Joseph Krist

Publisher

BATTERY FIRE

One of the concerns cited by opponents of the establishment of industrial battery storage facilities is the threat of fires. That fear and the inability of the industry to address concerns have stopped a variety of battery storage facilities around the country. While much attention is being focused on the California wildfires, another event in Monterey County is providing unwanted attention on the risks of battery storage.

A massive blaze that began a week ago forced the evacuation of 1,200 residents before it burned itself out. The fire at the plant, a 300-megawatt lithium storage facility, destroyed most of the building and its contents, according to county fire officials. The storage facility is a part of a natural gas-powered electricity plant operated by Vistra Energy, a Texas company. The facility also has a battery storage station owned by PG&E.

The fire raised concerns about the toxic impact of chemicals released during the fire on air, water and soil in the area of the facility. It will certainly embolden those with concerns over the siting of battery facilities. This is the largest such fire event associated with battery facilities. It will be important to conduct a thorough transparent investigation. The industry needs public support for its efforts so the circumstances need to be understood and realistic remedies must be offered.

The first bill on the subject has been offered in the CA Legislature. The Battery Energy Safety & Accountability Act, or AB 303, will remove battery energy storage facilities from the California Energy Commission’s opt-in certification program, and return the power to local communities on whether to accept new battery plants. AB 303 purports to “establish reasonable limitations on where battery energy storage facilities can be located,”. The limitations include requiring a 3,200-foot setback from sensitive places like residences, schools and hospitals.  

The California Public Utilities Commission will soon vote on establishing new standards for maintaining and operating battery energy storage facilities. In the San Diego area, the most recent fire occurred September 5 in Escondido at San Diego Gas & Electric’s 30-megawatt, 120 megawatt hours facility. That led to the temporary evacuation of about 500 nearby businesses. Last May, a fire broke out in Otay Mesa at the 250-megawatt Gateway Energy Storage facility, operated by LS Power and its subsidiary, Rev Renewables. Fire officials said the batteries kept re-igniting and it took nearly 17 days before the last fire-fighting and air monitoring crews left the facility.

WILDFIRE INSURANCE

The FAIR Plan said mid-month that it has received 3,600 claims so far and estimated that it covers 22% of the structures in the Palisades fire, representing potential exposure of more than $4 billion. Meanwhile, about 12% of the structures in the Eaton fire are covered by FAIR, representing potential exposure of more than $775 million. FAIR said actual claims following a fire have historically translated to about 31% of the total exposure in an area, on average.

FAIR also said it can access reinsurance once the first $900 million in claims are paid. Once that threshold is reached, reinsurance is fully available for the next $350 million of claims payments, subject to certain conditions. FAIR said it hasn’t yet asked California’s insurance commissioner to levy an assessment on insurers. This would be the ultimate source of funding for FAIR as is the case with other catastrophe bond programs across the country.

As the situation in Los Angeles County unfolds, the realities of individuals insurance situations become clearer. One of those involves the fact that many policies do not cover enough to “rebuild” a residence. That primarily reflects the fact that the cost of building materials has never fully come back down after the inflation of the pandemic. FAIR caps its residential policy limits at $3 million. For many insured, that would not be enough to “rebuild” in the Southern California market.

CHAOS AND CREDIT

This may be one of the more challenging budget seasons faced by state and local governments in many years. The potential economic impact of efforts to slash the number of federal employees will cause local issues. The complete chaos around the effort to withhold loans and grants one day and the restoration of those loan and grant agreements cast great uncertainty over the true availability of those monies.

In addition, it is clear that Medicaid is a prime target for cuts. The online portal through which state Medicaid departments receive federal funding stopped working. That halted the processing of claims and billing for services provided through the program. The outage naturally raised suspicions that it was intentional. Many states receive a large infusion of funds at the start of every month. 

The states received a warning that the system was taking “additional measures” that could cause delays because of “executive orders regarding potentially unallowable grant payments.” It’s a symptom of where it is believed that the current Administration wants to take Medicaid. A striped down, limited system with work requirements for all recipients seems to be where they are headed.

It isn’t just the impact on state budgets directly from Medicaid. Cutbacks and restrictions on the program would obviously impact hospital credits. Reduced reimbursements would ultimately lead to higher state funding levels to support “charity care”. This was something that the ACA specifically sought to address with success. Reimbursements on an interruptible basis for a lower level of payment will damage hospital liquidity which is a key ratings driver.

RHETORIC VERSUS REALITY

The issue of subway safety in NYC has ben front and center over the last year. One of the solutions involves increasing the number of uniformed police officers on the trains and platforms. As part of the 2025 State of the State Address, Governor Hochul announced a subway policing initiative to increase police patrols on subway platforms and trains in New York City. If passed in the State budget, every overnight subway train will have two New York Police Department (NYPD) officers onboard, along with additional officers stationed across the City’s subway platforms.

There is a cost to all of this and that is where an unexpected layer of uncertainty materializes. The NYC Independent Budget Office estimates that the cost, using citywide payroll data and information reported by the Hochul administration, is between $61 million and $159 million, assuming all shifts are paid at overnight overtime rates. The Hochul administration’s $154 million projection is at the high end of the range.

The Governor proposed that New York State and New York City will split the estimated $154 million overall cost of deployment. If approved, the State would pay half ($77 million) and the City would pay the other half. New York City is expected to cover the cost of the program until the State passes their final budget and can reimburse the City. The final cost depends on the mix of officers and their ranks which has a serious impact on the total actual cost as pay rates could vary by as much as two or three times depending on the rank of the officers deployed.

IDEOLOGY AND KANSAS SCHOOL DEBT

Voters in Greeley County, KS voted to approve a $4.6 million bond issue for Greeley County public schools in 2024. The 25 year bond was meant to finance refurbishment of school facilities such as a gymnasium. That approval was overturned by the Attorney General of Kansas, the renowned ideologue Kris Kobach. He said the election didn’t comply with a state law requiring the public to have been notified of the May vote through notices on a county website.

The attorney general’s office determined the county clerk’s “non-compliance with the website notification” amounted to a failure to follow state law. Two problems: the County did not have a website at the time of the election. It relied on three months of notices in local papers, the traditional way of notifying voters. In addition, the law cited as the basis for the objections by the AG did not directly mandate that each county have a website.

Now, the legislature is considering Senate Bill 2, introduced in the 2025 legislative session for the purpose of approving passage of the school bond. That would permit the district to issue bonds to finance construction of a gymnasium, locker room and playground compliant with the federal Americans with Disabilities Act. No complaints were filed at the state or local levels about the bond election. There is along history of acceptance of bond approvals that have failed to fully comply with vote requirements in Kansas.

CHICAGO PUBLIC SCHOOLS

The Civic Federation has released its analysis of the Chicago Public Schools (CPS) FY2025 proposed budget total of $9.9 billion. The Federation says that it presents a temporary solution to a long-term structural financial problem. The plan as presented manages to close a $505 million budget deficit through a series of strategies, including operational reductions and efficiencies, without resorting to irresponsible fiscal practices like issuing debt to fund operations or depleting reserves. 

The Johnson Administration suggested that CPS borrow up to $300 million in long-term debt financing to cover the costs of the contract and the proposed pension reimbursement. The Federation rightly points out that the City’s proposal would increase CPS’ daunting debt and increase the likelihood of a credit rating downgrade, thereby increasing borrowing costs and undoing much of the fiscal progress the District has made over the past several years to get back to investment-grade status. 

Trouble also lurks ahead according to the Federation. The District projects future budget deficits throughout the next five fiscal years upwards of a half-billion dollars before accounting for additional salary and personnel costs, which signals even larger structural deficits ahead. Assuming 4% raises for teachers and principals, as well as a $175 million contribution from CPS to the City’s pension fund for municipal employees, the FY2026 deficit could increase to $933 million. 

PUBLIC POWER IN TUSCON?

The Tucson city council heard an update from a study to analyze the financial feasibility of establishing either a Tucson Public Power Utility or a Community Choice Aggregation Program (CCA). A Public Power Utility would own and operate the electric distribution system within the City and provide power supply to residents and businesses. A CCA program would only provide the power supply portion of electric service while TEP would continue to provide delivery and transmission services.

For reference, based on current TEP residential rates, for every dollar charged 30 cents covers delivery services (distribution and transmission), and 70 cents is for power supply. TEP rates have increased at a rate of 3.4% annually since 2012. More recently, however, retail rates have increased by approximately 7.6% per year since between 2020 and 2023.

The study estimates the total distribution system book value at $1.5 billion. The City would not need to purchase the entire system. Assuming a simple cost allocation based on customers and usage characteristics, the City’s share of this plant is estimated at $820 million (book value). There is also some $575 million in general plant assets. The City would be acquiring a share of those assets as well. The Public Power Utility will be deemed feasible if costs can be met through rates that are equal to or lower than forecast TEP rates.

CALIFORNIA WATER OUTLOOK

The Department of Water Resources announced that its State Water Project would likely be able to allocate 20 percent of requested supplies, up from 15 percent at the end of December and just 5 percent earlier that month. Releases from the State Water Project come from the Sacramento-San Joaquin Delta (the “Bay-Delta”). The decision comes as the President has been pushing for more water to be released to Southern California from that source.

The water began flowing after a three day maintenance period. The President claims that “the military” was sent to increase water supplies. The reality is that Los Angeles actually gets an estimated 38 percent of drinking water from the Los Angeles Aqueduct. Another 9 percent of the city’s supply came from local groundwater and 2 percent from recycled wastewater, with 51 percent supplied by the Metropolitan Water District of Southern California. Just 30 percent of Metropolitan’s water originated in the northern part of the state, while 20 percent came from the Colorado River and 50 percent from a combination of other sources.

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

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.

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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.