Joseph Krist

Publisher

This is the first MCN of the new year. Publication has been on hiatus as we dealt with some health issues. Now that we’re back there is plenty on the horizon in the muni credit space to make 2025 a most interesting year.

Three of the nation’s largest cities are led by mayors facing political headwinds of their own making. In Chicago, Brandon Johnson is acting in an ideological way that rivals any conservative administration we have criticized over the years. The amount of political capital blown by Mayor Johnson will make it difficult to manage the City’s fiscal problems. This has already been validated by the City’s recent GO downgrade.

In Los Angeles, Mayor Bass finds herself significantly weakened in the wake of the recent wildfires. The mayor’s lack of presence at the outset of the fire’s is well documented. It will make it harder to generate support for the many decisions which will have to be made to facilitate the task of rebuilding. Added to the pressures of hosting a World Cup and a Summer Olympics within the next three years the Mayor will need significant political capital.

And then there is New York. It is difficult to cite a case of a weaker mayor in the last 75 years than is the case with Eric Adams. He is in the midst of proving that he can either fight his case in court as he faces multiple federal corruption charges or he can function as the Mayor. He will have to go hat in hand to a state legislature where his support is limited. The Governor can’t afford to send much more money for migrants to the City. A very contentious budget process will unfold while the Mayor faces trial in April on the charges he faces.

__________________________________________________________________

PUERTO RICO

It is hard to believe that the situation in Puerto Rico saw the new year rung in by a massive blackout. It is a fitting end to a year that saw the battle between debt holders and the Puerto Rico Electric Power Authority (PREPA) drag on. It seems that the near term outlook for a settlement is as bleak as it has been for some time. As for the cause of the latest blackout, “preliminary findings point to a fault on an underground line.”  The blackout caps off another year of weak operations of the utility. A blackout in June left about 350,000 customers without power. In August, 700,000 lost power in the wake of Hurricane Ernesto. On the financial side, the ongoing PREPA bankruptcy drags on through multiple administrations both in San Juan and Washington.

Amidst all of this, the US Department of Energy’s (DOE) Loan Programs Office (LPO) announced that it had closed on a $584.5 million for developer-operator Convergent Energy. The loan will be used to finance a 100MW photovoltaic (PV) system with a 55MW/55MWh battery energy storage system (BESS) in the municipality of Coamo, Puerto Rico. It will also help fund three other standalone BESS projects, a 25MW/100MWh system in Caguas, a 100MW/400MWh system in Peñuelas and a 100MW/400MWh system in Ponce.

Puerto Rico will also provide an early test of Trump administration policies regarding both the Commonwealth in general and energy in particular. Two other finance components for projects in Puerto Rico were not closed before January 20. One is a conditional commitment of US$489.4 million to Pattern, a subsidiary of Pattern Energy Group, for three standalone BESS projects. The loan would be used for the 50MW/200MWh BESS in Arecibo, a 50MW/200MWh project in Santa Isabel and an 80MW/320MWh BESS and integrated 70MWac solar PV system in Arecibo.

Additionally, the LPO’s announcement included a conditional commitment of US$133.6 million to Infinigen, a subsidiary of AL-Infinigen Operating, for a 32.1MWac solar PV project integrated with a 14.45/4.76MWh BESS and a co-located standalone 50MW/200MWh BESS expansion in the municipality of Yabucoa.

Overhanging all of this is the continued bankruptcy proceedings for PREPA. A change in administrations has given some hope that an early resolution of the bankruptcy might result. While we see the new governor as less populist, the reality is that there may be little the Governor can do. PREPA’s customer base remains poor and it’s ability to generate significantly higher revenues is clearly limited.

REEDY CREEK

Florida’s Chief Inspector General ended the investigation into what was then known as the Reedy Creek Improvement District (RCID) before Governor DeSantis reshaped it last year. The restructuring followed a political donnybrook between DeSantis and Disney. RCID was replaced by the Central Florida Tourism Oversight District through legislation which enacted in April 2023. The governor asked the state’s Office of Chief Inspector General to conduct a review of the former RCID board’s actions.

That investigation concluded there was a “blurring of the lines” between The Walt Disney Company and the Reedy Creek Improvement District, or RCID. This is not a surprise. The reality is that one of the attractions of Reedy Creek as a credit was the dominant role in the management and operations in the District it held. It is hard to argue that the resulting entity was not as much a creation of the Legislature as it was of Disney.

CANNABIS IN THE NEW YEAR

Nebraska will join 38 other states that have legal medical marijuana programs, following the approval of a ballot measure voters passed in November. The measure allows Nebraskans to acquire up to five ounces of cannabis if they get a written recommendation from a health care professional. In Kentucky, medical marijuana patients will be able to start purchasing products at dispensaries in the state under a program state legislators passed in 2023. Voters in Dallas approved an initiative that decriminalized possessing up to four ounces of cannabis. The Texas attorney general, Ken Paxton, a Republican, is suing the city in an effort to invalidate the measure.

CALIFORNIA

Voluntary measures by Californians to save water in the Colorado River system are on their way to keeping well over the promised 1.6 million acre-feet of water in the reservoir by 2026. This year, 500,000 acre-feet were saved through Dec. 4. That figure was 700,000 in 2023. On Dec. 26, Lake Mead’s water level was 18.5 feet above what it was two years prior. Since 2002, California users have decreased their Colorado River water usage by 800,000 acre-feet, according to the river board. In Los Angeles, users have cut their usage by 44% over the last 30 years despite a population increase of more than 1 million people.

A new state regulation will require home insurers to offer coverage in high-risk areas. It sets out clear metrics for determining whether an insurer is meeting requirements. Insurers will have to start increasing their coverage by 5% every two years until they hit the equivalent of 85% of their market share. Fror example, if an insurer writes 20 out of every 100 state policies, they’d need to write 17 in a high-risk area.

In return for increasing coverage, the state will let insurance companies pass on the costs of reinsurance to California consumers. California is the only state that doesn’t already allow the cost of reinsurance to be borne by policyholders. The ultimate goal of the new rules is to get homeowners out of the California Fair Access to Insurance Requirements (Fair) plan. (MCN 8.19.24)

TAXES

Indiana will slightly lower its income tax rate to 3% in 2025, down from 3.05% in 2024. Iowa lowered its individual income tax rate to a flat rate of 3.8% starting Jan. 1, down from a top tax rate of 5.7% in 2024. Mississippi reduced its individual income tax rate to 4.4% on Jan. 1, down from 4.7% in 2024. Missouri lowered its state income tax to 4.7% on Jan. 1 from 4.8% in 2024. Nebraska residents will see their income tax rate decline to 5.2% on Jan. 1, down from 5.84% in 2024.

North Carolina, whose legislature is controlled by the Republican Party while its governor is a Democrat, will cut its tax rate to 4.5% on Jan. 1, down from 4.75% in 2024. The individual tax rate is scheduled to lower again in 2026, to 3.99%. South Carolina’s top marginal income tax rate drops from 6.4% to 6.2%. West Virginia residents will see their top tax rate reduced from 5.12% in 2024 to 4.82% on Jan. 1.

There are two outliers. Louisiana is cutting its individual income tax rate to a flat rate of 3% starting Jan. 1, down from a graduated tax with a top rate of 4.25% in 2024. Taxpayers in Louisiana who earn between $30,000 to $40,000 a year, the largest number of taxpayers in any bracket in the state, will see their state taxes reduced by 50%. Here’s the rub. The state’s sales tax will rise to 5% in 2025, up from its prior 4.45% rate, partly to pay for the income tax cut.

Starting on Jan. 1, New Mexico’s individual income tax brackets will be reduced for all residents. Why is New Mexico an outlier? It is the only state with one-party Democratic control to enact a tax cut. The state will now have six brackets, versus five in 2024, with rates ranging from 1.5% to 5.9%. 

INFLATION REDUCTION ACT FUNDING

San Miguel Electric Cooperative (SMECI), located in Christine in Atascosa County, will receive more than $1 billion in funding from the U.S. Department of Agriculture to convert an existing coal-fired generation plant into a solar and battery facility. It operates a mine-mouth lignite-fired power plant. Lignite is cheap but dirty. San Miguel currently produces 391 MW of electricity sold through a Wholesale Power Contract with South Texas Electric Cooperative (STEC), which, in turn, supplies power to its distribution cooperative members who provide retail service to more than 340,000 rural Texas customers. 

Through funding under the Inflation Reduction Act, SMECI will converting its lignite mining and generation operations to a 400 megawatt (MW) solar generation and 200 MW battery storage facility. That power will be sold under a new agreement with STEC. SMECI will use part of the New ERA funding to refinance debt from its stranded lignite infrastructure.  

Qcells closed on a $1.45 billion Energy Department loan guarantee to support its solar panel manufacturing facility in Cartersville, Georgia. The facility will create 1,650 full-time jobs and generate 3.3 GW of solar panels annually, enough to power 500,000 homes. The facility will produce solar components to support the end-to-end supply chain, including ingots, wafers, cells and finished solar panels. The factory will be the largest ingot and wafer plant ever built in the U.S., according to DOE.

NYS STATE BUDGET

Governor Hochul put out her proposal for the FY 2026 budget. It totals some $252 billion – a new record.  New York is expected to end the current fiscal year on March 31, with a surplus of $3.5 billion thanks to higher-than-expected tax collections. Most of that is coming from personal income tax revenue. The state is also increasing its early income tax revenue projections for the next fiscal year by $1.8 billion, bringing the surplus to $5.3 billion.

Those funds will be used to fund the Governor’s “affordability agenda”. Those include a $1 billion tax cut for middle-class New Yorkers, an increase to the child tax credit and $300 to $500 rebate checks. It includes a 4.7% increase to state school aid, which is once again the highest state commitment to schools in state history. It brings the total amount of school aid to a proposed $37.4 billion. It notably maintains a practice known as hold harmless that ensures schools get at least as much aid as the year before.

The state’s future budget gaps have increased to $6.5 billion in the 2027 fiscal year, $9.8 billion the following year and $11 billion in the 2029 fiscal year. The most recent projections from the Division of the Budget put those first two holes at $6.2 billion and $7.1 billion. To address some of the gaps, the governor is proposing to extend the state’s so-called millionaire’s tax on New York’s highest earners to 2032.

Weak spots in the plan include $90.8 billion as the amount of money that the state is expecting to receive in federal funding. With Medicaid being a likely target for federal budget cutters, that number is likely to decrease. Completely missing are any suggestions for how to fund the gap in the Metropolitan Transportation Authority’s 2025-2029 capital plan. Legislative leaders rejected the most recent MTA funding plan. Governor Hochul’s proposal leaves the funding question up to negotiations with the state Legislature.

As for New York City, the amount of new money that the state is giving to New York City to deal with the migrant crisis is zero. Over the past two years, the state has set aside over $4 billion in state dollars to assist the city. The State would like to see all of that money spent before it allocates more.

CLIMATE LITIGATION WIN

The SCOTUS handed a victory to those states and cities suing the fossil fuel industry. The suits were all filed in state courts under state laws. The oil companies contended that because some of their production occurred pursuant to federal leases that their activities were governed by federal rather than state law. That would allow the cases to be consolidated and the federal courts are viewed as a more friendly venue to the industry.

The suit filed by the City of Honolulu was the chosen vehicle for review. The state Supreme Court found that the case argues on deceptive marketing grounds rather than seeking to restrict interstate commerce. Now, the industry will have to defend against nearly 40 such suits. The discovery process in that many cases is likely to provide more interesting information.

CONGESTION PRICING AND DATA

It only took one day for the MTA to show how hard its going to be to make a short-term judgment about congestion pricing. After the first work day of the program, MTA hailed an increase in ridership on a same day year over year basis. Of course, it was higher because the same date in 2024 was on a weekend. It’s one of many potential distortions in data reflecting more than the fee.

Most of Manhattan’s largest employers are bringing the era of work from home to an end. That in and of itself will contribute to positive ridership comparisons. It is also part of a nationwide trend of return to the office. Remote work dropped 8 percent nationally in 2024. Surprisingly, the tech industry is a source of significant return to the office (layoffs will do that). Working from home in San Jose declined 33 percent in 2024, with similar downward trends in San Francisco and Seattle, which showed 24 percent and 29 percent respectively.

PORT AUTHORITY OF NY/NJ

The rush to close loan and funding agreements funded under the TIFIA continued right until the end. The U.S. Department of Transportation’s (DOT’s) Build America Bureau (Bureau) announced it provided a $1.89 billion Transportation Infrastructure Finance and Innovation Act (TIFIA) to the PANY/NJ to modernize its famous Midtown Bus Terminal. The building serves some 65 million travelers and commuters annually.

The new Midtown Bus Terminal will replace the 74-year-old obsolete and deteriorated terminal with a new 2.1-million-square-foot main terminal. The project includes new bus storage and staging facilities which will serve as a temporary terminal during construction and will be paired with new ramps to and from the Lincoln Tunnel, removing busses from city streets. The new building will be built on the site of the existing one.

ROAD USAGE FEES

The Fixing America’s Surface Transportation (FAST) Act2 established the STSFA program to provide grants to States or groups of States to demonstrate user-based alternative revenue mechanisms that employ a user-fee structure to maintain the long-term solvency of the Highway Trust Fund. The State of Washington was one of the first to undertake a test of road usage fees.

The Washington State road usage charge (WA RUC) pilot was launched in January 2018. It involved more than 2,000 drivers from around Washington State and a small pool of drivers from neighboring States. Technical findings showed that the smartphone app tested in the pilot could not reliably determine the specific vehicle being driven and driver/passenger roles because there was no straightforward solution to establish a connection between the smartphone and the vehicle without installing supplemental electronic tags or equipment.

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.