Joseph Krist

Publisher

OAKLAND – WHAT’S WRONG WITH THIS PICTURE

In late September 2023, the City of Oakland, CA received an AA+ rating from Standard and Poor’s. The City proudly publicized that upgrade and the Mayor took credit for it citing “Oakland’s commitment to prudent financial policies and sound fiscal management,”. The City noted then that “Both credit ratings agencies point to challenges ahead for the City, among them rising costs to provide services and substantial long-term liabilities for retiree pensions and health care. The stable outlook assigned by both credit rating agencies signals their expectations that the City will be able to meet these challenges through continued prudent financial management and ongoing economic growth.”

Some 14 months later, the situation has apparently changed and declined so rapidly that municipal officials are openly talking about Chapter 9. The Mayor was recalled on November 5, as Oakland residents faced significant crime issues, a perceived decline in general services and quality of life. City officials are faced with an apparently surprising budget shortfall of $93 million for the upcoming fiscal year. Almost all this overspending will be by the police and fire departments. OPD is projected to overspend its 2024-2025 budget by $52 million, mostly due to overtime.

On June 26, 2024, the City Council approved Ordinance No. 13801 authorizing the City Administrator to negotiate and enter into a Purchase and Sale Agreement (PSA) with the African American Sports and Entertainment Group (AASEG) for the sale of the City of Oakland’s (City) 50% interest in the Oakland Alameda County Coliseum Complex property (Coliseum Complex). This follows the departure of MLB’s Oakland A’s after 57 years at the Coliseum.

On August 31, 2024, and as amended effective September 23, 2024, the City of Oakland (City) entered into the PSA, also known as the Real Property Sale Agreement, with Oakland Acquisition Company (OAC), an affiliate of AASEG. The Purchase and Sale Agreement between the City and AASEG provides for $110 million to be paid during the City’s fiscal year ending June 30, 2025. The budget passed by City Council includes $63 million in revenue from the sale.  

The problem is that not all of the parties to the transaction are ready to close. The County has not delivered its approval yet and there are questions about the resources behind the AASEG proposal. In the interim, the finance department forecasts an annual structural deficit of $120 million from 2025 to 2027. The Finance Department has strongly advised against incorporating the anticipated Coliseum sale proceeds into future budget measures until those funds have materialized and the transfer of property title has been executed.

All of this led S&P Global Ratings to placed its various ratings on Oakland, Calif.’s outstanding general obligation bonds, non-ad valorem bonds, and lease revenue bonds on CreditWatch with negative implications. “There is at least a one-in-two chance of a lower rating, potentially by multiple notches, in the next 90 days, given the material and rapid deterioration in the city’s financial position, largely driven by overspending, as well as what we view as potential governance weaknesses that could complicate fiscal decision-making under challenging circumstances,”.

CHICAGO

S&P Global Ratings placed its rating on the city of Chicago, Ill.’s outstanding general obligation (GO) debt on CreditWatch with negative implications, while affirming the ‘BBB+’ rating. The move comes after a unanimous rebuke of the Mayor’s proposal to raise property taxes by the City Council. “”The CreditWatch placement reflects our view that there is at least a one-in-two chance of a lower rating in the next 90 days, pending the passage of the city’s fiscal 2025 budget and our assessment of whether its credit quality has deteriorated due to heavy reliance on one-time budget-balancing measures, perpetuating a large outyear structural imbalance,”.

The 50-0 vote on the tax increase was telling. The Mayor has been reluctant to take on the forces driving the budget. The best example is his plan to finance a school system without addressing many of the issues facing CPS. Borrowing for current pension expenses and reliance on a politically untenable tax to cover the cost of maintaining underutilized buildings and staff just doesn’t cut it. It is unrealistic to expect support for a general tax increase designed to support the Mayor’s relationship with the teachers union.

The new fiscal year begins on January 1 so time is fleeting. The Mayor’s latest proposal is getting a frosty reception. The tax on sale of liquor that is 20 percent or more alcohol by the volume would increase to $3.62 cents a gallon, up from $2.68. The tax on beer sales would climb ten cents to 39 cents.  Many of the effected establishments were crushed during the pandemic. It will face heavy opposition. Our expectation is that the City will not have achieved a comprehensive solution through the current budget process. The Mayor is essentially refusing to do what everyone knows he must do and make significant cutbacks. That should make it easy to see a downgrade soon after New Year’s. 

CALIFORNIA WATER

The Biden administration and eight California water agencies have reached an agreement to share in the costs of raising a dam to expand San Luis Reservoir. A plan would raise B.F. Sisk Dam which would enlarge the reservoir near Los Banos to enable it to hold more water during water suppliers in parts of the Bay Area and the San Joaquin Valley.

Local California agencies that have agreed to help fund the project include urban suppliers such as the Santa Clara Valley Water District, which serves San Jose and other Silicon Valley cities; San Benito County Water District; and the city of Tracy. Also participating are agricultural water suppliers such as Westlands Water District, Del Puerto Water District and Pacheco Water District. The federal government has so far contributed $95 million toward the construction.

The dam is now undergoing a retrofit that will raise its crest by 10 feet and fortify the dam for earthquake safety. The Bureau of Reclamation and local agencies have agreed in principle to raise the dam an additional 10 feet to expand the reservoir’s storage capacity, making it a total of 20 feet taller than its original height. The reservoir will gain an additional 130,000 acre-feet of storage space.  

San Luis Reservoir’s more than 2 million acre-feet of storage space is divided between the State Water Project and the federally managed Central Valley Project. It is owned by the federal government and operated by the state’s Department of Water Resources. The Bureau of Reclamation said its endorsement of the project last year was the first approval of a major water storage project in California since 2011.

FLORIDA INSURANCE

Citizens Property Insurance in Florida paid homeowners’ claims less often than any other insurer in the state last year — with over half of claimants receiving nothing. It is an emerging phenomenon as it occurs in the private sector as well for storm-related claims. Overall, Floridians filing a homeowners insurance claimhad the lowest chance in the 50 states of getting a check from their insurer in 2022, with more than a third of claimsgoing unpaid. In 2022, Florida had the second-highest rate of claims paid after 60 days. Only Louisiana had a higher rate.

CARBON CAPTURE

Summit Carbon Solutions said it resubmitted its permit application to South Dakota regulators with what the company described as “major reroutes.” Summit is highlighting reroutes in Spink, Brown, McPherson and Lincoln counties — areas where local siting laws played a role in state regulators’ denial of Summit’s first permit application. 

Many of the new South Dakota legislators who will take office in January are opponents of the project’s potential use of eminent domain. Fourteen incumbent state legislators were defeated in the June primary election, and the incumbents’ support of a controversial pipeline law was a factor in many races. In August, the South Dakota Supreme Court ruled that Summit had not yet proven its status as a “common carrier,” a designation necessary to the eminent domain process. The court sent the lawsuits back to lower courts, where Summit said it would try to prove its case.

SALT RIVER PROJECT

Salt River Project (SRP) and Flatland Storage LLC, a subsidiary of EDP Renewables North America LLC (EDPR NA) have entered into an agreement to provide 200 megawatts (MW) of new energy storage. The Flatland Energy Storage Project will be a 200 MW/800 megawatt-hour battery energy storage system located near Coolidge, Arizona. The project will utilize lithium-ion technology, designed and manufactured in the U.S. by Tesla.

Scheduled to be online in 2025, the facility will have enough capacity to power up to 45,000 homes for four hours during peak electricity demand periods. SRP currently has nearly 1,300 MW of storage and nearly 3,000 megawatts of carbon-free resources online and serving customers. 

AFTER BERKELEY

When a 2023 federal court decision against the City of Berkeley, CA and its ban on the installation of gas infrastructure in new buildings took effect, environmental advocates looked for new ways to achieve that goal. Now some Silicon Valley municipalities are taking another swing at modifying building codes to influence builders not to use natural gas.

They are adopting “policies” rather than outright restrictions. Cupertino chose to implement a policy that requires new buildings to meet rigorous energy efficiency standards by incentivizing all-electric builds, but left room for a mix of electricity and gas. prohibits the installation of nitrogen oxide-emitting equipment such as water heaters, furnaces, ovens, stoves and dryers in new construction or substantial remodels. 

WILL TRUMP TANK THE D.C. ECONOMY?

One thing for sure is that if a second Trump Administration follows through on its promise to eliminate whole swaths of government, the District of Columbia would face real economic difficulties. “A drastic reduction in federal regulations provides sound industrial logic for mass head-count reductions across the federal bureaucracy,”. If they can’t fire people, the plan is to move agencies out of the District.

It is a tactic which was tried on the Bureau of Land Management during the first Trump Administration. The move did drive a significant majority of the D.C. staff to leave the Bureau. It made the move much more difficult and was generally seen as not successful. The first step in the expected process would be an end to remote work for the Federal workforce. The hope would be that this would drive people to give up their jobs. Then we’ll see if the next step is moving agencies.

MEDICAID

After a period of relative calm, the expansion of Medicaid under the ACA will be coming under pressure. No matter who oversees the Medicaid program, the goal will be to reduce eligibility. In the Southeast, several states will be expected to seek authorization to impose work requirements and more stringent record keeping rules on recipients. During the first Trump administration, it was clear that some of the reporting systems especially in areas of low or no internet penetration were really designed to make reporting very difficult.

Should those requirements be imposed (it will be done at the state level but federal approval is needed) the hospital sector will be under pressure. That will drive pressure on states to go back to the days of uncertain indigent care funding. In rural states, it will only increase the pressure on small rural hospital facilities.

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

NOVEMBER 5 AND MUNICIPALS

The election results and initial announcements of cabinet nominees have set everyone about the task of trying to figure out what the impact of the federal elections will be on municipal bonds. There are certainly plenty of tea leaves to examine in the process. One thing making analysis harder in this case is the history of wild inconsistencies in terms of policymaking and implementation we saw in the first Trump administration.

The prime example is the experience with Trump’s infrastructure policies. It’s easy to chuckle and remember that Infrastructure Week never happened. The massive support for public/private partnerships initially expressed quickly withered. The Gateway Tunnel project sat unfunded. In the time between 2016 and now, many significant P3 projects have been completed even in places like New York State. But they were locally driven.

Then there is the STAR deduction. Repealed by the 2017 Tax Act, it reflected real regional animus towards states like NY and CA. Now, the President purports to support reinstatement of the deduction. Considering his election performance in many of the states (even where he lost) it would not seem to be a high priority. Someone should tell that to the President of the NYMTA who is suggesting that congestion fees can be paid out of the lower tax bill due to a reinstated STAR deduction.

What exactly does an RFK Jr. leadership at HHS mean if it actually happens. There is plenty of reason to believe it won’t. Will he try further cuts to Medicaid and Medicare? Will an effort be made to repeal the ACA? Does he continue efforts to defund rural healthcare? What is the outlook for a hospital sector given all of these uncertainties? How will all of this impact health costs for states?

For big city credits with significant migrant related impacts, the outlook is really cloudy. If there is a serious effort to deport illegal migrants, a number of ancillary costs and impacts will be borne by localities. NYC is still taking care of some 60,000 migrants. Chicago is undertaking a plan to close migrant-only housing facilities and house homeless migrants in its existing homeless housing system.

What will the final shape of the expected tax cutting plan look like and how it will impact municipal bonds isn’t clear no matter what anyone tells you. Turnover leads to a need to constantly educate Congress about municipal finance. With different seniority rules, it’s harder to find legislators with enough detailed knowledge to advance the cause. Something on private activity bonds could be positive. I would be surprised if favorable changes to advance refunding rules emerge. I would be happily surprised if SALT was preserved.

One policy change likely to be implemented is the end of the $7500 electric vehicle purchase subsidy. Trump needs to repay fossil fuel industry supporters and his ally. Mr. Musk thinks that the end of the credit will be worse for his competitors. Tesla does not rely heavily on the tax credits as some Tesla models do not qualify for them because of several requirements, including that the vehicles be free of Chinese-made components. According to the International Energy Agency, the global rollout of electric vehicles could reduce oil demand by nearly six million barrels a day by 2030.

CONVENTION CENTER REALITIES

In 2023, Orlando will host the largest number of the top 250 conventions, followed by Chicago, New Orleans, and San Diego. The South/Southeast region will host 38% of the top 250 conventions in 2023, followed by the West/Pacific region at 31%. Within individual states, California will host 17% of the conventions, followed by Texas at 12% and Florida at 8%.

Dallas is spending $3.7 billion to build a new 2.5 million square foot convention center next to an existing one built in 1973. In Orlando, Fla., the Orange County Convention Center will be expanding at a cost of $560 million. The City Council in Los Angeles approved a $1.4 billion plan this year to add nearly 350,000 square feet to the city’s aging convention center as well as to renovate an adjacent plaza. The project is expected to be completed ahead of the 2028 Summer Olympics.

In recent years, Las Vegas, Denver and San Francisco invested hundreds of millions of dollars to expand and update their convention centers. The Javits Center in New York completed a $1.5 billion expansion in 2021. It is far from clear that these facilities achieve anywhere near the financial results initially projected in support of associated debt. The number of large conventions has declined even though available space is growing.

CONGESTION PRICING

Governor Kathy Hochul announced that she was supporting congestion pricing but at a lower charge. The originally planned rollout featured a $15 charge. The Governor proposes a $9 charge. The move is motivated by the fact that the elections are over for now and that it is highly unlikely that a Trump administration would give the required federal approval. The Governor’s goal is to have the charges begin before January 20.

It’s not clear that a $9 fee generates the level of revenues demanded by the authorizing legislation supporting the charge. The idea was to establish a charge at levels sufficient to generate some $1 billion annually. Advocates are already contemplating longer amortization of debt planned to be supported by fee revenues.

State officials believe that they will not need to repeat the lengthy environmental review process because the previous review accounted for a range of tolls from $9 to $23. The state and city must sign an agreement with transportation officials in the Biden administration. The proposed reduction would apply to all types of vehicles including trucks. Press reports indicate that state officials say privately that with a $9 fee instead of $15, more motorists may decide to drive into Manhattan, at least partially offsetting the loss in revenue from the lower toll.

Under a revised plan with a 40 percent toll reduction, cars would pay an off-peak rate of $2.25 from 9 p.m. to 5 a.m. on weekdays, and from 9 p.m. to 9 a.m. on weekends. Trucks would be charged $14.40 or $21.60 during peak hours, depending on size. And passengers would see an extra per-ride surcharge of 75 cents in taxis and $1.50 in Ubers and Lyfts. Passenger cars would also receive a discount for entering the congestion zone through four Manhattan tunnels — the Lincoln, Holland, Hugh L. Carey and Queens-Midtown — during peak hours, with a proposed credit of up to $5 going down to $3.

Advocates for congestion pricing are going along with the new plan. They have already expressed an intent for steadily increasing rates while settling for an initial lower rate. There will be many questions regarding the implementation of the plan although we note that the physical infrastructure is in place. The rollout of the program will likely provide lots of fodder for both sides of the debate surrounding the fees.

We will see if the program actually produces all of the traffic and environmental benefits promised or it becomes just another way for the MTA to get revenues.

PUBLIC TRANSIT CUTS

The San Francisco Municipal Transportation Agency (SFMTA) says it is looking at an annual deficit of $240 million to $320 million starting in 2026. It has been presented with several proposals to align service with available revenues. They are said to include cuts to three cable car lines; the F Market streetcar; cuts to undetermined buses and light rail lines; eliminating some nighttime service; and shutting down buses on hilly routes. Muni ridership reached a post-pandemic high in September, with more than 520,000 weekday boardings. The problem is that’s still under 75% of 2019 levels.

AUSTIN ELECTRIC

Austin Energy said that it will bring a new geothermal project online in 2025, and that it will add five megawatts of carbon-free energy to the local grid. It is a pilot project to be located at an existing Austin Energy generation plant. Scottish company Exceed Energy Inc. partnered with Austin Energy on the project.

TAMPA BAY STADIUM

The pictures released after Hurricane Milton hit Florida’s west coast made this week’s announcement that the Tampa Bay Rays would be unable to play the 2025 season at their current home stadium unsurprising. The fabric roof was completely torn off and substantial damage was incurred inside the stadium. It was estimated that repair of the roof and the other damage would be a $55 million proposition.

So, the Tampa Bay Rays will, for the first time, play home games in Tampa. They will utilize the stadium at the NY Yankees spring training complex in Tampa. Steinbrenner Field is the largest minor-league stadium in Florida, with 11,206 seats and 13 skyboxes. Steinbrenner Field is the largest minor-league stadium in Florida, with 11,206 seats and 13 skyboxes.  The Rays’ average attendance in 2024 was 16,515, among the lowest in MLB.

The irony is that this is the second MLB team to plan to play in a minor league ballpark in 2025. The Rays join the A’s in that category. The A’s will play in Sacramento in a triple-A ballpark.

DALLAS

Moody’s Ratings has revised the City of Dallas, TX’s outlook to negative from stable. It affirmed the A1 issuer rating and A1 general obligation limited tax (GOLT) rating. The negative outlook stems from the approval of Proposition U by the electorate. Proposition U requires the city to maintain a police force of about 4,000 and use at least 50% of new revenue for public safety (including pension contributions).

The city will annually increase its pension contributions starting this fiscal year to the Dallas Police and Fire Pension System (DPFP) and the Employee Retirement Fund (ERF) in order to amortize the unfunded liabilities within 30 years, as mandated by state law. Pension funding has been a continuing credit drag on the City for some time. Proposition U is expected to result in the eventual hiring of many additional officers (a force of 4,000 is mandated by the proposition) and an increase in officer starting salaries, both of which will increase the DPFP liability. 

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

THOUGHTS ON GOVERNANCE

Corruption and/or incompetence and/or ideology are all understood to just be something one is likely to have to deal with when politicians are your clients. Nonetheless, the growing list of local officials under indictment in some of the country’s major cities is concerning. This week, the mayor of Jackson, Miss., a City Council member and the local district attorney have been indicted on federal corruption charges. They join New York Mayor Adams in the ranks of the indicted.

Then there is the recall of Oakland’s district attorney as well as its Mayor. They were voted out by substantial margins. The Mayor had been the subject of a federal investigation. Further south in Orange County, a county legislator had to resign over the misuse of federal COVID related funds.

CLIMATE ON THE BALLOT

Washington State did not approve Initiative Measure No. 2117 which would have repealed the Climate Commitment Act (CCA), one of the most progressive climate policies ever passed by state lawmakers. Over 1.5 million of those voters, or 61.7%, voted “No” while over 972,600, or 38.3%, voted “Yes.” The law requires major polluters to pay for the right to do so by buying “allowances.” One allowance equals 1 metric ton of greenhouse gas pollution. Each year the number of allowances available for purchase drops — with the idea of forcing companies to find ways to cut their emissions.

It was not all good news for the climate on the statewide ballot. Initiative 2066 bars cities and counties from prohibiting, penalizing or discouraging the use of gas for heating, appliances and other equipment in buildings. The measure requires utilities and local governments to provide natural gas to eligible customers and prevents approval of utility rate plans that end or restrict access to natural gas, or make it too costly. It overrides state building and energy code requirements designed to get more electric heat pumps – instead of gas furnaces – installed in newly built houses, apartments and commercial buildings.

In California voters approved Proposition 4 authorizing $10 billion of new debt to fund loans and grants to local governments, Native American tribes, not-for-profit organizations, and businesses. Proceeds will be applied for projects including Drought, Flood, and Water Supply ($3.8 Billion); Forest Health and Wildfire Prevention ($1.5 Billion); Sea-Level Rise and Coastal Areas ($1.2 Billion); Land Conservation and Habitat Restoration ($1.2 Billion;. Energy Infrastructure ($850 Million); Parks ($700 Million); Extreme Heat ($450 Million); Farms and Agriculture ($300 Million).

Ann Arbor voterspassed ballot proposal A with 79% of the vote. It authorizes the creation of a municipally-owned sustainable Energy Utility (SEU) which would supply, generate, transmit, distribute and store electricity from renewable sources. It would run as a compliment to the existing DTE system serving the city. Businesses and households can sign up to receive power through the SEU or they can remain DTE customers. Initially, the SEU is expected to offer services including solar and battery storage, efficiency and weatherization programs, and electrification for homes and businesses. In the future, the city hopes the SEU will include the use of microgrids and geothermal energy.  

CANNABIS ON THE BALLOT

A majority of voters supported an amendment to Florida’s constitution to legalize recreational marijuana. The initiative required a 60% super majority so it failed. In South Dakota, voters rejected the latest effort at legalization of recreational cannabis. Voters authorized legalization in 2020 but a successful legal challenge overrode that vote. voters in North Dakota rejected Measure 5 which would have made it legal for adults 21 years old and older to produce, process, sell and use cannabis in North Dakota while establishing a state body to regulate it.

Nebraska voters approved two measures that legalize medical marijuana and regulate the industry. The measures received overwhelming support — nearly 71% voted in favor of legalization, while almost 67% voted in favor of establishing a commission to regulate the industry. It could all be undone by a pending legal challenge to 3,500 signatures on the petition to get the law on the ballot. A judge in Lancaster County, however, has yet to rule on whether some of those signatures were tainted. If the signatures are rejected, the results of the election could be voided. Nebraska’s election results are set to be certified on Dec. 2.

GOING TO THE SUN

The federal government recently released data on the utilization of solar energy. Nevada was ranked in first place. It sources nearly 29 percent of its electric capacity from utility-scale solar. It is pursuing an aggressive renewable portfolio standard which requires that 34 percent of the electricity supplied by the state’s utilities comes from renewables in 2024, 42 percent in 2027, and 50 percent by 2030. 

California came in second with just over 21 percent solar capacity on its grid. It’s very aggressive requiring 60 percent of the state’s electricity to be sourced from zero-carbon sources by 2030 and 100 percent by 2045. Utah is in third place with solar providing nearly 21 percent of its grid capacity. It is pursuing a non-binding target of 20 percent clean energy by 2025. 

At the other end of the spectrum are three states with less than 1% solar generation.

North Dakota, has no utility-scale solar. New Hampshire is second to last, with just 0.05 percent utility-scale solar. Kansas is third from the bottom at 0.2 percent. 

TRANSIT ON THE BALLOT

Davidson County, TN voters approved a plan to fund bus system, sidewalk and traffic signal improvements with a half-cent sales tax hike. Voters approved the plan 65.5% to 34.5%. Nashville is no longer one of just four of the nation’s 50 largest metro areas that do not have dedicated funding for transit. The tax surcharge will end once the debt issued for the plan is paid off and Nashville’s council affirms the tax is no longer needed.

Seattle voters approved Proposition 1, a property tax measure that will spend $1.55 billion over the next eight years on streets, sidewalks, bridges, transit routes and bikeways. The levy passed with 67% of Tuesday’s count.

CHICAGO PUBLIC SCHOOLS

Voters had a rare opportunity to elect ten individuals to the board of the Chicago Public Schools (CPS). The vote occurred as a part of the process of reconstituting the CPS board under the terms of state legislation which ended 30 years of mayoral control. The 10 individuals elected will constitute one component of its membership with the remaining 11 positions filled by mayoral appointment.

The range of ideologies which now sit in the elected seats includes 4 seats supported by the teachers union while 3 seats went to school choice supporters and 3 presented as unaffiliated. The question now is how many of the appointed seats will be seen as choices of the teachers union. The Mayor must announce his appointments by December 16. This puts the schools issue in the spotlight while the Mayor fights what is shaping up to be a real battle over a proposed tax increase for the City and the need to find revenue for CPS to support its plans to keep underutilized schools open.

The Mayor does have to deal with some limits to his appointment power. According to state law, each school board district is divided in two for the purposes of the 2026 election and beyond. The new winners become incumbents in the subdistrict in which they live. The law spells out that between now and Dec. 16, Johnson must appoint school board members who live in the opposite subdistrict of the winning candidate.

This follows the recent machinations at the board which saw 7 members appointed by the Mayor (now six after social media took down one of them). They could in theory be appointed so long as they lived in the right places. This all leaves the already weak CPS credit likely even weaker. Potentially, there could be a new fight over a CEO, a pension bond issuance, school building closures and/or taxes. None of the potential likely results over the next few months are likely to be positive for the credit.

CARBON CAPTURE VOTE

South Dakota voters rejected a proposal that would have made it harder for South Dakota Counties to regulate the location of carbon pipelines. Referred Law 21 was placed on the ballot by the legislature to try to override voter sentiment against the Summit Carbon Solutions pipeline in the state. The law would have exempted “pipelines for the transmission of carbon dioxide” from property taxation and shield them from future tax increases and additional fees.

Pipeline companies and other “transmission facilities” would have needed only obtain a construction permit from the three Public Utilities Commissioners in Pierre to be exempted from all local zoning rules and regulations that other companies doing business in those jurisdictions must follow, including setbacks and other safety protections. It was designed to overcome opposition to the use of eminent domain for acquisition of right of way.

Summit Carbon Solutions will apply for a permit in South Dakota on November 19th. The Iowa Utility Commission has awarded a permit to Summit so it can use eminent domain to seize property from unwilling land owners and build the pipeline, but construction cannot start until Summit gets regulators’ approval in the South Dakota.

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 finally approaching the finish line of the election. The MCN mothership resides in one of the most contested races for House of Representatives. The volume of mail has been astonishing. And everything you hear about how nasty some of this stuff can be is true. But now that we’re here – there’s only one thing left to do. Vote. Please. Don’t boo. Vote. That goes for either side. T-shirts, lawn signs, all of that does not matter if you don’t vote.

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WESTERN WATER

A federal district court judge ruled that the U.S. Army Corps of Engineers violated the National Environmental Protection Act and the Clean Water Act when it approved expanding a Colorado reservoir. The Gross Reservoir supplies 1.5 million people in the Denver metropolitan area. The Denver water utility has been seeking to expand the reservoir for some twenty years to deal with the ongoing growth in Colorado.

Work on the expansion of the existing dam began in 2022 despite the legal challenge. The project will add 131 feet to the reservoir’s 340-foot dam, allowing it to triple its water storage capacity and hold an additional 72,000 acre-feet of water diverted from the declining Colorado River beginning 2027. The decision cites the fact that the project could result in a “compact call” by the Lower Basin states (CA, NV, AZ). That would force the Upper Basin states (WY, CO, UT, MN) to release more water to satisfy the compact’s requirements.

The Upper Basin does not yet use all of the water it is technically entitled to, as the region doesn’t have large reservoirs as is the case with Lake Mead or Powell. It is still entitled to use an additional 3 million acre feet of water. Denver seeks to use water rights it acquired in 1945 to provide the additional water to the Gross reservoir. Colorado water law provides for water providers to receive a conditional water right from the state’s water court, which allows them to potentially develop that supply in the future. 

The court’s decision does not force Denver Water to stop construction, but orders the utility to meet with plaintiffs to agree on remedies for the project’s environmental impacts and notes that the groups have a right to relief from any damage caused by the construction. It’s not going to stop the dam expansion. It will possibly see Denver Water spend half a billion dollars on a project that will never be fully utilized. That will be on the ratepayers.

PORTS AND ELECTRIFICATION

This week it was announced that the US E.P.A. would award some $3 billion of grants to accelerate the electrification of vehicles at ports throughout the country. In many areas, ports have become associated with pollution from the ships themselves but primarily from the vehicles which serve the port. That includes not just the diesel trucks coming and going from the ports but much of the equipment used in the Port facilities themselves.

Two ports caught our attention. The Ports of L.A. and Long Beach were the recipients of some $412 million. This will be combined with some $225 million of funding from the Ports and the shippers. The Ports have been at the center of efforts to reduce the levels of air pollution around the Ports. The high volumes handled lead to significant truck traffic. The volume of trucks and sometimes long waits by those vehicles contributes to poor air quality.

The second is the Port of Baltimore. As part of the program, the Port will receive $147 million under the program. The collapse of the Key Bridge in March highlighted the important role the Port of Baltimore plays in the export market. The grant was announced in the wake of the settlement of claims against the operator of the freighter which crashed into the bridge. That settlement will provide $102 million towards the cost of cleaning up the debris from the bridge.

Overall, the program will provide grants to 55 ports in 27 states and territories. Ports receiving money include the Port Authority of New York and New Jersey, the Detroit-Wayne County Port Authority, the ports of Savannah and Brunswick, Georgia, as well as Philadelphia, Los Angeles and Oakland, California.

TRI STATE GENERATION

Tri State Generation has been at the center of the effort to address climate change. Its coal based generation fleet has led participating distribution coops it serves to seek out renewable power. It has been in response to customer sentiment. A few of these coops have executed agreements to withdraw from Tri State, requiring contributions from departing utilities. Those coops are replacing capacity with renewables. It has put Tri State under enormous pressure.

Now, the federal government is throwing Tri State a lifeline. The EPA is awarding $2.5 billion in federal loans and grants to retire existing coal plants and acquire new renewable energy resources across four Western states where its member cooperatives provide electricity to a million consumers. It will also fund Tri-State’s purchase of 1,280 megawatts of energy from solar, wind and wind/storage hybrid projects and more than 100 megawatts of standalone energy projects, about half of which will be located in Colorado.

The financing comes from the Department of Agriculture’s $9.7 billion Empowering Rural America (ERA) program for electric cooperatives only, helping co-ops in 23 states transition to green energy. A total of $1.1 billion of ERA money has been announced for Colorado. Tri-State received the largest allocation at $679 million.  United Power, the second-largest co-op in the state which left Tri State, received up to $261 million. CORE Electric Cooperative, the state’s largest co-op, is set to get $225 million. 

TEXAS POWER RULING

A U.S. district court ruled that a Texas law giving incumbent utilities the sole right to build transmission lines connecting to their systems was “invalid” because it violates the U.S. Constitution. Texas utility codes related to the transmission law “are unconstitutional because they violate the dormant Commerce Clause and are therefore invalid and unenforceable, to the extent they grant in-state transmission owners the exclusive right to build or acquire transmission lines in the non-[Electric Reliability Council of Texas] regions of Texas,” the district court said. The dormant Commerce Clause bars states from restricting interstate commerce.

In August 2022, the U.S. Court of Appeals for the Fifth Circuit found that the Texas transmission law likely violates the Commerce Clause. The Texas law was particularly restrictive because it prevented both regional transmission organization-planned and merchant projects. It comes after a few years of significant issues with the transmission of power in Texas. In one of those instances, El Paso which has access to power outside the Texas transmission system was able to continue to provide service when other utilities could not.

CHICAGO BUDGET

Chicago Mayor Brandon Johnson proposed a 4% increase in property tax bills for homeowners in the city as part of his plan to cover current and 2025 budget gaps. It is designed to generate $300 million in new tax revenues, although that could change based on property assessments for 2024. The tax increase proposal comes in the wake of the Mayor’s campaign pledges (last year) of no increases. His proposal includes no cuts in the City’s workforce.

Johnson’s proposed budget includes plans to use tax increment financing money for Chicago Public Schools, $52 million for youth opportunity programs, $40 million for an initiative to address the city’s homeless and migrant situation, and $39 million for a small business support program. Johnson noted that he plans to uphold the city’s pension obligations. The city’s projected budget deficit for FY 2024 is some $222.9 million, which is below previous estimates from earlier in the fiscal year. With the expiration of COVID assistance and other factors considered, the budget deficit for FY 2025 is estimated to be $982.4 million, according to city Budget Director’s office.

CHICAGO SCHOOLS ON THE BALLOT

On Election Day, voters will have their first chance in many years to elect 10 school board members, after the Chicago Teachers Union lobbied for years to end mayoral control of the school system. Enrollment numbers have ticked up in Chicago and other cities over the past two years, but still remain well below prepandemic levels. The resulting aid reductions tied to per pupil attendance have occurred at the same time spending on the schools increased.

We often criticize ideological approaches that involve finances and credits that usually come from red states. In this case, the nation’s most militant teachers union is working with the Mayor to limit changes to the school system. We do not argue here that historic funding for inner city schools was not equitable. It was not and still is not. The idea of having a neighborhood based school system is a valid goal.

But an example illustrates, in a time of clearly limited resources the goals have to be practical.  Frederick Douglass Academy High School is on the city’s West Side.  At its peak, it served more than 500 students in 2007. In the era after the Great Recession, demographic trends were negative in many cities and Chicago was no exception. In the case of the school, local trends have left the school with only 34 enrolled students.

Closing the school and getting the children to a fully staffed functioning school would seem to make sense. Under the union’s plans, these underutilized schools should be fully staffed even in the face of declining enrollments and a continuing nationwide teacher shortage. At the core of the current situation is a disagreement between the Mayor and the CEO of CPS.

The Mayor wants CPS to borrow to fund pension payment requirements. The CEO for CPS wants the City to apply new revenues generated by tax increment financing districts to covering some of the schools’ costs. Some Aldermen are advocating lessening pension funding contributions in lieu of a general property tax increase. There are still opportunities for a reasonable plan to be adopted but the politics of the situation don’t lend themselves to prudent judgments on credit issues.

ELECTION DAY

Several items on ballots across the country have drawn our attention. There are several initiatives to raise or establish taxes to support transportation. In Nashville, another effort is underway to develop and fund a comprehensive transportation system for this ambitious city. It comes after previous efforts to get voter approval for large scale projects failed. This time there is a much different backdrop to the effort to increase sales taxes than was the case in 2018 when a project including light rail was proposed.

Four states have cannabis on the ballot. Florida has an established medical marijuana scheme and now voters will be asked to approve legal recreational marijuana. Adults 21 years old and older would be allowed to purchase marijuana from licensed dispensaries. Florida also has a contentious ballot item regarding reproductive rights. Voters in Nebraska will have a vote on two initiatives which would legalize and regulate the use of medical marijuana in the state. Like Florida, Nebraska actually has two reproductive rights initiatives on its ballot.

North Dakota voters will have their third chance to legalize recreational marijuana. Efforts in 2018 and 2022 failed. South Dakota voters already voted in favor of legalization in 2020 but the head of the state police challenged the initiative in court. The South Dakota Supreme Court ultimately ruled against the measure. The current initiative was drawn up in the light of those concerns. The ballot also includes a proposed constitutional amendment regarding abortion rights.

AUTONOMOUS VEHICLES

This year, five states and Washington, D.C., enacted bills dealing with fully automated vehicles. The new laws in Alabama, Kentucky and South Dakota allow for the operation of fully autonomous vehicles. California’s new law requires manufacturers to continuously monitor every autonomous vehicle on the road and designate a remote human operator to immobilize a vehicle if necessary. The law also allows law enforcement to issue a notice of noncompliance when autonomous vehicles violate local traffic ordinances. California’s new law requires $5 million in insurance for manufacturers testing autonomous vehicles on state roads.

North Carolina’s brings the vehicles under updated dealer regulations for all cars. The new law in Kentucky for fully autonomous vehicles requires owners to file a safety and communication plan that law enforcement can use and to have a minimum of $1 million in liability insurance per vehicle, roughly 10 times higher than the amount for regular personal vehicles. Some of that reflects the fact that much of the impetus behind the law came from the trucking side of the issue. Alabama’s new law requires a minimum of $100,000 in liability insurance for fully autonomous vehicles, about the same as ordinary cars.

COOL PAVEMENT

A little over a year ago, we wrote about a test of “cool pavement”. The technology is a coating which can be applied on asphalt which will reflect sunlight. Untreated asphalt absorbs heat. The idea was to literally cool streets off in an effort to deal with local areas of overheating – “heat islands”. Now, Arizona State University researchers have issued a report on the effectiveness of the process tested.

Pavements in the city of Phoenix that were treated with cooling technology had significantly lower surface temperatures compared with conventional pavement. That heat has to go somewhere and on its way up increases the thermal stress that a person standing on the surface would experience at midday. Like if you’re waiting for a bus or to cross a street you would be buffeted by the heat rising. 

The researchers determined that cool pavement technology is most effective on large parking lots that lack shade or in car-centric cities with hot climates, low cloud cover and wide residential streets. It’s not effective in high-rise downtown areas and shouldn’t be used in areas with high pedestrian traffic like playgrounds, plazas or parks.

So, does it achieve its goal of reducing the impact on people of conditions in urban “heat islands”? Rather than rely on cool pavement to mitigate the effects of heat on pedestrians “Instead, heat exposure mitigation should focus on shading, such as trees and engineered shade, in these areas. “[Cool pavement] cannot replace the benefits of shade trees for pedestrian cooling.”

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