Joseph Krist

Publisher

WESTERN WATER

Back in 2017, the dam at Lake Oroville in California was damaged by water overflows resulting from a wet winter. It resulted in significant repairs to spillways and other infrastructure to handle anticipated water flows. Over the next few years, the lake found itself in a drought and water levels almost became too low to produce hydroelectric power. The Oroville Dam was becoming a virtual barometer of short-term water conditions.

Now those repaired spillways are being tested as the lake has filled and water is being released in a controlled manner. That water primarily serves customers in the north and east of the state and has a significant agricultural demand. Under current conditions, water is being counted on to recharge groundwater aquifers depleted during the drought years to support agriculture.

Compare this situation to that of southern California. There, irrigation interests and agencies like the Metropolitan Water District of Southern California are much more impacted by conditions in the Colorado River basin. The latest measurements of the lake, taken in February, showed its water levels at 1,047 feet, down more than 19 feet from the same time last year and down more than 40 feet from 2021.

March however, did bring unexpected good news. While the weather focus has been on the weather in California and its favorable drought impact, the weather has also been more favorable in the Rockies. Proof of that came this week when Lake Mead’s water level was at 1,045.91, almost 3 feet above the projected level. snowpack has built the Snow Water Equivalent (SWE) stored in the Colorado Rockies to 158% of the average. Lake Powell has risen more than a foot over the last month after dropping to a new all-time low in mid-March.

THE CLIMATE DEBATE IN A NUTSHELL

There may be no bigger fundamental disagreement than that we see in the debate over climate change. The amount of hype and distortion supporting various diverse opinions is overwhelming. While there are serious debates over the science of climate, the issue of climate change has become wrapped up in corporate virtue signaling and greenwashing.

The latest example comes from the Pacific Northwest. When the NHL Seattle Kraken was accepted into the league, they decided to play in a new arena which was designed to be carbon neutral. Much was made of the fact that even the ice the hockey was played on would be made from recycled rain water. Amazon went so far as to pay for the naming rights to the arena. In the midst of real debates over the contribution to climate change that distribution companies like Amazon make to a changing climate, Amazon is paying to have the arena named the Climate Pledge Arena.

Now, the Oregon legislature is considering a bill which would require data centers and crypto miners to use clean energy in big, new facilities. Amazon, Apple, Facebook and Google all operate large data centers in central and eastern Oregon. The companies have as yet not weighed in on their support or opposition to the bill publicly. It has become clear though that in private, Amazon has made significant efforts to oppose the clean energy requirement.

Apple and Facebook have built renewable energy projects to help power their Oregon data centers. Amazon’s data centers in Morrow and Umatilla counties appear to be relying primarily on carbon-burning fuel sources for most of its electricity. It’s not an accident that these facilities are located in eastern Oregon. Climate legislation passed in recent years in Oregon imposes emission limits on areas like Portland. Rural eastern Oregon was exempted from those limits.

The situation provides an example of why the politics and maybe more importantly the culture of the climate movement are so difficult. It is hard to advance the cause of decarbonization if its most prominent “influencers” creates an easy to criticize approach to the whole issue. And in the annual poll of NHL players by its labor union, Climate Pledge Arena did not make the top five of the rankings for best ice in the league.

PARIS PANS SCOOTERS

In the debate around “micro transit”, experiences in Europe and other locales are referenced by proponents of various schemes in the U.S. Whether it be bicycles, congestion pricing, Citibikes or other schemes (especially in New York), European experiences are referenced in the efforts to “nudge” behavior. This was especially true under the Bloomberg administration and continued since. Now, there is some evidence that those references might not be so helpful.

Voters in Paris voted to ban the devices from the streets of the French capital. Supporters of scooters will cite the fact that 100,000 Parisians voted, less than 7.5 percent of those eligible. Supporters of the ban can cite the margin of victory – 89%. Even the mayor of Paris who once championed the deployment of scooters led the campaign to support the ban. According to the mayor, “there will be no more self-service scooters in Paris” come Sept. 1. Privately owned scooters will still be permitted.

The City of Light joins Copenhagen and Montreal as large cities where deployment has been stopped. Copenhagen did allow scooters again but under a much stronger regulatory framework. It’s another example of not as much a rejection of technology but it’s manner of deployment. The same issues which have dogged scooter rental systems across the U.S. – careless riding, use on sidewalks, idle scooters strewn about sidewalks – plagued the Parisian system.

MEDICAID UNWINDING

Towards the end of 2022, Congress passed legislation which allows the continuous enrollment policy requiring that Medicaid recipients retain their coverage to end. That legislation carved out Medicaid from other pandemic related items and provided for states to begin to unwind changes during the pandemic which allowed people to stay on Medicaid without additional qualification checks through the term of the public health emergency declared due to the pandemic.

The carve out allows states to begin the process as of April 1 whereas most other impacted programs have until the end of the public health emergency on May 10. The eligibility verification process is expected to reduce Medicaid enrollment significantly. The legislation mandates that states report data monthly to the Department of Health and Human Services on how many people have been taken off Medicaid. It also allows the department to intervene if a state does not comply with federal requirements. It does not prevent recipients from losing benefits.

Last week we highlighted the importance of Medicaid to the rural hospital sector. Five states — Arizona, Arkansas, Idaho, New Hampshire and South Dakota — were expected to begin their processes of removing people from Medicaid this month. The expectation is that the process could take up to one year in some states. We note that these five states have significant rural health sectors.

The policy change also returns to the spotlight issues which plagued the Medicaid program before the pandemic regarding eligibility. The lack of computer and internet access and issues with literacy have been cited as major hurdles to be overcome by potential recipients.

COMMUTER RAIL GOES PUBLIC IN CHICAGO

Union Pacific announced that the freight railroad would transfer its Chicagoland commuter rail operation to Metra in early 2024. UP operates three commuter lines for Metra and the Burlington Northern Norfolk and Southern (BNSF) operates a fourth. Commuter service in Chicago is unique in that Metra operates some routes and others are operated by freight railroads under contract for Metra. The agency already owns the rolling stock operated by the private companies.

UP is paid $100 million annually to operate the commuter services. It has operated the lines since 1995 through an acquisition. In recent years, UP and Metra have had a contentious relationship. In 2019, UP sued Metra trying to get out of its obligation to provide commuter service. And in 2020, Metra said it was losing millions of dollars a month because UP was not having conductors collect fares. UP will continue to maintain the track and dispatch trains on the three impacted routes. 

WHY MADISON SQUARE GARDEN IS IN THE CROSSHAIRS

These should be heady times for the owner of Madison Square Garden. It’s two sports teams are in the playoffs, it remains a preeminent concert venue and it retains its reputation as “the world’s most famous arena. Nonetheless, the arena is now best known for the legal battles being waged between the Garden and some of its fans. The disputes have brought issues like the use of facial recognition to the forefront. That issue has focused a lot of attention on the tax breaks the Garden receives which are unique among New York’s teams

MSG is a privately-owned commercial property that would pay property taxes to New York City, if not for the property tax exemption granted to it in 1982 under state law. Prior to receiving the tax exemption, the owners of the arena, who also owned the Knicks basketball and Rangers hockey teams, threatened to move the teams to New Jersey if not provided with some form of property tax relief.

Since 1982, MSG has received a full exemption from property tax liability under Article 4, Section 429 of New York State Real Property Tax law. The exemption is contingent upon MSG’s continued use by professional major league hockey and basketball teams for their home games. It is worth some $40 million annually.

In contrast, Yankee Stadium, Citi Field, and Barclays Center were all built on publicly owned land that is exempt from property taxes. The land and the stadiums are leased to team-affiliated limited liability corporations (LLC). The team affiliated LLCs in turn make annual payments in lieu of taxes (PILOTs) to pay down the debt service associated with these bonds. The PILOTs do not enter the city’s general revenue stream as property taxes would. The stadium PILOTS totaled $84 million for Yankee Stadium, $44 million for Citi Field, and $39 million for Barclays Center in 2023.

It becomes more difficult to justify this sort of tax subsidy in the current environment. That has nothing to do with ownerships recent run of truly negative publicity (while he owns two playoff teams). It just screams out from an equity point of view that the current arrangement makes no sense.

NYC – WELL THAT WAS QUICK

It has been clear for some time that the fiscal outlook for NYC has been more guarded than many have let on. There were already questions about how the City would fund the increased costs related to labor settlements (MCN 2.27.23). When the settlements were announced, the City had no clear plan for those costs. Now it looks like the City is going to attempt to do things the old-fashioned way and rely on a significant budget cutback.

Mayor Adams announced that he was requesting the leaders of nearly every city agency, including the Police Department, to cut their budgets by 4 percent for the coming fiscal year, which begins in July. Only the Department of Education and the City University of New York will be subject to smaller cuts of 3 percent. The agencies must come up with a plan in 10 days.

The move comes after it became clear that the NYS budget was not going to significantly reduce the City’s costs associated with the wave of immigrants who have arrived in the City since last year. The budget director estimated that the price of providing services to the arriving migrants would be $4.3 billion through the next fiscal year. It also sets up a real conflict with the City Council who released its own plan that claims to have found an additional $2.7 billion in funding it said the mayor had failed to account for and called for $1.3 billion in new investments.

ARIZONA TRANSPORT CHOICE

In 1985, voters in Maricopa County, AZ approved a sales tax to fund transportation improvements in the County. It’s term was extended again in 2004. Over the years, projects like the City of Phoenix’s light rail system and major road projects were funded through the tax. Now the tax faces a 2025 sunset without a vote. Over the life of the tax, Maricopa County has been at the top of the list of the nation’s fastest growing counties. Regional leaders want to ask voters to extend the tax again but need approval from the state Legislature to hold an election. Two bills that would allow the county to hold the transportation tax election are under consideration in the Legislature. 

Over the same period, the politics of the state have become more ideological and the combination of climate issues and an anti-tax sentiment makes for an uncertain outlook for an extension. One bill would allow 39% of funds to be spent on transit, a small percentage of which could be used to operate and maintain light rail but not extend it. The second would allocate 26% of funds to public transportation and also forbids light rail expansion.

ANOTHER PRIVATE COLLEGE DOWNGRADE

Moody’s Investors Service has downgraded Rider University, NJ’s issuer rating to B2 from Ba3 and revenue bond rating to B2 from Ba2. The university had $111 million of outstanding debt as of fiscal year end 2022. The ratings have been placed under review for possible downgrade.

The downgrade reflects the university’s ongoing multi-year deep deficit of operations and rapidly deteriorating unrestricted liquidity, at just 22 monthly days cash on hand for fiscal 2022. Moody’s estimates that material negative cash flow from operations will continue through at least fiscal 2025, further depleting liquidity.

Starting in fiscal 2024, the university’s main source of liquidity is expected to be a $15 million line of credit; access to $10 million of the total $15 million line is at the bank’s discretion after it reviews the proposed use of funds, adding additional liquidity concern. Furthermore, the line expires on June 15, 2023, with the renewal process underway currently but not assured. Flat enrollment in fall 2023 continues the trend of enrollment which has seen enrollment decline 16% from fall 2018 to fall 2022.

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

TAR HEEL MEDICAID EXPANSION

North Carolina has become the 40^th state to expand Medicaid under the provisions of the Affordable Care Act. Advocates have estimated that expansion could help 600,000 adults. The legislation includes nearly all adults who make less than 133 percent of the federal poverty level. The provisions of the bill will go into effect at the start of 2024, and county social services departments can begin accepting applications from eligible individuals beginning as soon as December of this year.  

The expansion of Medicaid is especially important in states with significant rural populations. Between 2010 and 2021, 136 rural hospitals have closed. The bulk of rural hospital revenue comes from government payers, of which Medicare comprises nearly half. Medicaid expansion is one policy that has helped rural hospitals remain viable. Rural hospitals received COVID-19 relief funds from the Coronavirus Aid, Relief and Economic Security (CARES) Act and the American Rescue Plan Act. With those funding sources running out, the pressure increases on their finances and ability to stay open.

The majority (74%) of rural closures happened in states where Medicaid expansion was not in place or had been in place for less than a year. The holdout states are: Wyoming, Kansas, Texas, Wisconsin, Tennessee, Mississippi, Alabama, Georgia, South Carolina and Florida.

I FOUGHT THE MOUSE AND THE MOUSE WON

We have been clear that the effort by Florida Governor Ron DeSantis to politicize the operations of the former Reedy Creek Improvement District was poor governance. This week, we see that it may just be incompetence on the part of the Governor. While the Governor was busy renaming the district (the Central Florida Tourism Oversight District) and assembling a board to run it, Disney was busy quietly putting together a plan to effectively maintain control over the District for as long as it wanted.

In the final meeting of the Reedy Creek board, a new development agreement between the District and Disney was approved and executed. This agreement cements Disney’s role in the development of the District. One important change is the duration of the agreement. “Shall continue in effect until twenty one (21) years after the death of the last survivor of the descendants of King Charles III, King of England living as of the date of this declaration.” 

That contractual language is known as a “royal lives” clause. The use of this language is not uncommon. It seems to leave the Governor with no ability to interfere in the new development agreement. It also limits the District’s ability to use Disney’s name, Mickey Mouse and other characters without the company’s approval. The board knows its position. In the words of one new director “The board loses, for practical purposes, the majority of its ability to do anything beyond maintain the roads and maintain basic infrastructure,”.

It isn’t as if the royal lives clause is some obscure trick. It is a staple of first year law classes so it should not have been a surprise. Let’s just say that we have a strong view of which dwarf the Governor is after this conclusion to his effort.

NAVAJOS AND THE COLORADO RIVER

The Supreme Court of the United States ruled in a  908 case called Winters that when the government creates an Indian reservation, it accepts an obligation to deliver water to that reservation for agricultural use. The Navajo tribe has limited access to water from a few Colorado River tributaries. It does not have rights to the Colorado directly even though much of the reservation borders the Colorado River’s main stem. The tribe argues that it should have rights to use that water.

The Navajo have been able to get their legal quest to obtain Colorado River water to the Supreme Court. The question before the Supreme Court is whether the United States’ treaties with the Navajo Nation requires it to find more water for the tribe. In 1849 and 1868, the Navajo Nation signed two treaties with the United States which created a reservation that would serve as a “permanent home” for the Navajo so long as the tribe allowed settlers to live on most of its traditional territory, which include much of what is currently New Mexico, Arizona, Utah, and Colorado. 

The case sets up a dispute between the seven states in the Colorado River basin and the tribe. This reflects that the reality is that water from the Colorado is the most likely source of water for the tribe. The Biden administration is taking the side of the states. This based on the concern that giving the Navajo water rights would further increase the difficulty in allotting the Colorado’s diminishing supply.

A decision in favor of the Navajo would allow the tribe to pursue its interests in court as the states continue their process of reallocating water from the Colorado River basin. That process was supposed to be settled in the summer of last year but those negotiations have been contentious and non-productive. Ultimately, a settlement could be imposed. The federal government already would prefer for the states to work things out amongst themselves.

WASHINGTON STATE CAPITAL GAINS TAX

The Washington Supreme Court found the state’s capital gains tax constitutional. The 7-2 ruling was over a contentious bill previously overruled by lower courts and passed into law in 2021. Two opponents challenged the law by saying that the tax was a property tax on income, which violated the privileges and immunities clause of the state constitution and the dormant commerce clause of the U.S. Constitution.

The law provided for a 7% tax on an individual’s long-term capital gains exceeding $250,000 while imposing no tax for individuals with capital gains below the $250,000 threshold. Opponents claimed that the levy based on the amount of gains violated the state constitution’s uniformity requirement. The Court found that “The capital gains tax is a valid excise tax under Washington law. Because it is not a property tax, it is not subject to the uniformity and levy requirements of article VII, sections 1 and 2 of the Washington Constitution,”.

Collections on the tax will proceed as planned. The tax went into effect on Jan. 1, 2022, and the first payments for 2022 are due on or before April 18. The legislation provided for the deposit of the first $500 million of each tax year to a legacy trust account to support K-12 education for early learning and childcare programs. All additional revenue collected after would be donated to a school construction account funding the construction of school facilities.

Washington becomes the only state to levy a capital gains tax without taxing earned income.  

CLIMATE LITIGATION SONG REMAINS THE SAME

The latest jurisdiction to opine on the proper venue for climate litigation against oil companies is the US District Court for the Eighth Circuit. Just as was the case with the Tenth Circuit in Colorado’s case against fossil fuel companies, the Eighth Circuit said that the proper venue for these cases is the state courts. This makes the sixth court to reach that conclusion.

The states have been careful to base their actions on issues of state rather than federal law. In the case, the appeals court was clear that Minnesota’s suit rests solely on state law, including claims of common law fraud and violations of various consumer protection statutes. They were clear that “there is no substitute federal cause of action.” “Minnesota is not the first state or local government to file this type of climate change litigation. Nor is this the first time that the Energy Companies … have made these jurisdictional arguments. But our sister circuits rejected them in each case. …. Today, we join them.”

The companies continue to work to find a way to get the issue before the US Supreme Court. They got there once but the case was sent back to the lower court with instructions as to how wide a range of issues must be considered by the lower court. This decision comes in the wake of those concerns.

WEST VIRGINIA HOSPITAL DOWNGRADE

Cabell Huntington Hospital is a regional referral center with over 300 beds and serves as the primary teaching hospital for the Marshall University Joan C. Edwards School of Medicine in Huntington, WV. It is part of a two-hospital obligated group which includes St. Mary’s Medical Center, a tertiary care hospital with 393 beds. In addition to the hospitals, the system owns various outpatient sites, and is the largest healthcare system in the primary service area. The combined system saw 40,169 inpatient admissions in FY 2022 and over 33,000 surgeries. 

Huntington is the hub of a declining rural area at the connection of WV, KY and OH. Like many hospitals it faced significant strains during the pandemic. When those pressures abated, the system was in a weaker position with a declining balance sheet. Then it experienced a month-long strike of the services workers union in November 2021. Like so many others, the issues of labor costs, general inflation and a slow recovery of utilization levels pressured results.

All of this has resulted in a downgrade of the system’s ratings on its $334 million in outstanding debt at fiscal year-end 2022. Moody’s took their rating to Baa2 from Baa1. It maintained a negative outlook on the new rating. The outlook reflects an expectation that Cabell will face difficulties achieving substantial margin improvements in 2023 given ongoing and significant labor challenges and related costs.

FUNDING A NORTHWEST PASSAGE

Proposals to replace the crucial I-5 bridge between Washington and Oregon all rely on uncertain funding of the $6+ billion cost. Each of the states is committed to fund $1 billion of the cost. To date, the funding for Oregon’s share has been uncertain. Now, the legislature will get to debate and vote on a plan.

The latest proposal would see the State issuing $300 million of bonds backed against Oregon’s general fund and $700 million backed by the highway user tax program used by the Oregon Department of Transportation.  Concerns are around funding that debt service versus the trend of declining revenues. Proponents would be happy to move to a mileage tax and that is part of the debate.

Participation in the state’s mileage tax experiment has been a disappointment. The failure to act in years prior to this plan are coming back to haunt this as well as many other projects. The impact of inflation, supply chain problems and shortages in the workforce – all issues we’ve cited before – accounts for a recent increase in the estimated cost of the project to upwards of $7 billion.

It is a trend that is emerging as infrastructure providers negotiate the application process for federal funding. Various local matching funds requirements must be met at the state and/or level to qualify for funding. In many cases, the situation is competitive so there is a real incentive to solidify commitments to facilitate applications.

RENEWABLES

Last year, the U.S. electric power sector produced 4,090 million megawatt hours (MWh) of electric power. In 2022, generation from renewable sources—wind, solar, hydro, biomass, and geothermal—surpassed coal-fired generation in the electric power sector for the first time. Renewable generation surpassed nuclear generation for the first time in 2021 and continued to provide more electricity than nuclear generation last year.

Natural gas remained the largest source of U.S. electricity generation, increasing from a 37% share of U.S. generation in 2021 to 39% in 2022. The share of coal-fired generation decreased from 23% in 2021 to 20% in 2022 as a number of coal-fired power plants retired and the remaining plants were used less.

The share of nuclear generation decreased from 20% in 2021 to 19% in 2022, following the Palisades nuclear power plant’s retirement in May 2022. The combined wind and solar share of total generation increased from 12% in 2021 to 14% in 2022. Hydropower generation remained unchanged, at 6%, in 2022. The shares for biomass and geothermal sources remained unchanged, at less than 1%.

More wind-generated power was produced in Texas than in any other state last year. Texas accounted for 26% of total U.S. wind generation last year, followed by Iowa (10%) and Oklahoma (9%). One of the largest wind farms in the United States (nearly 1,000-megawatt capacity [MW]) came online in Oklahoma in 2022.

In 2022, California ranked first in utility-scale solar generation, producing 26% of the country’s utility-scale solar electricity. Texas was the second-largest producing state (16%), followed by North Carolina (8%). Several of the largest solar plants built in the United States in the last three years are located in Texas, including the 275 MW Noble solar plant, which started operations in 2022.

NUCLEAR HURDLES

It is becoming clear that the Biden administration supports nuclear power.

Recently, the Department of Energy (DOE) released “roadmaps” to guide industry and policymakers about new energy technologies. Nuclear was one of the three highlighted sources of carbon-free energy. According to DOE, advanced nuclear could become a major contributor to net-zero goals in 2050, accounting for around 200 gigawatts of the firm power capacity necessary to meet the deadline. But the department said that within the next few years, at least one specific nuclear design needs to emerge as a clear leader by winning contracts to build anywhere from five to 10 reactors.

Here’s what DOE says about modular nuclear and its context. Small modular reactors (SMRs) can provide more certainty of hitting a predicted cost target and are likely to play an important role in the early scale-up of nuclear power; scaling the industry toa full 200 GW of new nuclear capacity may require large nuclear reactors as well. DOE also describes where the market is in terms of the development of nuclear right now. While the estimated first of a kind (FOAK) cost of a well-executed nuclear construction project is ~$6,200 per kW, recent nuclear construction projects in the U.S. have had overnight capital costs over $10,000 per kW. Delivering FOAK projects without cost overrun would require investment in extensive upfront planning to ensure the lessons learned from recent nuclear project overruns are incorporated.

Subsequent nuclear projects would be expected to come down the cost curve to ~$3,600 per kW after 10-20 deployments depending on learning rate; this cost reduction would largely be driven by workforce learnings and industrial base scale-up. However, the nuclear industry today is at a commercial stalemate between potential customers and investments in the nuclear industrial base needed for deployment—putting decarbonization goals at risk.

The risk of delay is clear. Rapidly scaling the nuclear industrial base would enable nearer-term decarbonization and increase capital efficiency. If deployment starts by 2030, ramping annual deployment to 13 GW by 2040 would provide 200 GW by 2050; a five-year delay in scaling the industrial base would require 20+ GW per year to achieve the same 200 GW deployment and could result in as much as a 50% increase in the capital required.

EL PASO BALLOT

On May 6, voters in El Paso, TX will be asked to vote on one of the most detailed and complex voter initiatives we have seen in a long time. The initiative will ask voters: Should the City Charter be amended to create a climate policy requiring the City to use all available resources and authority to accomplish three goals: to reduce the City’s contribution to climate change, invest in an environmentally sustainable future, and advance the cause of climate justice.

The initiative would require the City Council to employ a Climate Director, who shall report directly to City Council; create a Climate Department to be directly overseen by the Climate Director; create a nine member climate commission appointed by City Council, create an annual goal for climate jobs and the adoption and implementation of a policy that will transfer current City employees to climate work and provide a preference for contractors who are able to advance the City’s climate policy.

The City would be required to create an annual Solar Power Generation Plan for the City of El Paso and to require the City Manager to establish and maintain policies that encourage the development of rooftop solar power generation capacity within the City of El Paso using existing City facilities and require both new buildings and retrofitted buildings to include solar power generation capacity.

The initiative would establish goals of requiring (1) 80% clean renewable energy by 2030 and (2) 100% clean renewable energy by 2045. The initiative calls for the City of El Paso to employ all available efforts to convert El Paso Electric to municipal ownership; to require the City to undertake all necessary efforts to prepare City infrastructure to withstand extreme weather conditions and ensure uninterrupted provision of basic services and utilities to City residents.

It would require the City to ban the use of City water for fossil fuel industry activities, defined to include El Paso Electric, outside of the city limits and prohibit the City from selling or transferring any water for purposes of fossil fuel industry activities outside of the city limits, or otherwise allow any City water to be used for such purposes. It would prohibit the City from imposing any fees, fines, or other financial or nonfinancial burdens that limit the purchase, use, or generation of renewable energy and nullifying any such fees, fines, or other burdens in existence at the time the charter amendment takes effect.”

The complexity of the initiative is what happens when one tries to legislate through the ballot. Complexity will not necessarily translate into support. It often leads to people either not voting on it or voting no simply because it is so complex.

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

ESG 

Utah’s State Treasurer is now invoking God in his argument against ESG investing. He recently gave a speech in which he opined that

environmental social governance, or ESG is an “outcomes-based” plan, like the biblical “war in Heaven.”  “Outcomes-based governance like the UN’s [Sustainable Development Goals] and ESG opens the door to authoritarianism.” ESG ignores “the very real human cost of boycotting fossil fuels” and that its “coercive tactics” mean that “capital is not going to where it would normally go—to profitable projects in the oil and gas industry.”

So far, the Treasurer has moved about $100 million in state money previously managed by the investment firm BlackRock to different asset managers. (Out of $30 billion under his management.) The Public Treasurers Investment Fund is where the state, cities, counties and other public entities deposit money to earn investment income until it’s needed. There is still $6.8 billion with BlackRock.

It is clearly not a state policy. The Utah Retirement Systems manage some $45 billion of pension funds. URS has the $6.8 billion under BlackRock management, and it has made no changes in its portfolio or asset managers related to ESG. The decision as to where and how to invest is made by the pension fund’s managers who report to a board.

We see that as a good thing in that the Treasurer clearly is not using logic or reason in his approach. It is hard to take someone seriously who opines as a government official that the UN’s Sustainable Development Goals “have widely been touted by UN leaders as the master plan for humanity” and were partially created by the Chinese Communist Party.

MODULAR NUCLEAR

NuScale Power says it will need to reach an 80% subscription level by February 2024, up from the current 25%, for its plans for a small modular reactor, or SMR, plant in Idaho. Failure to reach that level would require NuScale to reimburse Utah Associated Municipal Power Systems, or UAMPS, for costs incurred. NuScale will seek to increase subscriptions from members, power producers yet to join the consortium or others.

GOVERNANCE – VIRGIN ISLANDS POWER

The US Virgin Islands is now moving forward to comply with a ruling on legislation that compels the reorganization of the Virgin Islands Water & Power Authority’s Board of Directors. The law provides an opportunity for a changing of the guard at VIWAPA and is a positive turn for the embattled credit. 

Act 8472 was passed into law unanimously by members of the 34^th Legislature on August 3, 2021 after previously being vetoed by Governor Bryan. The legislation restructures the WAPA board to afford greater independence and establishes professional criteria for those who serve. Following the unanimous override of the veto, the Administration took steps to prevent the implementation of the new law by filing for both a temporary restraining order and a permanent injunction with the Virgin Islands Superior Court.

The VI Supreme Court has now ruled in favor of the law. The ruling on legislation that compels the reorganization of the Virgin Islands Water & Power Authority’s Board of Directors. It is some 16 months after the release of a scathing report on the failures of the existing Board. They include findings that WAPA’s Board and management did not fully exercise due diligence in undertaking the LPG Conversion Project, did not ensure that it mitigated WAPA’s financial risk when they approved the Project without detailed engineering plans.

WAPA’s management did not follow WAPA’s established procedures for contracts and change orders. In addition, WAPA’s contract negotiations lacked transparency. Furthermore, WAPA officials created an apparent conflict of interest when they engaged the professional services of a firm that also worked for Vitol during a similar time period. Finally, WAPA did not achieve its goal to convert the number of power-generating units it needed to burn LPG and did not ensure that its rented units could burn LPG as stipulated in rental agreements.

CLIMATE LITIGATION

Colorado municipalities, like many others across the country, have been litigating against fossil fuel companies over their lack of disclosure of the risks of climate change related to fossil fuel production and use. As has been the case in all of the other litigation, the plaintiffs sue in state courts. In response, the fossil fuel defendants try to have the cases moved to federal court. This is seen as more favorable for the defendants. The process has been for a federal court to deny the transfer to federal court. The federal appeals process plays out and this case now goes to the US Supreme Court.

In this case, the federal government was asked to weigh in on its view of the case as to the appropriate jurisdiction. Now, a brief is submitted in response to the Court’s order inviting the Solicitor General to express the views of the United States. In the view of the United States, the petition for a writ of certiorari should be denied. The brief notes that in similar litigation brought by the City of Baltimore, the court of appeals rejected petitioners’ contention that “there is federal-question jurisdiction over [respondents’] state-law claims because they are governed by federal common law.”

SOLAR AND PROPERTY VALUES

Researchers at the federally sponsored Lawrence Berkeley National Lab have released their findings from a survey in six states which looked at the impact of large-scale solar projects on local property values.

The study used data from CoreLogic on over 1.8 million residential property transactions that occurred within six years before and after a LSPVP was constructed in the five U.S. states with the highest concentration of LSPVPs as measured by number of installations: California (CA), Massachusetts (MA), Minnesota (MN), North Carolina (NC), and New Jersey (NJ), as well as in Connecticut (CT), chosen for its relatively high population density (i.e., urbanicity) near LSPVPs.

In our six-state study area (CA, CT, MA, MN, NC, NJ), we find that homes within 0.5 mi of LSPVP experience an average home price reduction of 1.5% compared to homes 2–4 mi away; statistically significant effects are not measurable over 1 mi from a LSPVP. These effects are only measurable in certain states (MN, NC, and NJ), for LSPVPs constructed on agricultural land, for larger LSPVPs, and for rural homes.

Changes in sales price are not statistically significant for CA, CT, and MA. However, MN, NC, and NJ, show a statistically significant negative effect of 4%–5.6%, more than double that of the average across all states in the base model. statistically significant home value reductions are only observed for homes nearest to LSPVPs that are sited on previously agricultural land.

LSPVPs accounted for over 60% of all new solar capacity in the United States in 2021, and, as the largest resource by capacity in interconnection queues.

MORE POLITICS IN FLORIDA

A group of suburban legislators is pushing legislation which would effectively take control of the Gainesville Regional Utilities out of the hands of local elected officials and place it in the hands of political appointees of the Governor. The proposed legislation comes after proponents of the change were defeated at the ballot box. The legislator behind the current bill also sponsored a 2018 referendum Gainesville for a bill that would put an independent GRU board in place appointed by the City Commission, rather than the governor. The vote failed, with 40% of voters in favor. 

The bill targets GRU specifically, one out of 33 regional electric utilities in the state. GRU is the fifth largest in Florida, serving 93,000 customers. Some 37,000 people served by the city-owned utility can’t vote for Gainesvillecommissioners. GRU rates were the second highest in the state in 2022. It’s not clear exactly how the proposed bill would change things as non-resident customers still won’t be able to vote on city positions.

CARBON PIPELINE TEST

The issue of land acquisition and the potential use of eminent domain to accomplish this for a carbon capture pipeline has emerged as one of the debates in the Iowa legislature. This week the Iowa House passed House File 565. The bill would require CO2 pipelines to obtain 90 percent of the miles of the route through voluntary easements and provide some compensation protections and require CO2 pipelines to obtain 90 percent of the miles of the route through voluntary easements and provide some compensation protections.

The bill also contains a requirement that pipeline projects be paused until the new federal regulations are announced, as well as requirements that pipelines be in line with all local zoning rules and obtain permits in other states before being granted a permit in Iowa. A proposed amendment to remove those provisions failed. The bill has bipartisan support. Conservatives are coalescing around the idea of opposition to eminent domain being used to build for-profit projects for private companies.

The debate included testimony from a federal regulator about carbon pipeline safety. There was something for both sides of the debate. The fact that the history to date provides a favorable statistical view of pipeline safety is evaluated in light of a 2020 CO2 pipeline break in Mississippi which forced evacuations and some hospitalizations. The fact is that federal regulations are still not fully developed. The goal is to produce regulations reflective of the 2020 experience to the rules in two years.

As it stands, support for the bill in the Iowa Senate is unclear and the Governor says she supports the current permitting process.

P3 FOR SCHOOLS AND ENERGY

The Washington State legislature unanimously passed a bill which would authorize the use of public private partnerships to finance and develop projects at schools in the state to increase energy efficiency. Municipalities, including cities, counties, and port districts, may negotiate performance-based contracts with companies that offer water conservation, solid waste reduction, or energy equipment and services under the terms of the bill. Conservation projects may be funded through utility savings, capital funding, grants, or loans.

The state would be authorized to issue COPs backed by pools of school district projects under the bill. This would also create a roll for the state in terms of project scope and compliance requirements. The underlying project contracts will call for a district to contract with a private provider who will develop, own, operate and maintain financed equipment. A traditional sale/leaseback arrangement between the district and the private provider provides for the equipment to return to district ownership at the end of the lease.

PRAIRIE STATES THREAT

It is hard to believe that a project which has been at the center of much of the energy debate in Illinois could escape full scrutiny from the many interest groups involved. That appears to be the case with the Prairie States Generating Station in southern Illinois. In a lawsuit filed this week the Sierra Club alleges that the coal-fired base load plant does not have a permit to operate. The suit follows a financial release from the operating entity from the plant owned by Prairie State Generating Company which operates the plant for its owners – the Illinois Municipal Electric Agency (IMEA) and the Northern Illinois Municipal Power Agency (NIMPA).

Prairie State reported to state regulators that it had during April 2021 exceeded the mercury emissions limits in its construction permit, which reflected federal mercury standards. Prairie State applied for the permit from the Illinois Environmental Protection Agency in 2010, but the state agency never granted nor denied the permit. The plant began operating in June 2012. 

A construction permit under the Clean Air Act to begin operations, but that permit is supposed to be replaced by an operating permit. The construction permit explicitly stated it was only valid for one year after operations began. The lawsuit demands that Prairie State cease operations until an operating permit is in place. The suit unintentionally shines a truly unfavorable light on the obvious weaknesses in the Illinois system of permitting and supervision. It also reflects badly on advocacy groups who “assumed” that there was an operating permit in place.

Illinois’ 2021 energy law allows the plant to keep operating with a mandate to close or capture all carbon emissions by 2045. Almost all other coal plants in Illinois will need to close by 2030. 

SALT RIVER RENEWABLES

The Salt River Project in Arizona has announced that it has acquired 100% of the capacity of a 161 MW wind project in northern Arizona. Construction begins this week and the facility is scheduled to begin delivering energy to SRP customers by early 2024.  The project is being developed by a private developer who will finance construction and operation of the assets. It will include some 50 windmills and as a privately owned facility is projected to generate nearly $10 million in direct tax revenue to the host county over its life.

SRP already obtains power from the 127-MW Dry Lake Wind Power Project, which was the first large-scale wind power facility built in the state. SRP’s renewables push includes wind and solar. SRP will install 2,025 MW of solar by 2025, which is enough to power more than 450,000 average-size homes.

PREPA RULING

The judge presiding over Puerto Rico’s Title III proceedings has found that bondholders  had a “unsecured net revenue claim” against PREPA. The holders had hoped that they would receive a claim on net revenues. Now, the ruling facilitates efforts the get the PR Oversight Board’s plan for those bondholders moving forward. It is a huge disappointment to them as they could receive as little as 0.2% of their principal under current proposals.

It is a carefully crafted and worded statement. In our view, the judge has made a real effort to make a ruling that is specific to this credit. There are references to individual words in the bond resolution that indicate that the ruling is narrow as it relates to revenue bonds in general. Judge Swain found that “the word “pledge” is an “unsecured” promise and did not create a lien, which would require use of the words “lien or charge.”. The Oversight Board takes the position that the PREPA trust agreement only granted a lien on cash in accounts held directly by the trustee.

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

PENNSYLVANIA GAS

The Commonwealth of Pennsylvania has been monitoring production in the natural gas industry which revolves around fracking. Now, the state’s Independent Fiscal Office has released data which shows drillers produced 1.6% less gas in 2022 in Pennsylvania than the year before. This is the first annual drop since data became available in 2012. The decline in production in the final quarter of 2022 was a reduction of 5.1% from the same time a year earlier. This is the largest year over year decline recorded since 2015. 

The average price of natural gas in Pennsylvania was $4.45 per million British thermal units (MMBtu) at the end of 2022. It represents an increase of 12% over prices at the same time the year before. In the recent cycle, the price reached a high of $6.89 per MMBtu earlier last year. The declines continue a trend in evidence since 2019. It has been attributed to a reliance on older less productive wells as new drilling sites have slowed.

Contrast this with the data from other producing states. Texas drillers reported a nearly 6% increase in gas production. Louisiana production grew by 17%. 

TRAINS, PLANES, AND AUTOMOBILES

New York has long stood out for its lack of ready mass transit access to its airports. Yes, the Air Train has run from Queens to Kennedy Airport. It has not proved to be quite the convenient option of choice it was supposed it would become. Nonetheless, the effort to connect La Guardia Airport with the city’s mass transit infrastructure was considered to be a prime interest of then Governor Andrew Cuomo.

The project had drawn much opposition from those living along its proposed route. The construction of the link to JFK was a nightmare for residents as well as travelers seeking to get to Manhattan. That experience was not lost on opponents. Once Governor Cuomo resigned, the project lost its primary champion. Now that loss of support has led to a new course for LaGuardia and access to mass transit.

The Port Authority of New York and New Jersey had received expedited federal approval of its plan to build the AirTrain between La Guardia and Willets Point, where it could have connected with the No. 7 subway line and the Long Island Rail Road.  As cost estimates increased to some $2.4 billion, the Port commissioned outside advisors to look at alternatives.

That panel recommended the Port Authority and the MTA should enhance existing Q70 bus service to the airport and add a dedicated shuttle between La Guardia and the last stop on the N/W subway line in Astoria. That would eliminate much of the cost (buses would be $500 million) and address neighborhood concerns connected with construction.

GIG WORK

The plight of drivers for transportation network companies (TNC) has been in the news on both coasts. Recently, NYC granted approval for drivers to receive raises of some 9%. The approval had been withheld for some time and this was the subject of protests over year-end. The raises come in the aftermath of the pandemic and in the midst of the effort to revive the city’s economy.

A California appeals court ruled that Proposition 22, the ballot measure passed by state voters in 2020 that classified Uber and Lyft drivers as independent contractors rather than as employees, should remain state law. The Service Employees International Union, which, along with several drivers, filed a lawsuit challenging Proposition 22 in early 2021, is expected to appeal the decision to the California Supreme Court.

Initially, drivers won their battle to be classified as employees which would have likely forced the TNC to pay costs that can include drivers’ unemployment insurance, health insurance and business expenses. An initial challenge to the law received a favorable decision in 2021. It is that decision which was appealed in this case. The latest ruling found that requiring collective bargaining to occur through an amendment to the proposition “violates separation of powers principles,” and ordered that clause to be severed from the rest of the ballot measure.

The case is unfolding as challenges to another law governing employee relations moves through the California courts. Proposition 22 gave gig workers limited benefits but exempted them from Assembly Bill 5, a law passed by the California Legislature in 2019 that set a new standard for determining whether workers should be considered employees under the law. If upheld, A.B. 5, is ever applied to gig drivers, the TNC could be found to be improperly treating those drivers as independent contractors rather than as employees.

MILEAGE FEES

Legislation has been introduced in the Oregon Legislature which would impose mileage fees on electric cars. Oregon has been conducting a voluntary pilot program since 2015 which imposes mileage fees. Now, SB 945 would measure the miles traveled, starting from when the car is registered, and charge at a rate that is equivalent to the gas tax owed by drivers getting 30 miles per gallon.

According to the state of Oregon, there are 60,623 registered electric cars in the state as of November 2022. The pilot program has enrolled only 2100 of them.

MARYLAND P3 IN TROUBLE

Maryland’s plan to build a new American Legion Bridge and put toll lanes along part of the Capital Beltway and Interstate 270 faces real questions with the news that Transurban – the leader of the consortium which was to be the state’s partner has withdrawn from the project. Now for the project to move forward, a new private partner must be found.  

Transurban’s announcement comes two weeks before a key performance milestone. The partnership was expected to submit a detailed plan for the project this month.  This also comes within less than 90 days from the change in administrations in Annapolis. It should be noted that Transurban cited challenges including delayed environmental approvals, “a changing political landscape,” and unresolved lawsuits. It also noted Maryland’s decision to pursue alternatives – whether that is in project scope, delivery, or partnership.”

The decision provides an opportunity for a “progressive” administration to see if its equity-based model for providing infrastructure can succeed. This is the second time that a major P3 project has been delayed or ended because of issues arising between the state and its P3 partners. The result has been increased costs and lengthening delays in project provision. It’s not just roads but mass transit too which has found itself in this position in Maryland.

TECHNICAL COLLEGES

Clarkson University is a private research university with a main campus in Potsdam, New York. It had 3,498 full-time equivalent students in fall 2022 and generates $135 million of operating revenue. In spite of its long-established name, it faces many of the same pressures buffeting private colleges nationwide.

Escalating student demand challenges include weak regional demographics and evolving consumer trends. This in spite of the fact that Clarkson is not considered a liberal arts college but rather one with a focus on technology and engineering programs. Nevertheless, weak operating results are projected in fiscal 2023, following a significant operating deficit in fiscal 2022. Current results are impacted by higher discounting and missed enrollment goals.

The University’s name and reputation along with currently sufficient investment assets protect its Baa1 rating from Moody’s. The outlook is negative. That outlook acknowledges the continuing student market challenges that could lead to a continuation of operating deficits beyond fiscal 2023 if the university is unable to adjust expenses to align with enrollment outcomes.

Another school with a technical rather than a liberal arts base is the Illinois Institute of Technology. Illinois Tech is a private, not-for-profit university located in Chicago, IL. In fiscal 2021, Illinois Tech generated operating revenue of approximately $274 million and enrolled 5,885 full-time equivalent (FTE) students as of fall 2022. It’s enrollments actually increased in the last year by some 7%. This has not translated into fiscal stability.

As a result, Moody’s downgraded Illinois Tech’s rating to Ba2. The downgrade to Ba2 is largely driven by rapid escalation of significant operating deficits. Meaningful structural operating deficits are likely to continue through at least fiscal 2024. The university consumed an estimated $62 million of its financial reserves in fiscal 2022 due to a large fiscal 2022 deficit.

What really hurts is the structure of the institution’s debt which includes reliance on working capital lines of credit and includes various covenants. The current trend of financial performance makes a covenant violation a real risk and Moody’s is concerned about a potential for acceleration of debt. “The negative outlook reflects prospects for further credit deterioration if the university is not able to make observable improvement in operating performance and stabilization of unrestricted liquidity beyond fiscal 2023.” 

WESTERN WATER

The California State Water Resources Control Board approved a request by the U.S. Bureau of Reclamation to take more than 600,000 acre-feet from the San Joaquin River and send much of that water flowing to areas where it can spread out, soak into the ground and percolate down to the aquifer beneath the San Joaquin Valley. The areas receiving the water have been reliant on significant drawdowns of underground aquifer water supplies.

Those drawdowns have a significant downside. Declines in water levels that have left families with dry wells in rural areas across the Central Valley. Subsidence has become a larger problem in addition to the lack of water which results from excessive pumping of underground water. The state order allows the federal government to deliver floodwater from the Mendota Pool, a small reservoir on the San Joaquin River, to be used for replenishing groundwater.

The pull of the agriculture industry certainly helped the decision along. Agricultural uses were the source of some of the biggest drawdowns so now those agencies (like irrigation districts) which support it are being favored in the distribution process. With those districts benefitting, those farther down the chain are facing their own choices.

Even with other shortages like those in the Colorado Basin, The Metropolitan Water District of Southern California will relax emergency water restrictions on dozens of communities with a combined population of nearly seven million people in the face of the recent record precipitation. In place since June, the limits required parts of the state, including parts of Los Angeles, to limit outdoor watering to once a week or restrict the volume of water that could be used. 

At the same time, a different approach is being debated in Nevada. The Nevada legislators are considering legislation that will give water managers the authority to restrict the amount of water available for residential use. The proposed bill would make Nevada the first state to allow a water agency, the Southern Nevada Water Authority, to shut off water use for single-family residences that use more than half an acre-foot of water, roughly 163,000 gallons, each year.

The Authority contends that the measure would only impact the top 20% of Las Vegas water users. The average customer in the Las Vegas Valley uses 130,000 gallons per year. Las Vegas depends on the Colorado River for 90% of its water supply. Nevada has already lost about 8% of its Colorado River supply from mandatory cuts by the federal government. Those cuts are occurring as the seven states in the Colorado Basin continue to be unable to agree on allocation formulas going forward.

ROTTEN AT THE CORE

Now that some time has passed from the onset of the pandemic through to its current condition, we are beginning to see data regarding population trends spurred by the pandemic. Efforts have been made to measure the impact we all see on economic activity in the core centers of major U.S. cities. The results of those efforts may give pause to holders of long-term debt from some of the cities studied.

Among the top 15 metropolitan population percentage gainers, 13 were in the South, with two in the West (Phoenix and Las Vegas). Austin had the strongest population growth (3.0%), followed by Raleigh (2.4%), Phoenix (2.4%) and Jacksonville (2.0%). Nine more metros exceeded growth rates of 1.0%: San Antonio (1.7%), Dallas-Fort Worth (1.6%), Charlotte (1.5%), Tampa-St. Petersburg (1.4%). Las Vegas (1.2%), Houston (1.2%), Riverside-San Bernardino (1.2%), Nashville (1.2%), and Oklahoma City (1.1%). Atlanta and Tulsa grew 0.9%. The largest numeric gains were in Dallas-Fort Worth (122,000), Phoenix (100,00) and Houston (85,000).

Now for the bad news. The largest losses were in the San Francisco Bay area, with metro San Francisco losing the most, (-2.6%) and San Jose second (-2.4%). Four more metros lost more than one percent, including New York (-1.8%), Los Angeles (-1.5%), Honolulu (-1.5%) and Chicago (-1.1%). Losses of from -0.8% to -0.4% occurred in Boston, New Orleans, Miami, Pittsburgh, Detroit, Cleveland, Milwaukee. Rochester and Washington.

The picture of NYC especially Manhattan is not favorable. The population and domestic migration losses in New York City were unusually high (337,000 and 383,000) over the 15 months. New York City had 43.5% of the state’s population (8,804,000) in April 2020. Since that time, the city accounted for 92.2% of the New York State’s population loss and 94.3% of its net domestic migration. Among counties with more than 20,000 residents in the nation, New York County (Manhattan) had the largest percentage population loss since the census, at 6.90%. Numerically, Manhattan trailed only Los Angeles County in terms of population loss.

SOUTH CAROLINA DISCLOSURE MESS

The South Carolina legislature is considering abolishing the office of State Comptroller. The elected position effectively makes the officeholder the State’s chief accountant. That puts the position in a difficult spot when a large “accounting error” is spotted. That is where the state finds itself after a review of the office by the State Legislature.

The Senate Finance Constitutional Subcommittee in the state legislature investigated how the state came to be overstating its cash position. The Comptroller admitted that a $12 million coding error in 2007 had gone undetected. When data was not updated in connection with an accounting systems conversion in 2011, it accelerated the impact of the error. The error effectively double counted the amount of money provided by the state to the state university system.

In the ten years after the initial mistake, the cash position was overstated by over $1 billion. Since then, the state has significantly increased funding for its university system and the cash overstatement has grown to $3. 5 billion. The Comptroller’s office admitted the mistake in February. Now, the committee urged South Carolina’s General Assembly to relieve the comptroller of his position “for willful neglect of duty”.

The comptroller general oversees the state’s annual financial report. That includes determining which cash expenditures to include or exclude in the year-end report. This raised a question as to the validity of the state’s financial statements dating back over a decade. It raises significant governance questions. It also leads one to question whether a state with clearly weak financial oversight is truly a Aaa credit.

NON-PROFIT HOSPITALS AND TAXES

There have been efforts over the years to attack the tax-exempt status of many not-for-profit hospitals. As these institutions have grown and consolidated, their operations mirror more and more those of profit-oriented enterprises. As the pandemic unfolded, hospitals were in the news for their aggressive efforts at debt collection related to stays in hospitals due to COVID. These included both secular and religiously sponsored institutions. This focused more attention on the issue of hospitals and their tax-exempt status.

Now, a study from the Kaiser Family Foundation raises issues about that tax exempt status. KFF found that the total estimated value of tax exemption for nonprofit hospitals was nearly $28 billion in 2020. This represented over two-fifths (43%) of net income (i.e., revenues minus expenses) earned by nonprofit facilities in that year. The total estimated value of tax exemption (about $28 billion) exceeded total estimated charity care costs ($16 billion) among nonprofit hospitals in 2020, though charity care represents only a portion of the community benefits reported by these facilities.

It is a long-term trend. The value of tax exemption grew from about $20 billion in 2011 to about $28 billion in 2020, representing a 41 percent increase. What is the tax loss to governments? The estimated value of federal tax-exempt status was $14.5 billion in 2020, which represents about half (52%) of the total value of tax exemption. The total estimated value of state and local tax-exempt status was $13.2 billion in 2020, which represents about half (48%) of the total value of tax exemption. This amount includes the estimated value of not having to pay state or local sales taxes ($5.7 billion), local property taxes ($4.4 billion) or state corporate income taxes ($3.1 billion).

THE EMERGING NATURAL GAS COMPROMISE

We commented two weeks ago about an apparent compromise ordinance to address the issue of natural gas usage.  Denver enacted an ordinance that called for a ban on natural gas for water heaters and furnaces in newly constructed buildings. This was to address strong objections from many cooks (both individuals and restaurants) over banning gas for stoves.

Now, San Francisco is taking a similar approach to the issue. The Bay Area Air Quality Management District (BAAQMD) has voted to adopt new rules that seek to eliminate harmful nitrogen oxide (NOx) emissions from these appliances. The rules will ban the sale of NOx-emitting natural gas water heaters in 2027 and prohibit NOx-emitting furnaces in 2029 and large commercial water heaters in 2031. The Air District regulates stationary sources of air pollution in Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Santa Clara, southwestern Solano and southern Sonoma counties.

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

OHIO CONVICTION

A federal jury convicted former Ohio House Speaker Larry Householder and the ex-chair of the state Republican Party of conspiring in a $60 million bribery scheme to save a pair of power plants then owned by FirstEnergy Corp. with a taxpayer-funded bailout package. He becomes the only speaker expelled from the Legislature and then convicted in a federal corruption case in Ohio history. The case revolved around the passage of House Bill 6 in 2019 which was designed to fund nuclear operations at two generation plants and was seen by many as a blatant bailout of First Energy.

The case had a bit of everything – dark money groups, payments through a web of vehicles, friends wearing wires, plea deals. In July 2021, FirstEnergy admitted it bribed Householder and a state regulator and agreed to pay a fine of $230 million. It is the largest public corruption conviction in Ohio history. Racketeering conspiracy carries with it a maximum term of 20 years.

Everyone knows that the emerging “clean energy economy” involves a titanic struggle between huge and well-funded interests. This crime lays bare the depths to which that struggle can sink.

__________________________________________________________________

AMAZON TAX INCENTIVE REVISITED

The effort by Amazon to receive significant tax incentives from New York City to locate a 25,000 job second headquarters generated heated debate at the time it was being considered. While there were a variety of issues that created hurdles, it was clear that the project would have been a net job producer. When Amazon finally decided to take an offer from Arlington, VA to locate and build there, it seemed like an obvious win for VA and a loss for NYC.

News this week will partially vindicate those in NYC who did not back the deal. Amazon will pause construction of some buildings at the second headquarters it is building in Arlington. Amazon has hired more than 8,000 of the 25,000 employees it projected to add in Arlington and plans in June to formally open the first phase of construction. A second larger phase has now been put on indefinite hold.

It is not unlike any number of corporate decisions regarding office space in the post-pandemic era we see across the country. It is important to remember that many projects falling into that category were planned just prior to the pandemic. The resulting and likely permanent change in office attendance and utilization has produced a glut of supply. Amazon announced last month that it would require workers to work from the office at least three days per week. This coincided with a plan to move 2,000 employees within Seattle to vacate leased space.

DIABLO CANYON EXTENSION

The Nuclear Regulatory Commission announced that it has granted PG&E an exemption that could allow California’s last nuclear power plant to continue running after the expiration of its federal operating licenses. Currently scheduled for closure in 2025, the exemption would allow the plant to operate while the NRC reviews an application for an extension of the operating license.

It is not unusual for a plant to operate while its operating license extension is considered. If a nuclear plant files for a license extension at least five years before the expiration of the existing license, the existing license remains in effect until the NRC’s application review is complete, even if it technically passes the expiration date.  That five-year requirement is what had to be overridden in the process. The company has said it intends to submit an application to extend the plant’s life by the end of this year. 

OIL AND PRIVATE ACTIVITY BONDS

The developers of a rail project designed to transport heavy crude oil products from Utah’s Uinta Basin oil fields to the national railroad network have announced their intention to seek some $2 billion in private activity bond capacity.   Utah’s Seven County Infrastructure Coalition was formed nearly nine years ago for the express purpose of supporting an oil export project.  The timing of the announcement, in the shadow of the East Palestine train wreck has drawn attention to the project and the material it will transport.

The Uinta Basin’s yellow and black waxy crude is laden with paraffin and notoriously difficult to move.  The rail cars would have to heat the material while it moves. Opposition existed prior to recent developments which will likely increase opposition now. The project would extend some 88 miles and cross into Colorado along the Colorado River.  It received approval in 2020 from the Trump administration.

The oil industry in Utah has been seeking a variety of alternatives to transporting its oil to refineries. The industry is fighting restrictions on coastal terminal facilities. Those barriers have concentrated support on a plan to access existing Gulf Coast oil infrastructure.  

FLORIDA AND STATE REGULATION OF MUNICIPAL UTILITIES

Newly filed legislation in the Florida State House and Senate would alter the way municipal utilities can operate, charge customers, and transfer money. The House Bill would cap the surcharges a municipal utility collects from people living outside of the boundaries of the government that runs it at 10 percent. The percentage must also be based on the number of customers outside the municipality’s boundaries. The Senate Bill, if passed, would redefine the legal definition of a public utility and empower the Florida Public Service Commission to regulate the utilities for five years.

The bill would also require voters to approve the amount of money that can be transferred from a utility to the municipality that runs it.  Customers who live outside of the boundaries of the municipality which owns and operates a public utility system often find that they cannot vote for the officials who run them. In this case, Gainesville Regional Utilities runs an electric utility which serves the greater metropolitan area. GRU has been at the center of a number of issues including rates and the siting of generating facilities.

It is not clear how much support the legislation has.

A SUCCESSFUL P3

On 28 February, the Kansas City, Missouri Airport Enterprise opened its new single terminal. The new terminal was completed within the $1.5 billion project budget and as originally scheduled. The project was developed through a public-private partnership (P3). The city entered a development agreement with private developer Edgemoor to design and construct the terminal for a guaranteed maximum price (GMP) of $1.36 billion. The airport enterprise retained risk for potential increased costs from events beyond the developer’s control, such as the COVID-19 pandemic. On budget completion has fully mitigated that risk.

The project addressed several concerns that the old terminal building’s unique design which made it difficult to satisfy security requirements. In addition, the new terminal will facilitate more connecting service. At one time, KCI had been a major hub.

CA HIGH SPEED RAIL

The California High Speed Rail Authority is required to update the state legislature regarding progress on the high-speed rail line designed to provide intercity service between SF and LA. The project has been plagued by delays and overruns. The project has achieved environmental clearance for all segments between San Francisco and Palmdale (Los Angeles County) and between Burbank and Los Angeles – 422 miles out of 500.

Construction is well underway on the first 119-mile section in the Central Valley, which will initially serve as a test track for high-speed trains, and additional advanced design is proceeding on stations and the 52 miles of extensions into the downtown Merced and downtown Bakersfield. The latest schedule calls for completion all environmental documents for the entire 500-mile system connecting San Francisco and Anaheim by the end of 2025. 

By 2028, complete and begin train testing on the first 119-mile, double-tracked and electrified high-speed rail test track between Madera and Poplar Avenue. Between 2030 and 2033, begin high-speed passenger service between Merced, Fresno and Bakersfield. By 2030, advance Northern and Southern California sections to 30% design so that construction can continue to progress if and when funding is provided

It is clear that the full project is significantly short of resources for the full train line to be completed. The Authority is looking to rely on significant federal grant funding and is looking to the Legislature to establish a clear source of funding after 2030. In addition, cost estimates have been raised. The new estimate no longer represents a “single-track” phased implementation approach to delivering the Merced to Bakersfield project – it includes double-track and fully built out facilities including stations and maintenance facilities rather than phasing them in. Compared to the 2022 Business Plan, the updated estimate has increased by between $6.5 billion to $9.7 billion.

The Authority has developed a new ridership forecasting model. It takes into account changes in travel and work wrought by the pandemic. In line with nearly all other surveys of mass transit demand, for the Merced-Bakersfield segment — which includes construction now under way in the central San Joaquin Valley — the expectation for overall train ridership in the Valley dipped from almost 8.8 million passengers per year forecast in a 2019-2020 financial plan to about 6.6 million in the 2023 project update. Ultimate annual demand is projected at 31.3 million in 2040, down from the 2020 estimate of 38.6 million.

OKLAHOMA AND RECREATIONAL CANNABIS

Oklahoma may be the medical marijuana capital of the US – the state counts 2,890 active licenses for medical dispensaries – but that did not translate into support for legalized recreational cannabis in an election this week. Proposition 820 was defeated by a significant margin – 62% to 38%. The measure would have, in addition to legalizing the use of marijuana for those 21 and over, would also have set up a process for expunging criminal convictions for certain past marijuana offenses. 

The initiative was set up for failure following an old script. By scheduling an election just on this issue outside of the normal voting schedule, a low turnout was assured and skewed towards those likely to oppose the measure. The vote took place while the Oklahoma legislature debates a bill introduced in this legislative session which would place new restrictions on ballot initiatives, including barring them from even-numbered years, when turnout is higher. 

The state’s approach has been somewhat scattershot. The number of dispensaries is high because of policies enacted which offered licenses at reduced rates compared to those of other states. That led the state legislature to pass a two-year moratorium on new medical marijuana business licenses last year. 

NYC MUNICIPAL WORKFORCE

The DeBlasio administration ramped up hiring by city government and brought it to its historical high headcount of some 330,000. It was to be expected that a new administration might slow that growth but the pandemic and some policy choices have put the City in a difficult place. One of those policy choices was to require in person attendance on a full-time basis by city employees. That has been a serious barrier to the retention and attraction of city employees.

Now a report from the NYC Comptroller has documented the impact of the Adams administration policies on not just headcount but also on the provision of services. The report notes that agencies which are at the front lines of the recovery from the pandemic – the Department of Small Business Services (SBS), Department of Health and Mental Hygiene (DOHMH), Housing Preservation and Development (HPD) and Department of City Planning are also consistently failing to meet or improve on the performance goals set for them.

The report notes a correlation between the inability to meet service provision goals and vacancy rates at the agencies charged with providing those services. SBS has a 32% vacancy rate, for example. Small businesses took the brunt of the impact of the pandemic so the vacancy rate is troubling. Similarly, agencies impacting some of those most vulnerable to the pandemic and its aftermath are facing clear limits on their ability to provide services.

One potential change to address vacancies was included In the recently-announced tentative agreement between the NYC Office of Labor Relations and DC 37 (the City’s largest municipal labor union), the parties agreed to establish a “Flexible Work Committee” to discuss options to provider greater flexibility and enhance employee morale, including remote work, compressed and flexible work schedules, and improve transit benefits. The parties’ goal is to begin a pilot program that includes remote work no later than June 1, 2023.

AMERICAN DREAM NIGHTMARE

East Rutherford, NJ is the home of the American Dream mall in New Jersey and the issuer of significant debt payable from payments in lieu of taxes paid by the developer. The financial problems of the project are well known. Now those problems are having real effects. East Rutherford has commenced legal action to recover some $7.6 million due from the developer. The payments are due under a payments in lieu of taxes agreement between the borough, the mall, and the New Jersey Sports and Exhibition Authority.

The developer has taken the position that the mall is not “fully open” as it still has some vacant space. If the mall is not “fully open”, the developer maintains that it does not owe anything on the parcels in question. East Rutherford’s suit argues that PILOT payments for those parcels were due once the mall and its associated entertainment venues opened in 2019.

The lawsuit highlights a concern that investors saw when the bonds were sold for the project.  “The defendants would prefer not to pay the borough because American Dream opened shortly before the COVID-19 pandemic, closed for a matter of months, and, according to widely circulated reports in the press, has struggled financially in the more than two years since it reopened post-pandemic.”

The action comes as the developer has received some covenant relief on its $1.7 billon of private debt. We are not surprised that the project has not met its demand projections which we never believed in. Debt-service reserves have been drawn down to make payments due on $800 million of PILOT backed bonds issued though the Wisconsin-based Public Finance Authority. Payments are also being missed on grant anticipation debt.

ZONING AND HOUSING

Affordable housing advocates have been increasingly focusing on zoning restrictions as a major impediment to the expansion of the affordable housing stock. In particular, the role of single-family housing zoning is a primary target. The idea is to promote both better land use and flexibility in terms of creating new housing on existing sites. Think two family houses or apartments over free standing garages.

Now, the Washington state legislature is moving a bill which would require cities between 25,000 and 75,000 people to allow two units per lot anywhere and four units on lots within one half-mile of a bus stop. Cities with more than 75,000 people or with a continuous urban area with more than 275,000 people would have to allow four units per lot anywhere and six units per lot within a quarter mile of a bus stop.

The bill also eliminates parking requirements for developing middle housing on lots within a half-mile of a major transit stop. For those lots smaller than 6,000 square feet, cities will not be able to require more than one off-street parking space per unit. For those lots greater than 6,000 square feet, cities can’t require more than two off-street spaces.

Some jurisdictions are revising local zoning ordinances. The Spokane City Council approved a temporary zoning ordinance to allow duplexes, triplexes, quadplexes and townhomes on all residential zones citywide for a year. It is all part of the movement towards density and proximity to transit and work. It is also a reminder that preemption goes two ways. Efforts to limit local regulation have been fought. Now, the proponents of zoning changes seek to use the same tactic to advance their goals.

It is what makes the debate over how best to implement policies so difficult to resolve.

CARBON STORAGE

Pore space is the open spaces in rock or soil. These are filled with water or other fluids such as brine. CO2 injected into the subsurface can displace pre – existing fluids to occupy some of the pore spaces of the rocks in the injection zone. The sequestration companies are undertaking to obtain easements on several such rock formations which cover large areas under predominantly agricultural land. The latest example of the problem is unfolding in Illinois.

Navigator CO2 Ventures’ is undertaking to get two sequestration sites approved in Illinois. It hopes to store up to 15 million metric tons annually of carbon dioxide. It is not clear how much fluid will be displaced at these sites and where it will go. This has raised the issue of potential groundwater contamination such as the acidification of local water. That occurs when CO2 and water mix and form carbonic acid.

In January, the Illinois Commerce Commission received a recommendation from its staff to deny a project permit because a sequestration site had not been acquired. Navigator then withdrew its initial permit application with the Commission. Illinois law does not address the use of eminent domain above underground pore space. Some believe that Navigator may need to get every landowner living over the sequestration area to agree to sell off a portion of their land rights.

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

BOLINGBROOK, ILLINOIS

Moody’s has released its current rating on the Village of Bolingbrook, IL. There has been a debate over what the impact on a default on non-guaranteed debt should be on a municipality’s when this happens. In this case Moody’s makes the argument that “governance is a driver of the current rating action given the village’s weak transparency and disclosure practices as reflected in the failure to report the Series 2005 Sales Tax Revenue Bonds, debt secured solely by sales tax revenue within a limited geographic area in annual financial reports. Public disclosure on this particular debt has not been timely.

The pledged revenue for Series 2005 Sales Tax Revenue Bonds fell short of the required sinking fund amounts because of weak home rule sales tax collections within a limited project area, which is extremely small relative to village’s full tax base creating idiosyncratic risks that are not indicative of the village’s general credit quality.”

We reiterate that investors need to focus on the underlying economics backing a credit. This is true when a credit is backed by a limited economic/revenue base. In this case, it looks like some buyers focused on a legal approach (even though it was pretty clear that this was a stand-alone credit) and the idea that reputational risk would motivate the Village to use general tax revenues to pay the sales tax bond debt service.

SMALL COLLEGE CREDIT

The latest example of the pressure on smaller private college financial positions is one of the more established names in this sector, Hartwick College. Moody’s Investors Service has downgraded Hartwick College’s (NY) issuer and debt ratings to B2 from B1. Ongoing multi-year deficit operations and decreasing liquidity are the primary sources of difficulty.”  Hartwick is in the sector which is increasingly vulnerable to the impacts of demographics and price. Hartwick College is a small, tuition-dependent private liberal arts and sciences college with fall 2022 enrollment of 1,089 full-time equivalent students and fiscal 2022 operating revenue of about $44 million. 

Moody’s Investors Service has confirmed Kaweah Delta Health Care District, CA’s (KDHCD) Ba1 revenue bond ratings. The system breached its debt service reserve fund covenant at December 31, 2022 which will require funding of a debt service reserve fund at maximum annual debt service of roughly $18 million.  The confluence of weak financial performance and declining reserves will challenge financial covenants for June 30, 2023 with expectations for a breach.

SMALL RURAL HOSPITALS

KDHCD operates a variety of health care facilities including 435-licensed bed Kaweah Delta Medical Center, a skilled nursing facility, a mental health hospital, a rehabilitation hospital, a dialysis center, and various other outpatient facilities including five hospital based federally-qualified rural health clinics. All combined, KDHCD has 613 licensed beds across its various campuses. Facilities are concentrated in Visalia, CA.

Recently, Moody’s affirmed the District’s revenue bond rating at Ba1. It kept the already below investment grade credit on negative outlook. The system breached its debt service reserve fund covenant at December 31, 2022 which will require funding of a debt service reserve fund at maximum annual debt service of roughly $18 million.  The confluence of weak financial performance and declining reserves will challenge financial covenants for June 30, 2023 with expectations for a breach. 

While the system remains the major tertiary referral center for Tulare County, the negative outlook reflects the risks to achieving projected results for year-end and into fiscal 2024, and a thin cash cushion to absorb any potential cash losses from operations should performance improvement stall.

NATURAL GAS

The use of natural gas is the subject of many debates across legislatures across the country. In some cases, the lead fight is at the state legislative level. This year the issue of natural gas bans in NYS has become highly politicized and a part of the budget process. Other states look at legislation to override local bans on natural gas. On the local level, restrictions on the use of natural gas for newly constructed buildings continue to be enacted.

The latest example of the issue is found in a legislative approach taken by the City of Denver. New building codes in Denver will ban natural gas furnaces and water heaters in new commercial and multifamily construction starting in 2024.  And by 2027, natural gas will not be permitted for any heating or cooling equipment in new commercial buildings. Here’s the difference between this and other bans. These restrictions do not apply to gas stoves. It is a clear attempt to split the baby to get support. The culinary industry strongly resists limits on gas for cooking, understandably. Getting that sector on board with the gas ban made its enactment easier.

It also acknowledges the role of politics. My e-mail gets inundated with political messaging about the proposed NY ban. You’d think a van full of stove removal agents is going to pull up in your driveway and take your stove away.  Denver’s approach was able to defuse that by exempting stoves.

SMALL NUCLEAR COST SETBACK

The Utah Associated Municipal Power Systems (UAMPS) has been undertaking  an effort to develop small modular nuclear generators. The developer of the units – NuScale – is hoping to show that groups of small modular reactors can be a realistic and less costly way to provide energy without carbon. UAMPS was the first municipal utility to try to go down this path. As the high costs of large scale nuclear have been clearly reaffirmed through the Votgle debacle in Georgia, proponents had high hopes for the modular approach.

The plan was for the development of six 77-MW reactors. The plan is now in some jeopardy as NuScale has informed members of UAMPS that the estimated costs of building the six 77-MW reactors had risen by more than 50 percent to $9.3 billion. Ironically, it is not for the “usual reasons” that this nuclear technology is more expensive than when proposed.

The reasons for the updated costs are rooted in general commodity inflation. Copper (up 32%) and steel (up 106%) are markedly more expensive. The major point for the participants is that the new cost estimates will raise their retail price by some 53.4%. That has already led to individual participants dropping out and the project’s power output is only 20% subscribed. The agency has said that it will need to reach 80% for planning and construction to proceed next year.

Good news? NuScale was the first of dozens of companies working on SMRs to have a design approved by US regulators. An application to construct and operate the plant is expected to be submitted to the U.S. Nuclear Regulatory Commission early next year. UAMPS has also decided to continue with the project despite the cost increases. Some 26 out of the 27 remaining UAMPS member agencies voted in favor of continuing the project. 

Another proposed modular nuclear generator which developers hoped to build on the Hanford Reservation in Washington State has been forced to look at a relocation. It will now build in Louisiana where the process of approval is felt to be more streamlined. X-energy has been working to meet an Energy Department timeline that calls for bringing the project on line by 2028. That process had effectively stalled.

The California Energy Commission (CEC) approved a staff analysis recommending the state pursue extending operation of Diablo Canyon Power Plant (DCPP) through 2030 to ensure electricity reliability. DCPP is currently scheduled for phased retirement in 2024 and 2025. The nuclear power plant supplies about 17% of California’s zero-carbon electricity and 9% of total electricity.

The Biden administration said on Thursday it is offering $1.2 billion in aid to extend the life of distressed nuclear power plants which, for the first time, could offer funding to a plant that has recently closed. The funding comes from the $6 billion Civil Nuclear Credit program, created by the 2021 infrastructure law, and will be distributed by the Department of Energy (DOE). The plan to offer support for recently closed plants is a plus.

The Palisades plant in Michigan would be able to apply. It closed in May 2022. Michigan is the home state of Energy Secretary Granholm. Holtec International, the current owner, had its first-round application rejected. It has estimated the cost of recommissioning at $1 billion.

CONGESTION PRICING

The MTA released its February Financial Plan, which stated that revenue collection from congestion pricing is now expected to begin in the second quarter of 2024, meaning April 2024 would be the earliest that drivers are charged for driving into Manhattan’s Central Business District. The move will cost it roughly $250 million in anticipated congestion pricing revenue in 2024.

NORTHWEST HYDRO

The municipal utilities in Washington State have long relied on the federal dam system for hydroelectric power. With 145 large federal dams, Washington state is the nation’s leading producer of hydropower. The region has experienced fluctuations in annual precipitation over the years but the region is in much better shape than the Colorado River basin. One example is the recent two years.

Water year 2021 was especially dry in Eastern Washington, most of Oregon, and most of Idaho. 2021 also featured an exceptionally dry spring and of course the record-breaking June heat wave. The result was decreased river flows and a twenty year low in hydropower production.

More snow and rain in 2022 fueled a 17% surge in power production in Washington, including a 19% increase at Grand Coulee Dam, the nation’s largest producer of hydropower. Hydroelectricity generation at rivers in Oregon jumped 19% during the 2022 “water year” from October 2021 to September 2022.

COLLEGE ENROLLMENTS

UC San Diego said it received 130,830 applications, a decline of 396 over the previous year. The change was a significant negative change from last year’s figure was almost 13,000 higher than it was for fall 2021. The number of California residents seeking a spot for this fall increased by 584, to 84,910. And the number of out-of-state applicants rose by 173, to 23,951. But the number of international students fell by 1,153, to 21,969.

The numbers highlight two of our regular themes. The most obvious one is the role of international students in the demand for college spots. These usually full fare paying customers are always attractive to these institutions. If that is indeed the driving force, it shows that the pattern of restrictions on international students has finally made its mark. Initially, it was immigration policies under the Trump Administration that hurt international demand. Then it was the limits due to the pandemic. 

The importance of international students’ willingness to pay top dollar has caused political pushback. In 2021, the California legislature looked to UCSD, UCLA and UC Berkeley to reduce the number of undergraduates it accepts from outside California to make more room for students who live here. Some accused the schools of favoring international students because they paid much higher tuition.

While the international shortfall is the primary culprit, the negative demographic trends driving demand reduce the cushion available when one particular demand cohort faces special issues or limitations.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Publisher

NYC LABOR AGREEMENT

As we went to press last week, Mayor Eric Adams announced a tentative contract agreement with New York City’s largest municipal union in a spectacular example of a Friday news dump. The announcement of a tentative agreement which will raise compensation approximately 16% comes just before a three-day weekend and the start of most schools’ winter break. That will leave a lot fewer eyes to look at the deal and see that it should serve as a warning going forward.

The deal would increase wages 3% a year in the first four years and 3.25% in the fifth. The Adams administration had set aside money in the city’s budget for raises of only 1.25% and must find additional funds or make spending cuts to cover the cost of contract. The agreement also includes a lump sum ratification bonus for all DC 37 members, a major investment in a child care trust fund established and administered by DC 37 in the amount of $3000.

DC 37 members will receive the following compounded and retroactive wage increases, representing a 16.21 percent increase across the life of the contract: May 26, 2021: 3.00%; May 26, 2022: 3.00%; May 26, 2023: 3.00%; May 26, 2024: 3.00%; May 26, 2025: 3.25%. The City claims that it has labor cost reserves to cover the increases. The Citizens Budget Commission and the City’s own budget director did not express those views. CBC said “the very real problem is the city has identified no way to pay the billions in extra costs.” CBC added that comparable raises for all city workers would cost New York City $2.5 billion in this fiscal year and $2.3 billion in the next.

The city budget director said simply that “We’re going to be looking for savings throughout city agencies.” That is another way of saying Who knows? These cuts and efficiencies will be sought and implemented while the city tries to develop and implement remote work policies. That move is a major concession on the part of the Mayor who has sought to use the city workforce as a catalyst to cause a return to the office by private sector employees. It reflects the realities of post-pandemic New York.

STATE COMPTROLLER WEIGHS IN ON NYC BUDGET

New York State Comptroller Thomas DiNapoli released the results of his office’s review of the City’s proposed FY 2024 budget. The $104.8 billion preliminary fiscal year (FY) 2024 budget, adjusted for surplus transfers (prepayments for future expenses), reflects better-than-projected revenue collections, the allocation of remaining federal pandemic relief funds and the accumulated impact of savings initiatives. After balancing the FY 2024 budget, the City assumes budget gaps reemerge in FY 2025 at $3.2 billion, growing to nearly $6.5 billion in FY 2027. As a share of City fund revenues, the remaining out-year gaps average 6.3 percent ─ the highest level at this point in the budget cycle since FY 2012.

Potential holes in the budget are driven by education and social services spending, uniformed services overtime and operating subsidies to the Metropolitan Transportation Authority (MTA). The level of City subsidies to the MTA is under debate right now. The City also has not yet budgeted for the costs of sheltering asylum seekers in FY 2024 or beyond, despite a very strong likelihood that its shelter population will remain elevated.

At the same time, there are some unexpected positives. The City released the January Plan before the publication of the FY 2024 tentative property tax assessment roll, assuming a relatively small growth in taxable values of 1.6 percent. However, the tentative roll showed taxable values increasing by 4.4 percent. The Office of the State Comptroller (OSC) believes that property tax collections may exceed the forecast by $1.4 billion over the plan horizon. This would represent an average annual growth rate of 1.4 percent for fiscal years 2024 to 2027, well above the City’s expectation of 0.6 percent growth.

The biggest risk to all of this is the economy. In nearly every sector, uncertainty about the national economy as well as the local economy (especially the issue of return to the office) is a recurring theme. With NYC still reporting only a 50% return to office ratio by the end of January, it is a clear economic laggard relative to the rest of the country.

FREE TRANSIT

The nascent move to provide free local bus service is gaining more support as other cities seek to experiment with various iterations of the concept. The initial experience has been favorable as these plans tend to increase ridership. Fares have been seen as an obstacle to utilization. The best current example is the experience in Boston where fares were no longer collected on one of its major bus routes. A recent evaluation of the introduction of fare free service on Boston’s bus route 28 found an increase in ridership of 38 percent while the policy was in effect.

Now, the New York MTA is in the center of the ongoing budget debate in New York State. The City is already being asked to increase its operating subsidy to MTA. In prior years, that debate has been tied into the overall debate over the level of fares and their impact on the primary users who tend to be the working poor and other lower income passengers. New York City bus ridership is currently just two-thirds of pre-pandemic levels and has remained at that level for most of 2022. IBO estimates MTA local bus fare revenue collections will total $708 million for 2022.

What would the “cost” of a fare free system be? If the bus system was entirely fare-free, it would have that initial $708 million cost. The estimates are complicated by the complexity of the bus system and its role as a feeder to the subway system. Free bus service would impact subway demand. IBO uses an estimate that sees 4% percent of 2022 subway trips switched to bus trips under fare-free bus service. That would result in a further $91 million in annual foregone revenue, assuming 2022 fare levels and collection rates.

The City already funds discounts for qualified low-income riders. Fair Fares program provides half-price transit trips to New York City residents between the ages of 18 and 64 with household income below the federal poverty line (currently $14,580 for an individual and $30,000 per year for a family of four), who do not otherwise qualify for reduced-price MetroCards or city-provided carfare. It is estimated that some 270,000 residents currently participate but that is only one-third of the potential eligible population.

Currently, the city pays for most MTA Bus Company operating costs above costs covered by fare revenues. In 2022, the city is projected to pay $719 million in these MTA Bus Company subsidies. That only covers part of the bus system. The remainder are systems which were absorbed from the private sector and any city contributions towards the costs of fare-free service on NYCT buses would need to be negotiated.

ILLINOIS

The State of Illinois took another step in its journey to improved credit ratings. Standard and Poor’s upgraded the State’s general obligation to A-minus. The action reflected the view that Illinois’ commitment and execution to strengthen its budgetary flexibility and stability, supported by accelerating repayment of its liabilities, rebuilding its budget stabilization fund to decade highs; and a slowing of statutory pension funding growth, will likely continue during the outlook period.

The move will likely reinforce efforts to continue to whittle down the State’s liabilities as in pensions and cash flow borrowings incurred during the pandemic. The full funding of statutory pension contributions begun some three years ago continues as does a pattern of some additional funding. The State has also built up its Budget Stabilization Fund while it addressed liabilities. That fund is budgeted to equal some 5% of operating revenues. There is also a rating benefit for the range of appropriation type debt that is found in many portfolios.

Along with the GO rating, S&P raised state appropriation-backed bonds to BBB-plus from BBB and moral obligation bonds to BBB-minus from the junk level of BB-plus. The state’s sales-tax backed Build Illinois bonds and Metropolitan Pier and Exposition Authority expansion bonds rose to A from A-minus.

OAKLAND

On 14 February, the City of Oakland, CA declared a state of emergency six days after a ransomware attack on the city’s computer network. The system outage that has disrupted its ability to collect taxes and issue permits, and has led to interruptions in many other non-emergency functions. Emergency services have also partly been affected: the Oakland police and fire departments continue to respond to calls. Fortunately, the 911 system is working, but the police department has acknowledged that delayed response times have resulted.

Two comparable examples are the experiences of Atlanta and Baltimore. Those cities faced costs of approximately $18 million each associated with their systems recoveries. The declaration of state of emergency is based partially in the hope that this might qualify the City for state and/or federal assistance to cover some of those costs. The declaration specifically calls for the governor to make funds available to the city, certain community members and businesses.

The event saw Moody’s reiterate its view that regional and local governments (RLGs) are among sectors least prepared for an attack in terms of engaging in protective basic cyber practices, which include having a cyber manager, using multifactor authentication and backing up systems regularly. They rightly acknowledge that in today’s economy, it is difficult for these governments to recruit and retain IT staff. Oakland is still in the process of strengthening its protections

FLOOD MAPS

It has been over five years since Hurricane Harvey moved through Texas and caused unprecedented levels of flooding, Those floods highlighted a shortcoming in the planning and development processes. Many flooded properties were located in areas which, based on data available at the time, were seen to be not located in a flood zone. The maps used to indicate where flooding risk was more likely turned out to be out of date and effectively inaccurate.

What was characterized as risk of a five-hundred-year flood was actually much greater of a risk than that. It created a demand for much more accurate and realistic mapping of what the actual risk from flooding is. Now, FEMA is planning to release updated maps reflecting The County has already issued regulations in the wake of the flooding

to cover all sources of potential flooding as opposed to the current maps which only cover potential river flooding.

Urban flooding often occurs when intense rainfall overwhelms stormwater systems regardless of how close a property is to a bayou or other channel. The new floodplain maps developed by the Harris County Flood Control District will be FEMA’s first maps to depict urban flooding. The new maps also will reflect updated rainfall estimates from the National Oceanic and Atmospheric Administration. The fact is that storms have intensified in recent decades, and the data used to support the mapping of flood risk had not been updated since the 1960s. 

On the new maps, Harris County’s 100-year floodplain will increase from around 150,000 acres to 200,000 acres. The County has already revised building codes in the wake of the Hurricane Harvey flooding. Under the post-Harvey regulations, buildings now have to be constructed two feet above the 500-year storm level, and that applies to properties in the 500-year floodplain, as well. It is estimated that some 1 in 8 homes in Harris County are located within floodplains.

It is a problem which extends to anywhere that allowed development based on so-called 500-year flood maps. The number of places experiencing 500-year floods continues to grow. While there has been much attention to coastal flooding and threats from rising sea levels in the analysis of credit risk, the threat from non-coastal flooding continues to grow.

PUBLIC HOUSING

The U.S. Department of Housing and Urban Development announced that it had awarded $3.16 billion in funding to nearly 2,770 public housing authorities (PHAs) in all 50 states, as well as the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands to make capital investments to their public housing stock. This funding is for dedicated housing to public housing residents to make sure they have adequate housing that is secure.

Housing authorities can use the funding to complete large-scale improvements such as replacing roofs or making energy-efficient upgrades to heating systems and installing water conservation measures. The grants announced now are provided through HUD’s Capital Fund Program, which offers annual funding to all public housing authorities to build, renovate, and/or modernize the public housing in their communities. 

The announcement was good news for the chronically underfunded NYC Public Housing Authority. It is scheduled to receive some $751.8 million from HUD. Given the proportion of public housing in the US represented by NYC, the allotment reflects New York’s share of public housing nationally. It comes as more recent data as to the sad state of NYCHA’s properties makes clear.

As of May 2022, the number of unaddressed repair requests from NYCHA residents—called open work orders—stands at over 600,000; that means there are more open work orders than the roughly 340,000 people living in NYCHA buildings. Residents must make a repair request and wait the 312 days, on average, that it takes NYCHA to return to fix the issue.

This all occurs in the context of the fact that NYCHA and New York City signed an agreement in 2019 with the federal court and HUD that would place NYCHA under a federal monitor and force NYCHA to reorganize itself. The monitor agreement binds the authority to strict performance metrics that concern lead paint, mold, pests and waste, elevators, heat, and inspections. The federal government has provided no additional funding to resolve the issues detailed in the monitor agreement.

ELECTRIC VEHICLES

The Georgia legislature is debating bills designed to facilitate the expansion and utilization of electric vehicles. It makes sense as Georgia is emerging as a key location for manufacturers of vehicles and batteries alike. One of the bills deals with an emerging policy issue over the use of commercial charging sites. Currently, chargers calculate the cost based on time – how long it takes to charge a car. EV proponents feel that this leads to higher charging costs. It also is seen as establishing on way of measuring electric usage versus all other classes of users.

House Bill 406 will allow for the owners of convenience stores and other commercial sites where electric vehicle chargers are set up to sell electricity based on the kilowatt hour instead of the amount of time it takes to recharge. The bill does not change the annual $211 fee paid by the owners of small battery-powered cars and $317 charged to owners of commercial electric vehicles. The fee is designed to cover the average amount in fuel taxes that a regular car owner would pay.

Georgia DOT will soon take part in a national pilot project that will allow drivers to track and pay based on how many miles they drive their electric car.

CALIFORNIA WATER

The January storms which flooded many areas of California also brought significant increased snowpack. The Department of Water Resources (DWR) said that it expects to deliver 35% of requested water supplies, up from 30% forecasted in January due to early gains in the Sierra Nevada snowpack. DWR runs the State Water Project which collects water from rivers in Northern California and delivers it to 29 public water suppliers. 

The Federal Bureau of Reclamation on Wednesday also made an announcement about allocations for users of Central Valley Project water, which are mostly irrigation districts that supply farms. Farms that received zero initial water allocations last year are now set to get 35% of their allocation this year.

Last year, water officials cut the State Water Project allocations to just 5% amid declining reservoir levels and reduced snowpack. Improved hydrologic conditions caused by the winter storms left the Sierra Nevada snowpack at well above normal conditions. However, not all river basins were equally improved. To the west, Trinity and Shasta reservoirs are below the historic average for this time of year and runoff forecasts indicate that overall storage for these reservoirs may be limited if substantial spring precipitation does not materialize.

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

BATTERIES POWER UP MANUFACTURING

This week, Ford announced that it planned to build a $3.5 billion electric-vehicle battery factory in Michigan, in Marshall, a rural town about 100 miles west of Detroit. The plant is expected to begin operations in 2026 and employ some 2,500 workers after construction. Ford is already is building two battery plants in Kentucky and a third in Tennessee with a South Korean partner. The plant in Michigan will be 100% owned by Ford.

G.M. recently started production at a battery plant in Ohio that it jointly owns with another South Korean partner. It is also building two more plants, in Tennessee and Michigan under co-ownership. Hyundai is working to develop a $5.5 billion EV plant in Bryan County, Georgia, creating 8,100 new jobs. The location of these manufacturing facilities in the U.S. reflects the benefits of the IRA as it favors electric cars and their components manufactured in the U.S.

Ford said its plant would be able to produce enough batteries for 400,000 electric vehicles a year. Ford is the second-largest seller of EVs in the U.S. after Tesla.

DE SANTIS LAND

The effort by Florida Governor Ron DeSantis to gain control over the municipality created to support Disneyworld concluded as we went to press last week. Legislation passed which replaces the Reedy Creek Improvement District with the Central Florida Tourism Oversight District. The important change is that the board of the new district will be appointed by the Governor. Disney no longer has the ability to nominate and/or appoint directors.

The state is going out of its way to state that there should be no impact on the payment of debt service. We are not concerned about the bonds. We reiterate our view that the Governor put bondholders in the middle of an ideological fight.

MBTA

The latest example of a big city transit system facing the lower number of passengers post-pandemic is in Boston. Fare revenues for the MBTA over the first two quarters of the current fiscal year came in at $183.6 million — 22 percent lower than the expected $234.7 million. In the second quarter alone, the MBTA collected $94.3 million in fare revenue — far below the $179.4 million generated during the same period in fiscal year 2020 for a total difference of $85 million.

Non-operating revenues (federal aid) and state sales taxes have grown enough to result in an estimated 2% increase in total revenue above pre-pandemic levels. That is likely not sustainable. So, the farebox matters even if not to the extent that fares matter in New York. “We’re very far away from pre-pandemic levels for fare revenue, and you can see that factor by reviewing the fare recovery ratio at 23% compared to fiscal year ’20 of 42%. This means fare revenue is now supporting less than one quarter of operating expenses today.”  – MBTA Chief Financial Officer Mary Ann O’Hara.

WHERE IS EVERYBODY

The U.S. Census Bureau has released annual population change estimates. The data showed that the largest losers in the population race are New York and Illinois. The join West Virginia, Puerto Rico, and Louisiana in the group of states losing the most population (Half of one percent or more decline. The decrease in New York was some 185,000. 

States losing population are spread through all regions of the country. California and Oregon saw declines on the West Coast along with Alaska and Hawaii. New Mexico and Kansas were the only states in the center of the U.S. to see declines. In the southeast, Mississippi was the only other state to see declines. The rest of the decline is unsurprisingly in the Northeast. New Jersey, Maryland, Pennsylvania, Ohio, Michigan, Rhode Island, and Massachusetts all saw population drops.

The southeast and the mountain West continue to see significant annual increase of over 1%. Florida saw a 1.9 percent population increase from 2021 to 2022 making it the fastest growing state.

RATINGS DEBATE

The Village of Bolingbrook, IL in the far southwestern suburbs of Chicago recently default on a series of nonrecourse sales tax revenue bonds backed by a narrow and specific area of its tax base. The source of payment was a pledge of the sales tax revenues generated by retailers in the specific project area. In this case, the anchor was a Bass Pro Shops location. Given the restrictions of the pandemic and changes in demand and prices for specific products, a shortfall in economic activity to generate sales taxes is not surprising.

The risk inherent in this deal has been inherent in many similar transactions across the country which financed infrastructure to support economic activity. As is usually the case, the limited offering memorandum for this specific issue of unrated bonds explicitly warns that the bonds are payable solely and only from the sales taxes on a concentrated, small retail area.  The offering statement made it clear (as they usually do) that the bonds are not general obligations and offered investors “neither the full faith and credit nor the general taxing power” of the municipality as security.

Now, S&P has taken a rating action against the general obligation credit of Bolingbrook. Even though the Village has asserted its continued willingness to pay its GO dent service, S&P nonetheless lowered the GO rating seven notches from its prior AA status to BBB-. They made it clear that the rating going forward will reflect whether the City pays the debt service on bonds for which it has no legal or assumed moral obligation. An upgrade is offered as a “carrot” to motivate the assumption of responsibility for the debt service.

Fitch took the unusual step of issuing a statement in response to S&P’s action. It differentiated its approach to credit structures like this and indicated that this sort of default would not alter its opinion of general obligation debt from an issuer. Fitch does not rate the Village but Moody’s does and held it’s a rating on GO debt from Bolingbrook at A2.

In the end, the situation serves as yet another reminder of the value of good old-fashioned analysis. The legal security structure was clear, it inherently shifted all of the risk to the investor and that is why the deal was distributed to “sophisticated institutional investors. The complaints of one fund manager that he had “retail mom and pop” clients in funds that held the defaulted bonds is more of a commentary of the fund business than it is on an issuer.

The experience of the high yield market through events like the mortgage meltdown and the default of Puerto Rico highlighted the need for individual fund investors to ask more questions about what their money is in. Whether it’s geographic concentration, industry concentration or duration risk, investors need to ask questions.

PENN STATION – TIMING IS EVERYTHING

The plan to develop 10 new office buildings in and around New York City’s Penn Station is taking a step back. Vornado Realty Trust, the developer has said that the plan could be delayed some 2 to 3 years as the demand for office space continues to be highly uncertain. The specific cause for the delay was cited as the prospect of new construction being “almost impossible” because of tight lending.

In the first week of February, office occupancy was under 49 percent of pre-pandemic levels. Vornado said that it is likely that a three-day workweek in office would be the new norm going forward. That is a problem for a project that is based on office development. There is a residential component designed to generate affordable housing and some retail and hotel space is expected.

The move to delay the project reflects trends seen not just locally but nationally. This week Salesforce announced that it is moving the headquarters operations of its Slack subsidiary to vacant space in the Salesforce headquarters building. That space reflects the very slow return to the office plaguing San Francisco.

MEMPHIS AND THE TVA

The latest twist and turn in the ongoing saga that is the process the Memphis Light, Gas and Water utilities is undertaking for execution of a long-term electric power supply contract occurred this week. An independent analysis of Memphis Light, Gas and Water Division’s bidding on its power supply found the inflationary environment in 2022 presented a terrible time for the city-owned utility to price how much energy would cost if it left TVA and purchased power elsewhere. 

The report said it disagreed with MLGW’s assessment of the bidding and did not agree that signing a long-term, perpetual agreement with TVA was the most economical option. There is no requirement that Memphis execute a long-term deal now as it operates under an effective “evergreen” contract with TVA. That allows Memphis to delay a decision on a long-term contract. Memphis remains the largest single customer of TVA.

MORE VOTGLE DELAYS

Georgia Power has announced more delays and cost overruns at its Votgle nuclear plant expansion project. Georgia Power says Unit 3 could now begin commercial operation in May or June, an extension from the most recent deadline of the end of April. The company also now says Unit 4 will begin commercial operation sometime between this November and March 2024. The company previously has promised commercial operation of Unit 4 by the end of 2023 at the latest. 

Georgia Power also announced an additional $200 million write off associated with the delays. The total cost of the project to build a third and fourth reactor at Vogtle has no grown to more than $30 billion. Georgia Power owns 45.7% of the project, while Oglethorpe Power Corp. owns 30%, the Municipal Electric Authority of Georgia owns 22.7% and the city of Dalton owns 1.6%. Georgia Power has settled its lawsuit with MEAG, but the suits with Oglethorpe and Dalton are still ongoing. The company warned it could have to pay those two co-owners another $345 million in the dispute. That would add to the $400 million of overrun costs which Georgia Power has assumed from the co-owners.

Just a reminder that the two were approved for construction at Vogtle by the Georgia Public Service Commission in 2009, and the third reactor was supposed to start generating power in 2016. The cost of the third and fourth reactors was originally supposed to be $14 billion.

WESTERN WATER

The January storms which blanketed California with flooding may have led some to believe that the drought had been broken, February has been especially dry so that belief has been weakened. Now more evidence of the impact of the drought across the entire West is here. Water levels in Lake Powell dropped to a new record low,  3,522.16 feet above sea level, just below the previous record set in April 2022. The reservoir is currently about 22% full.

That puts the water level only some 32 feet above minimum power pool levels. At 3,490 feet, a level referred to as “minimum power pool,” the bureau may be unable to generate hydropower for 5 million people across seven states. At 3,370 feet, the reservoir hits “dead pool,” at which point water can no longer pass through the dam by the power of gravity.

The situation is raising the specter of an inability to send enough water downriver to meet existing river compact requirements. That raises the likelihood of a more draconian solution to the current negotiations over allocations of the ever declining Colorado River supplies. In any event, power and water will continue to be in short supply at the Bureau of Reclamation dams on the Colorado. The lack of water is already limiting development. Current trends do not bode well for the situation.

HOSPITALS

The hospital sector continues to live down to our expectations for the sector. We are especially concerned about smaller institutions with limited geographic diversity in the revenue and demand base. This week, we saw a couple of examples of the trend of declining credit.

Moody’s Investors Service has placed Butler Health System’s (PA) Baa2 issuer and revenue bond ratings under review for downgrade. Butler Health System owns and operates a regional health care delivery system located in Butler, Pennsylvania, approximately 40 miles north of Pittsburgh. Butler Health is comprised of a 326 staffed bed hospital in Butler County, 72 ambulatory locations serving an eight county region with primary care, laboratory, imaging, health screening, occupational medicine and urgent care services, and an integrated multi-specialty physician medical group of about 250 providers.

Moody’s believes that Butler will breach its debt service coverage test under its bank debt for December 31, 2022 given the calculation is based on a rolling four quarter basis and the system has had negative operating cash flow in almost every month from January through September 2022. Failure to clear financial covenants could trigger an event of default and immediate acceleration at the discretion of the bank. Bonds under the MTI are subject to cross-default provisions which could result in immediate acceleration of all of the system’s debt. 

Moody’s Investors Service has affirmed the A1 assigned to John Muir Health’s (CA) revenue bonds and revised the outlook to negative from stable.  The organization has approximately $770 million of debt outstanding. John Muir Health is a two hospital system headquartered in Walnut Creek, CA. Revision of the outlook to negative reflects Moody’s expectation that it will take 12 – 18 months for JMH to restore margins to a level that generates sufficient cash to cover capital spending while maintaining a stable days cash position.  

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

PREPA GETS A CHANCE TO SETTLE

The Financial Oversight and Management Board for Puerto Rico filed an amended proposed Plan of Adjustment to restructure the debt of the Puerto Rico Electric Power Authority (PREPA), including a schedule to repay the reduced debt. The Plan proposes to cut PREPA’s more than $10 billion of debt and other claims by almost half, to approximately $5.68 billion.

The debt would be paid by a hybrid charge consisting of a flat connection fee and a volumetric charge based on the amount of PREPA customers’ electricity usage that would be added to the electricity bills. The estimated PREPA legacy charge for customers not currently benefiting from subsidized electricity rates would be, on average, about $19 a month. The PREPA legacy charge would exclude qualifying low-income residential customers from the connection fee and kWh charge for up to 500 kWh per month.

For non-subsidized residential customers, the proposed PREPA legacy charge would be: a flat $13 per month connection fee, 0.75 cents per kilowatt-hour (kWh) for up to 500 kWh per month of electricity provided by PREPA, and 3 cents per kWh for electricity above 500 kWh per month. For commercial, industrial, and government customers, the PREPA legacy proposed charge would be: a connection fee of between $16.25 for small business customers, $20 per month for smaller industrial companies, and $1,800 per month for large businesses proportional to their current rate. Between 0.97 cents and 3 cents per kWh per month for electricity provided by PREPA.

The resolution of the bankruptcy is a minimum piece of the foundation of any plan for the utility going forward. The early signs of life going forward in the near-term are not encouraging. Even under the best of efforts, the grid remains environmentally challenged. The record over the period of the bankruptcy, especially in light of the lack of debt service payments shows how difficult the future will be.

NYC BUDGET

The City’s Independent Budget Office has reviewed Mayor Eric Adams’ proposed fiscal 2024 budget. IBO projects that the city will end fiscal year 2023 with a $4.9 billion surplus, $2.8 billion more than the surplus projected by the Office of Management and Budget (OMB) in the Preliminary Budget. This higher surplus is the result of IBO’s forecast of $1.8 billion more in anticipated tax revenues in 2023 than OMB, coupled with IBO’s estimate that city-funded spending will total about $1.0 billion less than budgeted in the Preliminary Budget.

Led by strong growth in revenue from property, sales, and hotel taxes, IBO forecasts $70.6 billion in total tax revenue this fiscal year, $1.2 billion (1.7 percent) greater than 2022 collections. However, slower economic growth, higher interest rates, and the end of Wall Street’s bull market in calendar year 2022 have generated declines in the forecasts of business income, personal income, and property transfer taxes. Further decreases in business and personal income taxes are expected next fiscal year, and with the projection of only modest property tax growth, IBO’s forecast of total tax revenue in 2024 is $69.7 billion, 1.3 percent less than 2023 revenue.

IBO estimates that the city ended 2022 with a net gain of 212,300 jobs, bringing employment back to 97.6 percent of its pre-pandemic level. IBO estimates that the city ended 2022 with a net gain of 212,300 jobs, bringing employment back to 97.6 percent of its pre-pandemic level. The number of full-time municipal employees has fallen since the pandemic began from 301,000 in January 2020 to just under 281,000 in November 2022. Those reductions come with another cost. IBO notes that while the city has seen reduced costs due to the decline of active headcount, there is concern that these reductions have left some agencies unable to meet key performance targets.

The analysis points out two major sources of pressure and uncertainty arising from the Governor’s proposed state budget – transportation and Medicaid costs. One is a proposal to increase the city’s contribution to the MTA by approximately $500 million more annually. The second is the proposal ending Affordable Care Act (ACA) savings that the city has been receiving. These ACA Enhanced Federal Medicaid Assistance Percentage (eFMAP) payments have been flowing to localities, including New York City since 2015, which the city has passed on to H+H, the city’s public hospital corporation. This change would eliminate city savings of $124 million in 2023 and $343 million in 2024 onward.

COAL REGULATION

The US EPA announced that it would deny permits to continue dumping toxic ash into unlined or inadequately lined pits at six coal fired generating stations. The action reflects rules adopted in 2015. Enforcement of those rules was lax at best during the Trump administration. Now, the EPA is more actively enforcing the rules. Six individual coal generating plants were the subject of the ruling. One of those plants is operated and owned by a municipal power agency.

Salt River Project’s Coronado Generating Station is one of the plant’s whose owners argued that they should not have to meet the deadline since naturally occurring clay, archaic liners or other conditions made their pits essentially as safe as impoundments with modern liners. The EPA cited evidence of potential pollution releases from the pits, and “insufficient information to support claims that the contamination is from sources other than the impoundments.”

AMERICAN DREAM

Given all of the forces which have aligned against it, the recent news regarding the underperformance at New Jersey’s American Dream Mall is no surprise. We have been a skeptic from the days of the first efforts to create a retail mecca in the Meadowlands. Once the pandemic hit the region, it was only a matter of time.

On December 1, 2022, the Trustee delivered $26,743,375 to the trustee, to pay regularly scheduled semi-annual interest due and payable on the PFA Bonds for distribution to holders of record on the November 15, 2022 Record Date. In order to fund this payment, the Trustee transferred $2,595,130 from the Reserve Account to the Interest Account.

The PILOTs previously deposited to the Interest Account were insufficient to fund the interest payment in full due to a reduction in the assessed value of the Project, and a reduction in the Tax Rate, which resulted in lower PILOT obligations. After the transfer, the balance of the Reserve Account will be $51,504,870.

THE ESCALATING FIGHT OVER CARBON PIPELINES

The efforts by sponsors of several carbon capture pipeline projects to obtain permits and rights of way for their proposed pipelines are well documented. Most of the sponsors are working through the existing approval and acquisition process. Much has been made of efforts by those sponsors to be able to use eminent domain to obtain the necessary land for these facilities. The potential for the use of eminent domain has led to significant opposition at both the local and legislative levels in most of the states where carbon pipelines are proposed. In some cases, localities have voted for moratoriums of permitting and/or construction processes.

One example of the escalation of the debate is what is currently underway in Illinois. Last fall, McDonough County intervened in eminent domain proceedings before the Illinois Commerce Commission, noting that pipeline construction could affect emergency responders and farmland. A week later the county passed its pipeline moratorium covering a period of two years. Now, the sponsor of the project (Navigator) is trying a different approach.

Navigator has not been able to obtain enough leases for the pipeline’s route across Illinois or for a carbon sequestration site in the state, and on January 20 it withdrew its application for eminent domain powers, after state regulators said the application was incomplete. In the meantime, a draft agreement with McDonough County offers the county $20,000 per mile of pipeline per year for up to 30 years, with a $630,000 annual cap. The draft says the payment would be contingent on the county acting “in good faith” to “provide positive assistance” to the company, including obtaining road access and rights of way on county land.

It follows a prior effort in another Illinois county. The Illinois Times reported in October that Navigator had made a similar pitch to officials in Montgomery County, offering to pay up to $1.5 million a year for up to 30 years. No agreement has been reached there but the issue has been on monthly board meeting agendas for the past few months.

A 2011 Illinois state law regarding carbon dioxide pipelines mandates that regulators must make a decision on applications like Navigator’s request for eminent domain within 11 months of filing, which would mean June 2023.  In a January 6 filing, commerce commission staff urged the commission to deny the proposal or Navigator to withdraw it. The staff noted that the pipeline’s impact cannot be adequately evaluated since the exact route has not been determined, especially since the endpoint is not yet known.

Navigator would also need 14 separate federal, state and local permits for the project, and as of September the company had none of them, and likely could not obtain them before the June 2023 deadline for the commerce commission to rule on the eminent domain proposal. The current standards under state law meant to facilitate carbon dioxide pipelines expressly states that such pipelines are in the public benefit since they help grow Illinois’s “clean coal” industry.

It is not clear that ethanol plants are not viewed similarly with coal plants. The $3.2 billion, 1,300-mile proposed pipeline would connect to ethanol and fertilizer plants in South Dakota, Nebraska, Minnesota and Iowa before reaching Illinois.

ANOTHER SHOT TO HOSPITALS

On January 30, a federal appeals court allowed limits on hospitals’ use of pharmacies to distribute outpatient drugs, a credit negative for safety-net hospitals and other healthcare providers participating in the federal 340B program, which is designed to help hospitals that treat a disproportionate number of low-income patients. Under the program, not-for-profit hospitals can purchase drugs at a discount and receive reimbursement for the full price. Many safety-net hospitals and other providers rely on the program for a substantial share of operating cash flow.

Hospitals participating in 340B often reach agreements with contract pharmacies such as CVS and Walgreens to distribute the drugs on their behalf. In its ruling, the 3rd US Circuit Court of Appeals agreed with drug companies that hospitals can be limited in the number of contract pharmacies they can use. Using fewer contract pharmacies has the potential to curb hospital cash flow. While the financial benefit of the 340B program varies among participating hospitals, it can account for as much as 25% of operating cash flow. However, hospitals limited public disclosure on the program’s fiscal results makes it difficult to determine the precise effect contract pharmacies have on hospitals’ finances.

REEDY CREEK LEGISLATION

Governor Ron DeSantis unveiled his proposal to change the laws establishing the Reedy Creek Improvement District. The effort stems from the dispute which arose between the Governor and the Walt Disney Co. over the state’s “don’t say gay” law last year. The District was created to administer municipal services within the area largely comprised of Disneyworld. The proposed law would provide for the appointment of District managers by the Governor. Currently, the District’s taxpayers (Disney) appoint the board. The existing structure worked quite well for nearly a half century providing a stable credit.

The proposed move is troublesome given the motivation behind it. Everyone gets that Ron DeSantis is running for President and that he sees culture war issues as a foundational block of his campaign. Putting bond holders and bond insurers in the middle of a local, partisan, non-financial dispute over ideology is a real negative from our perspective. One of strongest magnets drawing people to invest in the US market is the existence of the rule of law and respect for it. While what DeSantis is doing is legal, it reeks of the sort of governance we find in far less developed countries.

MILEAGE TAXES

Vermont is the latest state to consider legislation to levy a usage-based fee on electric cars. Mileage data is already collected when vehicles undergo an annual inspection and officials say data from odometers could be used to charge EV owners 1.3 cents per mile. The proposal would also have people with plug-in hybrids pay an extra $57 per year when they renew their registration. Altogether, this would replace about $1 million in revenue. EVs now represent about 8% of vehicles on the road. EVs now represent about 8% of vehicles on the road in Vermont.

The issue has brought out a strange argument from “environmentalists.” They claim that a mileage fee on vehicles which do not pay any fuel tax at the pump are seeing a fee increase. The state is using the 1.3 cent rate in an effort to match what a typical gas vehicle uses. So, the argument loses force.

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

NEW YORK STATE BUDGET

The process of enacting a budget for fiscal year 2024 beginning April 1 is underway with the release of the Governor’s budget proposal. All funds spending is $227 billion, which represents an increase of 2.4 percent. Deposits to reserves that had been planned for FY 2024 and FY 2025 will be completed by the end of the current year — two years ahead of schedule – for a total of $24 billion in budget reserves.

An eight-year phase-in of personal income tax cuts for middle class taxpayers commenced in Tax Year 2018. It was scheduled to be completed with the 2025 Tax Year. This budget will allow for the full implementation of the tax relief to take effect this year.

New York State will suspend the state sales tax on motor fuels, the separate motor fuel tax, and the metropolitan commuter transportation district sales tax imposed on motor fuels from June through December, providing an estimated $585 million in relief. Transfers from the General Fund to the dedicated funds to offset the estimated revenue lost from suspension of these taxes is designed to ensure no negative financial impact for the MTA.

The State Budget also creates a new property tax relief credit, the Homeowner Tax Rebate Credit for eligible low- and middle-income households, as well as eligible senior households. Under this program, basic School Tax Relief (STAR) exemption and credit beneficiaries with incomes below $250,000 and Enhanced STAR recipients are eligible for the property tax rebate, where the benefit is a percentage of the homeowners’ existing STAR benefit.

The MTA is a prominent concern. The Governor’s proposal includes some $400 million of “efficiencies”. More usefully, the budget includes increasing the top rate of the Payroll Mobility Tax (PMT), generating an additional $800 million annually. Increasing New York City’s share of funding for paratransit services, providing students with reduced fare MetroCards, and offsetting foregone PMT revenues for entities exempted from paying the tax, is estimated to generate nearly $500 million annually. In addition, $300 million in one-time State aid to address the extraordinary impact on MTA operating revenues is included. The governor also proposed diverting revenues from three planned casinos in the New York City region to help the authority, and called on the city to pitch in nearly $500 million, all of which could add up to $1.3 billion in additional yearly funding for the subway system.

And then there is the environment which is already moving to the center of debate. The Executive Budget also includes building decarbonization proposals that will prohibit fossil fuel equipment and building systems in new construction, phase out the sale and installation of fossil fuel space and water heating equipment in existing buildings, and establish building benchmarking and energy grades. The new construction proposal includes certain exemptions such as commercial kitchens. The existing equipment phase out proposal does not impact stoves. 

The asylum issue is front and center as the City of New York deals with the influx of 40,000 undocumented immigrants. Under the Governor’s proposal, the State would commit more than $1 billion in the coming year on initiatives to support asylum seekers, including: $767 million to pay 29 percent of city shelter/HERRC costs for asylum seekers, consistent with existing State shares for Safety Net Assistance, which already supports City shelters. In addition, the budget plan would fund $162 million for logistical and operational support provided by the National Guard, which has deployed more than 900 service members for this mission.

Other sources of aid would include $137 million for health care to support the City of New York,  $25 million in resettlement funding for asylum seekers through the Office of Temporary and Disability Assistance; $10 million in legal services funding through the Office of New Americans; $6 million to support the shelter site at the Brooklyn Cruise Terminal and $5 million for enhanced migrant resettlement assistance.

STATE BUDGET PROPOSALS

Tax cuts are being advanced as many states are finding that pandemic aid and a recovering economy have generated large surpluses. In Nevada, the Governor has proposed a one year suspension of gas taxes and reductions in some business taxes. The proposals include a 12% raise for state employees. This at a time when the state reports a 24% vacancy rate. West Virginia’s Governor has proposed a 50% reduction in the personal income tax rate. The cuts would phase in over three years with a 30% cut in year 1 followed by two more 10% reductions. ARPA dollars are still on hand in the amount of $677 million. The Governor would put $500 million into an economic enhancement fund and put the remainder towards water and sewer infrastructure funding.

Gov. Josh Green of Hawaii has proposed a new climate impact fee of about $50 per tourist to raise $500 million to $600 million per year. Proposed legislation would also include raises fees on visitors to state parks, including charging for parking.

POWER AND TERROR

More information has been made public which highlights the growth of attacks on the physical infrastructure in the electric power industry. We have previously discussed the phenomenon but new information has come to light which increase concerns. These attacks have up to now been primarily on transformers and distribution substations located in rural areas. They have impacted both investor-owned and municipal utilities.

Now we see evidence that the current risk is concentrated geographically and that this will increase the exposure of municipal utilities as a result. Two news outlets in Oregon have obtained information from the FBI which confirm what many thought. The attacks are politically motivated (right wing extremism). “The individuals of concern believe that an attack on electrical infrastructure will contribute to their ideological goal of causing societal collapse and a subsequent race war in the United States.”

In the Northwest – there have been 15 since June, more than in the previous six years combined. Much of the electric infrastructure outside of the cities is susceptible given their remote natures. The attacks appear to follow manuals disseminated online by neo-Nazis and other far-right extremists such as “accelerationist” groups that advocate, however implausibly, that taking down the grid will hasten the demise of the federal government and start a race war.

In Oregon, the rural electrical grid is largely operated and maintained by public utility districts. So, the geographic concentration of the attacks creates a higher municipal utility exposure to the phenomenon. The efforts to make the fossil fuel industry face financial penalties and requirements to compensate governments for the costs they incur from climate change. There are several actions pending in federal courts across the country which will likely go to the US Supreme Court for final adjudication. In the meantime, state legislators in New York are pursuing a legislative approach.

A bill – The Climate Change Superfund Act – has been offered which is modeled on the concept of superfunds as they have been developed to address more specific instances of pollution. The model is based on the polluter-pays model which has been used to effect funding for the clean up of waste generated by industrial activities. In those cases, the pollution is more obvious – oil spills and chemical spills are examples.

CLIMATE LEGISLATION

The Climate Change Superfund Act is designed to raise money for infrastructure projects across the state to protect against extreme weather events caused by climate change. Damage costs would vary from fossil fuel company to company and wouldn’t apply to companies operating outside of New York. The New York State Department of Environmental Conservation would use a formula for each fossil fuel company to calculate their emissions and the percentage they would have to pay.

One major difference between federal Superfund laws and the state proposal is a requirement that negligence on the part of a polluter must be found for the polluter to pay. The NY law has no such requirement.

There is no language in federal law which would preclude state action in connection with pollution remediation. The trickiest argument for New York state to have to make would be proving a company’s jurisdiction. So, to find that a fossil fuel company emitted greenhouse gases in the region, the state would have to prove that the company operated in the state. The complex nature of the distribution chain in the industry will make this difficult.

PREPA

The Puerto Rico Electric Power Authority (PREPA) has announced an agreement with Genera PR is a subsidiary of New Fortress Energy (NFE) to operate the island’s electric generation system. The company is a liquefied natural gas company which builds LNG import facilities. The contract term is 10 years. The news came as the Authority’s bankruptcy’s mediation process has been extended to April 28 by the district judge for the U.S. District Court of the Southern District of New York hearing the bankruptcy case.

The decisions being made by the Commonwealth covering the management and operation of the electric system are disappointing. The reliance on what are best described as legacy providers as opposed to entities with expertise in renewables and microgrids is creating more and more of a missed opportunity to provide Puerto Rico with an affordable and reliable electric system.

WESTERN WATER

Starting on December 26, 2022, a series of 9 atmospheric rivers (ARs) brought significant amounts of rain, snow, and wind to California and other parts of the western United States over a 3-week period. 80% of a full seasonal snowpack was deposited in California during these storms. Statewide, precipitation over these 3 weeks was 11.2 inches, which is 46% of a full water year. Recent storms improved drought conditions by increasing soil moisture throughout much of the West, especially in California. The amount of water stored in many reservoirs increased, but some are still well below historical averages for this time of year.

The first estimates of water conditions in the American West in 2023 became available at month end. This does provide for at least some of the impact of the recent intense weather events in the West to be reflected in current conditions. The review covers the 54 storage reservoirs operated by the US Bureau of Reclamation. The average percentages are based on three decades of data. The resulting comparisons show why the recent atmospheric river events must be viewed with caution.

Two examples in California – New Melones Lake – New Melones Dam storage on 1/29/2023 was 978,413 acre-feet. This represents 72% of typical storage level for this date, based on the last 30 years of data. Trinity Lake – Trinity Dam storage on 1/29/2023 was 761,242 acre-feet. This represents 55% of typical storage level for this date, based on the last 30 years of data. These are two of the four reservoirs in the most distress. The actual levels at these two are 40% and 31% of capacity.

Other facilities are central to the Colorado River debate. On the Utah-Wyoming border, Flaming Gorge Dam And Reservoir storage on 1/30/2023 was 2,498,769 acre-feet. This represents 81% of typical storage level for this date, based on the last 30 years of data. This storage is the lowest value observed on January 30 in the last 30 years. Gibson Dam And Reservoir storage on 1/30/2023 was 9,386 acre-feet. This represents 34% of typical storage level for this date, based on the last 30 years of data. This storage is the lowest value observed on January 30 in the last 30 years. 

To begin to alleviate long-term hydrologic drought and contribute to spring and summer runoff, snow needs to continue to accumulate during the winter. Above-average precipitation over the next 3 to 5 years, combined with water conservation-focused resource management, would be needed to completely alleviate long-term hydrologic drought. Groundwater levels across the western U.S. remain low. Storage in many reservoirs also remain low, especially Lakes Powell and Mead in the Upper and Lower Colorado River Basins, which are important for water supplies in southern Nevada, Arizona, and southern California.

Reservoirs in eastern Oregon, southern Idaho, and eastern Idaho are much lower than typical for this time of year. In particular, the upper Snake River basin (which contains more than 60% of the agricultural land in Idaho) is short of water, and it seems more likely than not that drought will continue for a third year in that basin.  the NOAA Seasonal Drought Outlook is showing drought removal in some parts of central and northern California, drought remaining but with improvement in other parts of northern California and central Oregon, and drought remaining but improving in Idaho. Drought persistence is expected for the remainder of southern California, Nevada, Utah, Colorado, and western and eastern Wyoming. 

TEXAS RENTAL PROJECT

A new project in Texas lies at the nexus of several trends in the economy. One of those is the conversion of former military facility near San Antonio, TX to civilian uses. Another is the role of private equity in the municipal finance space. Another trend is the development of portfolios of traditional single-family housing by private equity interests. All of these interests have converged on the site of the former Brooks Air Force Base.

Preston Hollow Community Capital provided the $185 million in tax-exempt bond financing to Brooks Development Authority for the construction of a build-to-rent residential community called Los Cielos. The project is like many small residential developments built for ownership. It will include 492 for-rent, single-family homes that will be built with attached two-car garages and backyards. The community will feature an amenity center, working center, pool, dog park, gathering areas and pickleball courts.

The site’s former life as the Brooks Air Force Base came to an official end in September 2011. The project is part of an overall mixed-use development at the base. Private equity has been steadily increasing its home purchasing activities for the purpose of converting the properties to ownership status. The construction of single-family housing for the purpose of operating it as a rental is an extension of the trend.

INSURANCE STORM

When Hurricane Ian roared into Southwest Florida last September, it caused the second-biggest insured loss in history with damage estimated at between $50 billion to $65 billion; only Hurricane Katrina in 2005 caused more destruction. More than a half dozen private insurers have already been declared insolvent in the past year and several more are on the edge. In Louisiana, more than 20 companies have gone under or withdrawn from the state over the last two years.

If the trends are not reversed, pressure will grow on the established state insurers of last resort to fill the void.  Citizens Property Insurance Corp. already insures some 1 million homes (but not for floods) in Florida. At the same time, Florida is attempting to tighten provisions regarding litigation against insurers. Florida accounts for just 9% of overall insurance claims in the U.S. but 79% of all home insurance lawsuits. 

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.