Joseph Krist

Publisher

NEW YORK’S MUNICIPAL WORKFORCE WOES

Recently, much attention has rightfully been focused on the potential impact of the management upheaval in the New York City government. The lack of permanent commissioners at the police and Fire Department are the best examples of the knock on effects of the Mayor’s (and his team’s) ongoing legal troubles. Before that however, there were real issues with the City’s ability to attract and maintain workers to fill the career positions that are essential components of any effective bureaucracy.

Here’s one example of the impact of a hollowed out professional workforce. The City provides multiple benefits to low-income New Yorkers, including Supplemental Nutrition Assistance Program (SNAP) food stamps and Cash Assistance (CA). CA consists of two programs, Family Assistance (FA) and Safety Net Assistance (SN). The Federal and State governments determine the program requirements, and it is up to City employees at the Human Resources Administration (HRA) division of the Department of Social Services (DSS) to process applications, determine eligibility, and ensure benefit delivery. SNAP benefits are 100% Federally funded, while CA benefits are a mix of City, Federal, and State dollars.

SNAP and CA applications have significantly increased since 2020, accelerating with the end of pandemic-era safety programs. At the same time, staff levels declined during the pandemic and did not begin to recover until 2023 and 2024. From 2020 to 2022, SNAP and CA cases rose by 13%, while relevant staff levels decreased by 9%. This led to backlogs in the process which put the City out of compliance with federal standards. Timeliness has improved since 2023, but remains a challenge, especially for CA. Almost one third of new CA applications were still overdue as of June 2024, according to the most recent data provided by HRA.

Much of the difficulty with staffing is based on the pandemic and the City’s response to it. The effort to force City workers back to the office before many other facets of the City’s social service infrastructure were open or available was a major negative. It’s a situation which is manifested in the use of cancelled open positions as a way to “tighten the City’s budget belt” when issuing financial plans and updates. Hiring is likely to be a problem throughout the last one year plus of the current administration.

PFAS

The US E.P.A. is moving towards enforcement of standards covering certain chemicals generally known as PFAS and their presence in local water supplies. EPA established legally enforceable levels, called Maximum Contaminant Levels (MCLs), for six PFAS in drinking water. Public water systems must monitor for these PFAS and have three years to complete initial monitoring (by 2027), followed by ongoing compliance monitoring. Water systems must also provide the public with information on the levels of these PFAS in their drinking water beginning in 2027.

Public water systems have five years (by 2029) to implement solutions that reduce these PFAS if monitoring shows that drinking water levels exceed these MCLs. Beginning in five years (2029), public water systems that have PFAS in drinking water which violates one or more of these MCLs must take action to reduce levels of these PFAS in their drinking water and must provide notification to the public of the violation. 

EPA estimates that compliance with this rule is estimated to cost approximately $1.5 billion annually. The Bipartisan Infrastructure Law has dedicated $9 billion to help communities impacted by PFAS pollution in drinking water as well as another $12 billion in Bipartisan Infrastructure Law funding available to communities to make general drinking water improvements, including addressing PFAS chemicals. Estimated costs include water system monitoring, communicating with customers, and – if necessary – installing treatment technologies.

That raises the issue of the potential impact on the finances of local water systems from the rule. The circumstances of where these chemicals came from will dictate the financial burden. If it’s at a current or former military facility does the federal government have the responsibility? What is the cost breakdown between private and public sources of the pollution? It is important to note that “EPA will focus enforcement on parties who significantly contributed to the release of PFAS chemicals into the environment, including parties that have manufactured PFAS or used PFAS in the manufacturing process, federal facilities, and other industrial parties.”

Superfund sites take a long time to be remediated and that reduces the current financial burden for localities. I note that the agency says that “EPA’s enforcement policy…will provide additional clarity on the agency’s intent not to pursue certain parties such as farmers, municipal landfills, water utilities, municipal airports, and local fire departments, where equitable factors do not support seeking CERCLA cleanup or costs.”

I see the program as a manageable long term issue rather than any short-term credit issue. There are already military installations (primarily those with air facilities) across the country which have executed agreements with host localities to share the burden of the cost of compliance. Air facilities through the use of firefighting foam have been huge contributors to the problem. A funding path would allow the costs to be spread across multiple balance sheets.

Public water systems can choose from multiple proven treatment options. In some cases, systems can close contaminated wells or obtain a new uncontaminated source of drinking water. The final rule does not dictate how water systems remove these contaminants.

HOUSING AND TAXES

A bill introduced this year in the  Honolulu City Council is the council’s third attempt since 2018 to pass an empty homes tax. It would consider homes vacant if they’re unoccupied for more than six months per year and includes exemptions for things like being in the military, receiving medical care or if the home is undergoing renovations. The Honolulu tax would be in addition to regular property taxes, and would start at 1% of assessed value before gradually going up to 3% over a few years. The bill’s language restricts how revenue can be used. No more than 5% could be used for administrative costs, and at least half of the revenue must go toward affordable housing and homelessness initiatives. 

The goal is to increase occupancy rates and decrease the number of homes sitting empty. It is a concept that was first adopted in Vancouver, B.C. Like Honolulu, it had a significant stock of properties maintained as second homes and/or investment properties. Vancouver’s tax only exempts homes occupied by residents who are on a lease or sublease. The pending bill in Honolulu has been amended to exempt short-term rental owners. It is a phenomenon that we see in many areas which have significant tourism sectors in their local economies and significant second home bases. The pressure to offer short term rentals is immense.

Opponents also cite the associated costs of enforcement. In Honolulu, the bill’s language restricts how revenue can be used. No more than 5% could be used for administrative costs, and at least half of the revenue must go toward affordable housing and homelessness initiatives. Bill supporters acknowledge those allocations may change during the upcoming budget process.

The primary goal of empty homes taxes is to reduce the number of vacancies. In Vancouver, vacancy rates were roughly halved. Another goal is reducing the number of investment properties. It will take three out of five votes on the Honolulu City Council to enact a tax. The complexity of solving housing shortages nationwide is reflected in situations like this. Some want the revenues to be generally available. Others want funding for housing development.

WINDY CITY WOES

The City of Chicago is facing a host of fiscal problems. The City’s FY2025 Budget Forecast, released in August 2024, estimated a $222.9 million year-end budget shortfall for FY2024, a $982.4 million deficit for FY2025 and over $1.1 billion for FY2026. These deficits equal or exceed those faced during the pandemic, and the City must now fill the $1.2 billion deficit for FY2024 and FY2025 without the benefit of the federal pandemic funding.

The City already allocates approximately 40% of its operating budget to debt and pension payments. Its personnel costs continue to increase while its revenues have not recovered as hoped. Labor negotiations are a major pressure. Chicago Public Schools face a militant teachers union (represented legally by the Mayor before he ran for Mayor) which is trying to negotiate a large pay increase while simultaneously pushing for the Mayor to support keeping schools open by. In part, limiting access to charter schools.

In December 2023 legislation for Tier 2 Chicago firefighters that changed the calculation of final average salary.21 This was promoted as the first part of a “fix” to preemptively address concerns about Tier 2 benefits potentially failing to meet Internal Revenue Service Safe Harbor rules, which requires that government pension plans that do not coordinate with Social Security provide benefits that meet certain minimum standards. Fixes to Tier 2 employee pensions and a new firefighters contract also are pending. (Tier 2 State pension benefits must meet Internal Revenue Service Safe Harbor Rules, which require public workers to receive a retirement benefit from their public pension that is at least equal to the benefit they would receive under Social Security.) This triple threat of labor issues is real.

The Mayor recently announced a hiring freeze across City departments but it is not clear whether this excludes police and fire. Those address what he can control. The FY2025 Chicago Public Schools (CPS) budget had to fill an initial $505 million deficit, which could grow by hundreds of millions more once contract negotiations with the Chicago Teachers Union are finalized this fall.

The Regional Transportation Authority (RTA) has projected a $730 million budget gap beginning in FY2026 once pandemic funds have depleted. These will all pressure the City to provide more funding over a period of massive competition for the same tax base. Tax increases are seen as currently not feasible (MCN 10.14.24). The State has its own fiscal issues to continue dealing with. The projected $538 million budget gap the City faced in FY2024 — the first year ARPA funds were no longer available to be used for revenue replacement — was originally closed in part with $49.5 million additional TIF surplus.

A Civic Federation analysis of the City’s near term fiscal outlook showed worrisome trends. The City’s four pension funds have a total of $35.6 billion in unfunded pension liabilities. All four of the City’s pension funds began to transition to state law-mandated 40-year funding plans in 2016. Since 2022, all four are now funded on an actuarially calculated basis. The FY2024 total required pension contribution was $2.8 billion (which included a $306.6 million supplemental pension payment), comprising 22.9% of total net appropriations. The two largest funds, the Municipal and Police Funds, received the largest portion of annual funding at 77% or nearly $2.2 billion.

In the meantime, the City of Chicago allowed a temporary casino space to open in September 2023. The Mayor’s FY2024 budget estimated that the temporary casino would generate $35 million to contribute toward the total $1.5 billion payment to the Police and Fire pension funds in FY2024. Meeting this projection would require just under $3 million per month in local tax allocations. The casino has only generated $13.1 million in total local tax allocations in the past twelve months and has yet to break $1.5 million in local allocations in a single month.

FEDERAL FOOD FUNDS FOR THE SOUTHEAST

The U.S. Department of Agriculture (USDA) announced that people in Florida recovering from Hurricanes Helene and Milton may be eligible for food assistance through USDA’s Disaster Supplemental Nutrition Assistance Program (D-SNAP). Approximately 407,733 households in 24 Florida counties are estimated to be eligible for this relief. USDA makes this funding available through states in the aftermath of disasters. It even allows people who may not be eligible for SNAP in normal circumstances to participate if they meet specific criteria, including disaster income limits and qualifying disaster-related expenses. 

Earlier this week, USDA announced that residents in parts of Georgia, North Carolina and Tennessee may be eligible for D-SNAP. USDA also announced that five more counties in Georgia —Dodge, McIntosh, Taliaferro, Thomas, and Warren—are now eligible, bringing the total area where D-SNAP is offered to 112 eligible counties and one Tribe across the states impacted by Hurricanes Helene and Milton. 

To be eligible for D-SNAP, a household must live in an identified disaster area, have been affected by the disaster, and meet certain D-SNAP eligibility criteria. Eligible households will receive one month of benefits – equal to the maximum monthly amount for a SNAP household of their size – that they can use to purchase groceries at SNAP-authorized stores or from

CLOSER TO THE EDGE

The National Student Clearinghouse Research Center reports that preliminary data for fall 2024 shows undergraduate enrollment increasing 3 percent. All sectors are seeing growth in the number of undergraduates this fall. There are however, worrying signs. Contrary to overall enrollment growth, freshman enrollment is declining, down 5 percent from this time last fall with public and private nonprofit 4-year institutions seeing the largest declines (-8.5% and -6.5%).

An almost 6 percent drop in the number of 18-year-old freshmen (a proxy for those enrolling immediately after high school graduation) is driving most of the decline. Is this the beginning of the long-awaited demographic cliff facing the higher education sector?

NATIVE AMERICAN GAMING

In California, card rooms have been a long running opportunity for gamblers to play legally. They are restricted to table and card games, hence the name, but slot machines are prohibited. In a number of small communities, card rooms generate significant revenues. Tribal casinos offering the full array of gambling opportunities are seen as direct competitors to the card rooms.

A new California law will now allow the tribes to sue to determine if the card rooms are, as the tribes contend, illegally operating games which are not permitted under California law. The tribes have exclusive rights to run the full array of games including slot machines. The tribes have sought to establish standing to sue over the issues. Without standing, the state courts were unwilling to hear the tribes’ cases.

A law passed in the recent legislative session has changed that. The Tribal Nations Access to Justice Act authorizes a California Indian tribe, under certain conditions, to bring an action solely against licensed California card clubs and third-party proposition player services providers to seek a declaration as to whether a controlled game operated by a licensed California card club and banked by a third-party proposition player services provider constitutes a banking card game that violates state law, including tribal gaming rights under the constitutional provisions described above, and to request injunctive relief. 

That final provision is what will enable the tribal gaming facilities to obtain injunctions against the card room operators. The bill would prohibit a claim for money damages, penalties, or attorney’s fees and would require that actions be filed no later than April 1, 2025. More than 60 tribal casinos operate statewide. It is estimated that there are 80 operating card rooms.

The law has the potential to change the landscape for the municipalities where card rooms are significant economic drivers. There are several of these in Southern California and there are concerns that should the tribes prevail in their legal efforts some of these smaller municipalities would lose employment and tax revenues.

DID ARKANSAS HIT THE MOTHER LOAD?

Researchers at the United States Geological Survey and the Arkansas Department of Energy and Environment estimate that there might be 5.1 million to 19 million tons of lithium in the Smackover Formation brines in southern Arkansas. That would represent 35% to 136% of the current amount of lithium estimated to be in the U.S. The U.S. relies on imports for more than 25% of its lithium.

The USGS estimates there is enough lithium brought to the surface in the oil and brine waste streams in southern Arkansas to cover current estimated U.S.  lithium consumption.  The low-end estimate of 5 million tons of lithium present in Smackover brines is also equivalent to more than nine times the International Energy Agency’s projection of global lithium demand for electric vehicles in 2030. 

LOCAL GAS TAX SUBSTITUTION

The issue of funding for road maintenance paid for by gas taxes continues to evolve. Cities are finding it harder to generate funds from gas taxes as electrification and fuel efficiency make gas tax revenues less dependable. At the state level, the debate over how to replace gas tax revenues has led to new or increased fees for electric car owners.

One city is trying a new model for generating revenues for street maintenance. On November 1, the City of Rock Island. IL will begin adding a flat fee to residents’ water bills to fund local street maintenance. The amount of the fee will vary with the size of the land parcels being charged. All parcels with a gross area of less than 6,000 square feet will pay $7 monthly. Parcels over 6,000 but less than 18,000 square feet will pay $10 monthly. Parcels over 18,000 but less than 43,560 square feet (an acre) will pay $20 monthly. Parcels greater than 43,560 square feet will pay $30 per month.

Currently Rock Island’s local gas tax brings in an estimated $500 K annually. The new fee is projected to generate $2 million in revenue. The new fee comes in the wake of legislation earlier this year that would eliminate an existing 1% state tax on groceries. That goes into effect on January 1, 2026. The law allows counties and municipalities to levy their own 1 percent grocery taxes by passing an ordinance. This eliminates the requirement for a referendum.

It’s an example of how even local government will have to be nimble as the transportation landscape shifts right in front of them. This is especially true as the rollout of a majority electric car market has been uneven. In the meantime, the roads still need to be maintained especially if the much heavier electric vehicles become the norm.

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

AFTER THE STORM

The Biden administration this week has awarded a total of nearly $2 billion in new grants to help harden, expand, and modernize U.S. power grids. The 38 projects that received grants are in 42 states and Washington D.C., and range in scale from $7.5 million to harden a remote grid in Alaska to $160 million for utility Georgia Power to deploy advanced power cables and ​“dynamic line rating” technologies to expand the capacity of its transmission network.

Part of the program are the up-to-$612 million in grid grants President Joe Biden unveiled earlier this week during a visit to storm-ravaged Florida. That funding will flow to utilities in Florida, Georgia, and North Carolina, as well as to the federal Tennessee Valley Authority. The money comes from the third round from the Department of Energy’s Grid Resilience and Innovation Partnerships (GRIP) Program part of the IRA.

DOE has received $50 billion in applications for the GRIP program to date, she noted, but the program has already given out about $7.7 billion of its total $10.5 billion in appropriations.

CARBON  CAPTURE

A leak in a well used to inject carbon dioxide into underground storage wells in Illinois has raised concerns over safety. Monitoring wells monitor the movement of CO2 within injection wells. These wells help ensure that the CO2 is spreading as expected and that there are no signs of leakage. Archer Daniels Midland was the first company in the country to ever put in a CO2 sequestering well. It has been operating for 13 years.

Recently, one of two such wells from ADM was found to be leaking. The timing could not be less favorable. In May, the Illinois Legislature passed the SAFE CCS Act. It makes Illinois just the second state after California to put a moratorium on approval of carbon dioxide pipelines while the Pipeline and Hazardous Materials Safety Administration decides on regulations for such projects. There are currently 22 injection well applications into the Environmental Protection Agency for sites in Illinois that are scheduled to have draft permits issued in the next six months. 

As the process plays out, concerns about issues like eminent domain continue. A recent poll surveyed registered voters across six Midwestern states. It found that eighty-one percent of registered voters say they oppose corporations utilizing eminent domain for private projects. The poll was conducted before the Decatur monitoring wells leaked. Concerns about eminent domain and aquifer protection not being included in the SAFE CCS Act remain an issue. 

As these issues are worked out, the federal government continues to push hard for carbon capture.

CARBON PRODUCTION

Th e US EPA develops an annual report called the Inventory of U.S. Greenhouse Gas Emissions and Sinks (Inventory) that tracks U.S. greenhouse gas emissions and sinks by source, economic sector, and greenhouse gas going back to 1990. Large polluters, which include power plants, belong to a subset known as “large stationary sources” and represent about half of the country’s total emissions. Recently released data for 2023 show where the carbon is coming from.

Power plants cut their emissions by 7.2 percent between 2022 and 2023. The agency said that this sector emitted 1.5 billion metric tons of carbon dioxide in 2023. Power plant emissions are down 33.8 percent since 2011. This sector represents a quarter of the country’s total emissions. in 2023, emissions from oil and gas production and processing increased by 1.4 percent, and are 16.4 percent above where they were in 2016. 

Emissions from other major pollution in industrial and waste sectors fell by 1.1 percent.

HYDROGEN

One year ago, hydrogen hubs were making news as the Biden administration announced financial support for seven of these facilities. They are designed to facilitate the production of hydrogen for fuel without producing carbon dioxide resulting from traditional production methods. These facilities were split between the production of “green” hydrogen and “blue hydrogen”. The federal dollars were designed to allow these projects to attract private capital. Now, a year into the program that private investment is not panning out.

One example is the Appalachian hub known as ARCH2. A study by a regional environmental group documents the difficulties that this facility is facing. In the year since the US Department of Energy awarded ARCH2 up to $925 million in federal grants, four project development partners have exited ARCH2 and five of the 15 originally proposed projects have been scrubbed. 

The result is that the projected economic benefits of the project are much less likely to be realized. The report on ARCH2 finds that it is expected to achieve an emissions reduction of just 2% across the tri-state region and create fewer than 3,000 permanent jobs. The end-uses proposed as part of ARCH2 by project developers – electric generation and home heating – are not currently economically competitive with other sources of fuel for these projects.

Away from the environmental consequences, the economic fallout is a bigger concern for green energy proponents. One of the basic pillars of the Green New Deal is the potential economic benefits of renewable energy as a source of employment and business activity. As proponents rely on the economic potential to offset the potentially disruptive nature of the energy transitions, failures do not auger well for long-term support.

One just has to harken back to the hit that solar energy took under the Obama Administration. Solyndra was a manufacturer of cylindrical panels of copper indium gallium selenide thin film solar cells. It was based in Fremont, California. In 2009, the Obama administration co-signed $535 million in loans to Solyndra. On August 31, 2011, Solyndra announced it was filing for Chapter 11 bankruptcy protection, laying off 1,100 employees, and shutting down all operations and manufacturing.

NUCLEAR

The municipal finance industry will finally take part in the small modular reactor space. After one failed effort by a Utah municipal utility to get involved with an SMR project, a new one has been announced. Amazon has signed three agreements to support the development and deployment of small modular reactors in the United States. The company entered into a deal with Energy Northwest, the successor to the Washington Public Power Supply System to deploy four reactors developed by X-energy that will together generate approximately 320 MW of electricity beginning in the early 2030s.

The first phase of the Energy Northwest agreement would see the deployment of four 80-MW Xe-100 SMRs at the Columbia Generating Station in Richland, Washington. Future phases could add eight more reactors, bringing the site’s total SMR generating capacity to approximately 960 MW.

EPA AND EMISSIONS

The Supreme Court will not stop regulation from the Environmental Protection Agency which requires coal plants in the United States to reduce 90 percent of their greenhouse pollution by 2039, one year earlier than the agency had initially proposed. The E.P.A. also imposed three additional regulations on coal-burning power plants, including stricter limits on emissions of mercury from plants that burn lignite coal, the lowest grade of coal. Lignite limits would impact Texas generators.

The rules also more tightly restrict the seepage of toxic ash from coal plants into water supplies and limit the discharge of wastewater from coal plants. Toxic ash ponds have long been a source of concern. There are about 200 coal-burning power plants still operating, with many concentrated in Pennsylvania, Texas and Indiana.

More than two dozen states challenged the regulation, arguing that the federal government had failed to prove that the techniques used to control emissions would curtail them to the degree that the government is seeking. It is a temporary setback to efforts to fight the rules. West Virginia, said it would continue to contest the rule.

The state’s challenge is currently pending in the U.S. Court of Appeals for the District of Columbia Circuit. In July, a three-judge panel refused a request by the conservative-led states to stop the E.P.A. rule from going into effect while the court case continued, prompting the states and other groups to ask the Supreme Court to step in. Ultimately, this case could end up in the Supreme Court argued over different issues.

THE POST-REFUNDING WORLD

To the extent there has been any focus on the municipal bond market during the Presidential campaign, it has been on the SALT deduction. In Congress, recent disasters have focused attention on the issuance and use of tax-exempt private activity bonds. One thing lost in the era of Trump tax cuts which does not look to be resurrected is advance refunding. That has limited options for issuers in terms of reaping the benefits of favorable interest rate movements. It has renewed interest however in a different technique – the bond tender offer.

The Division of Bond Finance of the State Board of Administration of Florida (the “Division”), on behalf of the State of Florida is offering holders of up to $500 million bonds it selects the chance to sell their bonds and receive a premium for doing so through a tender offer process. This week, marks the midpoint of a tender offer which extends through October 23.

The Tender Offer is being made as part of a plan to reduce the State’s debt. The candidates for purchase were selected to maximize debt service savings through principal reduction and/or avoided future interest cost. The bonds were issued as both general obligation debt for education and transportation and revenue bond debt for the Florida Turnpike. The State has the funding to pay for the tender and it has been legislatively appropriated.

Will the offer succeed? It’s not mandatory so if you wish to keep your targeted bonds, feel free. Estimates from Barclays suggest that some $30 billion of debt will have been the subject of tender offers over this and last year. It seems that only half of the targeted bonds in these offers have been sold back. It will be interesting to see if the timing of the offer relative to the two hurricanes has any impact on the amount of bonds tendered.

PENSIONS

The Equable Institute is a bipartisan nonprofit that works with public retirement system stakeholders to solve complex pension funding challenges with data. It produces annual reports and interim results on state pension funds. It recently reported on results through 3Q24. Equable found that the funded status of public retirement systems in the U.S. has continued improving as of September 30, 2024 — thanks both to strong financial market performance and record high contribution rates.

That’s the good news. Several negative pressures on public plans include steadily growing benefit payments resulting in record high negative cash flow combined with over 1 in 5 public plans contributing less than the interest accumulating on their existing unfunded liabilities. The net result is a nearly 6 percentage point increase to the national average funded status that hovers at a fragile 81%. Why is it fragile? After investment returns of nearly 25% in 2021 the national average funded ratio had improved to 83.9%. Public plans then suffered sharp losses, strong gains again, and some flat performance as well.

Current trends support a more positive few through this year. The national funded ratio average is projected to increase from 75.6% in 2023 to 81.4% in 2024. The total pension funding shortfall will decline to $1.29 trillion in 2024, down from $1.63 trillion in total unfunded liabilities in 2023.

RENEWABLES AND PUERTO RICO

We have long advocated for a reconstruction of the public power grid in Puerto Rico on a localized basis. This reflected the ongoing failure to consistently operate a heavily centralized system in an environment does not support that approach. Now, we see steps being taken to address a portion of the capital need to support a local approach and employ resources at hand such as the sun to power the island.

The U.S. Department of Energy announced this week that it has finalized an $861.3 million loan guarantee for the development of two solar+battery facilities and two standalone battery facilities in Puerto Rico. Project Marahu, will add 200 MW of solar generation and up to 285 MW/1,140 MWh of standalone storage to the island’s grid. The Marahu solar installations are expected to produce approximately 460,000 MWh of energy annually.

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,

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

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.