Joseph Krist

Publisher

COLORADO RIVER WATER

The Bureau of Reclamation announced annual operational guidelines for the Colorado River basin and the seven states that comprise it. The guidelines were developed through a 24-month study of the Colorado River basin and will apply to the 2025 water year, which extends from October 1, 2024, through September 30, 2025.

Based on projections in the study, Lake Powell will operate in a Mid-Elevation Release Tier in water year 2025 and Lake Mead will operate in a Level 1 Shortage Condition with required shortages by Arizona and Nevada. Those “required water shortages” are the reductions in the amounts of water each state can withdraw from the system. The reductions in Arizona:  512,000 acre-feet of water, which is approximately 18% of the state’s annual apportionment. The reduction for Nevada:  21,000 acre-feet of water, which is 7% of the state’s annual apportionment.  

The important news is that there is no further reduction from last years’ levels required for those two states. The Colorado River System continues to face low reservoir storage with Lake Powell and Lake Mead at a combined storage of 37% of capacity. The guidelines stem from the Supplement to the 2007 Colorado River Interim Guidelines, in all Lake Mead operating conditions, the three lower division states will target a cumulative Reservoir Protection Conservation volume of 3 million acre-feet or more of additional conserved water in total for calendar years 2023 through 2026, with a minimum of 1.5 million acre-feet physically conserved by the end of calendar year 2024. This conservation volume of 1.5 million acre-feet has already been achieved.

CALIFORNIA WATER

We have regularly observed the cyclical nature of the weather and its impact on water supplies in California. Lake Oroville has been a symbolic center of the state’s ever changing water supply conditions. During the most recent drought years, levels at the Oroville Dam plunged to under 30% of capacity. This followed a year of damage at the dam as water supplies exceeded the capacity of the lake creating significant overflows and damage to the dam’s spillways.

At the beginning of the decade, Lake Oroville was far below its capacity of 900 feet mean sea level (MSL). In May 2020, the water level was at 800 feet. However, by the end of the year, it had gone down to 700 feet. By September 2021, it was near the bottom, sitting below 650 feet. sitting below 650 feet. The atmospheric river storms of early 2023 brought the Lake out of drought and Lake Oroville literally went from below 30% capacity in the winter of 2022 to 100% capacity by the Spring.

The State has announced that for the second consecutive year that Lake Oroville is at 100% capacity.

INSURANCE

The Texas Windstorm and Insurance Association’s nine-member board voted for a 10% rate increase after a staff analysis found that the insurer has for years been unable to cover expected costs, which include paying claims on damage from storms. TWIA is governed by Chapter 2210 of the Texas Insurance Code. TWIA provides a source of insurance used as a last resort for property owners that have been denied windstorm and hail property insurance coverage in the private (voluntary) market.

It insures Texas’ 14 coastal counties and a corner of Harris County. The number of TWIA policies has grown significantly by 38% since 2020. The increase in risk exposure has driven the need for reinsurance. The cost of reinsurance has also increased driving the need for a rate increase. Reducing TWIA’s reliance on reinsurance, either by using state reserves to fund the nonprofit’s catastrophic reserve fund or otherwise propping up a state-sponsored reinsurance fund, would help lower rates. 

The consideration of legislative fixes to the problem of rising rates and reduced availability reflects the inability of the state to limit these increases. Unlike many states where the insurance industry and its rates are regulated, Texas is a file-and-use state, which means that insurance companies need only to file their rate increases before they can go into effect. The regulatory structure which might enable some state insurance regulators simply does not exist in Texas.

COLORADO TAX INITIATIVES

Colorado is no stranger to long-term opposition to taxes from conservative taxpayers. Government has long functioned under the limits of the TABOR amendment which was enacted in 1992. TABOR requires voter approval for tax increases and limits the growth of government revenues and spending. Any revenue generated over the set limit, which is calculated each year based on inflation and state population growth, must be returned to taxpayers unless they vote to let the government keep it. 

Voters have loosened TABOR restrictions on most local governments in the state. Fifty-one of Colorado’s 64 counties have chosen to waive TABOR’s strict government spending limits along with 177 of Colorado’s 178 school districts and  over 200 municipalities . Notwithstanding, anti-tax advocates have managed to place two items on the ballot – Initiatives 108 and 50 – designed to significantly limit government revenues.

Initiative 50, which would amend the state constitution, might be the more consequential of the two. It would limit property tax revenue growth to 4% statewide, with no flexibility for local governments or their voters to opt out without a statewide referendum. Initiative 108 would limit assessments to 4% of value from 6.7%. That is estimated to reduce revenues statewide by some $2.4 billion.

Now the Colorado Legislature will hold a special session to consider a new proposal designed to address initiative sponsors concerns and motivate them to ask for the ballot initiatives to be off the ballot. The proposal under consideration includes: In the 2025 tax year for taxes owed in 2026, the residential assessment rate for local government taxes would drop an additional 0.15% to 6.25%. Today the rate is 6.7%, It is scheduled to fall to 6.4% in the 2025 tax year for taxes paid in 2026. This proposal Residential assessments for schools would remain separate from those of local governments, and would fall to 7.05% from 7.15%. 

In the 2026 tax year, the residential assessment rate for local governments would rise to 6.8%, but the increase is offset by a tax break that kicks in that year, exempting up to $70,000 of a home’s value from taxation. Under current law, it is scheduled to rise to 6.95%. The school assessment rate would remain at 7.05%. Local government revenue would be limited to 10.5% growth over two years, instead of 5.5% annually under Senate Bill 233. School districts would be limited to 12% growth over two years, a new cap.

If this all can be enacted, the initiatives are expected to be removed and the sponsors must agree not to try again for 10 years. The deal would have to be completed before Sept. 9, when the November ballot is required to be certified by the Colorado Secretary of State’s Office. 

ELECTRIC VEHICLES

According to a recent survey by AAA Northeast, just 14% of more than 1,700 respondents across Rhode Island, Massachusetts, Connecticut, New York and New Jersey “definitely” plan to buy or lease electric when looking at their next vehicle. By comparison, 42% are “not interested at all.” AAA found that leading causes of EV anxiety stem from fear of driving an electric vehicle, operational differences that create “a different feel” when driving, and concerns about public charging station locations, charging times and safety. The survey did not ask if cost was a concern.

Among those surveyed who don’t own and never plan to buy an electric vehicle, 65% said they had concerns about the availability of charging stations. Sixty-six percent of respondents in this group also said they were concerned about charging station reliability; 67% were concerned about price; 65% were concerned about safety; and 61% had concerns about charging station speeds.

CARBON CAPTURE

A recent federal court decision has at least temporarily delivered a setback to the carbon capture industry. The $18.4 billion Rio Grande LNG export terminal project is currently under construction near Brownsville, TX. In 2021, the company added a carbon capture facility onto the project. That was in response to a decision in the D.C. Circuit Court of Appeals which found that FERC had failed to properly consider the project’s climate impact.

Specifically, the D.C. Circuit found regulators failed to properly consider how that terminal and another proposed LNG project nearby would impact environmental justice communities in Cameron County, Texas. FERC also hadn’t properly reviewed the impacts of the carbon capture element of the project. In light of the renewed need for approvals and cancellations of contracts for LNG due to the carbon footprint of its production, the Company has decided not to pursue approval of the carbon capture for this project.

TAX CREDITS AND ALTERNATIVE ENERGY

The US Treasury marked the second anniversary of the enactment of the Inflation Reduction Act with some data regarding the use of tax credits associated with the law. More than 1.2 million American families have claimed over $6 billion in credits for residential clean energy investments – such as solar electricity generation, solar water heating, and battery storage, among other technologies – averaging $5 thousand per family. 2.3 million families have claimed more than $2 billion in credits for energy efficient home improvements – such as heat pumps, efficient air conditioners, insulation, windows, and doors – averaging $880 per family.

Solar electricity investments accounted for the largest number of residential clean energy credit claims. In total, more than 750,000 families reporting a total of more than $20.5 billion in qualified solar electric property costs in 2023. For reported investments in energy efficient home improvements, more than 250,000 families claimed investments in electric or natural gas heat pumps, more than 100,000 families claimed investments in heat pump water heaters, and almost 700,000 families claimed investments in insulation and air sealing.

SMALL COLLEGE BLUES

Centre College of Kentucky is a small, liberal arts college situated in Danville, Kentucky, approximately 35 miles south of Lexington. Established in 1819, Centre serves an entirely undergraduate student population of 1,346 full-time equivalent students and generated fiscal 2023 operating revenue of $68 million. This week, Moody’s downgraded the College’s rating from A3 to Baa1. The usual suspects were cited for the change in the ratings’ outlook to negative.

Operating deficit in fiscal 2023, the college’s financial projections reflect expectations of further significant operating deficits through fiscal 2025. The potential for further credit pressure as ongoing student market challenges will continue to limit net tuition revenue growth and could lead to weaker than expected operating results in fiscal 2025 and beyond. At the same time, the college’s revenue diversity, with nearly half of its operating revenue derived from investment income and philanthropy, provides it with relatively more flexibility than for other similarly sized institutions.

Manhattan College today announced that, effective immediately, it will change its name to Manhattan University in order to better recognize its more than 100 majors, minors, graduate programs, and advanced certificates and degrees, and attract a more globally diverse student body. It’s that last item – globally diverse – that as much as anything drives the move. Enrollment is down to 2,800 from a peak of 3,300 before the pandemic. Much of that is attributed to recruiting difficulties related to COVID 19 travel restrictions. Those restrictions hurt many institutions which counted on demand from international students.

As we have pointed out before, international students are a much sought after demand cohort. They typically pay full fare to attend. A university is seen as a more attractive option for those students. That accounts in part for why a 2022 study in the journal Economics of Education Review said that 122 four-year colleges morphed into universities between 2001 and 2016.

FOR PROFIT HOSPITAL SALE

Santa Clara County, CA has announced its intent to purchase Regional Medical Center from its for profit owner/operator. Over recent months, the hospital has been reducing the level and range of services it provides. Its status as a trauma center was downgraded from Level III to Level II. The overall decline in services created pressure for the County to find a way to preserve the facility and maintain/restore its prior service levels.

This is not the first time that the County has stepped in to add a facility to its overall health system. This will be the county’s fourth hospital purchase since 2019, when it bought O’Connor and St. Louise Regional hospitals and De Paul Health Center in Morgan Hill that were poised to close. In 2004, HCA closed San Jose Medical Center, the city’s only downtown hospital. In 2020, the corporation shut down the maternity ward at Regional, which had an immediate effect on East San Jose residents. In 2023, HCA ended its acute care psychiatrist services and neonatal intensive care unit at Good Samaritan Hospital in San Jose.

County officials announced their intent to buy the hospital from HCA Healthcare, the nation’s largest hospital corporation, for $175 million. The deal enables HCA to walk away from a population it does not want to serve and frees it to increase its facilities serving wealthier areas in the City of San Jose. The funding is coming from a one-time reimbursement of Federal Emergency Management Agency (FEMA). The county and HCA are aiming to complete the transaction in the first quarter of 2025. Once the deal goes through, the county intents to restore prior service cuts including the trauma center and maternity.

BACK TO THE FUTURE FOR TRANSIT FARES

The Transit system which serves the Seattle-Tacoma metropolitan area is dealing with many of the issues holding back full returns to pre-pandemic passenger levels. Now, Sound Transit is proposing returning to a fare structure which any New Yorker would recognize. Currently, fares are based on distance – which range from $2.25 to $3.50. New construction expanding the Link light rail system would create new lines out into the suburbs. This created a potential for those lines to require a $5 fare based on the current fare system.

Starting Friday, Aug. 30, the regular adult fare for Link light rail will be $3. The price for an Adult ORCA day pass will drop to $6 from the current $8 as part of a six-month promotional period. The price for a reduced- fare pass will drop from $4 to $2. Youth 18 and under continue to ride free.

The change to flat fares coincides with the opening of the Lynnwood Link Extension on Aug. 30. This extension to the 1 Line will add 8.5 miles and four new stations, including the first ones in Snohomish County. Link 2 Line service to Downtown Redmond is expected to open early next year, followed later in the year by the rest of the 2 Line. The Federal Way extension is set to open in early 2026.

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 BALLOT ISSUES

Last month, a ballot initiative was qualified for the November ballot in Richmond, CA. (MCN 7.29.24) In the wake of that announcement, Chevron announced that it was moving its headquarters from California to Texas citing the regulatory environment. The initiative is also being challenged in the courts. Initial hearings in the case indicate that at least some of the ballot challenge might not meet legal requirements.

While all of this plays out, the City and Chevron continue to talk. Those talks have yielded a proposed agreement which would see Chevron make annual payments to the City. If the agreement is approved, Chevron would pay $50 million annually to the general fund for the first five years, followed by $60 million annually the last five. The city would retain its right to impose new taxes on Chevron and other businesses, but the settlement payments would be credited toward what the refinery would owe.

The refinery tax ballot measure was estimated to have cost Chevron between $60 million and $90 million annually, depending on the amount of raw materials the plant processed. The council on Wednesday could accept the agreement, pull the measure from the ballot, or opt to keep the measure on the ballot for voters to decide. Another option would be to direct staff to continue negotiating with Chevron.

Another ballot initiative to deal with housing in the Bay Area was announced in July. Regional Measure 4 would “address housing affordability and reduce homelessness by: providing an estimated 70,000 affordable apartments/homes; creating homes near transit, jobs, and stores; converting vacant lots/ blighted properties into affordable housing; and providing first-time homebuyer assistance.

The proposal calls for the issuance of $20 billion in debt, supported by an estimated tax of $18.98 per $100,000 of a property’s assessed value to pay for the bond. A two-thirds (66.67%) vote is required for the approval of Regional Measure 4. The initiative has already faced challenges. It has had to be reworded as a result.

None of that seems to be helping. Currently, polling shows that 55% of voters support the measure. Now, the Bay Area Housing Finance Authority has decided to remove the bond measure in response and attempt another vote in the future.

WISCONSIN

This was primary week in Wisconsin which also allowed voters to decide on two ballot initiatives designed to limit the ability of the Governor to spend certain state revenues. One measure would have prevented the state Legislature from delegating its authority to appropriate funds which is permitted under existing law. The second would have prohibited the governor from spending federal funding that has not been earmarked for a specific purpose without legislative approval. 

The initiatives had to be viewed through the prism of the state’s highly and ever more partisan environment. The Legislature is Republican and the Governor is a Democrat. The Governor has been reelected once. The initiative’s reflected disputes between the Governor and the Legislature over how federal COVID-related funds were spent.

The limits on spending federal dollars were a concern. Supporters of the status quo framed it as something which could hobble the ability to use federal disaster monies. The need to go through the formal legislative process was seen as an impediment to assistance and recovery.

PORTS

Last summer, the Port of Los Angeles was facing labor problems and impacts on operations which lowered throughput at the Port. During the period before negotiations on a new contract were concluded in September, shippers began diverting cargo to east coast ports. There was concern that some of the movement might be permanent.

Those concerns have not been borne out one year later. The Port of Los Angeles handled a record-breaking 939,600 Twenty-Foot Equivalent Units (TEUs) in July, a 37% increase over the previous year. It was the best July in the Port’s 116-year history and the busiest month in more than two years. Seven months into 2024, the Port of Los Angeles is 18% ahead of its 2023 pace. July 2024 loaded imports landed at 501,281 TEUs, a 38% spike compared to the previous year. Loaded exports came in at 114,889 TEUs, an increase of 4% compared to last year. It was the 14th consecutive month of year-over-year export gains in Los Angeles.

Now the shoe is on the other foot. Some of the increase in tonnage at the Port of Los Angeles reflected early arriving holiday related cargo. That occurred in anticipation of potential labor actions at east coast ports. Union negotiations covering longshore workers on the East and Gulf Coasts have been stalled since June 10, bringing the union closer to a potential strike at the September 30 contract expiration. 

The five major ports facing a strike potential are New York/New Jersey, Savannah, Houston, Virginia, and Charleston. The last East-Coast-wide strike was in 1977, lasting seven weeks. 

WIND

The federal Bureau of Safety and Environmental Enforcement (BSEE) updated its suspension order for Vineyard Wind, allowing it to resume the installation of turbine towers and nacelles. The company is still prohibited from installing additional blades – all of which are in the process of being reinspected – or power production from the 24 turbines that have been completed since last October.

This incident has not diminished activity by potential providers to develop new wind generation. This week, the Department of the Interior held an offshore wind auction in the Central Atlantic for two lease areas; one 26 nautical miles from the mouth of Delaware Bay (Delaware and Maryland) and the other 35 nautical miles from the mouth of Chesapeake Bay (Virginia). Wind turbines off the coast of Delaware, Maryland, and Virginia could generate up to 6.3 GW of clean, renewable energy and provide power for up to 2.2 million homes.

ERNESTO

Once again, Puerto Rico and the US Virgin Islands had to contend with a hurricane. This one, Ernesto, left half of Puerto Rico without power. Luma Energy, which transmits and distributes electricity in the territory, was reporting that more than 718,000 customers were still without power there as of Wednesday. The emergency management director for the U.S. Virgin Islands said that as of Wednesday morning that the power was out across the entirety of St. John and St. Croix. There was some power being generated in St. Thomas.

This all served to remind people that the electric systems in both Puerto Rico and the USVI are embarrassingly unreliable. At the same time, the operations of the VI Water and Power Authority have been impacted by the replacement of the CEO by a more politically connected individual. The agency still faces all of its long standing issues as well as the cleanup from this storm.

As over half a million people went without power, the parties in the PREPA bankruptcy proceedings were reduced to arguing essentially over the meaning of words. The bondholders have been fighting efforts by the Oversight Board to restrict their rights to revenues only to those collected. The contention is that any future revenues are receivables not revenues and that the bondholders should only get revenues. It’s all over the meaning of the word account.

FIRES AND INSURANCE

With every new wildfire igniting in California, you can almost hear one more commercial insurance carrier withdraw from the fire insurance market. With fires becoming larger, more frequent and location repetitive, the cost of available coverage rises and the number of providers shrinks. This parallels the issue of insurance in the southeastern US against damage from hurricanes. So do some of the responses/solutions undertaken by impacted states.

In California, the theory is the same as in the case of hurricane coverage.

The FAIR Plan was established more than 50 years ago as the state’s insurer of last resort. It was designed to serve as a source of insurance primarily to meet mortgage requirements. Considering the amount of growth as well as the expanded footprint resulting from that growth, one can see how much the demand for insurance has increased. Unfortunately, it paralleled the growth in the absolute risk of fire.

In the midst of one of the largest wildfires in the state’s history, California has adopted a plan to address near term shortfalls in the availability of fire insurance. The commercial insurers have sought more flexibility in their underwriting process and higher rates. In return, companies will be required to offer policies to 85% of homeowners in places categorized as wildfire-distressed areas. In those areas, localities would be encouraged to employ mitigation policies like clearance requirements for vegetation.

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

We are a bit more brief this week in deference to the weather. Here at the mothership, we are dodging falling trees while many of you will be bailing out, drying out or cleaning out. Be careful, especially travelling. And oh, yeah, this is what climate change looks like.

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JOBS AND PERCEPTIONS

Some recent data points have produced some food for thought as people try to understand the clash between favorable macro data on the economy and less favorable perceptions on the ground. One example is in the oil and gas industry. Production is at record levels. This has not translated into higher job numbers. Oil production is up 5 percent since 2019, the last peak before the pandemic. The industry set a new record for crude production last week, according to the U.S. Energy Information Administration, pumping an average of 13.4 million barrels a day.

Employment in the industry has not followed along. In 2014, more than 600,000 people worked to produce oil and gas. Today, it’s more like 380,000, producing 45 percent more gas and 47 percent more oil. Gas production in Pennsylvania has settled in at about 630 billion cubic feet a month. Production had previously peaked at 670 billion in December 2021. The current level of production remains strong but 30 percent fewer people are working to produce it compared to before the pandemic. Bureau of Labor Statistics data shows that a little more than 12,000 people worked in the state’s gas industry in 2023.

In other industries, there is the issue of layoffs. One example is at John Deere, a major employer in the Quad Cities region of Illinois and Iowa. It has announced layoffs in two segments totaling nearly 1,000. In this case, the layoffs include white collar salaried jobs in addition to typical production layoffs. Some suppliers have also announced layoffs so you can see where life may not look so great in the Quad Cities. Then there is the auto industry which has seen layoffs at each of the Big Three automakers. Like the situation at Deere, they include both production positions as well as white collar jobs. While some of the layoffs were announced as temporary, the uncertainty is just as bad for voter psyches.

The tech industry is in its own bind. The race over AI has not produced the sort of profitability which was hoped for and now those outside of that area have become more vulnerable. Intel plans to lay off 15,000 employees, or more than 15% of its total workforce. This follows a clear 2024 trend as this year has already seen 60,000 job cuts across 254 companies, according to one industry analyst.  Companies like Tesla, Amazon, Google, Tik Tok, Snap and Microsoft have conducted sizable layoffs in the first months of 2024.

BAY AREA TOLLING

According to a recent report from the Bay Area Infrastructure Financing Authority, toll lanes across the region generated over $123 million in revenue last year. The largest amount, $50 million came from Interstate 880 express lanes and more than $22 million (first three quarters of FY 2024) from the Highway 101 corridor in San Mateo County. The different agencies that operate these express lanes say they’re generating more revenue than they originally projected. The revenue from these express lanes primarily funds operations, road maintenance, enforcement, and debt payments. In San Mateo County, a portion of the revenue from the 101 Express Lanes is used to support lower-income residents, including providing free toll lane trips or public transportation rides for those earning $80,000 a year or less.

NEW YORK OFFICES AND TAXES

NYS Comptroller DiNapoli released an analysis of the New York City office market in terms of property values and revenues. There has been great concern as headlines feature buildings being sold at deep discounts and investors worry about the potential impact on property tax revenues. Commercial real estate in New York City accounts for 21.9 percent of all property market values as of fiscal year (FY) 2025.

Office buildings comprise the largest share of Class IV billable values at 45.5 percent of the total in FY 2025, followed by retail properties (18.2 percent) and hotels (9.7 percent including condo hotels). The City did reassess office properties downward significantly after the first year of the pandemic, from which office properties have slowly recovered. The City first reflected the decline in assessment roll values beginning in FY 2022 to reflect changes in office buildings’ income-generating power. Total office market values declined by 16.6 percent between FY 2021 and FY 2022, a loss of approximately $33.6 billion in value. FY 2021 and FY 2022, a loss of approximately $33.6 billion in value.

Market values returned to growth the following fiscal year, increasing by 9.9 percent in FY 2023 and have continued to grow since then, though the rate of increase has been slow, with FY 2025 seeing a 3.1 percent growth year over year. Total office market values grew by about $8.7 billion between FY 2020 and FY 2025. While the overall office market has record high vacancies, the effect is significantly different when comparing submarkets and property types, with high-quality, amenity-rich office space still in demand. That growth has been concentrated as Hudson Yards has contributed an inordinate amount of the valuation increases. Older buildings are not faring nearly as well in terms of occupancy.

Many observers also do not understand the City’s property tax system. Valuation declines on a year by year basis don’t happen. The City uses a five year average valuation formula which has tended to reduce volatility in collections. For residential high rise buildings, co-ops and condominiums find their valuation which relies on rental data from comparable units to derive a value. Rents are one thing which continued to rise through the pandemic. There’s little indication that this trend will slow.

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

NUCLEAR START UP

An entity backed by several venture capital investors announced plans to develop a fleet of traditional nuclear generating plants. The Nuclear Company will initially target sites with active combined operating licenses (COL), early site permits (ESP) or limited work authorizations from the Nuclear Regulatory Commission. The Company is looking at locations in the southeastern U.S., the PJM Interconnection and the Midcontinent Independent System Operator territory.

One example – active COLs for Turkey Point units 6 and 7 in Florida and William States Lee III units 1 and 2 in South Carolina. They use the same basic technology which was used at Plant Votgle’s recent expansion. The idea is that lessons from previous plants will be applied to prevent significant delays and cost increases. As for new sites, the Company targets former coal-fired generation sites for potential conversion.

The development of generation at existing sites is also one way to overcome the issue of transmission capacity. Existing generation plant has the benefit of significant transmission connection capability. It might also make future plants more attractive to utilities which need to replace the coal power but would like to avoid the clear financial risks associated with nuclear construction. Repurposing also avoids transmission upgrades associated with new plants. The Company has also said that it is open to developing plants on a turn key basis.

We’ll see if this approach works any better than have prior efforts to learn from past mistakes to gain efficiency or cost savings.

COLLEGE TUITION

Michigan is the most recent of at least 30 states to offer a version of free community college. Those eligible for Michigan’s program must enroll in college full-time and fill out federal student aid forms. The program is not dependent on a student’s household income. The Whitmer administration estimated that its free community college program will save money for over 18,000 students, up to $4,800 per student each year.

The idea is gaining support across the country. In addition to Michigan, Minnesota and New Hampshire will begin free community college tuition programs in FY 2025. Colorado will begin its program in FY 2026. Ironically, it is some of the more populous states which do not have such programs. Those include Texas, Ohio, Pennsylvania, Illinois, Wisconsin and Florida.

A 2020 study produced by the Federal Trade Commission found free community college increases enrollment by 26 percent, welfare for all students, and degree completions by 20 percent. Programs that only cover tuition after accounting for other sources of grants increase enrollment by 10 percent and degree completions by 10 percent, but provide no benefit to low-income students. Need-based programs that make community college free for low-income students increase enrollment by 12 percent.  

OAKLAND CHILDRENS HOSPITAL

The Regents of the University of California recently approved a major expansion of one of Oakland’s primary medical facilities, the Oakland Children’s Hospital. The hospital is a level 1 trauma facility as well as a “safety net” hospital. That is reflected in the fact that the hospital derives 70% of its revenues from Medi-Cal. The hospital had struggled financially for years before it merged with UCSF Benioff Children’s Hospital in San Francisco in 2014 following a $100 million gift from billionaire Salesforce founder Marc Benioff.

UCSF plans to pay for the construction through a combination of $891 million in debt financing, $350 million in gifts, $163 million in hospital reserves and $87 million in grants, according to the plan approved by the regents. The project will double the safety net facility’s emergency department space and triple the number of single-patient hospital rooms. 

Parkview Health System is a regional hospital system, anchored by a tertiary facility in Fort Wayne, Indiana. In total, Parkview operates 14 acute and specialty service hospital campuses, several ambulatory sites, and numerous physician offices throughout its market in northeastern Indiana and northwestern Ohio. In fiscal 2023, the organization reported $2.8 billion in operating revenue and saw over 59,000 admissions.

This week, Moody’s changed its outlook on some $800 million of outstanding debt from Parkview to negative from stable. The Aa3 rating had benefitted from a more stable operating environment in terms of reimbursements from the states under Medicaid. Now, the system is facing reduced cash flow which is always key to a rating. Moody’s notes that “lower cash flow will keep debt to cash flow elevated at about 3.0x after years of measuring 2.0x – 2.5x, and the rising expense base will constrain days cash to under 250 days, down from over 300 days prior to current financial challenges.”

A RELIC

Simmons University is a private, nonsectarian university with an all-women’s undergraduate college and coeducational graduate programs. That single-sex tradition and orientation has been a financial stumbling block for many schools of that category. Simmons reflects that trend. Located in Boston’s historic Fenway district, Simmons currently serves around 5,103 FTE students and generated roughly about $172 million of operating revenue as of fiscal year end 2023. 

The university had approximately $264 million in debt outstanding as of fiscal year end 2023. Moody’s recently downgraded Simmons from Baa2 to Baa3. That move was not enough to stabilize the outlook which was held at negative. The downgrade to Baa3 also considers the university’s material debt burden, up 88% over the past five years, exacerbated by declining operating revenue, down 13% over the same period. 

The near-term answer from management is to rely on reserves but that can only be sustained for so long. The hope is that draws on reserves can continue through fiscal 2027. That is a red flag for the rating.

STADIUM DEAL

Pinellas County and the City of St. Petersburg have reached an agreement over how to fund the construction of a new baseball stadium for the Tampa Bay Rays. The stadium is expected to cost about $1.3 billion, of which the Rays will cover $700 million. This week, Pinellas County approved some $300 million of support for the facility. The key to that is based in the effort to tie the stadium to the revitalization of the surrounding community.

The concept of a stadium anchoring a larger real estate development scheme is increasingly the go to tactic employed by teams seeking new stadia. Successful examples are to be found in St. Louis and Atlanta. In this case, the Rays also envision year-round non-baseball events at the stadium, as well as a planned mixed-use development in the area that will include 5,400 residential units, 750 hotel rooms, 1.4 million square feet of office and medical space, 750,000 square feet of retail space, a new Woodson African American Museum of Florida, a concert/entertainment venue of 4,000 to 6,000 seats and 14 acres of green space.

BAY AREA TRANSIT

An initiative that would place a new tax on Uber, Lyft and Waymo to fund the San Francisco Municipal Transportation Agency has qualified for the November ballot. The Community Transit Act, the proposed ordinance would the revenues earned by these companies from their rideshare and robotaxi services in San Francisco. It would be levied at a graduated rate that would rise from 1% to 4.5% as that revenue increases.

The measure would use the money raised — which its authors estimate to be $20 million to $30 million annually — to maintain or expand Muni service and the agency’s discounted-fare programs. The ride share customers are already paying for transit as the result of the passage in 2019’s Proposition D, which placed a 1.5% to 3.25% tax on all ride-hailing fares in The City. Muni is facing a massive deficit as ridership and fares haven’t recovered to the levels they were at before the COVID-19 pandemic and also to the end of federal pandemic-related financial support.

In Santa Clara, the Santa Clara Valley Transportation Authority (VTA), the transit agency designing and building the BART extension to San Jose and Santa Clara, announced the federal government will contribute $5.1 billion to complete the long-awaited project. The award from the Federal Transit Administration (FTA) is the second largest transit-related grant from the agency in history and the largest amount of federal money ever given to a West Coast transportation project.

Phase I of the BART extension brought service into Santa Clara County from Alameda County, with stops in Milpitas and North San Jose opening in 2020. The grant is for a four-station BART extension that will run from the Berryessa Transit Center in North San Jose through downtown and up to Santa Clara. The estimated cost of the project was originally $4.4 billion and scheduled to begin service in 2026. The opening date for this segment of the extension has now been extended to 2037.

P3 GOES PUBLIC

The Texas Transportation Commission voted to authorize spending more than $1.73 billion to terminate a 52-year agreement with Blueridge Transportation Group, which began constructing the 10-mile stretch of toll lanes in 2016. That segment of State Highway 288 opened in 2020 and has since been managed by the private operator. The operator sets the fluctuating toll rates.

It is the only such public-private partnership for a toll road in Houston. The agreement calls for TxDOT to take ownership of the tollway in early October, after which point TxDOT will be able to set its own toll rates and use the revenue along the south Houston corridor and for other infrastructure projects in the region.

“The agency believes the cost of the ‘buyout’ provision in the contract is substantially below the value of future toll revenues on the corridor. It is expected that the ‘buyout’ payment would be repaid with future toll revenue bonds, but would allow future toll rates to be significantly less than what are allowed under the current concession agreement.” Drivers currently pay up to $29.23 round trip during peak commuter times on a weekday, which is more than double the cost when the toll lanes opened in 2020.

After the takeover, TxDOT would be able to expand the road without imposing tolls on the new lanes. Under the existing agreement, any expansion would require that tolls be imposed on those lanes.

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