term regional sustainability.

The project concept relies on available capacity in an extensive network of existing pipelines and interties that already connect the agencies, as well as existing wastewater outfalls and pump stations in the region. The only new infrastructure envisioned for the project would be a treatment plant and connections to the network of interconnections that would already be in place.

The goal is to provide a reliable water supply source available during contract delivery reductions, extended droughts, and emergencies such as earthquakes or levee failures. It would also allow other major facilities such as treatment plants, water pipelines, and pump stations, to be removed from service for maintenance or repairs.

The biggest issue facing this and any other desalinization project is the high cost per gallon of producing the water. Desalinization is the most expensive alternative by far producing a cost per gallon roughly double versus other ways to maintain and develop water supplies.

FOSSIL FUEL TAX ON THE BALLOT

An initiative placed on the Richmond, CA ballot in November would tax the Chevron refinery, one of the largest in the state, $1 for each barrel of oil processed within city limits. The City estimates that the tax would generate some $90 million and would be available to the City’s General Fund. As a general tax, the initiative would only require a majority of the vote not a supermajority.

Carson, California, enacted its own refinery tax in 2017 that helped move the city’s finances the city into surplus by adding tens of millions of dollars to its annual budget.

PUERTO RICO AND ELECTRIC RESILIENCE

The U.S. Department of Energy (DOE) has announced a $325 million funding opportunity for the new Programa de Comunidades Resilientes (Community Resilience Program). The funding is derived from DOE’s Puerto Rico Energy Resilience Fund (PR-ERF). It is designed to provide funding for solar and battery storage installations in community healthcare facilities and subsidized multi-family housing properties.

The plan calls for between $70 million and $140 million to be allocated to federally qualified health centers, dialysis centers, and diagnostic and treatment centers to improve their energy resilience. The loss of power for extended periods to facilities such as these had significant negative impacts on health on both long and short term bases.

Other funds of between $93 million and $185 million will be dedicated to enhancing energy resilience in community centers and common areas within public or privately owned multi-family housing properties subsidized by the U.S. Department of Housing and Urban Development. This includes powering shared building infrastructure and common spaces, such as elevators, in addition to community centers located on public housing properties in Puerto Rico.

That dedication of funds for public housing projects is a neat way to get around historical Congressional hostility to funding public housing on either a new construction or maintenance basis. In December 2022, a law providing $1 billion for the PR-ERF was signed. It is part of an overall effort to invest in renewable and resilient energy infrastructure in Puerto Rico. in February 2024, the DOE launched the Programa Acceso Solar on the island. It is designed to connect low-income Puerto Rican households with subsidized residential solar and battery storage systems.

NEW YORK STATE

The State Legislature ended its session in late June finally bringing an end to an extended budget cycle. The fiscal year started April 1. The ultimate stumbling block was not transportation or migrant related costs. Rather it was the issue of affordable housing. A long standing program known as 421-a had been the main tool used in NYC to generate new affordable housing.

421-a was created in 1971 as a 10-year as-of-right tax break (plus three years during construction) for new multi-family residential construction.  It went through many iterations during its half century of existence. They were all designed to enhance a program which many contend did not actually achieve its goals. One thing was certain – the cost to NYC in terms of lost tax revenue associated with the program was a larger amount than any other single New York City housing budget item.

The New York City Independent Budget Office (IBO) found that developments already under the 421-a program would receive $25.7 billion from fiscal year 2023 through fiscal year 2056, when the last of the 421-a exemptions would cease (all amounts are in 2022 dollars). In fiscal year 2024, the Department of Finance reported that the City provided almost $1.9 billion in tax breaks to 421-a properties. At the same time, the issue of affordable housing in the state became more difficult.

In 2022, there was a consensus that 421-1 a was no longer appropriate. In an atmosphere of upended Albany politics and poor City-State relations, the program was allowed to expire. This year’s budget was seen as a point of leverage by housing advocates and that came to pass. The Legislature and the Governor were able to agree on a new plan.

In the 2025 State Enacted Budget, the 421-a program was revised, renamed Affordable Neighborhoods for New Yorkers, and placed under a different part of the tax law, 485-x. The 485-x program was made retroactive back to June 15, 2022, when 421-a expired, and applies to all qualifying new construction residential housing with construction starting by June 15, 2034. There are substantial differences in the benefits and requirements in comparing 421-a with 485-x. 

There are substantial differences in the benefits and requirements in comparing 421-a with 485-x. 485-x limits affordable units to 100% Area Median Income (AMI) while 421-a allowed affordable units up to 130% AMI. Most rental buildings under 485-x will be required to set aside 25% of units as income-tested affordable units, compared with 25% to 30% of units under the 421-a.

485-x requires permanent rent stabilization for affordable rental units but does not require any rent stabilization for market-rate units. The prior 421-a program required both affordable and market-rate units to be rent stabilized for the duration of the compliance period, limiting how much rents could increase year-to-year for all units.

To help make office-to-residential conversions more financially feasible, the 2025 State Enacted Budget includes a new tax exemption for office-to-residential conversion projects, called the Affordable Housing from Commercial Conversions Program, housed in Section 467-m of the Real Property Tax Law. This is the first tax incentive program for office-to-housing conversions since the 421-g incentive program, which from 1995 through 2006 specifically benefited conversions in an area of lower Manhattan.

467-m offers a full property tax exemption during construction, and a partial property tax exemption for up to 35 years after completion. The exemption is more generous for projects located south of 96th Street in Manhattan (referred to in the legislation as the Manhattan Prime Development Area). To receive benefits, at least 25% of the rental units must be affordable, with the affordability levels of those units averaging at 80% AMI or lower.2 These units are subject to permanent rent stabilization.

NUCLEAR

Terra Power, the Bill Gates backed entity, announced groundbreaking in Kemmerer, Wyoming on the nation’s first advanced nuclear reactor. The company is building the nuclear facility at the site of an abandoned coal generating plant. The new technology uses liquid sodium as a coolant instead of water, which can absorb much more heat and doesn’t require pumps to circulate. 

The plant is a public-private partnership with the U.S. Department of Energy’s (DOE) Advanced Reactor Demonstration Program (ARDP). The plant will also include a molten salt energy storage system. This is designed to enable higher output and provide an ability to operate on a dispatchable rather than a base-load schedule. It is projected to commence commercial operation in 2030 reflecting an extended testing period and approval process.

On the traditional side, the restart of Michigan’s Palisades nuclear plant seems to be proceeding apace. This week, the outlook got a boost when the Chair of the Nuclear Regulatory Commission told Congress that the plant is on track to restart in August 2025. This assumes completion of the environmental review process by May, 2025.

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

FEDERAL INFRASTRUCTURE GRANTS

Since 2017, the idea that there was a new and better way to finance infrastructure seemed to always be just around the corner. As infrastructure day dragged into infrastructure week and month through the Trump administration, those ideas languished. Or maybe they never existed. Yet recent months have shown that good old fashioned federal funding for these large projects is emerging as the main catalyst for execution of some of these projects.

The biggest example is the federal grant funding for the Gateway Tunnel project in the NY metropolitan area. While initially stalled by New Jersey state action, the project received no support from the Trump administration. Once new administrations took over in NY and NJ, federal funding emerged.

Alabama Gov. Kay Ivey announced the U.S. Department of Transportation has awarded a $550 million grant to the Mobile River Bridge and Bayway Project. Initially conceived in the late 1990’s, the project had previously suffered from local objections to user-based funding. According to a 2019 public hearing survey conducted by U.S. Department of Transportation and ALDOT, 86% of people said they did not believe there is a need for this project, mainly because of a proposed toll.

The money comes from the Bridge Investment Program, which Congress created in 2021. It is a discretionary program of the U.S. Department of Transportation allowing states to compete for projects of national importance.  The Alabama Department of Transportation has acquired all of the land and completed preliminary steps, such as environmental impact statements and archaeological reviews. That put the project in a favorable competitive position.

The cost is now estimated at between $3.3 and $3.5 billion. The state already has $125 million from a grant awarded in 2019 under that Nationally Significant Multimodal Freight & Highway Projects program. The state has pledged at least $250 million, which is on top of $200 million already spent on preliminary measures. The latest federal grant brings the committed funding total to $1.075 billion. The state will apply for a TIFIA loan from the federal government as well.

The federal money does not mean that there will not be tolls on the new bridge. There is however, a pledge from the state that tolls will be limited to $2.50 for “frequent users”. The toll revenue will pay off any TIFIA loan as well as any additional borrowing undertaken by the State.

The Mobile project is the fifth such to be a grant recipient since the enactment of the IRA. It joins grants of $1.35 billion to the Brent Spence Bridge project to rehabilitate and reconfigure the existing span between Kentucky and Ohio over the Ohio River; $400 million to increase the Golden Gate Bridge’s resiliency against earthquakes; $158 million to for the Gold Star Memorial Bridge, which is part of the Interstate 95 corridor over the Thames River between New London and Groton in Connecticut and $144 million to rehabilitate four bridges over the Calumet River in Chicago.

Another grant will benefit two states with one project. The Tennessee Department of Transportation announced in May of this year that they were studying plans for a new bridge to replace the current 75-year-old bridge that connects Memphis and Arkansas. The current I-55 bridge is “not designed for modern interstate standards.”

The Tennessee and Arkansas Departments of Transportation have now been granted over $393 million by the federal government for the new I-55 bridge. It will be combined along with the Tennessee Department of Transportation, and the Arkansas Department of Transportation which have each committed up to $250 million to the project.

CLIMATE LITIGATION

A Baltimore Circuit Court Judge dismissed the City of Baltimore’s lawsuit against the big oil companies saying that the case belongs in federal rather than state court. The decision is at odds with how other courts have ruled in similar cases, including a Maryland state court that allowed climate deception lawsuits that the city of Annapolis and Anne Arundel County separately brought against fossil fuel companies to proceed to trial. 

The U.S. Court of Appeals for the Second Circuit issued a similar ruling in a case called City of New York v. Chevron. Courts in Hawaii, Massachusetts, Colorado ruled the opposite and said that the cases could move forward. The US Supreme Court declined to hear in January of this year an appeal of a decision by the St. Louis-based 8th U.S. Circuit Court of Appeals. That court found that Minnesota’s lawsuit accusing the energy industry of engaging in decades of deceptive marketing to undermine climate science and the public’s understanding of the dangers of burning fossil fuels belonged in state court, where it was originally filed.

Eight U.S. appeals courts have affirmed lower court decisions remanding similar climate cases to state courts, finding generally that the lawsuits exclusively raise state law claims and thus federal courts do not have jurisdiction.

HOUSTON CLIMATE TROUBLES

The last decade has been tough on the City of Houston. There was Hurricane Harvey in 2017. The state’s electrical grid failure during the winter of 2021. Nearly one week without power in May of this year. Now, over a week without power from Hurricane Beryl. More than 2.2 million customers of the local utility, CenterPoint Energy, were without power at the peak of the outages last week.

Before the storms, Harris County, which includes Houston, had been experiencing net negative migration from other parts of the country.  Since 2016, according to U.S. census data, more people have left Harris County for other counties than have moved in from elsewhere. That trend continued after 2017 when Hurricane Harvey flooded large areas of the city.

STATE BUDGETS

In June, Hawaii Governor Josh Green (D) signed into law the largest income tax cut in that state’s history—totaling $5.6 billion in lost revenue by 2031. Meanwhile, the Kansas Legislature went into a special session to decide on tax relief, ultimately passing property and income tax cuts totaling $2 billion over five years. Nebraska is headed into a special session later this month to debate property tax cuts. Arkansas passed its third income tax cut in less than two years, lowering top corporate and personal rates by half a percentage point each and making the cut retroactive to the beginning of 2024.

FY 2024 is the last to see any more fiscal help related to the pandemic. Now, the impacts of policy decisions made during the pandemic when there was a lot of extra money sloshing around government budgets are becoming clear. Revenue growth is slowing but so are expenditures. One area receiving attention is employee compensation. It has been markedly harder for governments to adequately meet their staffing needs both through recruitment and retention.

Thirty-one states, the District of Columbia (DC), and Puerto Rico reported proposed across-the-board (ATB) pay increases for at least some employee categories in fiscal 2025. Additionally, 14 states, DC and the U.S. Virgin Islands proposed at least some merit increases. These moves come as thirty-three states reported that general fund collections for fiscal 2024 from all revenue sources (including sales, personal income, corporate income, and other revenues) were coming in higher than original estimates used in enacted budgets.

Collections were on target with original estimates in seven states and lower than projected in ten states. Compared to fiscal 2024 current estimates, fiscal 2025 revenue forecasts in governors’ budgets project 2.4 percent growth in sales and use taxes, 2.9 percent growth in personal income taxes, a 0.8 percent decrease in corporate income taxes, and 2.0 percent decrease in all other general fund revenue.

DATA CENTERS AND POWER

According to the Energy Information Administration, U.S. commercial sector electricity use grew 1% last year from 2019 levels. That is the headline. The reality is that the growth in commercial demand for electricity is concentrated in a handful of states experiencing rapid development of large-scale computing facilities such as data centers. Electricity demand has grown the most in Virginia, which added 14 BkWh (billion kilowatt hours), and Texas, which added 13 BkWh.

Commercial electricity demand in the 10 states with the most electricity demand growth increased by a combined 42 BkWh between 2019 and 2023, representing growth of 10% in those states over that four-year period. By contrast, demand in the forty other states decreased by 28 BkWh over the same period, a 3% decline.

Virginia has become a major hub for data centers, with 94 new facilities connected since 2019 given the access to a densely packed fiber backbone and to four subsea fiber cables. Demand for electricity by the commercial sector in some large states such as New York, Illinois, and California has been flat or has declined compared with 2019.

Nationally, EIA projects that U.S. sales of electricity to the commercial sector will grow by 3% in 2024 and by 1% in 2025.  The South Atlantic and West South Central census divisions together account for 40% of U.S. commercial electricity demand. EIA now expects that commercial consumption in the South Atlantic will increase by 5% in 2024 and 2% in 2025 and in West South Central by 3% this year and 1% next year. 

The U.S. electric power sector generated 5% more electricity in 1H24 than 1H23 because of a hotter-than-normal start to summer and increasing power demand from the commercial sector. EIA expects a 2% increase in U.S. generation in 2H24 compared with 2H23, with solar power, the fastest growing U.S. source, generating 36 billion kilowatt hours (BkWh) more electricity in 2H24 than in 2H23 (an increase of 42%).

Solar power is the fastest growing source of electricity in the United States. We expect 36 billion kilowatt hours (BkWh) more electricity to be generated in the United States from solar in 2H24 than in 2H23, an increase of 42%. We forecast 6% more U.S. wind generation during 2H24–12 BkWh more than in 2H23—driven by more wind turbines coming on line, and we forecast 4% (5 BkWh) more hydropower, as a result of slightly improved water supply conditions this year.

ELECTRIC VEHICLES

Electric vehicles, including plug-in hybrid vehicles are taken into dealerships at a rate three times higher than that of gas-powered cars. That comes from the J.D. Power 2024 Initial Quality Survey. According to the study, battery electric vehicles averaged 266 problems per 100 vehicles, about 48% more than gas- and diesel-powered vehicles, which averaged 180 problems per 100 vehicles. The good news is that the issues do not reflect electric cars breaking down as much as they reflect issues with the technology inside the vehicle.

The failures tended to involve things like issues with infotainment systems, which was the most problematic area in the study. Issues with in-vehicle features and controls like windshield wiper or turn signal display buttons, false warnings from advanced driver assistance systems, difficulty connecting to the vehicle with popular apps like Apple CarPlay and Android Auto drove negative ratings.

These findings won’t help to reverse current sales trends in the electric vehicle space. General Motors said it now expected to make 200,000 to 250,000 battery-powered cars and trucks this year, about 50,000 fewer than it had previously forecast. In Oakville, Ontario, a production facility recently stopped making the gasoline-powered Ford Edge S.U.V.

It was slated to shift to new electric versions of the Ford Explorer and Lincoln Aviator, both three-row S.U.V.s. Instead, Ford will turn the factory in Oakville into a third production location for its Super Duty pickup trucks, which are among its most profitable models. It also positions Ford and the others to mitigate against likely Trump administration moves to eliminate tax breaks currently benefitting EV sales. It would seem to increase concerns (if not doubts) about projects announced but as yet undeveloped.

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 URBAN WATER REGULATION

The California State Water Resources Control Board approved regulations that will set long-term limits on the amounts of water the state’s urban utilities can use on an annual basis. The goal is to generate about 500,000 acre-feet in water savings each year by 2040. The new rules arose as the result of legislation from 2018. The regulation is expected to apply to 405 urban suppliers, which collectively provide water to about 95 percent of California’s population, according to the Water Board.

Each year a water utility will be required to generate an “urban water use objectives” plan and will require compliance beginning in 2027. The limits will be phased in over the ensuing 13 years. The expectation is that ultimately annual water savings will approximate 500,000 acre feet. The mechanics of how each regulated utility achieve these goals – legal, regulatory, education, enforcement – are left to each utility. What will apply across the board is that in the event that a water utility exceeds its usage limits, it will be fined $10,000 a day until usage returns to required levels.

According to the board’s estimates, cuts greater than 30 percent will only affect six suppliers (two percent of all suppliers in the state affected by the regulation) by 2025 and 46 (12 percent) by 2040; this means that 118,370 people will be affected by the largest cuts by next year, and 1,733,569 in 15 years. The regions where water suppliers will be asked to make the biggest cuts to water delivery (greater than 30 percent) by 2040, are South Coast, San Joaquin Valley, and Tulare Lake.

The reductions needed to meet the objective based on 2040 standards, relative to the subset of urban uses subject to standards, will be of 92 percent for the City of Vernon; 58 percent for City of Atwater; 50 percent for Oildale Mutual Water Company; 45 percent for the West Kern Water District; and 43 percent for the City of Glendora.

Sixty-five percent of suppliers serving 29,157,064 people will initially be unaffected as of next year. By 2040, 31 percent of suppliers serving 12,459,736 residents would have avoided a reduction in water delivery entirely. Eight percent will see a reduction of less than 5 percent; 13 percent will have to cut water delivery between 5 and 10 percent; 21 percent between 10 and 20 percent; and 15 percent between 20 and 30 percent.

The new rules must still receive the final approval of the Office of Administrative Law. If approved, the regulation will come into effect by January 1, 2025. 

KEY BRIDGE COLLAPSE IMPACT

The financial impact of the Key Bridge in Baltimore was always going to be about more than the cost of replacement. It is expected that the Federal government would pick up much of the cost of that project. In the meantime, the impact on operating revenues is a different story. The Maryland Transportation Authority operates 7 other facilities – three bridges, two tunnels and two turnpikes – funded by tolls covering operations and maintenance and debt service.

The Authority’s Board was recently advised that a $153 million decline in toll revenues throughout the 2024 through 2030 forecast period is expected. While mostly attributed to the Key Bridge, the forecast sees a decline of usage across the entire Authority portfolio. That will likely cause tolls to rise sooner than initially planned.

It is noted that the Authority emphasized its need to not only meet operating needs but also to respect its various bond covenants.   “Beginning in fiscal year 2028, a systemwide total increase will be necessary to maintain two-times debt service coverage throughout the remainder of the forecast period.”

PENSION FUNDING

Earlier this year, the City of Houston reached a long sought labor agreement with its firefighters. The hurdle that proved the highest to climb was the issue of funding levels. It was important to the unions that pension funds be adequately funded. The high levels of underfunding and the increasing cost of funding had been a long time negative weight on the City’s credit. Now, the City has turned to the capital markets to help it meet obligations it incurred in reaching the labor agreement.

The key component is the provision of some $650 million to increase the fun ding level of the pension funds. The plan is to issue debt to fund the expenditure. The wrinkle is that many municipalities have turned to pension funding bonds (pension obligation bonds or POB) to increase funding. The usual mechanism however is to issue POB which are not backed by the taxing power of the issuing municipality.

Houston is choosing to use debt but is also issuing that debt in the form of general obligation debt. That is a pledge of taxing power in support of this debt for an operating cost. In this case, the bond issue would provide the $650 million to be turned over to the pension fund. It also comes as the City seeks to fund the cost of salary increases agreed to as a part of the overall contract package.

The plan has earned pressure on the City’s ratings.  S&P Global Ratings revised the outlook on Houston’s AA rating to negative from stable. “The negative outlook reflects challenges to balance the budget in the outlook period with material fund balance declines as a result of increased debt service and salary increases, with limited capacity to raise revenue due to a city charter that restricts property tax increases.” 

The City also faces increasingly frequent flood and hurricane events generating increased expenses. It also faces legal issues from an April Texas court ruling in a lawsuit brought by taxpayers over how much property tax revenue is allocated to the drainage fund. The Court found that the amount subject to transfer is limited under state property tax laws. The estimated revenue hit if that survives all the way through the state court system is $110-120 million annually.

The City of East St. Louis has long been a depressed credit. It has often underfunded its pension funds as a way of maintaining current budget balance. Under state law, pension boards which oversee the funds can request that the State Comptroller intercept state aid to a city and direct those funds to the pension funds. For months, the City and its pension boards have been negotiating over how much the City needs to put in during its current fiscal year. The Police Pension Fund has now decided to request that the State Comptroller intercept some $3.5 million to be deposited into that fund.

Now the City has chosen to challenge the intercept provisions in court. The City is suing the Police Pension Board and the Comptroller claiming that the intercept program is unconstitutional. The city is asking the court for a permanent injunction that would block the comptroller’s office. “The enforcement of this statue exacerbates existing inequalities by reducing the City’s ability to provide essential services that these communities rely on. The reduction in state funds due to the intercept will lead to decreased public safety, health services, and other vital municipal functions, disproportionately affecting minority residents.

The City stopped making monthly payments to the Police and Fire pension funds after September of last year. The Funds indicated in January that they would seek impoundment without funding. Since then, the Fire and Police Funds have taken slightly different approaches. The Fire pension fund negotiated an agreement with the city in March. Under that deal, the city government agreed to put $4.5 million into the fire pension fund by the end of May.

The East St. Louis Police Pension Board says the city owes $3.5 million to the fund, covering fiscal years 2016, 2019 and 2021. The city says it received less than that – about $3.3 million – from the state during the first quarter of this year. It takes some 60 days to process an intercept request which would put a decision into August. A local judge has issued a temporary restraining order that stops the intercept from proceeding, for now. A hearing will be held on August 5 which is six days before an intercept could occur.

MUNICIPAL FINANCE AND HOMELESSNESS

One of the more intractable problems which is also the most visible is that of homelessness and its intersection with mental illness. The lack of facilities, the reluctance to fund or locate needed facilities and current politics have all stood in the way of dealing with the issue. Now a recent financing and a project groundbreaking are showing what can be accomplished through the municipal market.

The Mead Valley Wellness Village is a 450,000 sq. ft. behavioral health campus with five main buildings: a Community Wellness and Education Center, a Children’s and Youth Services building, Urgent Care Services, Supportive Transitional Housing, and Extended Residential Care. It includes residential as well as outpatient facilities. There are provisions for families as well. They reflect the state of the art in terms of holistic treatment of the overarching problem.

The facilities will be operated by Riverside University Health System–Behavioral Health (RUHS-BH), a county agency.  The County owns the land – an 18 acre site near Perris, CA – and created an entity specific to this project to act as landlord. Through this structure, the County has affected a P3 with the developer and builder/designer at risk through construction. Upon acceptance of the facility, the County’s obligation to make lease payments kicks in.

The location of the facility isn’t exactly a garden spot off I-215. That reflects the difficulty in siting projects like this. There isn’t much around to object to it. The facility is anticipated to open in 2026 and is estimated to have an annual impact of more than $78 million and will lead to more than 800 jobs.

PIPELINES ON THE BALLOT

The South Dakota Secretary of State has certified a ballot item which could repeal legislation seen as supportive of the Summit Carbon Systems proposed pipelines. Senate Bill 201 was enacted in 2023. Pipeline opponents were able to gather signatures in numbers well above the requirement. This puts the law in the classification of a “referred law.” It’s uncommon, The last referred law vote was in 2016.

Senate Bill 201 allows counties to collect a pipeline 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. It provides that commission’s permitting process overrules local setbacks and other local rules regarding pipelines, unless the commission requires compliance with any of those local regulations. That means local rulemaking still exists, and the decision to make a carbon pipeline company comply with those setbacks still rests with the Public Utilities Commission.

FEMA FLOOD RULES

Since August 2021, FEMA has partially implemented the Federal Flood Risk Management Standard (FFRMS). Prior to the FFRMS, FEMA required non-critical projects to be protected to the 1% annual chance (100-year) flood to minimize flood risk. Critical projects, like the construction of fire and police stations, hospitals and facilities that store hazardous materials, had to be protected to the 0.2% annual chance (500-year) flood. This standard reflected only current flood risk.

The FFRMS will increase the flood elevation — how high — and floodplain — how wide — to reflect future, as well as current, flood risk. Until now, implementation relied on existing regulations to reduce flood risk, increasing minimum flood elevation requirements for structures in areas already subject to flood risk minimization requirements, but not horizontally expanding those areas (widening of a flood plain). That was a problem exposed when prior storms revealed that much development was occurring in flood plains in Harris County, TX.

One of the major distinctions between partial and full implementation are the expansion of the floodplain to reflect both current and future flood risk and the requirement to consider natural features and nature-based solutions.  Less reliance on sea walls and the like and more on softer more absorptive natural areas with greater spacing between development on the shore or the riverbank.

Given the last 10 days or so of weather up here in the NYS woods, the argument over climate change is pretty much over. So, it’s only rational to face reality and mitigate risk. No reason for the government not to apply at least some insurance industry common sense. In this case, it’s at least based on some evidence. The efforts at flood mitigation in the Rockaways for housing and other smaller areas on Staten Island and in New Jersey in the wake of Superstorm Sandy provided that. It does hit values no doubt but we haven’t seen evidence of real fiscal problems.

It’s appropriate that the release came as a spate of storms has been brewing. The predictions have been for a more dangerous than normal storm season. It’s clear that the issue of managed retreat is going to gain prominence. Just this week the situation in Houston has been pretty severe so this is becoming almost a regular occurrence there. There was already a realization that planning maps needed to be adjusted in Harris County. The same is true in rural Vermont where it’s two years in a row for one town.

Eventually, the insurance market will tighten and the pressure against building back will increase.

PREPA BANKRUPTCY

The never ending process we know as The Puerto Rico Electric Authority bankruptcy may be closer to an ending but not a solution. The bankruptcy court has given the Oversight Board, PREPA and its creditors some 60 days to come up with a workable Plan of Adjustment. The parties have been negotiating but to no avail. Now, the judge has raised the potential for the bankruptcy to be dismissed if a solution cannot be found.

Mediation efforts have come up short with the mediator expressing a pessimistic view. “I must tell you the mediation team does not see a prospect for meaningful, serious negotiations between the parties. “We’ve no reason to believe that either side is ready to move enough to facilitate a realistic settlement.” The judge noted that a “failure to act with any degree of decency and compassion for the plight of over three million people, who are living in often unbearable heat, paying high bills for electrical service that is unacceptably unreliable and suffering through increasingly expensive failures of those charged with transforming their power system to accomplish discernable change.”

Both sides in the process were admonished for taking unrealistic positions in their negotiations. Bondholders are being “expansively aggressive in their attack” and are “likely delusional” in some of them, Swain said. Despite their arguments, there doesn’t seem to be “meaningful” net revenues available. The judge noted that none of the parties’ written submissions charts a path to a conclusion of the case. Both sides include positions rejected by the First Circuit on appeal.

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