Joseph Krist

Publisher

CHICAGO

Chicago Public Schools (CPS) is undergoing real governance issues as a mass resignation by the Board comes in the midst of difficult negotiations with the teachers union. The Mayor comes from the union and this has put him in a vise as he tries to pacify his former employers while facing an ever increasing City budget deficit. Tax increases seem unlikely and expense cuts will be heavily opposed. In the meantime, there was sobering news regarding tax increases.

Cook County showed that initial property tax collections were down on a year over year comparisons. It was disappointing as a new set of assessments were generated for use in this year’s tax collections. Unfortunately, the reassessment had the effect of significantly raising tax bills and the impact of those increases has slowed payments as residents find ways to afford the increases.

The area most impacted were on the County’s south side. The number of delinquencies increased by 13% on a year after year basis. In the south and southwest suburbs, collections were down by 1.5% — fueled by a 27.7% increase in the number of residential delinquencies — after reassessments in that region shifted much of the tax burden from businesses to homeowners. The shift contributed to a record 19.9% increase in that region’s median residential bill.

New pressure on the City’s water utility came in the form of new EPA rules regarding lead pipes and the water supply. (see EPA Lead Rule below). It will undoubtedly rely on significant new debt. That will require higher rates

EPA LEAD RULE

The EPA announced new rules governing the use and maintenance of lead water pipes. The new rule imposes the strictest limits on lead in drinking water since federal standards were first set. Utilities will be required to generate an inventory of their lead pipes and replace them over the next 10 years. The measure replaces less stringent regulations, adopted during the Trump administration, on lead in drinking water. The federal government banned lead pipe in new plumbing in 1986. 

The E.P.A. estimates that water utilities must replace about nine million lead pipes at a total cost of $20 billion to $30 billion over the ten year period. The E.P.A. announced $2.6 billion in new funding to support lead pipe replacement. This funding will flow through the drinking water state revolving funds (DWSRFs) and is available to support lead pipe replacement and inventory projects.  The new rule also lowers the allowable amount of lead in the before replacement to 10 parts per billion, from the current 15 parts per billion. If the water supply repeatedly exceeds the new threshold, utilities must make water filters available. 

The rule also doesn’t require utilities to pay for the portion of lead lines that are on private property, including within a home. The new rule also allows some utilities with a particularly large number of lead service lines to go beyond the 10-year deadline. Chicago, which has the most lead pipes in the nation, has that problem because city building codes required all homes (smaller than a 4-flat) to install the lead service lines until 1986, decades after other cities banned them for health reasons. It will get twice as long to comply.

Several cities have been ahead of the curve on this issue. Milwaukee Water Works is on track to replace all remaining lead pipes within the EPA’s ten-year timeframe. In 2024 alone, Milwaukee received approximately $30 million in Bipartisan Infrastructure Law funding to replace 3,400 lead service lines. 

The Detroit Water and Sewerage Department has received $90 million from the Administration and will replace more than 8,000 lead service lines this year, putting the city on track to replace all lead pipes in 10 years.

The Erie, Pennsylvania Water Works has received $49 million from EPA to enable the city to replace all lead pipes within 5 years instead of 25 years. Syracuse now plans to use state and federal financing to start replacing the approximately 14,000 service lines in the city, which expects to get to 2,400 of them next year.

Denver Water has accelerated its efforts through $76 million from the Bipartisan Infrastructure Law, allowing the city to be on track to replace all lead pipes within a decade.

In Newark, NJ. the danger from some 23,000 lead pipes was exposed in 2019 and there was no real program to provide funding for it. So, Essex County, which includes Newark, stepped up and $120 million in bonds were issued through the county’s improvement authority. We would expect to see issuance for water systems to grow as these programs move forward.

CHATTANOOGA STADIUM MOVING DOWN THE TRACKS

The latest financing for a pro sports stadium is for a minor league franchise, the Chattanooga Lookouts. The City is issuing debt payable from a variety of taxes generated from activity in and around then stadium. The plans include development of an entertainment district centered on the stadium. It is a continuation of the current trend in stadium development, especially for baseball.

It’s being stimulated, in part, by the success of the stadium developments in St. Louis and Atlanta. Ballpark Village in St. Louis was a muni financed deal. Looking at the skyline behind center field this week in San Diego, it was easy to see much of that development you see wasn’t there before Petco Park. The Tampa Bay Rays new stadium (how timely) deal is packaged as an overall development project and that is the model that proponents of a new stadium for the KC Royals are hoping to get approval for as well.

The model of pairing stadium and commercial development is extending to other sports like soccer and hockey. It is not a surprise that this happening in Tennessee. Chattanooga is taking a cue from Nashville. Nashville has been very upfront about its belief that pro sports teams are a key to achieving their economic goals. They have been pushing tirelessly for an MLB franchise to go along with the Titans and Predators.

One of the reasons there is still some doubt about where the Oakland A’s will be playing in three years is because the potential for associated development at the proposed site in Las Vegas is limited. The site was cleared this past week with the demolition of the Tropicana hotel.

As always, the details of these deals are what ultimately determine whether these projects are worth it. The results have been mixed overall. The municipalities often are at a disadvantage in those negotiations especially given the political nature of the whole process.  In this case, the process has yielded a pretty good result for the Lookouts. There will also be more of these situations as Major League Baseball continues to pressure Minor League franchise operators to modernize and/or replace stadia to maintain their working agreements with MLB franchises.

CARBON PIPELINE LITIGATION

Legal efforts to stop Summit Carbon Solutions from constructing its pipeline for captured carbon through Iowa have moved to a decisive stage. Over the last couple of years, litigation challenging Summit’s right to enter private property for the purpose of surveying land without the right of eminent domain have produced conflicting opinions.

In May 2023, a Clay County landowner along the now-abandoned Navigator CO2 Ventures pipeline brought suit against Summit on the same issues. In that case, the district judge agreed with landowners that the Iowa law in question was unconstitutional, since landowners were not compensated for intangible damages of allowing a survey on the land. 

A case in Hardin County is the one before the Iowa Supreme Court. The district court in Hardin County ruled in May 2023 that the landowner plaintiff could not interfere with Summit Carbon Solutions’ attempts to enter his land to survey for its pipeline project. The landowner is appealing the Hardin County decision on the argument that it is unconstitutional for a pipeline company to undertake land surveys and examinations before it is vested with eminent domain.

GEORGIA EV PLANT

Hyundai has begun producing electric SUVs in Georgia less than two years after breaking ground on its sprawling, $7.6 billion manufacturing plant. The official formal opening will occur in 2025 but production is underway. Hyundai has said it will produce up to 300,000 EVs per year in Georgia, as well as the batteries that power them. The plant’s vehicle production areas have been completed and are being staffed by more than 1,000 workers. Battery-making facilities remain under construction. 

ORLANDO UTILITIES COMMISSION

Within 16 years, the Orlando Utilities Commission (OUC) plans to take out of service more than 90 percent of its with generation plants that burn fossil fuels, mainly coal and natural gas, and will have erected solar panels on more than 10,000 acres. The plans will put OUC at the forefront of the changing energy production industry. Later this year, OUC will start generation at a pair of large solar plants – Harmony II and Storey Bend in Osceola County – able to provide for about 28,000 homes or roughly 10 percent of residential customers. 

While the utility moves towards creating its own base of solar power, it also wants to reduce payments under its net metering plan. That is not going over well with existing owners of residential solar. Of the utility’s nearly 250,000 residential electric customers, about 10,000 have solar panels on their rooftops. Those panels plus those of commercial customers have a combined capacity to generate 104 megawatts, or nearly 5 percent of OUC’s capacity. By 2032, according to OUC reporting to the state’s Public Service Commission, OUC “anticipates” constructing a dozen large solar plants, each covering between 500 and 800 acres, containing approximately 300,000 panels.  

DISASTER BONDS

When large scale disasters occur, Congress has authorized spending plans to assist recovery by authorizing special issuance of private activity bonds. Congress has created special tax-exempt bond categories in response to disasters over the past two decades, including Liberty Bonds following September 11, Gulf Opportunity Zone Bonds and Ike Bonds after hurricanes, and Mid-Western Disaster Recovery Bonds after severe flooding along the Mississippi River.

Each required a special act of Congress that took months before capital became available. Those processes took weeks and months to be enacted which complicated recovery. Now, large scale natural disasters are becoming more frequent and widespread. This is generating a proposal from the Council of Development Finance Agencies (CDFA). It would provide for permanent provisions governing the use of tax-exempt private activity bonds in response to natural disasters.

The bonds would not be subject to federal volume cap restrictions and would be available to the affected areas upon the declaration of a state of emergency by a state’s or territory’s governor. Disaster Recovery Bonds would be authorized for use in a Disaster Recovery Zone to finance: the acquisition, construction, reconstruction, or renovation of non-residential real property (land, buildings, and fixtures); the construction and rehabilitation of multi-family rental property for low- and moderate-income individuals; the repair or reconstruction of damaged public utilities facilities and transportation infrastructure; and the immediate repair and mitigation of severe environmental contamination to a public water source.  

DAMS

Every natural disaster creates new opportunities to learn from. In recent years, flooding has become a more widespread concern. The recent experience with Hurricane Helene has highlighted the number of dams located throughout the country. While people tend to think of the larger scale dams which provide power, water and flood control, the majority of these facilities are much smaller and localized. They primarily were designed to control flooding.

The very active summer storm season has served to highlight the infrastructure that is at the base of much of the flood control effort in the US. Some $3 billion was dedicated to dam projects under the Bipartisan Infrastructure Law, which Congress passed in 2021. So far this year, the Federal Emergency Management Agency (FEMA) has distributed a record $215 million in dam safety grants. The FEMA dam safety grant program only accepts dams that could cause loss of life if they fail and are in poor or unsatisfactory condition. 

FEMA has a limited amount of money to give out so the agency is prioritizing dams in the poorest condition that also pose the greatest risk to the public. That means that the larger hydroelectric dams in the West and dams near higher populations are the current funding priority. That has generated disparate distributions to different regions as FEMA releases funds. Eleven Midwest states will receive a total of $30 million in FEMA dam safety grants this year, just half of the roughly $60 million that 13 states in the South will receive. Another $60 million will go to 11 states in the Northeast. In the West, 11 states will receive about $45 million.

Earlier this month, the Department of Energy (DOE) announced it was handing out more than $433 million to projects that will improve safety and grid resilience for hydropower dams across 33 states. DOE will provide $63 million between seven Midwest states to improve their hydropower dams. That is half of what Northeastern and Southern states will receive and one-third of what Western states will get. DOE awarded more than $176 million to six Western states: Arizona, California, Oregon, Washington, Idaho and Utah.

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

NYC

The realities of the current situation with the Office of the Mayor of the City of New York and his merry band of long time “associates are in full view. He stood as a lonely and forlorn figure at this week’s Tuesday with Eric, alone at the podium. He didn’t get to enter to his walkup music. Yes, the Mayor had walkup music as if he was coming to bat at Yankee Stadium. It reflects the reality that since our last issue, the Governor has reminded Mr. Adams of her power to remove him.

It is clear that his survival depends on a reshuffle at City Hall. Two of his most influential and long-time associates left and it’s clear that hanging on is not a strategy. It would not be a surprise to see additional administration insiders depart sooner rather than later. The implications that more charges could be filed will likely generate some more reflection and action.

We still remain sanguine about the City’s willingness and ability to pay debt service. From the point of view of consumers of public services, the next 15 months will be rocky at best. There are significant vacancies in the city’s civil service ranks with many spots vacated in the face of the pressure from the City to return to work quickly during the pandemic. Many of the job “cuts” announced by the City over recent financial plans are actually just acknowledgement that many of those positions have become unfillable under current conditions.

Still think the rating is stable?

HOSPITAL CONVERSION

The Lee Health System operates 6 hospitals in Southwest FL, numerous specialty and service centers, and employs over 15,000 people. The healthcare system first opened its doors in 1916 as a community-centered nonprofit. In 1968, Lee Health began operating as an independent special healthcare district created by the State and governed by an elected Board of Directors. Now, the system wants to convert into a private nonprofit healthcare provider.

Moody’s announced that the proposed conversion of Lee Memorial Health System (LMHS) from a governmental unit to a private, nonprofit corporation would not, in and of itself and as of this point in time, result in a reduction, placement on review for possible downgrade or withdrawal of its current rating of A2. Lee Health System, Inc. will the sole remaining member of the Obligated Group under the existing Master Trust Indenture and solely responsible for the repayment of the outstanding bonds. 

Management has desired the change to enable the System to expand its footprint into neighboring counties. Some 20% of patients are from out of the county. This change would for example, allow the system to own and operate physician practices and the like in adjacent counties.

AUTONOMOUS VEHICLES

Cruise, the autonomous driving unit of General Motors, has agreed to pay a $1.5 million penalty for failing to properly report an accident in which one of its self-driving taxis severely injured a pedestrian last year. That accident was largely responsible for Cruise vehicles to be taken out of service in San Francisco. Cruise will also face increased oversight of its activities as it restarts testing of its technology in Phoenix, Houston and Dallas, the regulator, the National Highway Traffic Safety Administration

Waymo continues to offer autonomous rides in San Francisco, Los Angeles and Phoenix. The company is also testing its service with human drivers in Austin, Texas. Zoox, a subsidiary of Amazon, is also testing a self-driving taxi service that uses a car with no steering wheel or driver’s seat. Humans monitor vehicle operations from a remote command center. Cruise has resumed autonomous driving operations in Phoenix and Dallas, but with humans at the wheel who can intervene.

Prior to October 1, New Jersey residents who purchased an electric vehicle did not have to pay state sales tax on that purchase. This week, legislation took effect that reduces that subsidy by half. Now, a sales tax of 3.3125% will be included in the purchase price of the vehicles. The establishes that the state’s full sales tax of 6.625% is to be levied on transactions involving zero-emission vehicles, beginning July 1, 2025.

The NJ Office of Legislative Services estimates that the phaseout of the sales-tax exemption is expected to bring in $75 million in new revenue for the budget’s general fund during the 2025 fiscal year.

HELENE

The hurricane has moved on but the impact is likely to be around for a long time. We’ve been asked what we think the credit impact might be on communities damaged. In terms of debt repayment, we are not concerned in the near term. We see the greater pressure reflecting the role that local and county governments will play in any recovery going forward.

Even under these circumstances, a process needs to be followed. As issuers and overseers of a variety of regulations and procedures, localities and counties will bear the brunt of the demand for services. Managing building on this scale within a limited amount of time will create bottlenecks in the system. Government workers will be torn between their jobs and their need to rebuild and/or relocate.

The storm will also focus attention on transportation, particularly the road and bridge infrastructure. A number of local bridges were not just damaged but destroyed, and floated away In the short term, I-40 and I-26 suffered significant damage and were closed. The barriers to workers and goods moving about to respond are significant. The situation calls out for quick solutions but some of the damage points to longer term issues.

In total, according to data from PowerOutage.us, about 1.3 million electric customers remained without power on Wednesday morning, almost a week after Helene struck Florida as a Category 4 storm. About 500,000 of the outages were in South Carolina; North Carolina and Georgia each had more than 300,000 outages remaining. 

FEMA can spend as much as it needs to on disaster recovery thanks to a provision Congress approved a few days ago and special caveats for emergencies. The stopgap spending bill enacted last week, which keeps the federal government running through Dec. 20, included a provision allowing FEMA to spend money from its Disaster Relief Fund at a faster rate than would have otherwise been allowed. Provisions covering “immediate needs funding” or INF are designed to facilitate recovery. INF restrictions do not affect individual assistance, or public assistance programs that reimburse emergency response work and protective measures carried out by state and local authorities.

The role of insurance is always important in the process of recovery from natural disaster. In dozens of counties in Georgia, North Carolina and South Carolina that were flooded by Helene, less than 1 percent of households have flood insurance through the federal program that sells almost all of the nation’s flood policies. In South Carolina, just 0.5 percent of the 770,000 households in disaster counties have FEMA insurance. In North Carolina, 0.8 percent of households in disaster counties have FEMA insurance.

In Georgia, 8.5 percent of properties in disaster counties have FEMA insurance, though the figure is inflated by a large number of policies in coastal Chatham County, which includes Savannah. Excluding Chatham, 0.7 percent of households in disaster counties have FEMA insurance. In Florida, which has one of the highest rates of FEMA coverage, 24 percent of households in disaster counties are covered.

Arguably, flooding has been a greater destructive force than have wildfires. As more of these events become likely, the more attention will be paid to the issue of flood insurance. The lack of insurance purchases for flooding along with the increased likelihood of more flooding going forward may drive demand for some government insurance program for natural disaster losses. Flood insurance is something the industry has little stomach for especially in light of its recent storm and fire payout experience.

CLIMATE HAVENS

I have always been amused by the notion that climate change could drive migration to areas perceived as cooler and less exposed to things like rising seas. That things would get sufficiently difficult in Florida or North Carolina that millions would seek to relocate from say, Miami to Buffalo. Over the last few years, the strength of that notion has been tested. The storm will only stir more debate. It does remind us of some instances in that time which might rebut the concept.

One of the communities which was often mentioned by supporters of the concept was Buffalo, NY. Its location on a Great Lake was both a positive (supply of fresh water) and a negative (rising lake levels) but the lower average temperatures seemed to tip the balance. And then winter returned to explain why its so hard to live in a climate haven like Buffalo. A couple of moved or delayed Bills playoff games only highlighted extraordinary conditions which can prevail in that climate haven.

In New York, voters approved a ballot item in November, 2022 creating a “right” to a safe environment. They enshrined it in the constitution. It was meant to drive the transition to a green environment. The electric industry and cars were its primary target. Then fast forward to June of 2023 when you couldn’t walk outside up here in the climate haven mountains I live in and one needed a mask just to walk along the road because our neighbors to the north were on fire.

Now, Asheville, NC is being tested as a “climate haven”. The mountainous area and inland location were seen as being shielded from the potential worst impact from storms. The winters weren’t too bad snow wise. It was hundreds of miles from an ocean coastline. It’s easy to underestimate the flood risk in mountain communities (like theirs and mine) but every large storm leads to more “water events” in these areas.

They drive more damage to land which then undermines infrastructure. Roads quickly become unpassable and alternatives limited. Infrastructure for power tends to be more vulnerable and the distances covered make rebuilding that much harder. Water and sewer infrastructure is significantly damaged. Not much of a haven.

NUCLEAR

The Supreme Court agreed to review a ruling by the 5th U.S. Circuit Court of Appeals that found that the Nuclear Regulatory Commission exceeded its authority under federal law in granting a license to a private company to store spent nuclear fuel at a dump in West Texas for 40 years. The outcome of the case will affect plans for a similar facility in New Mexico.

The NRC contends that the states forfeited their right to object to the licensing decisions because they declined to join in the commission’s proceedings. A second issue is whether federal law allows the commission to license temporary storage sites. Texas and environmental groups, unlikely allies, both relied on a 2022 Supreme Court decision that held that Congress must act with specificity when it wants to give an agency the authority to regulate on an issue of major national significance.

On the first issue, two other federal appeals courts, in Denver and Washington, that weighed the same issue ruled for the agency. Only the 5th Circuit allowed the cases to proceed. In its ruling for Texas, the 5th Circuit agreed that what to do with the nation’s nuclear waste is the sort of “major question” that Congress must speak to directly.

HOSPITAL PRESSURES CONTINUE

In the aftermath of the pandemic, demand for hospital services has been negatively impacted. Utilization rates remain behind where they were and this has had the expected impact on revenues. It has put many of these facilities in retrenchment mode regarding staffing. Many of those positions are visible if administrative. Nevertheless, finances remain tight at many facilities. The latest example is in Oklahoma.

Norman Regional Hospital Authority (NRH) is a regional hospital system located in Cleveland County, Oklahoma (south of Oklahoma City) with 387 licensed beds and $566 million of operating revenues. NRH operates as a public trust and operates Norman Regional Hospital, Norman Regional HealthPlex, Norman Regional Moore facility, and recently opened Norman Regional Nine facility, as well as numerous outpatient locations.

This week, Moody’s announced that it had downgraded NRH’s rating to B1 reflecting a material and precipitous decline in liquidity well in excess of projections. Cash and liquidity are king in hospital ratings. A short-term line of credit is currently fully drawn, and ongoing cash flow losses continue. This and an outlook which seems unimproved over the near term keep the credit under review for further downgrade. The line of credit renewal needed to carry the status quo and failure to achieve it will further damage the rating.

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.